When Banks Multiplied

Federal architecture had a hold on us for years, because the period was so great. Municipal Building, Wilkinsburg, Pennsylvania, 1930s. (Photo by Smith Collection/Gado/Getty Images)

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Bray Hammond made this remarkable observation in his Banks and Politics in America: From the Revolution to the Civil War, the winner of the 1958 Pulitzer Prize in History:

“In 1791, when the Bank of the United States was chartered,…there were three banks in operation. In 1811, when the Bank of the United States was let die,…banks…had multiplied from three to ninety. In the next five years the number increased to nearly 250; by 1820, it exceeded 300—an increase of more than a hundred-fold in the first years of the federal union.”

Hammond went on:

“This growth was not the multiplication of something familiar, like houses or ships or carriages, but a multiplication of something unfamiliar or even mysterious. Had banks been thought to be merely depositories where savings were tucked away—as came to be thought in time—there would have been nothing remarkable about their increase. But they were known to do more than receive money. They were known to create it. For each dollar paid in by the stockholders, the banks lent two, three, four, or five.”

Banks grew like weeds in early America. How did the country do? Spectacularly. Economic production and the development of markets was stellar in the generation after 1789. Food production, road and river traffic, mechanization, new products, new services—all was on the increase in this period, as would be the case through the glory years of what became, by the end of the nineteenth century, the great American industrial revolution.

And why were banks multiplying like rabbits? To produce an essential medium, an essential good, for a big growing economy. This was money. In our new book Free Money, we recount the American tradition of letting private institutions create American money, indeed American dollars.

When the United States ratified the Constitution, the last thing it attempted to do was nationalize its monetary system. You will note that the Constitution says next to nothing about giving the government monetary powers. The United States set up a bank in 1791, but its main functions were to collect tax payments and make payments of its own on the national debt. (By the Constitution, state debts amassed in the cause of the Revolution together became that of the federal government.) Given the light rule of law of the new Republic under the founding document, economic activity was set to swirl. People went at it in production and sales. Banks produced money for this expansion. Not the government—private institutions, private banks.

In colonial America, money had always been short. This is why all sorts of expedients, including paper money, developed. This money generally fed economic growth, and not inflation. Money (as the great Austrian economist Carl Menger taught) is a good and service like any other, to be made by competitive producers in an economy looking to impress people with price, quality, and service. The United States in its founding years understood this verity (long before it was articulated by modern theorists) and lived it. The Constitution—and, truth be told with a hat tip to Bernard Bailyn, the British order in the colonies before that—had such a light if sure imposition on society that society realized that it was time to make bank. The economy grew very well in the colonial era and kept it up in the Federal period.

Banks, banks, banks. Money, money, money. Growth, growth, growth. Inflation, inflation, inflation? Not that last trio. There were banks, they made money, we got growth—and prices of goods and services stayed totally stable. The United States defined the dollar, as grains of precious metal, in 1792. Banks freely availing themselves of this definition of the dollar in the Federal period—in their own monetary issues of dollars—created so much money that it precisely fed real growth and precisely did not feed inflation.

What kind of fantastically well-engineered machine was this? Was there some National Lab in Hawkins, Indiana, that came up with such a glorious, complex, perfect outcome? Far from it. That un-wordy Constitution, the thing all the shorter because the Founders had their abundant drinking schedule set every day at the convention at at early happy hour, engineered nothing. The British order engineered nothing. The expectation was that if there were a classical framework of government and mores, the society would get to it. And it did.

We are gearing up for the 250^th of 1776. The last time we tried this, for the Bicentennial in 1976, stagflation beset us. The celebrations were off-kilter because of it. Yay America? Yay double-digit inflation and slow growth? Here approaching 2026, Government is nice and overweight, with a Federal Reserve and everything, and in the 2000s we have largely sported sub-2 percent growth on the usual metrics while struggling to fend off inflations and housing and commodities bubbles and collapses. Thank goodness for the tech revolution giving us a glimpse of private-sector mass abundance.

After 1976, the nation squared up and gave itself a free-market revolution, in the 1980s although beginning rather right away with Jimmy Carter’s prodigious deregulation. If we are going to get all historical for the 250^th, there are many wonderful places to start. One of them is to reflect on how we used to have free money, free production of dollars—and my, did we do well with it.