The History of the US Banking System and the US Dollar
Hamilton’s Blueprint (1775-1791)
Before the establishment of the formal banking system, the American Revolutionary War and Confederate period plunged the country into financial chaos. The war was financed through the use of “continental currency”, which rapidly depreciated, leading to the notion that it was “not worth a continental currency”. To restore order, President George Washington appointed Alexander Hamilton as the first Secretary of the Treasury. Hamilton proposed that the federal government assume state debt, issue federal bonds, and create a national bank to regulate currency and credit. Hamilton was uneasy about the chaos of currency competition among states and convinced Congress to charter the establishment of the First Bank of the United States, calling it a “political machine of vital importance to the nation” and believing it to be the key to unifying the Republic’s financial system.
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The First Banking Era (1791-1811)
In 1791, Congress chartered the establishment of the First Bank of the United States, which was signed by President Washington and became the de facto first central bank of the United States. Headquartered in Philadelphia, with a capital of $10 million, 20% held by the government and 80% privately held, the bank serves as the financial agent of the federal government, managing deposits, taxes, payments, and issuing nationally accepted gold and silver backed paper currency. Under the leadership of President Thomas Villin, banks opened branches in major cities, stabilizing the post-war economy. However, the establishment of the bank sparked strong opposition from Jefferson and Madison, who believed it was unconstitutional and biased towards elites. Despite the effective operation of the bank, political resistance continued to increase. In 1811, Congress narrowly rejected the renewal of the charter. Without a central bank, the United States faced financial chaos during the War of 1812, highlighting the need for new national institutions and laying the foundation for the establishment of the Second Bank of the United States.