You are here:

U.S. History/Continuing Questions on the National Bank and the Federal Reserve

Advertisement


Question
QUESTION: Aha! There's a key piece of the puzzle that I definitely needed to grasp!

So the only thing that really distinguished the Bank of the US from normal banks of the day would have been its role as the depository for all federal tax revenues. And as a result of that role, it was able to perform typical banking practices on a much larger scale. It had more money at its disposal for making loans than was held by any other singular bank, and so it was able to carry a certain amount of influence over those other banks when making loans to them by requiring that they meet agreed upon terms. It also influenced the economy by returning bank notes to smaller banks in exchange for specie (I assume that this is a process that was practiced by all banks of the time, but again, since the Bank of the US had more bank notes at its disposal, it was able to perform the action on a larger scale than any other singular bank). Like any other bank of the time, the Bank of the US printed its own currency, and while this currency was circulated alongside many others, it was more widespread and held a greater value.

Is all of that right? So would the Bank of the US actually have been considered as a "central bank", or would that term be a bit of misnomer here? You couldn't open a bank account and make a deposit at any modern central bank, could you?

ANSWER: I think your description is correct.  Whether you define it as a "central bank" or not depends on your definition of central bank.  It certainly dominated the US economy and exerted a great deal of control over economic issues.  In that sense it was a central bank.

But it was a private institution.  Although the Federal government was a part owner, it did not have a controlling interest and could not direct the Bank to act as it wished when the interests of the government and the Bank differed.  Most modern definitions of a central bank think of it as an arm of the government, and under the power of the government.  Neither Bank of the United States fit this definition.  On the other hand, at the time of these banks, other countries also had central banks in private hands.  The Bank of England, for example, long considered the central bank for England, was a private bank until it was nationalized in 1946.



---------- FOLLOW-UP ----------

QUESTION: Okay; this is great. I think I've just about got a firm grasp on the Bank of the US.

Moving back to the bank's role in making loans to the federal government - you initially said, "It could use that money [federal tax revenues] to provide loans to governmental and private organizations..."

But I suppose that this might not be the best way to think about it. The federal government wasn't borrowing the exact same money that it had deposited with the Bank of the US; rather it was just borrowing any money that the Bank of the US happened to have on hand at the time, much of which would have come from the deposits of private citizens. Right?

One other point that I'm now wondering about is whether the Bank of the US existed as a single building in Philadelphia or if it had multiple branches across the country. You recently said that the bank's startup capital "was used to build new buildings" - building*s*, plural. What kind of buildings would this have included?

ANSWER: Right, government revenues did not always line up with expenditures.  So there were times when the government needed to borrow money and times when it kept money on deposit.  Also, the government had long term debt from the assumption of State debts from the revolution.  That debt, owed primarily to foreign lenders had to be serviced over time as well.  

The Bank was not a single building.  Although both the First and Second Banks were both headquartered in Philadelphia, they had branches in Boston, New York, Baltimore and Charleston (which were all the major port cities at the time) and later opened branches in Norfolk, DC, Savannah and even New Orleans after it became part of the US.  The Second bank had even more branches around the country.

Based on your interest, you may also find these short summaries about the first and second banks interesting:

https://www.philadelphiafed.org/publications/economic-education/first-bank.pdf

https://www.philadelphiafed.org/publications/economic-education/second-bank.pdf



---------- FOLLOW-UP ----------

QUESTION: Sorry for the long delay. I've almost reached the end of my questions on this topic, but still have a few more.

So the Bank of the US would make loans to the federal government, but the Federal Reserve does not do this. Today, the Federal Government receives loans by selling Treasury bonds (as well as Treasury bills and notes as I understand). I believe that Treasury bonds, notes, and bills were all first introduced during WWI. However, some sort of government security was sold under Washington's administration, right? Do you know what these securities were and how they differed from modern T-bonds/bills/and notes?

Answer
The modern treasury bond program has been in place since 1935.  But the Treasury department has sold bonds on and off since it existed.  Even before the Treasury Department existed, the Continental Congress sold bonds since 1776.

Here is the Treasury Department's explanation:

https://www.treasurydirect.gov/indiv/research/history/history_sbbegin.htm

Bank loans from the Bank of the US were not used instead of bonds.  They were used to cover short term cash needs.  Selling bonds takes time and planning.  Sometimes an entity, even the government, needs cash right now.  Only a bank can handle that.  

U.S. History

All Answers


Answers by Expert:


Ask Experts

Volunteer


Michael Troy

Expertise

I can answer just about any question on early American History. My specialties are the American Revolution through the Civil War/Reconstruction. I also have greater expertise in matters relating to military, political or legal history.

Experience

I have lectured at George Washington University regarding the Civil War, as well as several elementary school Civil War demonstrations. I was also a member of a Civil War reenactment group for about 10 years.

Publications
http://unlearnedhistory.blogspot.com

Education/Credentials
J.D. University of Michigan B.A. George Washington University

Awards and Honors
Truman Scholar

©2016 About.com. All rights reserved.