Why Did Hamilton Want a National Bank? The 1790 Answer to London

Alexander Hamilton wanted a national bank because the new United States was deep in war debt, had weak credit and no common currency. His December 1790 plan gave the government a bank to hold its money, collect taxes, lend in emergencies and issue notes accepted nationwide. Congress chartered it in February 1791 for twenty years.

The Revolution settled who governed America. It did not settle how America would pay its bills. That job fell to Hamilton, the first secretary of the Treasury, and the bank was the center of his answer.

Why did Alexander Hamilton want a national bank?

The Federal Reserve's own history site describes the 1780s as years of "widespread economic disruption." The country had to restart trade, repay war debt, restore the value of its currency and bring down inflation. The National Park Service puts it more bluntly: after the Revolution the United States "faced overwhelming debt and an uncertain commercial future."

Hamilton took on the debt first. Old war securities had been trading far below their face value. Economists George Hall and Thomas Sargent write that "[t]hroughout the 1780s, repayment of the Revolutionary debt remained in doubt, as indicated by its being traded at about 20 percent of its face value." Hamilton's own report, dated January 9, 1790, describes critics who thought it unfair "to pay twenty shillings in the pound, to one who had not given more for it than three or four," and he rejected that idea. The report proposed that the federal government take over the states' war debts and fund them as one national debt. The Veil of the Square Mile explains the goal this way: the book argues that a single national debt would tie merchants, lawyers and landowners to the survival of the federal government, because their money would now rise and fall with the Union's credit. The book also recounts the June 1790 dinner, arranged by Jefferson, at which Madison agreed to find the votes for assumption and Hamilton agreed to back a capital on the Potomac.

The bank came next. In December 1790 Hamilton sent Congress his proposal. According to Federal Reserve History, he argued that a national bank could issue paper money, keep public funds safe, give merchants banking services and act as the government's fiscal agent, collecting its taxes and paying its debts.

Hamilton made the same practical case when he defended the bank to President Washington in February 1791. A government at war needs money faster than taxes come in, he wrote: "If there be a bank the supply can at once be had." He pointed to a frontier expedition that had to be paid for before a new tax would even begin to be collected.

In his January 1790 report on public credit, Hamilton had already said he planned to buy back debt with borrowed money "through the medium of a national bank; for which, with the permission of the House, he will submit a plan in the course of the session." The bank was part of the debt plan from the start. You can follow how the book connects these steps in The Veil of the Square Mile's chapter on Hamilton.

How did he model it on (and differ from) the Bank of England?

Hamilton did not hide where the idea came from. Federal Reserve History says he "used the charter of the Bank of England as the basis for his plan." The Park Service says he was "inspired by the British example of a central bank."

The Bank of England had been founded in 1694 as a private bank to lend to the government, mainly to pay for war with France. The Veil of the Square Mile argues that Hamilton studied that system closely because he wanted the United States to have its own credit, so that it would not become a financial dependency of the empire it had just beaten. You can read that argument in The Veil of the Square Mile. The Bank of England sits in the City of London, which has its own local government; our page on what the City of London Corporation is explains how it works.

The American version had real differences, and they are on the record:

• The government owned a stake. The bank started with $10 million in capital. The federal government owned $2 million of it, or 20 percent, and private investors owned the other $8 million.
• The Treasury could look inside. The Treasury secretary could inspect the books, demand a statement of the bank's condition as often as once a week, and pull the government's deposits at any time for any reason.
• It could not buy federal bonds. To avoid inflation and the appearance of a conflict of interest, the bank was barred from buying U.S. government bonds.
• Foreign shareholders could not vote. Many early investors were foreign, which bothered many Americans, but those shareholders had no vote.
• It had a time limit. The charter ran twenty years, not forever.

The bank was not a modern central bank. It did not set monetary policy, regulate other banks or act as a lender of last resort. But because it was so large, it could slow or speed up lending by state banks by deciding when to cash in their notes for gold and silver. Its notes were the only bank notes accepted for federal taxes, which made them the closest thing the country had to a national currency.

For how this program grew into what Henry Clay later called the American System, see our American System entity page.

Why did Jefferson and Madison oppose it?

Secretary of State Thomas Jefferson argued that the bank was unconstitutional. In his written opinion to Washington in 1791, he wrote that incorporating a bank was not among the powers the Constitution gave Congress, and that the "necessary and proper" clause did not cover it. "A bank therefore is not necessary," he wrote, "and consequently not authorized by this phrase." He warned that reading the Constitution more loosely would "take possession of a boundless field of power."

Jefferson also had economic objections. Federal Reserve History says he feared the bank would become a financial monopoly, hurt state banks and favor financiers and merchants, who tended to be creditors, over planters and family farmers, who tended to be debtors. It clashed with his picture of the country as mainly agricultural.

James Madison, then a congressman from Virginia, made the case against the bank on the House floor on February 2, 1791. The record of his speech says he denied that Congress had authority to pass it, an opinion "he had entertained ... from the date of the Constitution," and that "he well recollected that a power to grant charters of incorporation had been proposed in the General Convention and rejected."

Hamilton answered with a long rebuttal. The Park Service says Washington gave him a week and that Hamilton's 15,000-word reply persuaded the president. Its core argument was that "necessary" in the Constitution means "needful, requisite, incidental, useful, or conducive to," not "absolutely" necessary. Washington signed the bill in February 1791. The bank opened in Philadelphia on December 12, 1791.

That argument over implied powers did not end with the bank. Americans still have it.

What happened to the First Bank of the United States in 1811?

The charter ran out in 1811 and Congress did not renew it. The vote was as close as a vote can get. In January 1811 the House voted against renewal by one vote. In the Senate the vote was a tie, and Vice President George Clinton of New York broke it against the bank.

Federal Reserve History gives the reasons. Many of the bank's original opponents still opposed it. Hamilton was dead. He was shot by Aaron Burr in a duel at Weehawken, New Jersey, on July 11, 1804, and died the next day. His Federalist Party was out of power. And the number of state banks had grown, and they feared competition from a national bank.

The book argues that the United States entered the War of 1812 without a bank able to finance the war, and that the Treasury struggled to borrow and briefly missed interest payments. Five years after the charter ran out, after the War of 1812, President James Madison, who had opposed the first bank, signed a bill creating the Second Bank of the United States. The Park Service notes that the First Bank's building on South Third Street in Philadelphia, finished in 1797, still stands and reopened to the public on July 1, 2026.

FAQ

Why did Hamilton want a national bank? To manage the war debt, hold and move the government's money, collect taxes, lend to the government in emergencies, and give the country bank notes accepted everywhere.

Was the First Bank of the United States modeled on the Bank of England? Yes. Federal Reserve History says Hamilton used the Bank of England's charter as the basis for his plan. The American bank differed: the government owned 20 percent, the Treasury could inspect its books, and its charter lasted twenty years.

Why did Jefferson think the bank was unconstitutional? He argued the Constitution did not give Congress the power to create corporations, and that a bank was convenient but not "necessary."

When did the First Bank close? Its twenty-year charter expired in 1811 after renewal failed by one vote in the House and on a tie broken by the vice president in the Senate.

Where was the First Bank? Philadelphia. Its building on South Third Street, finished in 1797, is part of Independence National Historical Park.

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Next in the series: Hamilton was answering a money fight that started a generation earlier, when Britain came out of the French and Indian War deep in debt and decided the colonies should help pay. Next: why Britain taxed the colonies after 1763. Was that fight the real start of 1776, and could there ever be a new 1776 over money?