The First Bank of the United States is considered a successby economic historians. Treasury Secretary Albert Gallatiancommented that the Bank was "wisely and skillfully managed"(Hixson, 114). The Bank carried a remarkable amount ofliquidity. In 1809, for example, its specie/banknote ratio wasabout 40 percent (compared to a modern average reserve/depositratio of about 12 percent) making it probably the most liquidbank in the U.S. at the time. Despite the liquidity, the Bankwas also profitable, earning most of its income throughsubstantial loans to both government and private business. Ithelped to end several bank runs by transferring funds to banks inneed of temporary liquidity.
The chief argument in favor of the Bank's renewal in 1811was that its circulation of about $5 million in paper currencyaccounted for about 20 percent of the nation's money supply(Symons, 12). It was the closest thing to a national currencythat the U.S. had. Ironically, this may have contributed to itsdownfall because the Bank's issuance of notes came at the expenseof state banks. In addition, the currency issued by the Bankwas not discounted, whereas the currency issued by the 712 statebanks were discounted anywhere from 0 to 100 percent. However,the arguments against the Bank were too strong. Foreignownership, constitutional questions (the Supreme Court had yet toaddress the issue), and a general suspicion of banking led thefailure of the Bank's charter to be renewed by Congress. TheBank, along with its charter, died in 1811.
Following the Bank's disappearance, state banks, unhinderedby either state regulations or the discipline imposed by the Bankof the U.S., greatly increased the number of bank notes incirculation. John K. Galbraith writes of the period, "State banks,relieved of the burden of forced redemption [imposed by the FirstBank], were now chartered with abandon; every location large enoughto have 'a church, a tavern, or a blacksmith shop was deemed a suitableplace for setting up a bank.' These banks issued notes, and other,more surprising enterprises, imitating the banks, did likewise. 'Evenbarbers and bartenders competed with banks in this respect'" (Galbraith, 58).Coupled with the disruptions associated with the war with England,this caused considerable inflation from 1812-1815. During that period,prices rose an average of 13.3 percent per year. An 1815 attemptto establish a new central bank failed, but by 1816 a consensus emergedfor a return to central banking (Ibid, 13).
