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The history of central banking in the United States does not begin with the Federal Reserve. The Bank of the United States received its charter in 1791 from the U.S. Congress and was signed by President Washington. The Bank's charter was designed by Secretary of the Treasury Alexander Hamilton, modeling it after the Bank of England, the British central bank.
The Bank met with considerable controversy. Agrarian interests were opposed to the Bank on the grounds that they feared it would favor commercial and industrial interests over their own, and that it would promote the use of paper currency at the expense of gold and silver specie (Kidwell, 54). Ownership of the Bank was also an issue. By the time the Bank's charter was up for renewal in 1811, about 70 percent of its stock was owned by foreigners. Although foreign stock had no voting power to influence the Bank's operations, outstanding shares carried an 8.4 percent dividend. Another twenty year charter, it was argued, would result in about $12 million in already scarce gold and silver being exported to the bank's foreign owners (Hixson, 115).
Secretary of State Thomas Jefferson believed the Bank was unconstitutional because it was an unauthorized extension of federal power. Congress, Jefferson argued, possessed only delegated powers which were specifically enumerated in the constitution. The only possible source of authority to charter the Bank, Jefferson believed, was in the necessary and proper clause (Art. I, Sec. 8, Cl. 18). However, he cautioned that if the clause could be interpreted so broadly in this case, then there was no real limit to what Congress could do. Then, curiously, in the memorandum in which he articulated his thoughts on this matter, Jefferson advised that if the President felt that the pros and cons of constitutionality seemed about equal, then out of respect to the Congress which passed the legislation the President could sign it (Dunne, 17-19). James Madison said the Bank was "condemned by the silence of the constitution" (Symons, 14).
Hamilton conceeded that the constitution was silent on banking. He asserted, however, that Congress clearly had the power to tax, to borrow money, and to regulate interstate and foreign commerce. Would it be reasonable for Congress to charter a corporation to assist in carrying out these powers? He argued that the necessary and proper clause gave Congress the power to enact any law which was necessary to execute its powers. A "necessary" law in this context Hamilton did not take to mean one that was absolutely indispensable. Instead, he argued that it meant a law that was "needful, requisite, incidental, useful, or conducive to." Then Hamilton offered a proposed rule of discretion: "Does the proposed measure abridge a pre-existing right of any State or of any individual?" (Dunne, 19). Hamilton's arguments carried the day and convinced President Washington.
The Bank of the United States had both public and private functions. Its most important public function was to control the money supply by regulating the amount of notes state banks could issue, and by transferring reserves to different parts of the country. It was also the depository of the Treasury's funds. This was an important function because, as later experience would prove, without a central bank, the Treasury's deposits were placed in private commercial banks on the basis of political favoritism. The Bank of the U.S. was also a privately owned, profit-seeking institution. It competed with state banks for deposits and loan customers. Because the Bank was both setting the rules and competing in the marketplace especially irritated state banks, and they joined with agrarian interests and Jeffersonians in opposition to the Bank. The Bank was supervised by the Secretary of the Treasury who could inspect all the Bank's transactions and accounts, except those of private individuals, and order audits on demand (Ibid, 11-13). The Bank's ownership was set by $10 million in capital, divided into 25,000 shares of voting stock with a par value of $400 each. About 80 percent of the stock was sold to the public with the remainder capitalized by the federal government. No individual could own more than 30 shares. Shares were also sold to foreigners, although the Bank's charter did not grant them voting rights (Phalle, 43).