Wall Street History: The Politics of New York’s First Banks

Prior to the American Revolution, there were virtually no banks in the United States. However, Alexander Hamilton, who was George Washington’s key advisor on financial matters, was familiar with the central banks of England and the Netherlands which had been key factors in the growth of the economy of those countries.

Unlike some agrarian Virginian politicians such as Thomas Jefferson, Hamilton believed that banking and credit was the key to the nation’s future. In 1781 he encouraged Robert Morris, the recently appointed Superintendent of Finance for the Continental government, to form the Bank of North America in Philadelphia. For a time up, until the British surrender of New York, this was the only Bank in the colonies.

The Bank of New York

After the British surrender of New York City on Evacuation Day on November 25th, 1783, Hamilton returned to the city of New York. There, in 1784, he convinced the New York State Legislature to charter the Bank of New York, the only bank in the city until the Manhattan Company was chartered in 1799. Hamilton’s Bank of New York was instrumental in assisting New York merchants, whose city had been ravaged by the British during the Revolution, to rebuild the city’s economy. Banking in those days was in many ways a highly partisan endeavor however, and the Bank of New York was affiliated with Hamilton’s Federalist party, so that it behooved merchants seeking financing to support the Federalists.

The post-Revolution government was committed to enforcing New York State land forfeiture laws, which allowed the seizure of land from those who had sided with the British, a sizable portion of the residents of the city of New York. This policy violated the terms of the Treaty of Paris which had ended the Revolution which provided that the pre-war rights of British supporters would be respected. As a result, a number of Loyalist landowners sought out New York lawyers such as Hamilton to argue claims to their land which had been forfeited to the new State of New York.

Hamilton became an ardent advocate of the U.S. Constitution, which would provide what he considered a more rational federal system leading to an economically and militarily stronger United States. One provision of the new Constitution was the clause that said “No State shall impair the obligation of contract,” which was used to guarantee Loyalist rights to their prewar lands. The fight to ratify the U.S. Constitution in New York was thus very bitter, and was strenuously opposed by Anti-Federalists.

The fact that the Bank of New York had a monopoly position over banking in the city was undoubtedly significant factor in the Federalists’ ratification victory. However, in the next decade, there would be increasing bitterness in the city among many veterans of the revolution who felt that the pre-war aristocracy was reasserting itself in contravention of what they believed had been hard won rights.

Ultimately this feeling would be reflected in the rise of the Tammany Society and the creation by Aaron Burr of the Bank of Manhattan in 1799 as a rival to Hamilton’s Bank of New York.

The Bank of Manhattan

As the city of New York’s economy began to improve in the 1790s, many veterans of the Revolution felt they were left out of the prosperity and began to congregate in a civic organizations, especially the Tammany Society. Over time, these disaffected veterans and their supporters denounced the ruling Federalists and the increasingly autocratic administration of John Adams. Particularly galling was the administration’s Alien and Sedition Act (1798), which stifled free speech.

By 1799 a new political party, the Democratic-Republicans, (ancestors of today’s Democratic Party) was coalescing around Aaron Burr a prominent lawyer and politician. They challenged the Federalists for control of the city government and the state legislature, although the Federalist Bank of New York’s monopoly on banking was a significant impediment to their efforts.

Burr promoted a civic project to fresh bring water into Manhattan by convincing the State Legislature to incorporate the Manhattan Company for this purpose. The charter for the company however, also permitted their excess funds to be invested in banking. In fact, the corporation made fairly minimal efforts on their water plan (although a hexagonal cistern remains the logo of JP Morgan Chase, its corporate descendant).  As a bank however, it was successful in breaking the Bank of New York’s monopoly. Among the directors of the new Bank of Manhattan were Aaron Burr, 72-year-old Horatio Gates and other members of the Tammany Society.

Horatio Gates was a former British officer who had been the Patriot commander at the Battles of Saratoga and had afterward clashed with Alexander Hamilton, Washington’s young aide, and later Washington himself, whom he was alleged to be scheming to replace. Gates’ reputation significantly declined after his disastrous defeat at the Battle if Camden in South Carolina in 1780, and, unlike Adams and Washington, he had played no role in the formation of the new government after the Revolution.

Gates was active in the Society of Cincinnati, another organization devoted to perpetuating the liberties secured in the Revolution, and in veterans affairs more generally. In 1790, he moved from his home in Virginia to the city of New York, where he became friends with Aaron Burr and was convinced to run, as a kind of celebrity candidate, with former Governor George Clinton , in the 1800 election on the Democratic-Republican ticket. Gates and the other Democratic-Republicans won a stunning upset victory, which helped elect Thomas Jefferson over John Adams.

Gustave Myers in his history of Tammany Hall (1902) states that without the formation of the Bank of Manhattan and the Tammany Society, the Democratic-Republicans would have been wholly ineffective. By providing a vehicle through which merchants not allied with the Federalists could obtain financing, the Bank of Manhattan broke the stranglehold on the city’s merchant community, and subsequently chartered banks continue to expand the availability of credit. Ultimately, the largest faction of the Democratic-Republicans, the Democratic Party, would become the predominant political power in the city of New York for most of the 19th and 20th centuries.

The opening of banking to a broader base of merchants and the proliferation of bank charters subsequently granted by the New York State Legislature would lead to one of the most entrepreneurial periods in New York’s history. Although undoubtedly there were some speculative excesses, in the 25 years after 1800 election, the State of New York would become a national center for some of the most daring technological projects in the nation’s history (notably the Erie Canal, completed in 1825) which would lead the city to commercial dominance by the mid-19th century.

Postscript

One would think that JPMorgan Chase would be proud of its origins in the fight of Aaron Burr and Horatio Gates to oppose the monopoly of the Bank of New York and open banking more broadly. However, in the early 2000s Chase Bank ran an advertisement in Crains New York with a picture of Hamilton, boldly proclaiming that he and a group of far-sighted businessmen had founded the bank in the 1790s.