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Bank of the United States

Bank of the United States

The Bank of the United States was established in Philadelphia in 1791. By the 20th century the bank was one of the most important in the country. In 1930 rumours began to circulate that the bank was in trouble. On the 7th December long queues began forming outside the bank's branches. Over the next four days depositors took out $20 million from the bank. On the 11th December, all its branches closed, as the bank no longer had any money to give back to its customers. It was the most disastrous failure in the banking history of the United States. Investigators discovered that the bank's owners had been guilty of incompetence and three of them, B. K. Marcus, Saul Singer and Herbert Singer, were sentenced to terms in Sing Sing Prison.

The governor of New York, Franklin D. Roosevelt, was one of those deeply shocked by the failure of the Bank of the United States. When he became president in 1933 he persuaded Congress to pass the 1933 Banking Act. The Federal Reserve Board was given tighter control of the investment practices of banks and the Federal Deposit Insurance Corporation was set up to insure all deposits in banks up to $5,000.

All through the Twenties, they were having about six hundred banks a year close. In 1929 and 1930 they got into thousands. Closing every day. There was one bank in New York, the Bank of the United States - in the wake of that closing, two hundred smaller banks closed because of the deposits in that bank from the others.

It was one of the most disastrous failures in the banking history of the country. The collapse carried with it four affiliate corporations, involving an additional 200 million dollars. Men wept as they tried to rush past the police guards and pound on the closed doors; women screamed as they held up their bank books. Crowds refused to disperse and stayed outside the doors for days, hoping that their savings were not lost.

Some of our bankers have shown themselves either incompetent or dishonest in their handling of the people's funds. They had used money entrusted to them in speculations and unwise loans. This was, of course, not true of the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity. It was the government's job to straighten out this situation and do it as quickly as possible. And the job is being performed. Confidence and courage are the essentials in our plan. We must have faith; you must not be stampeded by rumours. We have provided the machinery to restore our financial system; it is up to you to support and make it work. Together we cannot fail.

A Brief History of U.S. Banking

Banking has changed in many ways through the years. Banks today offer a wider range of products and services than ever before, and deliver them faster and more efficiently. But banking's central function remains as it has always been. Banks put a community's surplus funds (deposits and investments) to work by lending to people to buy homes and cars, to start and expand businesses, to put their children through college, and for countless other purposes. Banks are vital to the health of our nation's economy. For tens of millions of Americans, banks are the first choice for saving, borrowing, and investing.

Andrew Jackson shuts down Second Bank of the U.S.

President Andrew Jackson announces that the government will no longer use the Second Bank of the United States, the country’s national bank, on September 10, 1833. He then used his executive power to remove all federal funds from the bank, in the final salvo of what is referred to as the �nk War."

A national bank had first been created by George Washington and Alexander Hamilton in 1791 to serve as a central repository for federal funds. The Second Bank of the United States was founded in 1816 five years after this first bank’s charter had expired. Traditionally, the bank had been run by a board of directors with ties to industry and manufacturing, and therefore was biased toward the urban and industrial northern states. Jackson, the epitome of the frontiersman, resented the bank’s lack of funding for expansion into the unsettled Western territories. Jackson also objected to the bank’s unusual political and economic power and to the lack of congressional oversight over its business dealings.

Jackson, known as obstinate and brutish but a man of the common people, called for an investigation into the bank’s policies and political agenda as soon as he settled in to the White House in March 1829. To Jackson, the bank symbolized how a privileged class of businessmen oppressed the will of the common people of America. He made clear that he planned to challenge the constitutionality of the bank, much to the horror of its supporters. In response, the director of the bank, Nicholas Biddle, flexed his own political power, turning to members of Congress, including the powerful Kentucky Senator Henry Clay and leading businessmen sympathetic to the bank, to fight Jackson.

Later that year, Jackson presented his case against the bank in a speech to Congress to his chagrin, its members generally agreed that the bank was indeed constitutional. Still, controversy over the bank lingered for the next three years. In 1832, the divisiveness led to a split in Jackson’s cabinet and, that same year, the obstinate president vetoed an attempt by Congress to draw up a new charter for the bank. All of this took place during Jackson’s bid for re-election the bank’s future was the focal point of a bitter political campaign between the Democratic incumbent Jackson and his opponent Henry Clay. Jackson’s promises to empower the 𠇌ommon man” of America appealed to the voters and paved the way for his victory. He felt he had received a mandate from the public to close the bank once and for all, despite Congress’ objections. Biddle vowed to continue to fight the president, saying that “just because he has scalped Indians and imprisoned Judges [does not mean] he is to have his way with the bank.”

On September 10, 1833, Jackson removed all federal funds from the Second Bank of the U.S., redistributing them to various state banks, which were popularly known as “pet banks.” In addition, he announced that deposits to the bank would not be accepted after October 1. Finally, Jackson had succeeded in destroying the bank its charter officially expired in 1836.

Jackson did not emerge unscathed from the scandal. In 1834, Congress censured Jackson for what they viewed as his abuse of presidential power during the Bank War.

Banking Panics of the Gilded Age

The late 19th century saw the expansion of the US financial system but was also beset by banking panics.

The Gilded Age in US history spans from roughly the end of the Civil War through the very early 1900s. Mark Twain and Charles Dudley Warner popularized the term, using it as the title of their novel The Gilded Age: A Tale of Today, which satirized an era when economic progress masked social problems and when the siren of financial speculation lured sensible people into financial foolishness. In financial history, the term refers to the era between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. In this period, the US monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.

At the time, like today, New York City was the center of the financial system. Between 1863 and 1913, eight banking panics occurred in the money center of Manhattan. The panics in 1884, 1890, 1899, 1901, and 1908 were confined to New York and nearby cities and states. The panics in 1873, 1893, and 1907 spread throughout the nation. Regional panics also struck the midwestern states of Illinois, Minnesota, and Wisconsin in 1896 the mid-Atlantic states of Pennsylvania and Maryland in 1903 and Chicago in 1905. This essay details the crises in 1873, 1884, 1890, and 1893 this set includes all of the crises that disrupted or threatened to disrupt the national banking and payments system. A companion essay discusses the Panic of 1907, the shock that finally spurred financial and political leaders to consider reforming the monetary system and eventually establish the Federal Reserve.

The Panic of 1873 arose from investments in railroads. Railroads had expanded rapidly in the nineteenth century, and investors in many early projects had earned high returns. As the Gilded Age progressed, investment in railroads continued, but new projects outpaced demand for new capacity, and returns on railroad investments declined. In May and September 1873, stock market crashes in Vienna, Austria, prompted European investors to divest their holdings of American securities, particularly railroad bonds. Their divestment depressed the market, lowered prices on stocks and bonds, and impeded financing for railroad firms. Without cash to finance operations and refinance debts that came due, many railroad firms failed. Others defaulted on payments due to banks. This turmoil forced Jay Cooke and Co., a notable merchant bank, into bankruptcy on September 18. The bank was heavily invested in railroads, particularly Northern Pacific Railway.

A cartoon of a giant figure named 'Panic' clearing garbage on Wall Street, 1873 (Library of Congress Prints and Photographs Division, LC-DIG-ds-04513)

Cooke’s failure changed expectations. Creditors lost confidence in railroads and in the banks that financed them. Stock markets collapsed. On September 20, for the first time in its history, the New York Stock Exchange closed. Trading did not resume for ten days. The panic spread to financial institutions in Washington, DC, Pennsylvania, New York, Virginia, and Georgia, as well as to banks in the Midwest, including Indiana, Illinois, and Ohio. Nationwide, at least one-hundred banks failed.

Initially, the New York Clearing House mobilized member reserves to meet demands for cash. On September 24, however, it suspended cash payments in New York. New York’s money center banks continued to supply cash to country banks. Those banks fulfilled withdrawal requests by drawing down reserves at banks in New York and in other reserve cities, which were municipalities whose banks could hold as deposits the legally required cash reserves of banks in other locations. The crisis subsided in mid-October.

The Panic of 1884, by contrast, had a more limited impact. It began with a small number of financial firms in New York City. In May 1884, two firms – the Marine National Bank and the brokerage firm Grant and Ward – failed when their owners’ speculative investments lost value. Soon after, the Second National Bank suffered a run after it was revealed that the president had embezzled $3 million and fled to Canada. Then, the Metropolitan National Bank was forced to close after a run was sparked by rumors that its president was speculating on railroad securities with money borrowed from the bank (those allegations later proved to be untrue).

The latter institution had financial ties to numerous banks in neighboring states, and its closure raised doubts about the banks to which it was linked. The crisis spread through Metropolitan’s network to institutions in New Jersey and Pennsylvania, but the crisis was quickly contained. The New York Clearing House audited Metropolitan, determined it was solvent, advertised this fact, and loaned Metropolitan $3 million so that it could withstand the run. These actions reassured the public, and the panic subsided.

The Panic of 1890 was also limited in scope. In November, after the failure of the brokerage firm Decker, Howell and Co., securities’ prices plunged. The firm’s failure threatened its bank, the Bank of North America. Depositors feared the bank would fail and began withdrawing substantial sums. Troubles began to spread to other institutions, including brokerage firms in Philadelphia and Richmond. Financier J.P. Morgan then convinced a consortium of nine New York City banks to extend aid to the Bank of North America. This action restored faith in the bank and the market, and the crisis abated.

The Panic of 1893 was one of the most severe financial crises in the history of the United States. The crisis started with banks in the interior of the country. Instability arose for two key reasons. First, gold reserves maintained by the US Treasury fell to about $100 million from $190 million in 1890. At the time, the United States was on the gold standard, which meant that notes issued by the Treasury could be redeemed for a fixed amount of gold. The falling gold reserves raised concerns at home and abroad that the United States might be forced to suspend the convertibility of notes, which may have prompted depositors to withdraw bank notes and convert their wealth into gold. The second source of this instability was that economic activity slowed prior to the panic. The recession raised rates of defaults on loans, which weakened banks’ balance sheets. Fearing for the safety of their deposits, men and women began to withdraw funds from banks. Fear spread and withdrawals accelerated, leading to widespread runs on banks.

Uncle Sam points a gun at 'hard times,' 1893 (Library of Congress Prints and Photographs Division, LC-DIG-ppmsca-29097)

In June, bank runs swept through midwestern and western cities such as Chicago and Los Angeles. More than one-hundred banks suspended operations. From mid-July to mid-August, the panic intensified, with 340 banks suspending operations. As these banks came under pressure, they withdrew funds that they kept on deposit in banks in New York City. Those banks soon felt strained. To satisfy withdrawal requests, money center banks began selling assets. During the fire sale, asset prices plummeted, which threatened the solvency of the entire banking system. In early August, New York banks sought to save themselves by slowing the outflow of currency to the rest of the country. The result was that in the interior local banks were unable to meet currency demand, and many failed. Commerce and industry contracted. In many places, individuals, firms, and financial institutions began to use temporary expediencies, such as scrip or clearing-house certificates, to make payments when the banking system failed to function effectively.

In the fall, the banking panic ended. Gold inflows from Europe lowered interest rates. Banks resumed operations. Cash and credit resumed lubricating the wheels of commerce and industry. Nevertheless, the economy remained in recession until the following summer. According to estimates by Andrew Jalil and Charles Hoffman, industrial production fell by 15.3 percent between 1892 and 1894, and unemployment rose to between 17 and 19 percent. 1 After a brief pause, the economy slumped into recession again in late 1895 and did not fully recover until mid-1897.

While the narrative of each panic revolves around unique individuals and firms, the panics had common causes and similar consequences. Panics tended to occur in the fall, when the banking system was under the greatest strain. Farmers needed currency to bring their crops to market, and the holiday season increased demands for currency and credit. Under the National Banking System, the supply of currency could not respond quickly to an increase in demand, so the price of currency rose instead. That price is known as the interest rate. Increasing interest rates lowered the value of banks’ assets, making it more difficult for them to repay depositors and pushing them toward insolvency. At these times, uncertainty about banks’ health and fear that other depositors might withdraw first sometimes triggered panics, when large numbers of depositors simultaneously ran to their banks and withdrew their deposits. A wave of panics could force banks to sell even more assets, further depressing asset prices, further weakening banks’ balance sheets, and further increasing the public’s unease about banks. This dynamic could, in turn, trigger more runs in a chain reaction that threatened the entire financial system.

In 1884 and 1890, the New York Clearing House stopped the chain reaction by pooling the reserves of its member banks and providing credit to institutions beset by runs, effectively acting as “a central bank with reserve power greater than that of any European central bank,” 2 in the words of scholar Elmus Wicker.

A common result of all of these panics was that they severely disrupted industry and commerce, even after they ended. The Panic of 1873 was blamed for setting off the economic depression that lasted from 1873 to 1879. This period was called the Great Depression, until the even greater depression of 1893 received that label, which it held until the even greater contraction in the 1930s -- now known as the Great Depression.

Another common result of these panics was soul searching about ways to reform the financial system. Rumination regarding reform was particularly prolific during the last two decades of the Gilded Age, which coincided with the Progressive Era of American politics. Following the Panic of 1893, for example, the American Bankers Association, secretary of Treasury, and comptroller of currency all proposed reform legislation. Congress held hearings on these proposals but took no action. Over the next fourteen years, politicians, bureaucrats, bankers, and businessmen repeatedly proposed additional reforms (see Wicker, 2005, for a summary), but prior to the Panic of 1907, no substantial reforms occurred.

The adjective “gilded” means covered with a thin gold veneer on the outside but not golden on the inside. In some ways, this definition fits the nineteenth century banking and monetary system. The gold standard and other institutions of that system promised efficiency and stability. The American economy grew rapidly. The United States experienced among the world’s fastest growth rates of income per capita. But, the growth of the nation’s wealth obscured to some extent social and financial problems, such as periodic panics and depressions. At the time, academics, businessmen, policymakers, and politicians debated the benefits and costs of our banking system and how it contributed to national prosperity and instability. Those debates culminated in the Aldrich-Vreeland Act of 1908, which established the National Monetary Commission and tasked it to study these issues and recommend reforms. The commission’s recommendations led to the creation of the Federal Reserve System in 1913.


Andrew Jalil, “A New History of Banking Panics in the United States, 1825-1929: Construction and Implications,” 323.

Charles Hoffman, The Depression of the Nineties, 109. Elmus Wicker, Banking Panics of the Gilded Age, 16.


Calomiris, Charles W., and Gary Gorton. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, 109-74. ed. R. Glenn Hubbard, Chicago: University of Chicago Press, 1991.

Carlson, Mark, “Causes of Bank Suspensions in the Panic of 1893,” Federal Reserve Board of Governors, 2011. http://www.federalreserve.gov/pubs/feds/2002/200211/200211pap.pdf.

Grossman, Richard S. “The Macroeconomic Consequences of Bank Failures under the National Banking System.” Explorations in Economic History 30, no. 3 (1993): 294-320.

Jalil, Andrew J. “A New History of Banking Panics in the United States, 1825-1929: Construction and Implications.” American Economic Journal: Macroeconomics 7, no. 3 (July 2015): 295-330.

Kemmerer, E. W. “Seasonal Variations in the Relative Demand for Money and Capital in the United States.” National Monetary Commission Doc. 588, 1910. https://fraser.stlouisfed.org/title/633

Sprague, O. M. W. “History of Crises under the National Banking System.” National Monetary Commission Doc. 538, 1910. https://fraser.stlouisfed.org/title/653

Twain, Mark, and Charles Dudley Warner. The Gilded Age: A Tale of Today. Hartford, Conn.: American Publishing Company, 1873. [Online at Project Gutenberg: http://www.gutenberg.org/files/3178/3178-h/3178-h.htm]

Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000.

Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed. Columbus, Ohio: Ohio State University Press, 2005.

The Bank War&aposs Lasting Implications

To weaken the Bank before its charter ran out, Jackson ordered that all U.S. government deposits be withdrawn and deposited in various state-chartered banks. In response, Biddle restricted the Bank’s loans, tightening the nation’s money supply in an effort to inspire public outrage toward Jackson’s policies and force the recharter. Instead, the ensuing financial distress inspired greater suspicion of the Bank’s power.

As the Bank War continued, Jackson’s opponents organized the Whig Party, named after the British term for opponents of monarchical power. In 1834, the Whig-dominated Senate formally censured Jackson for removing the federal deposits, an action that Jackson’s supporters—who now called themselves Democrats—voted to remove from the Senate record as soon as they gained control in 1837.

The charter of the Second Bank of the United States expired in 1836, and a defeated Biddle accepted an offer from Pennsylvania to turn it into a state-chartered bank. With the removal of the Bank as a regulating force, state banks began printing currency and lending money in exorbitant amounts. The resulting high inflation, and Jackson policies favoring hard currency (gold or silver) led many investors to panic and many banks to close due to insufficient reserves, in a financial crisis known as the Panic of 1837.

Jackson’s Democratic successor, Martin Van Buren, proposed the establishment of a new independent treasury system, which would fulfill Jackson’s goal of separating the nation’s finances from its government. Repealed by Whigs in 1841 after Van Buren’s loss to William Henry Harrison, the Independent Treasury Act was signed back into law by Democratic President James K. Polk in 1846. The independent treasury system would function until 1914, when it was replaced by the Federal Reserve.

First Bank of the United States

George Washington's Secretary of the Treasury, Alexander Hamilton, suggested that the United States would benefit from the formation of a national bank along the lines of the Bank of England. He was convinced that the bank was both proper and constitutional, being allowed by the tenth amendment (not at that time even ratified) because it was an appropriate means, albeit not specified, to achieve the goals of the federal government. Jefferson strongly disagreed, both as a matter of financial policy and due to his interpretation of the tenth amendment. Jefferson pointed out that nowhere in the constitution was authority given to the federal government to charter a bank. This debate over reserved powers would be continued by others for more than a century. Washington adopted the arguments offered by Hamilton. The First Bank of the United States was given a 20-year charter in 1791. Its equity capital was $10 million, of which $2 million was contributed by the federal government and the balance by private shareholders. It was governed by a board of 25 directors, of whom five were chosen by the federal government. The bank's headquarters were in Philadelphia. The original bank building was restored for the Bicentennial in 1976 and can be toured today. The bank had branches in other cities and played a valuable role in the commerce of the young nation. However, it was constantly under attack from the Jeffersonian Democrats who prevented its charter from being renewed in 1811. However, the financial stress of the War of 1812 showed the need for the bank, and the Second Bank of the United States was chartered after the end of the war. After Alexander Hamilton spearheaded a movement advocating the creation of a central bank, the First Bank of the United States was established in 1791. The First Bank of the United States had a capital stock of $10 million, $2 million of which was subscribed by the federal government, while the remainder was subscribed by private individuals. Five of the 25 directors were appointed by the U.S. government, while the 20 others were chosen by the private investors in the Bank. The First Bank of the United States was headquartered in Philadelphia, but had branches in other major cities. The Bank performed the basic banking functions of accepting deposits, issuing bank notes, making loans and purchasing securities. It was a nationwide bank and was in fact the largest corporation in the United States. As a result of its influence, the Bank was of considerable use to both American commerce and the federal government.

National Banks: 1863-1913

The outbreak of the Civil War and the need to finance it led again to a renewed interest in a national bank. But this time, with the lessons of the Second Bank, the designers took a different approach, modeled on the free banking system. In 1863, they established what is now known as the &ldquonational banking system.&rdquo

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The new system allowed banks to choose between a national charter and a state charter. With a national charter, banks had to issue government-printed bills for their own notes, and the notes had to be backed by federal bonds, which helped fund the war effort. In 1865, state bank notes were taxed out of existence. Thus, in spite of all previous attempts, this was the first time a uniform national currency was established in the United States.

The Bank

One area of particular concern among bankers, businessmen, and government leaders was banking on the frontier. Frontier land was cheap, and speculators would buy large tracts expecting the price to go up as settlers entered the region. In order to finance their investments, speculators borrowed as much as they could from “wildcat” banks that sprang up to cater to this demand. These banks were themselves often speculative in nature, being more interested in making a fast dollar than building a secure banking business. Their excessive loan practices caused many more banknotes to be in circulation in the United States than there were deposits to cover them. Hard-pressed banks were sometimes forced to suspend specie payments to depositors and noteholders wanting to withdraw coins. Confidence in banknotes dropped, causing them to lose value, and more of them were needed to purchase the same amount of goods.

A similar situation of unstable currency had existed after the Revolutionary War. Alexander Hamilton as Secretary of Treasury proposed a national bank that would issue banknotes of stable value. Among other benefits, Hamilton felt such a bank would tie the interests of the wealthy to the interests of the government and, therefore, to Americans in general. The federal government would supply one-fifth of the new bank’s initial capital, much of it in government bonds. Private investors would supply the other four-fifths. After much debate, Congress created the First Bank of the United States, and President Washington signed it into law amid grave misgivings in 1791. Thomas Jefferson had opposed the bank saying it vastly exceeded what was specified in the Constitution and that it opened “a boundless field of power, no longer susceptible of any definition.” Hamilton countered that the power to charter corporations was inherent in government and that the Constitution authorized Congress to pass any laws “necessary and proper for carrying into execution . . . powers vested by the Constitution in the government of the United States.” (Art. I, Sec. VIII, para.18) This provision came to be known as the “elastic clause” for its opening to a broad interpretation or “loose construction” of the powers granted to the government by the Constitution. The Bank’s charter ran out in 1811 and was allowed to lapse because of a turn of the political tide in favor of strict construction as well as deep concerns over the large proportion of British ownership in the Bank. Absence of a central bank hurt trade and hampered the war effort in 1812.

Inflation and the risk-taking behavior of frontier banks threatened the nation’s financial stability. Frontier banks were beyond the regulatory reach of the state banks, however, because the state banks had no means to compel banks outside their state to exchange their notes for specie. In addition, on the frontier there was no cooperative network of banks to ensure sound practices as there was from one state to another. This situation prompted the federal government to charter the Second Bank of the United States in 1816. Like state banks and the First Bank of the United State, the Second Bank of the United States was privately owned. All federal funds were deposited in the Bank making it a powerful source of investment capital, and its federal charter extended its reach throughout the states and into the frontier. The government intended that the Bank’s size and consistent practices would help regulate the speculative frontier banks.

Unfortunately, the first managers of the Second Bank of the United States did not understand its role in the economy. Almost immediately, the Bank fell into practices of overextending credit, especially among its western branches, which loaned ten times more banknotes than it had gold and silver on deposit. For several years a boom in frontier land values masked the danger to the country, but in 1819 land values declined and many frontier borrowers were unable to make their loan and mortgage payments. Wildcat banks were unable to meet their obligations, which created financial difficulties for their creditors and depositors, and so on throughout the economy. Foreclosures and bankruptcies were a painful reality to many in this era when the debtor’s prison was still a legal institution. The Panic of 1819 caused many business failures and was a general hardship for great numbers of people for the three years it continued.

The Second Bank of the United States had badly overextended credit, and many of its loans had defaulted in the panic, nearly causing it to fail. Only by taking the severest measures did it remain solvent. To save itself, the Bank refused to extend credit to smaller banks that were also financially in trouble. These banks, in turn, were forced to implement drastic measures such as calling in loans and foreclosing on mortgages in order to stay afloat. Though these steps saved the financial structures and institutions that supported the economy, they were hard on many individuals and businesses and even caused failures among banks. Consequently, public opinion was critical of the Second Bank of the United States in the aftermath of the panic.

In addition, many state banks felt that their authority to regulate credit within their state was threatened by a national bank such as the Second Bank of the United States. The State Bank of Maryland persuaded the Maryland Legislature to impose a tax on out-of-state banks, including the Second Bank of the United States. The federal government refused to pay the tax, whereupon Maryland sued the head cashier at the Maryland branch of the Bank of the United States, John W. McCulloch.

The case of McCulloch v. Maryland went to the U.S. Supreme Court, which was led by Chief Justice John Marshall. The Court ruled in favor of McCulloch. In writing the majority opinion, Marshall stated that “a power to create implies a power to preserve.” By this he meant that the government has the right to exercise its power and authority to protect an entity that it has legally created. Marshall went on to say, “the power to tax involves the power to destroy,” by which he conveyed the court’s opinion that a state government has no authority to exercise destructive power over a legitimate and constitutional entity chartered by the federal government.

Another significant aspect of the McCulloch case was Marshall’s defining the doctrine of “loose construction” of the Constitution. Loose construction allows the government to act outside what is specifically stated in the Constitution. Previously many people, particularly Jefferson and the Republicans, had insisted on “strict construction,” whereby the federal government is confined to do exactly what is expressly stated in the Constitution, no more and no less. Marshall argued, however, that the Constitution was derived from the consent of the people and this allowed the government to act for the people’s benefit. He also stated that the tenets of the Constitution were not strictly set but were adaptable to circumstances and that whatever means were appropriate to achieve a desirable end, so long as they were not prohibited or morally wrong, were within the bounds of the intent of the Constitution. Often using Hamilton’s exact words, Marshall’s argument for a broad interpretation of the Constitution expanded the powers of the federal government. In particular, Marshall upheld the legality and appropriateness of the creation of the Second Bank of the United States by the federal government.

The Farmers Alliance and the People's Party (1877-1869)

In 1877, in Lampasas County, Texas, a group of farmers formed a group called the Knights of Reliance who were concerned about the financial power being "concentrated into the hands of a few." Later renamed the Farmers Alliance, it spread to 120 chapters throughout Texas and by 1887 the movement stretched up to the Dakotas and as far east as the Carolinas. By the time 1890 rolled around, this Populist philosophy had succeeded in establishing itself and they had elected governors and congressmen.

They advocated a progressive income tax for railroads, communications, and corporations to be regulated by the Federal government the right to establish labor unions and government mediation to stabilize falling commodity prices and the initiation of credit programs. They were against the gold standard and the country's private banking system which was centered at Wall Street. They were impressed with Lincoln 's "greenbacks" because of the ability to adapt in order to meet the credit needs of the economy. They wanted the money supply to be controlled by their elected representatives and not the money interests of Wall Street. They created the People's Party and ran their own independent presidential candidate in 1892. In 1896 they hitched their wagon to the campaign of Democrat William Jennings Bryan who lost to William McKinley effectively ending the Populist movement. This political movement created the initial stirrings for what eventually became the Federal Reserve Act.

The First Bank of the United States: A Chapter in the History of Central Banking

A look at the origins and operations of the first Bank of the United States, the nation’s first attempt at central banking.

The War for Independence was over. The spirited, though often tattered, militia of the American colonies had defeated the army of one of the greatest nations in the world. Great leaders had emerged from the conflict: George Washington, John Adams, and Thomas Jefferson, to name just a few.

But all was not well. The United States of America, a name the new country had adopted under the Articles of Confederation, was beset with problems. In fact, the 1780s saw widespread economic disruption. The war had disrupted commerce and left the young nation, and many of its citizens, heavily in debt. Furthermore, the paper money issued by the Continental Congress to finance the war was essentially worthless because of the rampant inflation it had caused, and many people were bankrupt, even destitute. Add to this the lack of a strong national government and it&rsquos easy to see how the fragile union forged in the fight for independence could easily disintegrate.