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Within the first few years of independence, it was almost natural that more trust was needed in the banking system. "The thinking of the time favored the establishment of a single quasi-governmental bank in each state that would operate in the public interest under private management. The overriding fear of political leaders was that excessive numbers of banks or loans too much in excess of specie reserves would hobble the taxing and spending functions of government by swamping the economy in depreciated paper. Political leaders also recalled very well the wild inflation resulting from unrestrained governmental issues of continental and state bills of credit (paper money) during the Revolution, and in the Constitution they barred the states from issuing them"(Foner/Garraty, 192).
These forces led to the creation of the First Bank of the United States. As will be noted below, this was a quasi-central bank that lent money to the government as well as to the private sector. The overriding focus was to operate the bank with conservative efficiency. "Balance sheets for the years 1792-1800 reveal a generally high degree of success in maintaining the Bank's specie reserves. The ratio between bank notes in circulation and specie holdings was quite small"(Foner/Garraty, 193). The problem was that the bank could not keep up with the growing need for capital. As will be examined below, this was one of the factors that led to the proliferation of state banks. During the 1791 to 1811 period, the number of state banks increased from 5 to 117, and their combined capital stock appreciated from $4.6 to roughly $66.5 million(Foner/Garraty, 193). This spectacular growth gave strength to state oriented economic growth. Naturally, de-centralist political forces began to evolve and conflicts ensued between federalists. The rest, as is often said, is history. .
The Banking Controversy at the Turn of the 19th Century.
