The 'American System' Requires a National Bank

PHYSICAL ECONOMY -- Part IV

by Nancy Spannaus and L. Wolfe


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Once the new government of the United States had assumed central responsibility for its debts (see previous column in this series), the next step was for it to assume responsibility for generating credit which would be available for building the nation, and assuring prosperity for current and future generations. Treasury Secretary Alexander Hamilton proposed to fill this need in his ``Second Report on Public Credit,'' otherwise known as the ``Report on the National Bank.'' In it, he laid out the need for the establishment of a public bank, partly funded by the U.S. government debt, and regulated by the U.S. Treasury, which would provide both the basis for a national currency, and a source of capital for long-term investment to promote the general welfare.

The Bank of the United States, as the new institution was known, was intended to free the country from dependence upon foreign or private interests, and provide the means by which the country could grow. Hamilton called the Bank a ``nursery for public wealth,'' and conceived of its operations not primarily as an adjunct to Federal finances, but as a resource to permit private entrepreneurs to invest in the nation. His political descendants, among them nationalists such as Mathew Carey, Henry Clay, John Quincy Adams, and Abraham Lincoln, considered the National Bank to be, along with tariffs and internal improvements, the touchstone of the American System of Economics.

Because the Bank of the United States was responsible to the government, was partially owned by the government, and was capitalized largely by government debt, it was a regulated body, which not only had to carry out its operations in order to make a profit for its shareholders, but also was constrained to invest for the benefit of economic growth in the physical economy of the nation. Those who opposed it were primarily from the ranks of plantation owners and other large land-holders, who saw in the creation of the Bank an institution that would promote manufacturing and industrialization. Indeed, industrialization, a sine qua non for making the new nation economically independent of the Empire which it had just defeated, was precisely what Hamilton was up to when he proposed the national bank, as his subsequent ``Report on Manufactures'' made clear.

A bank--any bank--in Hamilton's view, was only as good as the judgment of its directors and administrators in discriminating sound ventures from purely speculative ones. But Hamilton does not want to over-regulate such creative judgment, by listing what a bank can and can't do; this, he fears, would cripple its operation and require constant changing, since judgments of what is in the national interest at specific times, will (and should) change; instead, he proposes to establish ``guideposts'' that should direct such judgments. For example, Hamilton recommended that to avoid speculation in real estate, the National Bank be prohibited from lending for real estate purchases or from owning or holding property, other than the land and improvements for the Bank's offices and branches. Human intellect must otherwise discern the sound from among many possible investments, but priority must be given to the enhancement of physical production or ``public improvement'' (i.e., infrastructure).

- Turning Debt into Credit -

To generate the starting capital for the National Bank, Hamilton proposed that it sell $10 million in subscriptions (shares) denominated at $400 each, and available to individuals, as well as ``bodies politic''; the shares would then be allocated a dividend, as and when deemed fit by the Bank's directors.

The shares were payable one quarter in currency, gold or silver, and three-quarters in instruments of U.S. sovereign debt, carrying 6% interest (which was among the debts assumed from the states and other lenders; see previous section). In that way, Hamilton was assuring the fungibility of the assumed U.S. debt. Further, Hamilton proposed that President be authorized to subscribe to the Bank with $2 million in sovereign U.S. debt, while then borrowing from the Bank an equal sum payable in equal installments, over a 10-year period, or in such larger payments as the government deemed fit.

Thus, Hamilton was capitalizing a bank with debt--an impossibility from an accountant's standpoint. But, this was not just any debt: It was the sovereign debt of the United States of America, and as such had the full faith and credit of the nation behind it. The sovereign debts of the United States (or any nation) are not merely a liability on some accountant's ledger book; they are potential assets, awaiting guaranteed repayment. Repaid by what? Why, by the revenues created by the productive economy of the nation, for which they generate investment capital (through the Bank, and through their fungibility as an asset) to increase the wealth of the nation! Hamilton has turned what financiers and their flaks like Adam Smith consider a ``dead'' financial instrument--a debt--into a living, breathing part of the economy: productively invested capital with the potential to create physical wealth.

In fact, through the structure of the Bank of the United States, Hamilton was wedding the nation's private interests to the public, in such a way that the physical economy of the nation would benefit, with a stable currency, low interest rates, long-term investment, and a secure economic future. Those who opposed the Bank sought a contrary future, as experience would show.

This is Part 4 of a continuing series.


Part I: What Is 'American System' Economics?

Part II: The 'American System' Means Sovereignty, Not Free Trade

Part III: The 'American System' Requires That A National Control Its Own Currency

Part IV: The 'American System' Requires A National Bank