In preparing his “Second Report on the Further Provision Necessary for Establishing Public Credit,” Hamilton relied heavily on European precedents and theories of banking. The Bank of England and Adam Smith’s Wealth of Nations undoubtedly influenced Hamilton’s thinking in varying degrees. It is more difficult, however, to generalize on the effect of earlier American experiments in banking on the development of Hamilton’s ideas, for the banks that were established in America before and after the Revolution were essentially the products of European precedents, and both the critics and defenders of these banks frequently based their arguments on European theories and experience. Under the circumstances it is not always possible to determine whether Hamilton obtained his ideas directly from Europe or from those Americans who had a knowledge of European banking.

There is general agreement among historians that the Bank of England was the model for the plan of the bank which Hamilton proposed in 1790.1 Charles Franklin Dunbar states that Hamilton worked with the British statutes laid out before him.2 Bray Hammond, who has described the close correlation between sections of the original act incorporating the Bank of England and corresponding parts of the act incorporating the Bank of the United States, has written: “Those sections of the Act of 1694 which authorized establishment of … [the Bank of England] had influenced the measures which had already incorporated the Bank of North America, the Massachusetts Bank, and the Bank of Maryland, but to nowhere near the extent the act was to influence the charter of the Bank of the United States.… It was prepared by Secretary Hamilton on the basis of his proposal, or ‘report’ to Congress.… In effect it takes over from the Bank of England’s charter various provisions that have been fixed ever since in American and Canadian banking laws.”3 The similarity between the acts incorporating the Bank of England and the Bank of the United States can be seen most strikingly in the sections dealing with the restriction on liabilities, the prohibition of trade in commodities, and the prohibition of financial aid to the state without the approval of the legislature.4 In addition to the original charter of the Bank of England, Hamilton was probably familiar with later acts regarding the Bank (especially the Engraftment Act5 passed under the auspices of Charles Montagu).

Several books which were available to Hamilton contain information on banking practices and theories in Europe. Lex Mercatoria description begins Wyndham Beawes, Lex Mercatoria Rediviva: or, the Merchant’s Directory Being a Complete Guide to all Men in Business,… Containing An Account of our Trading Companies and Colonies, with their Establishments, and an Abstract of their Charters; the Duty of Consuls, and the Laws subsisting about Aliens, Naturalization and Denization … (Second Edition, London, Printed for R. Baldwin at the Rose, and S. Crowder and Co. at the Looking-Glass, in Pater-Noster-Row, 1761). description ends , for example, gives the provisions of various acts relating to the Bank of England as well as information on banking in some other European countries.6 Malachy Postlethwayt, whose Universal Dictionary had been used extensively by Hamilton in the past,7 outlines accounting procedures for a mercantile bank and discusses banking in general economic and political terms.8 Postlethwayt’s criticism of land as stock or partial stock and as security for the loans of a mercantile bank resembles that of Hamilton. In addition, parts of his general description of banking functions are similar to Hamilton’s discussion of the same subject in his Report. In this connection Postlethwayt wrote:

“And, as [the Bank of England] … has all the conveniencies of [the Bank of Amsterdam] …, it has also this beyond it, that it’s capacity of lending money is an invaluable accommodation to the community, since it will always have a tendency to the keeping low the interest of money, and being an effectual and permanent check to usury, which is the greatest bane to our trade and navigation.…

“By what has been said, it may sufficiently appear, that nothing but ready money can be a proper foundation for a bank; that the [Bank of England] … is the most useful and extensive, to all the conveniencies of the public, and of commerce; and that it’s business is to keep the cash of traders, or others, to deal in bullion, exchanges, and discounts, and to lend upon securities, but upon none but such as are morally certain, and for short time of payment; or which, upon occasion, may be readily exchanged again for money: on the contrary, that such a bank ought never to purchase or lend money upon lands, as well because of the hazards of titles, as of the tediousness and uncertainty of repayments: lest of all should a bank deal in merchandize, because of the risque of adventuring, the dubiousness of profits, and the length of time for returns: it ought, indeed, to be always strictly restrained from the buying and selling merchantable commodities, by reason of the great injury which might thereby arise to trade in general, from an uncontroulable monopoly.

“It may be here requisite to take notice of that erroneous notion entertained by some, that banks and bankers engross the money, hoard it up, and hinder it’s circulation in trade; but, if such will consider this matter in it’s true light, they will easily be convinced, that the money lodged in banks, and in the hands of bankers, is the most constantly employed of any; for, though the specie should lie still ’till called for, yet the notes given out for it’s value are continually circulating.…”9

Information concerning the charter and laws of the Bank of England, John Law’s bank in France, and the Bank of Amsterdam are also given under various headings in the Universal Dictionary,10 but a more detailed discussion of the legal aspects of European banking can be found in Lex Mercatoria description begins Wyndham Beawes, Lex Mercatoria Rediviva: or, the Merchant’s Directory Being a Complete Guide to all Men in Business,… Containing An Account of our Trading Companies and Colonies, with their Establishments, and an Abstract of their Charters; the Duty of Consuls, and the Laws subsisting about Aliens, Naturalization and Denization … (Second Edition, London, Printed for R. Baldwin at the Rose, and S. Crowder and Co. at the Looking-Glass, in Pater-Noster-Row, 1761). description ends .11

Adam Anderson’s Origin of Commerce was an invaluable source book for Americans interested in the history of English banking. Both criticisms and support of various banking projects in England are quoted and paraphrased in these volumes. The opponents of the 1694 act incorporating the Bank of England are described as the “Disaffected” who “were all against it; alleging, it would engross the Money, Stock, and Riches of the Kingdom.”12 As for the support for the bank, Anderson quoted one pamphlet and commented on it:

“… ‘if the Bank can circulate their Foundation of 1,200,000£ without having more than 300,000£ lying dead at one Time with another, the said Bank will be, in effect, as 900,000£ fresh Money brought into the Nation—Thus … it will make Money plentiful,—Trade easy and secure;—will raise the Price of Lands,—will draw the Species of Gold and Silver into the Hands of the common People, as we see it in Holland, Genoa, and other places where these Funds are accommodated to Receipts and Payments. But after all … the Happy effects of this Undertaking, like almost all other great Things in Trade, will be best understood by the Practice thereof, when Time shall convince the Ignorant,…’ And, as this has actually happened … we shall not need to say more in this Place on the great Benefits of this Bank.”13

Anderson’s discussion of the subsequent history of the Bank of England contains several passages which must have been of particular interest to Hamilton. Thus, in describing the 1697 subscription to the bank, Anderson wrote: “This happy Engraftment … redounded greatly to the Credit of Mr. Montague.… For, it is almost incredible, that in a few Months after this Provision for the National Debt in Arrear, the Stock of the Bank … should be currently sold at 112 per Cent.”14 The reasons for the exclusive privilege granted by this act which are stated in the act’s preamble and quoted by Anderson, read as follows: “‘some Corporations … by Colour of their Charters; and other great Numbers of Persons, by Pretence of Deeds or Covenants united together, had presumed to borrow great Sums of Money; and therewith deal as a Bank, to the apparent Danger of the established credit of the Kingdom.’”15 Finally, Anderson’s account of the activities of brokers in London which led to a law of 1697 restricting stock-jobbers16 may well have convinced Hamilton of the necessity of attaching the interest of “monied men” to the financial policies of the government. On the other hand, it can be argued that Hamilton’s ideas on this subject were derived from his knowledge of the failure of John Law’s Mississippi scheme or from firsthand experience with the depreciation of the “Continentals.”17

It is relatively easy to discover parallels between Hamilton’s Report and Wealth of Nations, a copy of which was sent to Hamilton by Angelica Church, a sister of Elizabeth Hamilton and a resident of England.18 In describing Scottish banks and other credit institutions, Adam Smith wrote:

“It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital which a dealer is obliged to keep by him unemployed, and in ready money for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock.… The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country.”19

Another example may be cited. In his Report Hamilton states that every loan is initially “a Credit given to the borrower on … [the bank’s] books”; Scottish banks, according to Smith, “invented … another method of issuing their promissory notes; by granting, what they called, cash accounts, that is by giving credit to the extent of a certain sum … to any individual who could procure … [two signatures].… Credits of this kind are, I believe, commonly granted by banks and bankers in all different parts of the world.”20

In contrast to Adam Smith, the eighteenth-century philosophers had at most only a negligible effect on the “Second Report on the Further Provision for Establishing Public Credit.” Hamilton could have derived little comfort from David Hume, who, while conceding that banking provided an impetus to trade and industry, opposed public banks on the grounds that they raised prices and facilitated the export of specie.21 Although Montesquieu wrote relatively little concerning the theory and practice of banking, he did say: “In states that carry on an œconomical commerce, they have luckily established banks, which, by their credit, have formed a new species of wealth.”22 On the other hand, Montesquieu’s distinction between “real” and “ideal” money was used by critics of banking, who nevertheless usually failed to recognize that Montesquieu was opposed to a debased metallic currency while they were criticizing paper money.23

When one turns from British to American precedents, it should be pointed out that Hamilton was not the first American to attempt to set up an American counterpart to the Bank of England. For example, in the “Remarks and facts relative to American paper-money,” which was reprinted in The American Museum in 1787, Benjamin Franklin considered plans advanced before 1764 for establishing a bank similar to the Bank of England. In this connection, he wrote: “a bank, in imitation of the bank of England, with a sufficient stock of cash to pay the bills at sight … has been often proposed, but appears impracticable, under the present circumstances of the colony-trade, which … draws all the cash to Britain, and would soon strip the bank.” In Franklin’s opinion, the Maryland notes based on stock purchased from the Bank of England were unfavorable to debtors because of appreciation, while paper issues which depreciated were unfavorable to creditors. He also pointed out that bills carrying interest were hoarded as investments rather than circulated as cash. Franklin concluded that the loan office certificate system used by Pennsylvania during the colonial period had offered the best supplementary currency devised by the colonies.24

Opponents of banking in the post-Revolutionary era were often proponents of loan office schemes. Pennsylvania’s use of loan office certificates had drawn cautious approval from Adam Smith and even from some British merchants, although from 1764 to 1773 most emissions of these certificates had been prohibited as legal tender under the Currency Act.25 The advocates of various proposals for banks during the Confederation criticized the loan office system, but it should be pointed out that the failure of currency finance during the Revolution can be attributed to special conditions. In this connection, William Findley, a member of the Pennsylvania legislature, said in 1786: “And to look back, I rather wonder that those emissions served us so well, than otherwise. Though the measure was then unavoidable, I must observe there is not sufficient safety in one public body judging of the quantity of money to be emitted—and another, or rather many other public bodies having to judge of and appropriate the means of redeeming it. But there is more safety in one body being obliged to judge of the quantity—the uses—the funds—and the manner of redemption.”26

While some Americans in the post-Revolutionary years argued in favor of the loan office certificates that had been issued before the war, others sought to revive earlier proposals for a mercantile bank patterned after the Bank of England. Under the Confederation various banking schemes were suggested, and three banks were opened.27 Hamilton, of course, participated in many of the controversies over banking during the seventeen-eighties, and he followed with interest the discussion over the relative merits of land banks and specie banks and the debate over mercantile banks as opposed to state bills of credit.

The various plans for banks that were developed in the United States during the Confederation period were at least in part an outgrowth of the economic demands made by the war on the new nation’s government. During the American Revolution various individuals suggested that banks be established as a means of sinking Continental bills and rescuing the finances of Congress. Hamilton was among those who during the war displayed an interest in banking, and in the winter of 1779–1780 he drew up a detailed plan for a national bank.28 In 1780, several merchants pooled their funds to form the Bank of Pennsylvania as a device for supporting the war effort; but this so-called bank was in actuality an emergency fund rather than a bank in the usual sense.29 In the same year, a plan for a bank was considered by Congress’s Committee of Finance, but no action was taken on this proposal.30 In the winter of 1780–1781, James Wilson asked the Pennsylvania Assembly to provide for the expansion of the Pennsylvania bank,31 and in May, 1781, Robert Morris laid before Congress his plan for a bank.32 Several weeks earlier Hamilton had written to Morris congratulating him on his appointment as Superintendent of Finance and offering still another proposal for a bank.33

On May 26, 1781, Congress approved Morris’s plan for a bank, and at the end of the same year that body chartered the Bank of North America.34 Subscriptions were obtained with great difficulty, and Morris finally bought a large majority of the stock for the Confederation.35 Some of the stock of the original Pennsylvania bank was added to the proceeds of a foreign loan to form the core of subscriptions to the Bank of North America. The transaction was similar to the plan for government participation in a national bank suggested by Hamilton in 1781 and again in 1790.36

Because of the Confederation government’s revenue problems the Bank of North America did not prove to be as useful to Congress as some had hoped. In 1784 Jefferson asked for a government loan from the bank,37 but Robert Morris replied: “The Idea … is … a good one, but the present Moment is unfavorable. The Establishment of so many Banks, instead of aiding Credit and facilitating Operations, will for some time to come have a contrary Effect, and it is not without great Difficulty that they will collect a Capital sufficient to support its own Operations.”38 But at least as a private bank the operations of the Bank of North America were so successful that the bank invited emulation in Massachusetts and New York.39 Although Hamilton in his “Second Report on the Further Provision Necessary for Establishing Public Credit” criticized as well as praised the Bank of North America, to Hamilton the significance of that institution undoubtedly lay in the fact that it offered proof of the success of a mercantile bank similar to those which he was advocating.

The legislative history of the Bank of North America in the seventeen-eighties provided further precedents for Hamilton’s proposals in 1790. In 1785, when the Pennsylvania Assembly was considering the repeal of the bank’s charter, James Wilson and Gouverneur Morris issued significant defences of the bank and its charter. Wilson wrote an influential pamphlet, a copy of which is in the Hamilton Papers in the Library of Congress.40 Although portions of this pamphlet clearly had no effect on Hamilton’s thinking, it may be significant that some of Wilson’s arguments against limiting the privileges conferred by Congress on the Bank of North America were used by Hamilton in his Report to show that the bank was a local institution after the acceptance of the 1787 Pennsylvania charter.

The section of Hamilton’s Report in which he replies to criticisms of banking that had been made during the debate over the recharter of the Bank of North America indicates that he also may have relied on the arguments used by Gouverneur Morris in the mid-eighties. One criticism made during the debate concerned the inability of borrowers to obtain mortgage loans from mercantile banks. In his Report Hamilton maintains that the capital of mercantile banks would not be available for mortgage loans even if such capital had not been placed in a bank. In advancing this argument Hamilton was following a line of reasoning developed by Morris, who had said: “… it is notorious that few stockholders are of that class, who were in the habit of lending on interest. Such as are foreigners or inhabitants of the neighboring States, and these it is said own half the stock, would not lend their money in Pennsylvania, even if circumstances favored such loans. A considerable part of the remaining half belongs to small stockholders, who would not send their money into the country. And a far more considerable part is the property of merchants, who would be obliged immediately to employ their funds in their own business, if deprived of those facilities which the Bank affords.”41 During the 1786 debate over the recharter of the Bank of North America, Pelatiah Webster and Robert Morris had given similar analyses.42 In this connection it should also be mentioned that Postlethwayt and Adam Smith objected to mercantile banks granting mortgage loans on the ground that the length of time necessary for the return of money lent on land deprived a bank of its ability to provide for the rapid turnover of capital and short-term loans required by merchants.43

In answering the other criticisms advanced against banking, Hamilton often followed the line of reasoning developed by Gouverneur Morris. To the charge that banks tended to promote usury, both men replied by emphasizing the punctuality necessary to banking,44 and Hamilton stated (while Morris implied) that the increase in the medium of exchange that would result from banking would tend to lower, rather than raise, the interest rate.45 In answer to the argument that banks had a tendency to encourage the export of specie, Hamilton agreed with Morris’s statement that “The operations of the Bank depend, as every body knows, on the quantity of specie in its vaults … when the directors find that cash is exported, which they do at once, by perceiving that any considerable sum goes out of the Bank in a week more than is received, they are not merely led by inclination, but driven by necessity, to lessen or to stop their discounts.…”46 The same characteristic of demand-note banking was indicated by Smith and used by Hamilton in distinguishing between government issues and notes of a specie bank.47

The debates in the Pennsylvania Assembly in 1786 over the recharter of the Bank of North America undoubtedly had an important influence on Hamilton’s thinking. Hamilton followed these debates with particular interest, for John B. Church, Elizabeth Hamilton’s brother-in-law for whom Hamilton served as attorney, and Jeremiah Wadsworth, who was Church’s partner, were both large stockholders in the Bank of North America. Parts of the debates were printed by Matthew Carey in 1786, and some of the arguments used by Hamilton in his Report can be found in Carey’s version of the debates.

In these debates, opponents of the bank provided Hamilton with the arguments that he lists and then refutes in his 1790 Report. These arguments, which appear in the minutes of the Pennsylvania Assembly for 1785 and are reprinted as a footnote to a pamphlet by Thomas Paine, bear a striking resemblance to the antibank arguments cited by Hamilton in his Report. In a petition to the Assembly, the opponents of banking stated:

“… whilst men are enabled, by means of the bank, to receive near three times the rate of common interest, and at the same time receive their money at very short warning, whenever they have occasion for it, it will be impossible for the husbandman or mechanic to borrow on the former terms of legal interest and distant payments of the principal; that the best security will not enable the person to borrow; that experience clearly demonstrates the mischevious consequences of this institution to the fair trader; that impostors have been enabled to support themselves in a fictitious credit, by means of a temporary punctuality at the bank, until they have drawn in their honest neighbors to trust them with their property, or to pledge their credit as sureties, and have been finally involved in ruin and distress.… the said bank has a direct tendency to banish a great part of the specie from the country, so as to produce a scarcity of money, and to collect into the hands of the stockholders of the said bank almost the whole of the money which remains amongst us.”48

The committee to which this petition was referred reported on it as follows: “… That the great profits of the bank, which will daily increase as money grows scarcer, and which already far exceed the profits of European banks, have tempted foreigners to vest their money in this bank, and thus to draw from us large sums for interest.

“That foreigners will doubtless be more and more induced to become stockholders, until the time may arrive when this enormous engine of power may become subject to foreign influence; this country may be agitated with the politics of European courts, and the good people of America reduced once more into a state of subordination, and dependence upon some one or other of the European powers.”49

Hamilton may also have had access to some of the pamphlets printed in 1786 at the height of the controversy over the Bank of North America. Pamphlets written by William Barton and John Witherspoon were published during that year and reprinted in The American Museum in the July issue of the following year.50 Pelatiah Webster’s Essay on Credit as well as Paine’s pamphlet was published prior to the 1786 debates in the Pennsylvania Assembly. After the conclusion of these debates, supporters of the bank proposed a charter including the same regulations as those specified for the Bank of England. John Chaloner wrote to Hamilton in December, 1786, supporting this view, and Tench Coxe’s pamphlet dated December 13, 1786, outlined the regulations necessary to remodel the Bank of North America on the Bank of England.51 “The bank of England,” Coxe wrote, “is better worth our attention, than any which has ever existed, whether we consider it with regard to the prodigious aids it has afforded to the government, or its usefulness to the commercial and manufacturing interests and, through these to the cultivators of the soil.…”52 Coxe sent his pamphlet to Hamilton on March 5, 1790.53

There can be little doubt that Hamilton’s ideas on banking were also in part the product of his experience with the Bank of New York. Not only was Hamilton the bank’s attorney and one of its directors, but there is also some reason to believe that he was the author of its constitution.54 The Bank of New York had been initiated by a group of merchants who were opposed to a land bank scheme promoted by Robert R. Livingston.55 The contest between the two banks for a charter possibly prevented the incorporation of either institution, and the conflict reflected opinions which had precipitated similar controversies in England and Scotland at the end of the seventeenth century and in Massachusetts in 1740. The arguments had changed little over the years, but it seems reasonable to conclude that Hamilton became more aware of them in the seventeen-eighties and that this in turn explains why his Report—in contrast to his letter to Robert Morris of April 30, 1781—rejected land as a form of auxiliary security.

Among the many Americans who may have helped to shape Hamilton’s views on banking, special mention should be made of William Bingham and Samuel Osgood. In 1789, Bingham, a Philadelphia merchant and a large stockholder and director of the Bank of North America, wrote to Hamilton suggesting policies which the new government might pursue. Among his proposals was an enlargement of the stock of the Bank of North America by means of a new subscription, five-sixths of which would be in government securities. The government would pay an annual sum equal to six percent of the full value of the securities, and the price of shares would be set at a premium of fifteen percent to compensate the original holders of bank stock.56

Osgood had been a member of the Board of Treasury under the Confederation, a director of the Bank of North America, and cashier of the Bank of Massachusetts. After the inauguration of the new government under the Constitution, Osgood became Postmaster General. Although it is not certain that Osgood discussed his plan of a national bank with Hamilton, his opinions are of interest both because of John Adams’s view of the debt which “Hamiltonian finance” owed to members of the former Board of Treasury and because Osgood shared Hamilton’s interest in current British opinions on matters of financial policy.57 After mentioning the effect which funding the British debt had on the price of land, Osgood noted: “And the same effects will be produced in this Country if the present Debt should be well funded & a Bank could be established in which general confidence should be placed so as that the paper might freely circulate thro all the states.”58 The twenty-million dollar capital of Osgood’s plan was determined apparently by the need to raise the price of government debts. Osgood believed that since mercantile discounts would not be able to absorb an extensive note issue proportionate to the capital, government loans should take up the remainder. He also advocated that the government pay for management of the bank as the British government did in the case of the services of the Bank of England. There are striking similarities between Osgood’s views of banking and those of Hamilton, but Hamilton’s emphasis on the public nature of the bank differs to a marked degree from that of Osgood. A large part of the similarity between Osgood’s plan of a bank and Hamilton’s may be traced to their common reference to British precedents. Differences stem primarily from the broader tradition of British law and European precedents upon which Hamilton drew.

It is not only possible to discover some of the sources and precedents which shaped Hamilton’s general views on banking, but an assiduous student can also ascertain with some degree of certainty the background of many of the specific proposals in his Report. The acceptance of bank bills for the payment of taxes, which was the privilege of the proposed bank that probably was most familiar to Hamilton’s audience, provides a case in point. This means of giving circulation to paper or raising its value was an essential ingredient of “currency finance” as practiced in the colonies and as described not only by Adam Smith in Wealth of Nations but also by Hamilton’s contemporaries who favored a government loan office.59 The effect of tax acceptance on the circulation of bank notes was recognized in Europe. John Law had stated the advantages of the increased circulation which might be obtained by making banknotes acceptable in taxes, and Adam Smith had made a more cautious statement concerning its effect on the value of a paper currency.60 In England the legal interpretation of currency which could serve as tender had given the bills of the Bank of England a similar privilege without express legislation.

In the United States specie payment of taxes was mandatory under the Collection Act of July 31, 1789.61 In April, 1790, in his suggestions for revising this act, Hamilton said that bank notes were the usual means of transporting customs receipts from the customs houses to the Treasury, and he supposed that the act provided for collection not only of specie but also of demand notes of public banks based on a specie fund. If a national bank were founded, he said, some clarification of the issue would be required.62 The section of Hamilton’s “Second Report on the Further Provision Necessary for Establishing Public Credit” which provides for the tender of bank notes in tax payments formed a part of the requisite change.

The question of exclusive privileges for a bank was one on which there was little agreement in either England or America. The Bank of England, as Osgood pointed out, had a certain kind of exclusive privilege, and during the American Revolution several states had granted the Bank of North America exclusive privileges by prohibiting private and local banks.63 There were, however, those on both sides of the Atlantic who opposed grants of exclusive privilege. During the debate over the recharter of the Bank of North America in 1786, Robert Whitehill of Pennsylvania said: “Is it not better have two or three equal banks, and then the citizens will be courted for their custom, than one which can do as it may see fit?”64 The charters of John Law’s bank and the Caisse d’Escompte contain explicit declarations against the exclusion of other banks, and banks were among the four types of joint-stock companies which Adam Smith found admissible because no exclusive privilege was necessary.65 In addition, Smith belittled the exclusive privilege section in the Bank of England legislation which provided that “no other banking company in England shall consist of more than six persons.”66

During the decade that preceded the presentation of his Report to Congress, Hamilton had more than once changed his opinion on the necessity and desirability of exclusive privileges for a bank. In the plan of a bank which he drew up in the winter of 1779, he said: “It may be objected that this plan will be prejudicial to trade by making the Government a party with a trading company, which may be a temptation to arrogate exclusive privileges, and thereby fetter that spirit of enterprise and competition on which the prosperity of commerce depends. But Congress may satisfy the jealousies on this head by a solemn resolution not to grant exclusive privileges.… Large trading companies must be beneficial to the commerce of a nation, when they are not invested with these.”67 But Article 18 of the plan which he submitted to Robert Morris in April, 1781, states: “No other bank public or private to be permitted during that period.” In explaining the reason for this provision, Hamilton wrote: “Other banks might excite a competition prejudicial to the interests of this and multiply & diversify paper credit too much.”68 Early in 1784, after a drain on the specie reserves of the Bank of North America had caused anxiety, Hamilton wrote to Gouverneur Morris explaining his former approval of competition: “… on a super[fi]cial view I perceived benefits to the community which on a more close inspection I found were not real.”69 The provision suggested in Hamilton’s plan in the 1790 Report is less extensive than the wartime privilege of the Bank of North America, for the prohibition extends only to incorporation of another “similar institution” by Congress. Instead, it resembles the section of the Engraftment Act of 1697 quoted in Lex Mercatoria: “During the Continuance of this Bank, no other Bank, or Fellowship in nature of a Bank, shall be erected, or permitted by Act of Parliament.”70

The question of exclusive privilege was only one part of the debate over the larger problem of monopoly. The Bank of England, for example, was frequently charged with being a monopoly, but the bank’s exclusive charter privilege was not the only basis for such a charge. In the course of the debate over the recharter of the Bank of North America in 1786, William Findley said: “As wealth is the means of conducting—as wealth is the means of obtaining monopolies—even when in the hands of jarring individuals—how much more must it facilitate such designs, when in the hands of a permanent society, congregated by special privilege, and actuated by the principles of united avarice? …” At another point in the debate he charged: “This institution is itself a monopoly—being incorporated a great trading company—and having a right to turn ten millions of dollars into trade, if the president and directors please—or to lay out that amount on land.” In a similar vein, Robert Whitehill warned: “This stock of ten millions of dollars was too great an estate—it afforded too great a liberty to the bank.” John Smilie referred to the same section when he said: “are we prepared to give a charter empowering the corporation of the bank to hold ten millions of dollars—and that in what kind of property they please?” In concluding the debate on this part of the charter, Whitehill said: “It has been observed, that the bank has not a capital of ten millions of dollars, and that therefore no danger is to be apprehended on that head. But it might have had that capital by the charter, why then should we restore it?”71

The Bank of North America had proposed in 1781 that it be provided with a license to hold nonliquid assets to an amount equal to seventy-five times the face value of the issued stock. The provision that was approved by Congress, however, reduced the ratio by two-thirds.72 No section comparable to this provision is included in any of Hamilton’s earlier plans for a bank, in the outline of a charter for the Bank of New York, or in that bank’s proposed constitution. A variation of this provision, however, appears in the charter of the Massachusetts Bank and reads as follows:

“And be it further enacted by the authority aforesaid, That the said corporation are hereby declared and made able and capable in law, to have, hold, purchase, receive, possess, enjoy and retain, lands, rents and tenements, to the amount of fifty thousand pounds and no more at any one time; and also monies, goods, chattels and effects, to the amount of five hundred thousand pounds and no more; and also to sell, grant, devise, alien, or dispose of, the same lands, rents, tenements, money, goods, chattels and effects. Provided; That the said President and Directors, nor any or either of them in their said capacity, nor any person or persons for or in behalf of the said corporation or body politic, shall at any time, directly or indirectly, use or employ any money or monies of the said corporation or body politic, in trade or commerce.”73

In contrast to the provision in the charter of the Bank of North America, the comparable section in the charter of the Massachusetts Bank makes a distinction between real and personal property and prohibits trade and commerce. In addition, the relevant section in the charter for the Massachusetts Bank, by including “monies” in personalty, appears to come closer to a provision for authorized capital.

A review of the sections dealing with the nature of a bank’s assets in the charters of banks incorporated in the seventeen-eighties and in Hamilton’s Report of 1790 reveals that there was little or no agreement on this subject among Americans. The various proposals in the different charters and in Hamilton’s Report range from an allowance for purchases and loans in default, which it would be difficult to construe as a limit, to a restriction of authorized “estate,” a restricted license in mortmain, and a prohibition of trade and commerce. In the second Pennsylvania charter of the Bank of North America in 1787 the provision became a limit to the amount of more than double the issued capital on nonliquid assets which might be held for bank buildings and grounds and for loans in default, but not for the purposes of trade and commerce.74 The section was sometimes called a limitation on capital, but exclusion of “monies” in the list of assets makes this interpretation untenable even by eighteenth-century mercantile definitions of capital.75 In Hamilton’s bank plan of 1790 the section allows for property held for loans in default and bank buildings and grounds to the amount of half the nominal capital, or between one and two and one-half times the specie capital. The comparable sections were the only limitation on financial matters in the charters of the Bank of Massachusetts and the Bank of North America. Hamilton’s 1790 plan in the Report added a specification of authorized capital and a debt limit.

Among the most significant sections of Hamilton’s plan of 1790 is his proposal concerning the liability of the bank’s shareholders and directors. The charters of the Banks of England and Scotland explicitly refused a grant of limited liability to stockholders. On the other hand, limited liability was implied by charters granted to the Bank of North America in 1781 and 1787 and to the Bank of Massachusetts in 1784. There is however, no mention of limited liability in Hamilton’s 1779 proposal for a bank, and the plan which he drew up in 1781 provided for a liability similar to that imposed on the holders of British bank stock.76 But in 1785, after the Pennsylvania legislature rescinded the charter of the Bank of North America (and by so doing removed the state’s guarantee of limited liability to the shareholders), Hamilton recommended to Jeremiah Wadsworth that he sell his stock in the bank.77 Hamilton’s advice to Wadsworth reflected a common attitude among those connected with banks. The backers of the Bank of New York viewed incorporation primarily as a device for obtaining limited liability, and one subscriber to that bank refused to pay the second installment of his subscription on the ground that the bank had not been granted a charter.78 Among those who were not shareholders there was, of course, considerably less enthusiasm for limited liability. Findley, in the course of the debate over the recharter of the Bank of North America in 1786, spoke for this group when he said: “For, under the charter, the incorporated property was the only security to the public: therefore the stockholders, who have the property of it, and draw the dividends from it, might be rolling in wealth, and the bank break and ruin thousands. The bank might be robbed, or thrown into the Delaware, and the owners who profit by it, be safe as to their estates.”79

Hamilton’s proposals in his Report of 1790 provide for the liability of directors in excess of the value of the capital. The liability of stockholders, on the other hand, is limited to their investment in bank stock. There was ample precedent for making bank directors liable. Although it is unlikely that Hamilton had read the bylaws of British chartered banks, the fact remains that in the bylaws of both the Bank of England and the Bank of Ireland provision is made for a penalty against, as well as the liability of the directors responsible for making loans in excess of a statutory limit.80 In effect, Hamilton’s policy of concomitant power and liability for bank directors was similar to that of the French societés en Commandite. There is, however, no indication that Hamilton relied on the plan of the Caisse d’Escompte for this provision.81

The dollar amount of a bank’s capital was one of the few features of Hamilton’s different bank schemes that remained unchanged. In each of his plans he proposed that the bank’s capital be fixed at $10,000,000 or its equivalent in pounds. In 1779 he stated that such a large sum was needed to absorb the Continental currency,82 while in 1781 he maintained it was needed to chain the profit motive of “monied men” to the financial program of the government.83 Hamilton’s emphasis on the need for an expanded currency, even when he does not correlate that need with the benefits of banking, suggests that the amount of capital he proposed may have been influenced by the extent of subsidiary currency which he believed to be necessary.84 Bingham had also emphasized this aspect of the size of the bank in November, 1789, when he wrote: “… the Capital of this Bank must be extensive, in proportion to the Demands that will be made on it, for the purposes of Circulation.”85

In 1790, Hamilton argued that a bank as large as the one proposed was necessary to avoid the charge of favoritism in granting loans—a charge to which both the Bank of New York and the Bank of North America had been subject.86 In replying to this criticism of the Bank of North America, Gouverneur Morris had said “… it must be owned, that there is some force in this objection. But it cannot be alleged that the supposed advantages are unfair. Some advantages are necessarily attendant on the place of a director, and some inconveniences are as necessarily the appendages. It is not possible that things should be otherwise, and the only check is in the annual election, by which the stockholders have an opportunity of testifying their sense of each director’s conduct.… But must we forgo a great advantage to all, because a greater advantage will result to a few?”87 Robert Morris, in answering the same criticism, had advanced a different theory to support the bank’s stand on the matter. “Had this institution been let alone,” he said, “the confidence it had obtained, would soon have procured such an increase of stockholders and stock, as would have turned the tables: and instead of its being deemed a favour to obtain loans at the bank, the directors would have been glad to receive applications for them, from men of proper credit: and as the capital increased, they would not only have been enabled to accommodate the public more generally, but it might have so happened, that they would have had it in their power to lend to farmers for the improvement of their lands.”88 Although Hamilton agreed with Robert Morris that an increased capital might eliminate charges of favoritism, he did not believe that the increase should be at the discretion of the company. In a different connection Gouverneur Morris had said, “It is notorious that if the directors had not been under compulsion, they would not have extended the subscription beyond the first four hundred thousand dollars. It is notorious also, that every addition to the number of shares lessens the value of each. And therefore we have the best security in the world, the interest of the proprietors themselves, against an increase of the capital.”89

The extent of bank profits in times of money scarcity led to another criticism of banking. Opponents of banking maintained that banks would not cure the dearth of specie upon which they thrived. In the words of one critic of banking: “It is easy to conceive, why persons, who have embarked their funds in the Bank, are so averse to a currency issued by Government. In proportion to the scarcity of money, will be the demand for credit; and while the Bank can monopolize this credit, it may also monopolize the emoluments accruing from it.”90 In 1779 and 1780 the shortage of specie had been one reason for Hamilton’s promotion of banks, but it was also an obstacle to their establishment. The solution which Hamilton proposed in his 1790 Report was a foreign loan.

A foreign loan, government shareholding, and government loans from the bank were common to all of Hamilton’s plans for a national bank.91 This shuffling of credit and debit entries has been criticized as a species of sleight-of-hand and as a bad practice for individual stockholders who would purchase their stock through similar maneuvers; but Bray Hammond says that Hamilton’s proposal cannot be criticized unless one wishes to “deplore procedures generally followed in the growth of the American nation, both economic and political.… It is a case where a pious lifting of oneself by the bootstraps is preferable to cynical realism or conscientious passivity.”92

In 1779, Hamilton had said “A foreign loan makes a necessary part of the plan; but this I am persuaded we can obtain if we persue the proper measures. I shall suppose it to amount to 2000000£ Sterling. This loan to be thrown into the Bank as a part of its stock.… The Bank to furnish Congress with an annual loan of two millions sterling if they have occasion for it at 4 ⅌ Cent interest.”93 Robert Morris described a similar transaction with regard to the Bank of North America: “In November 1781, the president and directors of the bank were elected; they obtained a charter of incorporation from congress—and opened the bank for transacting business in January 1782 … on the first of April 1782, the united states possessed stock in the bank, to the amount of 252,918 28/90 dollars; and … they were then indebted for money borrowed of the bank, 300,000 dollars.”94 The total amount of debt which the government owed the Bank of North America rose to $400,000 before the stock was sold out and the debt discharged by January, 1784.95 During the debate over the recharter of the Bank of North America in 1786, Robert Morris stated, “… the united states shared in … dividends of 10 to 16 per cent. per annum, and paid only 6 per cent. per annum for what they borrowed.”96

Government ownership of bank stock raised questions concerning the management of the proposed bank. In 1779, Hamilton had proposed that the bank be managed “by the trustees of the company under the inspection of the Board of Trade.”97 In 1781, he had suggested a plan which would have included government appointment of four of the twelve bank directors. Hamilton explained this participation on the grounds that: “It is necessary for reciprocal security of the public, the proprietors and the people, that the affairs of the bank should be conducted under a joint direction.”98 But in 1786 Pelatiah Webster, speaking of the Bank of North America, had said: “No plan of this sort can be so sure of a proper management under the state, as it would be under the direction of its own proprietors.”99 And in the same connection, Robert Morris had said: “Were it under the control of government, the people would withdraw their confidence; and neither stockholders or depositors would be found to trust their money under such control.… If government, in the present state of things, could control the funds of the bank, and were to apply them to the use of the state, how should an individual, whose money was taken by such authority, obtain satisfaction? Should he go to law with the state? No; the government has too much power, and he must submit to what it should dictate. But if the president and directors of the bank abuse their trust, and misapply his money, the law is stronger than they are; and the law will give him relief.”100

Hamilton’s earlier plans had included reservations concerning the extent of government management of a public bank. In 1779, he had indicated that the government was at least as responsible as the proprietors for the downfall of Law’s system in France.101 In a letter to James Duane in 1780 he had said, “How far it may be practicable to erect a bank on the joint credit of the public and of individuals can only be certainly determined by the experiment.”102 Adam Smith, commenting on the ownership of a public bank as a means of revenue, wrote: “The orderly, vigilant, and parsimonious administration of such aristocracies as those of Venice and Amsterdam, is extremely proper, it appears from experience, for the management of a mercantile project of this kind. But whether such a government as that of England; which, whatever may be its virtues, has never been famous for good œconomy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into; could be safely trusted with the management of such a project must at least be a good deal more doubtful.”103

In the bank plan in the Report, government participation in management is specifically rejected, for Hamilton concludes that “private interest is the best guide of policy for a bank from the point of view of management of it and investment in it and the only security for a careful and prudent administration.” Hamilton’s shift in opinion on this point may have resulted from the fact that the opposition to banks in Congress, in the New York and Pennsylvania legislatures, and in the Constitutional Convention had increased his distrust of government participation in the management of a bank.

Another facet of the question of the relationship between the government and public banking centered on the way in which a bank would support public credit through accepting government securities as payment for stock. Osgood’s plan provided for bank stock that would consist entirely of government securities with the interest from these securities providing a specie fund, while Bingham suggested a ratio of five-sixths of government securities to one-sixth of specie for new stock which would be engrafted onto the specie stock of the Bank of North America.104 In England, several of the larger trading companies as well as the Bank of England had taken government securities in part or full payment for company stock. In France, a royal edict of 1719, which indicates the ratio between public debts and cash for a subscription to Law’s Mississippi Company, reads as follows: “Moreover … beside the 100 Millions of public Debts, already subscribed into the Western Company’s Capital, there shall now be a Subscription, in ready cash, of 25 Millions of new Actions.…”105 The same ratio was used in taking in government debts and demand bank notes under the Engraftment Act for the Bank of England in 1697.106 The ratio of one to four for cash and government debt is the ratio proposed in Hamilton’s earlier draft of the 1790 plan. In the final version of the Report the ratio of one to three for private investors was substituted.

The lack of a clear line of demarcation between specie and credit transactions poses problems in analyzing the emission ratio of the proposed Bank of the United States. Since the capital of the Bank of England formed a loan to the British government, the specie fund of that bank was provided by the interest on the loan. The relation between the interest paid by the government and the debt limit, which was equal to the value of the total capital, set a limit on the ratio of bank bills to specie. The ratio of specie to total capital in Hamilton’s plan in the Report is less clear. Like the Bank of England, the debt limit was equal to the total capital, and Hamilton said, “The quarter yearly payments of interest will also be an actual addition to the specie fund during the intervals between them and the half yearly dividends of profits.” According to Hamilton’s plan, $2,000,000 in specie from individual subscribers would form the major part of the specie fund. It is less certain, however, that the same amount subscribed by the government was considered specie, although the following statement by Hamilton concerning the proposed transaction suggests that it might be so considered: “Though it is proposed to borrow with one hand what is lent with the other; yet the disbursement of what is borrowed will be progressive and bank notes may be thrown into circulation, instead of the gold and silver. Besides, there is to be an annual reimbursement of a part of the sum borrowed, which will finally operate as an actual investment of so much specie.” If the government subscription was considered specie, at the outset the limit on the ratio of bills to specie would have been less than three to one. If the government purchase was not considered specie, according to the plan at the end of two years when the subscription should be completed, repayment on the government loan and quarterly payments of interest on the government securities would reduce the ratio to four to one, and at the end of six years the ratio would be further reduced to three to one. Actual transactions on the part of both government and private subscribers to the Bank of the United States carried the ratio to as high as ten to one (not including deposits),107 but the plan of the bank apparently conforms to the following statement by Hamilton in the early part of his Report: “The extent of the possible excess [of circulation over specie capital] seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one.”

Several years before the appearance of Hamilton’s Report writers on both sides of the Atlantic had discussed to what extent a bank’s specie should serve as a limit on its emission of bills. Anderson indicated interest in the subject but arrived at no conclusion;108 John Law mentioned ratios of four to five times the specie fund;109 Pelatiah Webster maintained that the usual ratio was two or three to one;110 and Adam Smith stated that although a banker “has generally in circulation … notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may, frequently, be a sufficient provision for answering occasional demands.”111 In discussing the related problem of the reserves of goldsmith bankers, Postlethwayt said: “From these examples it is apparent, that the quantity of money a goldsmith may be able to lend out of his cash, is proportionable to the methods of acting of those who deposit their money in his hands. Whence it follows, that one goldsmith may be able to lend out ⁹⁄₁₀, when another cannot afford to lend out ½; and this may be the case, though we suppose the credit of both equally good.”112 Although Postlethwayt recognized that the profit of banking arose from the emission of notes beyond the value of the specie reserve, he was extremely cautious on this point, for he said, “… every one must be afraid to trust that bank, or banker, who would venture so far as to reserve but a fourth part in ready cash for the circulating notes payable at sight.…”113

In drawing up his proposals for the management of the Bank of the United States, Hamilton borrowed heavily from British precedents. Thus, in Hamilton’s plan in his Report, as in the Bank of England, rotation of the bank’s officers was made mandatory, citizenship was a requirement for office holding, and new stockholders had to wait a stipulated time before acquiring voting rights. It is more difficult, however, to ascertain the sources of Hamilton’s ideas on the distribution of voting rights among shareholders. In Hamilton’s plan the number of shares owned by an individual determined the number of his votes, but the ratio of shares to voting rights was not in exact proportion, and the maximum number of votes for any individual was set at thirty. The basis upon which voting rights were distributed in British companies varied from one vote per shareholder to one vote per share. In British chartered banks the ratio ranged from one vote for every shareholder to a maximum of twenty votes per shareholder allowed by the Bank of Scotland. The old East India Company had “a sliding scale, but not a uniformly progressive one” that was comparable to the arrangement proposed by Hamilton, but the voting procedure was changed when the new and old East India companies were merged in 1702.114 According to Armand Budington Dubois, in England during the latter part of the eighteenth century, “Voting … was based on a substantial financial interest in the business, and there was little thought of permitting an equality of votes to all those with any financial interest. Nevertheless, almost universally, in order to prevent the concentration of control, there would be a relatively low maximum number of votes that any one proprietor might cast.”115 As far as American precedents are concerned, the voting arrangements in the Bank of New York were similar to those of the Bank of the United States,116 while Robert Morris’s plan of 1781 for the Bank of North America provided for a one to one ratio between shares and votes, and this provision was subsequently adopted.117 In the Bank of Massachusetts, as in the Bank of North America, each share carried one vote.

Branch banking presented special problems for Hamilton in 1790, for there were few precedents to guide him, and this was a subject on which he had changed his opinion in the years preceding his Report. Although branches of the Bank of England had been proposed at various times, their establishment was not seriously considered until the nineteenth century. Branches of the Bank of Scotland had been formed soon after its founding, but they were neither successful nor long-lived. In Hamilton’s 1779 plan for a bank no provision is made for branches, but in his letter to Robert Morris in 1781 he proposed that branch banks be set up in Massachusetts, Pennsylvania, and Virginia “to facilitate the circulation and payment of the bank notes.”118 In 1790 he proposed that no branch banks be created until the experience of the central bank indicated that they would prove both safe and useful. Repeating the arguments that he had used in his letter to Morris in 1781, he defended branch banks on the grounds that they provided “more general accommodation” and reduced the danger of a run on the bank. In spite of Hamilton’s reluctance in 1790 to establish branch banks, he was later active in promoting them. It is not clear whether Hamilton’s caution in 1790 stemmed from a fear of mismanagement, the possibility of competition with banks already in existence, or the danger of weakening the central bank through a dispersal of its resources.

Like branch banking, the question of whether land should be accepted in payment for bank stock was one on which Hamilton had changed his mind during the decade preceding the presentation of his Report to Congress. Land formed a part of the stock in Hamilton’s suggestions for a bank in his letter of 1780 to James Duane and in his 1781 plan for a bank.119 But in 1784 he opposed the charter of the Bank of the State of New York, which was sponsored by Robert R. Livingston and which provided that two-thirds of the subscription would consist of land pledges.120 In the same year in a letter to John B. Church concerning the land bank scheme, he stated that he thought “it necessary … to start an opposition to this scheme; and took occasion to point out its absurdity and inconvenience to some of the most intelligent Merchants.…”121 In 1790, Hamilton explicitly rejected the idea of land as part of stock. The reasons he gave for his opposition were similar to those given in Postlethwayt, who wrote: “There are some, however, that have proposed a much more rational scheme for the constituting of what they would call a land-bank, which is by settling a competent value in lands, to remain as a fixed fund of credit for the undertaking, and to raise thereon a considerable sum of money, to lie always ready for the circulating of their bills: … lands can neither be fitly applied in this way.… ’tis plain that a bank of lands can never prove effectual, without a sufficient fund of money to support it.… when it is furnished with a stock of money.… And if the managers shall act so equitably as to extend their credit no further in dealing than is adequate to their capital … it is manifest that the lands would have no manner of operation in such-like negociations. But, if they shall adventure to extend their credit beyond the power of this money-capital … this will be effectually the same thing as mortgaging the lands twice over.… Upon the whole, men may, if they think fit, mortgage their landed estates for the raising of money to be employed in banking.”122

It is a relatively easy task to discover the principal sources for the ideas advanced by Hamilton in his Report. In the first section Hamilton drew heavily on Adam Smith for his explanation of the advantages of banks. The second section reflects many of the criticisms and answers to criticisms given during the debate over the Pennsylvania charter of the Bank of North America. The rejection of branch banking follows a pattern set by the Bank of England, and the rejection of the use of land as security or land for stock is expressed in terms which closely resemble those used in the Universal Dictionary. The majority of provisions contained in the plan of the bank which Hamilton proposed in the Report are contained either in the laws relating to the Bank of England or in eighteenth-century laws and legal interpretations applicable to British corporations.

As significant as what Hamilton included in his Report are those ideas and proposals which he omitted. He did not, for example, discuss the authority of Congress to establish a bank, although this subject had played an important part in the debates over the recharter of the Bank of North America. The question of the inflationary effects of banking provides another case in point. The pros and cons of banks as engines of inflation had been discussed in the debate over the recharter of the Bank of North America, and many authorities on banking, including John Witherspoon, Hume, Postlethwayt, and Smith, had considered the problem. Hamilton, however, ignored the subject in his Report. Finally it is significant that Hamilton’s 1790 plan for a bank differed from the Bank of England in two important provisions. In the first place, Hamilton proposed a minimum requirement of specie stock, while the Bank of England had no such requirement. Secondly, Hamilton proposed that voting rights be determined according to the scale of investment, while the Bank of England’s charter stipulates that each shareholder be given one vote.

Some significance can also be attached to the fact that Hamilton omitted from his Report in 1790 some proposals that he had included in his earlier plans for a bank. This point should not, however, be overemphasized, for his major views on the advantages of a national bank did not change during the decade preceding the presentation to Congress of his “Second Report on the Further Provision Necessary for Establishing Public Credit.” The purport of Hamilton’s Report of 1790 is the same as that of the letter written to Robert Morris in 1781: “The tendency of a national bank is to increase public and private credit. The fomer gives power to the state for the protection of its rights and interests, and the latter facilitates and extends the operations of commerce among individuals. Industry is increased, commodities are multiplied, agriculture and manufactures flourish, and herein consist the true wealth and prosperity of a state.”123