Just a few months after the American War of Independence finally came to a formal conclusion with the Treaty of Paris in 1783, a bank was founded that would live to today. The Bank of New York had humble origins, founded with under $500,000 in equity capital. However, it had an illustrious backer and a novel goal of serving merchants, and not the landowners on whose needs past banking firms in the agrarian country had focused. The bank’s business corresponded to the vision of its founder Alexander Hamilton, a vision for the country that ultimately was realized and served as a tailwind for the bank’s growth.
Banking in Early America
Upon securing its political independence, the United States severely lacked the suitable financial infrastructure expected for a relatively wealthy country of over three million people. There were almost no banks or even a single national currency. Among the few important financial institutions of the era were the provincial ‘land banks’ established by previous colonial governments to lend paper money solely against property. They served two important functions. First, their issuance of paper money allowed for an expansion of credit despite the shortage of metal coins endemic to the American colonies. Second, they supplied longer-term loans which were particular difficult to arrange. These land banks were established in several of Britain’s North American colonies in the early-to-mid 1700s.
It was not until the end of that century however, that new types of banks began to appear in the new country. The only other ‘modern’ bank in existence when the Bank of New York was founded was the Bank of North America. That firm was chartered in 1781, at the end of the American War of Independence, by the Continental Congress in Philadelphia. It was founded with an equity investment of $400,000 and had the financial backing of Robert Morris, the new nation’s Superintendent of Finance and one of the richest men in America. Besides the land banks, the Bank of North America was the first ‘general’ bank in the country and defended its monopoly in Philadelphia vigorously, sending would-be competitors to look elsewhere.
It was a strange time and place to be in the banking business. In the 1780s, the money stock of the new nation was comprised of several different coins from Spain, France, Portugal, Britain, and elsewhere. Besides these coins obtained in trade, banks would have also needed to decide whether to accept deposits or payments in the paper currencies of other American states, which were still in charge of issuing their own monies. On top of this, the principle of limited liability was not yet in vogue. Governments were not quick to grant the privilege and so incorporating a bank could be an uphill fight.
Bank of New York
It was in this barren financial wasteland that the Bank of New York was founded. Revealing one redeeming quality of the era was how quickly the bank got off the ground. In February 1784, an article appeared in a New York City newspaper, the Packet, proposing the establishment of a land bank for New York and New Jersey. With the public call for such a bank being made, the intentions of different men operating independently were fused into a single initiative. Within a month, twelve directors and a president for this new bank were elected at the Merchant’s Coffee House on the southeast corner of Wall and Water Streets in Manhattan.
In the end though, this was not to be just another land bank. While the land banks made sense for rural regions, it was not what a commercial city like New York needed. The city then was the second largest in the new country, with a population perhaps just under 25,000. However, it already served a vital role in the nation’s economy. As a port city, it was where importers interacted with wholesalers who transferred wares from abroad into the American hinterland and vice versa. The Treaty of Paris, which ended the War of Independence, had been signed just six months earlier. With the war over, that trade was sure to grow, and the need for the financial accouterments to trade would grow with it.
When the subscription books opened up, a thousand shares were offered for $500 each. If fully subscribed, this would have given the bank an initial capitalization even larger than that of the Bank of North America in Philadelphia; however, only about seven hundred of the shares were successfully sold before the bank was launched. Many of the under two hundred initial investors were merchants, the very people the bank was founded to serve. However, one investor was a lawyer from Nevis who had served under General Washington and who would later become Treasury Secretary, Alexander Hamilton. He bought a single share. Other illustrious founders included Isaac Roosevelt, ancestor to two American presidents and a New York legislator himself. He would later serve as the bank’s president.
The company started operating quickly. Its first office was opened in June of 1784 on Queen Street, which is today’s Pearl Street, just south of the Brooklyn Bridge and not far from the East River wharfs. The bank was initially housed in the former mansion of William Walton, a prominent merchant in colonial New York. It was here that the bank’s directors met and the roughly half dozen first employees handled day-to-day operations. Just four months earlier, the bank was just an idea; now it was in business and within a few years its shares were among the first traded on the New York Stock Exchange.
In keeping with the needs of its urban environs, the Bank of New York extended short-term credit to shopkeepers and wholesalers who used the loans to finance purchases of inventories from merchants and importers. These were very different products from the mortgages offered by the land banks. First, as ‘discount loans’, they paid no interim interest during their very short lives. Rather, the lender advanced to the borrower some bit less than what would have to be repaid at maturity. Also, the term of the loans was very short, no more than thirty days; they were meant more to make up for a shortage of currency than to provide financing.
The effective interest rate on the loans offered was a rather low 6% per year, repayable in either banknotes or metal coins. To earn its investors a competitive return of 10% or more annually, the bank needed to use leverage. By 1791, the bank had almost $850,000 in loan assets but only about $370,000 in equity capital. The balance of its assets was funded by customer deposits and the issuance of banknotes, each of which were redeemable on demand and thus required that sizable reserves be held in cash.
So quickly was the bank formed that it put off incorporating until a later date. This meant that for the first few years of its existence, the bank operated without limited liability. Before finally achieving incorporation in 1791, shareholders were personally liable if the bank failed. This provided a strong incentive for prudent management but also limited the bank’s growth. A balance sheet compiled when the firm was incorporated showed that a substantial amount of the assets of the firm were held in cash. The sum of cash and coins on hand equaled roughly half of the outstanding balance of deposits and banknotes, a very conservative reserve ratio. Obviously, the lack of limited liability was a constraint.
“That standing on the footing of a private Company, in which each member is supposed to be personally responsible for all the engagements entered into, it has been found that many persons who would otherwise be desirous of becoming subscribers, are deterred by that circumstance, from doing it; whereby the increase of the stock of the bank is obstructed and its operations proportionably confined.” – petition to the New York Legislature by the Bank of New York
The attorney, legislator, and future Treasury Secretary Alexander Hamilton was an initial shareholder of the bank and though he owned just one share of stock, he played an outsized role in its founding. Hamilton had previously conceived of such a firm in New York and was among the men whose efforts were combined in 1784 following the February article in the Packet. It was Hamilton who drafted the company’s constitution and he also served as an initial director of the firm. While in government, he continued to serve as a benefactor of the bank, though he sold his small stake in it at a healthy profit to avoid some of the appearance of conflict.
In his first two years in office, Hamilton arranged for the Bank of New York to extend loans to the new government which had recently relocated to New York. In 1789 and 1790, the federal government borrowed a total of $100,000 from the bank paying the same 6% interest charged to merchants for the money. The Bank of North America was also used to raise short-term funds for the government so this was not the unique privilege of Hamilton’s bank.
The sum of these loans was also miniscule compared to the total indebtedness of the United States at the time, which stood at over $50 million. The interest in arrears alone amounted to $13 million and neither of these figures includes the debts of the individual states, soon to be assumed by the federal government at Hamilton’s insistence. The loans Hamilton arranged were merely meant to fund the tiny federal bureaucracy until revenue from customs duties came into the Treasury. Hamilton’s request for President Washington’s approval of the loan described the use of proceeds as “to furnish in the course of the ensuing month for the compensation of the members of Congress and the officers and servants of the two Houses”. The Bank of New York was helping the government keep the candles lit.
While at the Treasury, Hamilton relied on the bank when tinkering with the nation’s financial markets. This was most noticeable during the panic of 1791-92, triggered by a fall in the prices for shares of the newly formed Bank of the United States. The Bank of New York first intervened in the country’s nascent sovereign bond market in 1791 by buying treasury bonds to support their price and reduce yields on behalf of the government, which guaranteed to make the bank whole in the event of any loss suffered in the intervention. Hamilton’s use of the bank for open market purchases of government securities was repeated the following year; the firm briefly blurred the line between private state-chartered bank and national central bank.
For Hamilton, healthy financial markets and successful banking institutions were critical, not just for the kind of trade the Bank of New York was launched to serve, but for industry as well. But even here, the Bank of New York played a part. It loaned $300,000 to Hamilton’s Society for Useful Manufactures, which was planning an industrial city in New Jersey. In the coming decades, even more banks which later went on to finance the industrialization of the country began sprouting up. Though the Bank of New York was only the second ‘general’ bank in America, by the end of the century, no fewer than two dozen were in existence.
The bank Alexander Hamilton helped establish over two centuries ago has survived to the present day as the Bank of New York Mellon. In the decades after it was established in 1784, the bank saw the nation around it transform from a largely agrarian and scattered country to an increasingly industrial and connected one. Essentially, the United States was beginning to look like the kind of country Hamilton envisioned it to become. The bank was not just a passive observer of this change. As a bank established for merchants, and later a financier of industry, it played a part in that transformation.
More from the Tontine Coffee-House
Read more about early American financial history, including about the how the American Revolutionary War was financed. Be sure to check out the post that started this whole blog while you are at it.
1. Domatt, Henry W. History of the Bank of New York, 1784-1884. G.P. Putnam’s Sons, 1884.
2. Hamilton, Alexander. Report on the Subject of Manufactures. 1791.
3. Jaffe, Steven H., and Jessica Lautin. Capital of Capital: Money, Banking, and Power in New York City. Columbia University Press, 2014.
4. “Loans of the United States.” Rhodes’ Journal of Banking, Aug. 1894.
5. Miller, John Chester. Alexander Hamilton and the Growth of the New Nation. Transaction Publishers, 2004.
6. Staff. “Alexander Hamilton: New York City’s Financial Founding Father.” Behind The Scenes, New York Historical Society, 20 Nov. 2018.
7. Wright, Robert E. “Origins of Commercial Banking in the United States, 1781-1830.” Edited by Robert Whaples, EHnet, 26 Mar. 2008.