Unfortunately another use of the notes from Morris’s bank was to pay for hundreds of thousands of acres of land in western Virginia and Kentucky that he bought. One of the relatively few signers of the Declaration of Independence who was also a member of the Constitutional Convention (and a senator in the first Congress after the adoption of the Constitution), Morris ran out of indulgent creditors in the late 1790s—though his bank, which had quickly retreated to the status of a Pennsylvania institution, remained solvent and survived into this century. Among Morris’s visitors in debtors’ prison, where he spent three years (from 1798 to 1801), was Thomas Jefferson, who had a low opinion of banks and bankers—and thought nationally chartered banks were flatly unconstitutional—but remained grateful for the financier’s services during the war. One notes in passing and without comment that today’s national association of bank lending officers, the second largest bankers’ organization in the country, perpetuates Morris’s name, even though he went bust.

Banks create new money by making loans, though many bankers will deny it.

The earliest state charter for a bank went in 1784 to Alexander Hamilton for the Bank of New York, which continues to this day and still honors Hamilton. This was to be the most conservative bank imaginable, lending only for thirty days, essentially a device to help wholesalers carry their inventories. But before the century was out, the bank was financing the Society for Establishing Useful Manufactures in the construction of a factory at the waterfall in Paterson, New Jersey. The inevitable had occurred: once the agency was there to create new money by making loans—which is what a bank does, though a surprising number of bankers will deny it—even the most prudent directors will see reasons to help the growth of industry.

The first golden age of bank chartering was the 1790s, when the states needed help with their own budgets and the federal government established the Bank of the United States, with a twenty-year license, to clean up the new nation’s indebtedness, collect taxes, borrow abroad, and be reponsible—as the Bank of England was—for the operation of a national currency. The federal government put up $2 million of the necessary $10 million in capital, but the bank was to be run as a private institution (again like the Bank of England, in which George Washington himself was a stockholder). Among those who became shareholders were Harvard College, the state of New York, and thirty members of Congress. It was perhaps the most successful new issue ever to hit an American market: within months the twenty-five-dollar subscription price for the four-hundred-dollar par value shares rose to three hundred dollars.

The headquarters for the new bank was a superb, two-story Greek revival structure, completed in 1797 and located two blocks from Independence Hall in Philadelphia. Still a feature of every tourist’s trip to the nation’s first capital, it set a style for bank buildings that persisted until after the Second World War.

To Hamilton’s dismay, the Bank of the United States almost immediately began opening branches, an arrangement he thought would create insurmountable management problems. Moreover, one of the branches competed for business with his own Bank of New York.

Allowed to lapse with the end of its first twenty-year charter in 1811, the bank was rechartered in 1816 as the Second Bank of the United States, its purpose to clean up the fiscal mess following the War of 1812. This new bank gave rise to one of the most important of Chief Justice John Marshall’s constitutional decisions (he carefully sold off his stock in the bank before writing it): McCulloch v. Maryland established the immunity of federal institutions from state taxation. Shortly after Marshall handed down his opinion, it became known that James McCulloch, treasurer of the bank’s Baltimore branch, against whom the suit had been brought by the state, with two other conspirators, had embezzled nearly $1.5 million, very much more than Maryland had tried to assess in taxes, and had nearly broken the bank.

More important than the federally chartered bank was the proliferation of state-chartered banks, institutions to serve local needs—especially the needs of the states themselves, for these banks were required to buy state bonds as part of the price of a franchise. Soon banks were competing for business, restrained in their competition by the fact that on a normal day they held each other’s notes in their vaults as part of their own assets. The power to award bank charters was among the most early solicited privileges of state legislators, and a great source of corruption, with bribes paid both by people hoping to start a bank and by already established bankers hoping to lock out competition. Eventually these scandals would be diminished by the passage of “free banking” legislation, authorizing the state registrars to incorporate banks as they did any other kind of business. But there was always a lot of politics in banking, if only because decisions about who would and who wouldn’t get a loan were often influenced by political affiliations in a period when Americans took their politics much more seriously than they do today.