The Father of the Financial System -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business
We all recognize George Washington as the father of our country, but Alexander Hamilton was the father of the financial system. That part gets lost in the history books, but without the financial system, the political system never would have worked. Hamilton deserves the credit for this. He’s more famous for being a lousy shot and losing a duel to Aaron Burr, but he was also an astute economic planner and one of the founders of the Bank of New York.
Hamilton realized that the country couldn’t get along without money, and to have money, it needed banks. It seems obvious today, but back then, banking was a controversial subject.
George Washington agreed with Hamilton about the banks, and even invested in one himself. Washington was a shareholder in the Bank of Alexandria, which opened near his home at Mount Vernon. But a lot of important people were opposed to Hamilton’s ideas, and foremost among them was Thomas Jefferson. Jefferson was a gentleman farmer who believed there was virtue in tilling the soil and living off the land. He hated factories and the cities that grew up around the factories. To Jefferson, banks were the root of all evil, especially the government’s bank.
As it turns out, Jefferson was no expert on personal finance. He ran through a large fortune and died virtually bankrupt in 1826. He was a big spender, particularly on gadgets and on books, and his library had more volumes than Harvard College, which had been in existence for more than one hundred years before Jefferson was born. He was a tinkerer, a bookworm, and a farmer at heart the gentlemanly kind who left the farm work to others.
Jefferson wanted America to be a nation of pastures and wheat fields, where independent “yeoman” farmers could dominate local politics and have the strongest voice in public affairs. He rejected the European idea that government should be run by a ruling class of snooty aristocrats.
Never would Jefferson have imagined that the factories would lure millions of farm workers away from the farms and into the cities and the mill towns, or that factories would be their ticket to a better life, or that heavy industry with all its problems would provide Americans with the highest standard of living in the history of human beings. It couldn’t have happened without the massive amounts of money that went into building the roads, canals, highways, bridges, factories and where did most of this money come from? Jefferson’s dreaded banks!
In spite of Jefferson’s opposition, the first Bank of the United States got the congressional go-ahead in 1791 and managed to stay in business for twenty years, until 1811, when a new group of bank haters in Congress refused to renew the charter. The bank was shut down.
A second Bank of the United States was chartered in 1816, this time in Philadelphia, but it ran into trouble a few years later when Andrew Jackson was elected president. Jackson was a rough character who came from the wilds of Tennessee. They called him “Old Hickory,” because he was tall like a tree (six feet one inch, which was very big for those days), he had a thick skin like a tree, and he grew up in a log cabin. In spite of his outdoorsy reputation, Jackson was sick most of the time and stayed indoors. Like Jefferson before him, Jackson believed that the states should have more power and the federal government less.
This second Bank of the United States was blamed for a nationwide financial panic in 1819, when a lot of businesses went bankrupt and people lost their life savings and their jobs. (This was the first of a long string of panics, which created havoc around the country.) Western farmers joined with eastern factory workers in waggling their fingers at the “monster bank” that they said was the culprit of the panic.
So when Jackson was elected president a decade after the panic, he listened to these people and took all the money out of the federally sponsored bank and shipped it off to be deposited in various state banks, and that was the end of the second Bank of the United States. From then on, the states controlled the banking business and gave out the charters. Soon, every John and Jane Doe with nothing better to do decided to start a bank.
Thousands of banks appeared on main streets and side streets in big towns and little towns, the way chicken restaurants are cropping up today. And since every one of these state banks could issue its own paper money, it was very confusing to do business, because from state to state it was hard to tell whose cash was worth what, and a lot of merchants wouldn’t accept any of it. Traveling within the country then was very similar to traveling abroad today: You had to worry about changing money from place to place.
This is an area in which the United States and Europe have gone in different directions. Europe has always had a few banks with many branches, while we’ve always had a slew of different banks. By 1820, there were three hundred separate banks in the United States, as compared to a handful of banks in England. Today, there are over ten thousand banking institutions in the United States, if you add in all the savings and loans and the credit unions, while Great Britain has less than fifteen.
Many of our local banks were shoestring operations that lacked the necessary capital to tide them over in an economic crisis, and there was always a crisis waiting to happen. Half the banks that opened their doors between 1810 and 1820 had failed by 1825, and half the banks that opened between 1830 and 1840 had failed by 1845. When you put money into a bank, it wasn’t insured the way it is today, so when a bank failed, people with savings accounts or checking accounts had no protection and lost all their money. There was no such thing as a safe deposit.
Banks were dangerous places to park cash, but that didn’t stop Americans from putting their life savings into them. The banks would take these savings and lend the money to the bridge builders and the canal builders, the turnpike projects and the railroad projects that got America moving. When a bank loaned money to a railroad, or a bridge company, or a steel company, the money came from the savings accounts of the people who put money into the bank.
In other words, all this high energy, this excitement, this hustle and bustle that led to economic progress was financed out of the pockets of the man and woman on the street.
Whenever the government needed money for a project, it had four choices of where to get it: taxes, bank loans, selling lottery tickets, or selling bonds. (More about bonds on page 104.) Whenever a company needed money, it could borrow from a bank, sell bonds, or sell shares of stock. But in the first half of the nineteenth century, stocks were a company’s last resort. The idea of selling shares to the public caught on very slowly.