| I am sorry for the delay in getting this out. I had a computor melt down and lost a lot of material that took some time to recover.
The material in this post is drawn from a number of histories and a compendium of papers from the Library of Congress. This is very concise and may not do proper justice to a subject that is very complicated not only by financial considerations, but an interwoven epic of political and historical events and personalities.
Much of this has faded into history or worse, is misconceived or
distorted by our modern "thinkers" and their communications. Surprisingly, about a year ago, Robert Prechter, who has written extensively on the Federal Reserve, mentioned in his monthly newsletter, that he had only recently been apprised of the Commercial Bank component of the system.
Why should anyone care about this?
Why care about something that dates back to the 1790's? Aren't we far more sophisticated today?
In the most simplistic terms, if we are ever to solve our financial, political and ethical problems, long term, we actually must go back to this age old system. Even for people, whose primary concern is the decay of societal values, they will find that the concepts of the system, that are a barrier to monetary corruption, are, in fact, the primary defense to the breakdown of society and political systems.
There's a key point here and it highlights the flaws in many people's thinking and the gaps in their knowledge and understanding of historical banking operations and finance.
In a kind of Occam's Razor mentality many people see the solution to world's present precipitous financial and political state in purely political terms. If moral and ethical statesmen can be put in a position of power, the world's problems will get fixed. As a corollary to this, many see the dilution of societal ethics as the principal motive force initiating the downward spiral in government and finance.
This would seem on the surface to have some degree of validity, but it is in fact, the flawed "no homework quick fix" view of the situation. Any review of ancient and modern history elicits a single fundamental repetitive scenario.
The beginnings of the degradation of societal ethics and political systems begins with corruption of the monetary system. It occurs first. More specifically, it is the capability of some form of banking mechanism to transfer wealth into a "derivative" construct which gives an asset inordinate perceived value resulting in a credit bubble and ultimately collapse of the commercial system. Exploitatation of this "house of cards" is age old and directed at consolidating power in a minority of hands that compose a "shadow" government. Many are familiar with a quote attributed to Mayer Rothschild, which in so many words says let me control the monetary system and I'll control the government. Whether he actually said this doesn't matter because the essence of this is true.
It matters not whether you study the era of goldsmiths or temple money changers or modern international bankers. This corruption is historic and titanic in nature and always the same.
Ancient lawgivers recognized this threat. Hammurabi's code, which dates to 2,500 BC, dealt with a number of legal issues but specifically with integrity of the coinage, loan operations, crude banking and even regulation of a very vestigial form of agency and brokerage machinations. All to maintain the integrity of the monetary and commercial system --- and the political system. (This regulation was not of the character of the charade that goes on in DC today).
What most people don't get., today. Just as much as opposing an armed invasion, a crucial part of the "defense" is keeping the excesses and corruption of international banking, ala the Federal Reserve, out of the monetary system.
That is what the banking system of 1791 did.
A necessary departure.
There are so many distortions of this issue, some coming from our most prestigious universities based on fragmentary extrapolations, such that a couple of points have to be dealt with up front. Discussion of each of these issues could almost be a book.
First and foremost, almost all modern essays on banking history, today, state that the First Bank of the United States, the first central bank of the United States, founded by Hamilton as the first Secretay of the Treasury, was a copy of the BOE.
That is totally false. All of the founding fathers knew that the primary threat to the existence of the US, even after the Revolutionary War, was the privately "foreign" owned BOE and its financing of British military operations and political policy around the world. During the Revolutionary War, it became immediately obvious, particularly with Lafayette's personal input, that the colonies were waging a war against the monied interests of the world as much as a strategic and tactical military operation.
Secondly, and even more outrageous, some modern authors (1970's) based on distortions of some fragmentary writings, have implied that Hamilton was part of some gray international banking cabal aimed at elitist erosion of the philosophical and legal foundation of individual rights of US citizens.
Alexander Hamilton and John Adams are the true fathers of the US Constitution (contrary to a lot of modern authors). Hamilton as the motive force for the Annapolis Convention of 1787 and the principal author of the Federalist Papers which gained national acceptance for ratification of the Constitution and Adams as the sole author of the Massachusetts Constitution. The US Constitution is based almost entirely on the original Massachusetts Constitution of 1780 (as were most other state constituions). It was written, solely by John Adams over a six month period in 1779, and ratified in 1780, almost a decade before the US Constitution was ratified. It is the oldest constitutional document in the history of the world. Adams was queried so many times and his correspondence became so voluminous on the philosophical foundations of his document that he had to have a pamplet printed that he passed out which essentally was "how to write a constitution and what ought to be in it." He had lost patience with his fellow statesmen and was sick of answering the same questions over and over.
Hamilton was the most outspoken supporter of consitutional govenrment and individual rights and "the pursuit of happiness" over national and state government, in the US.
Hamilton and Adams, in their lifetimes, were the preeminent constitutional lawyers in the US. They were regarded in this role by every division of national and state government and by the common US citizen who had
access to routine publications.
We come to one last initital consideration which is a very complicated, and for many, a sensitive facet of of this whole issue. We are deluged today by postings of quotes attributed to Jefferson. Some are clearly spurious and some, out of context, are misleading. The quotes on banking attributed to Jefferson, if applied to our present Federal Reserve system, seem apt and almost prescient. From these quotes many have drawn the conclusion that Jefferson was opposed to the concept of a central bank. This is false.
Jefferson did not oppose Hamilton's creation of the First Bank of the United States. Without it there would have been no Louisianna Purchase or Erie Canal.
What Jefferson opposed, like many (not all) southerners was the creation of solvent local banks; the Banks of Commerce and the National Banks which were part of Hamilton's system. What Jefferson feared, like many southerners, was that the liquidity and financing for the plantation system in the south and the importation of slaves would wane over time because the bulk of the wealth of common men would be channeled into the development of local commerce and infrastructure and away from the slave system. This had significant political ramifications for southern states. The bulk of the free voting population at the time, was in the northern states. During the revolutionary war, approximately one quarter of the entire civil population of the thirteen colonies died from disease, starvation and conflict. The southern states, which had lower populations, were particularly hard hit. The death toll in the thirteen colonies approached a million, almost a quarter of the total population. In order to pass the Constitution, states with major slave populations were granted a
3/5 tally of their slave populations in determining the number of votes their states would have in the Electoral College. This gave southern states a far more powerful position in national elections for the Presidency and in about the first 60 years of the country most Presidents were from southern states.
Jefferson did not win the popular "free" vote in his election to the Presidency. In a three way race with Adams and Burr, Adams, in his second term, got about half of the popular "free" vote in the US, but after about a dozen votes in the Electoral College, Jefferson finally got the majority vote. The electoral vote tally attributed to slave populations was the deciding factor. 
This is a personal check written by Thomas Jefferson to William Shipmen in November of 1793 for $63.67. It is from the Office of Discount and Deposit ----- from The Bank of the United States, the central
bank of the United States.
Jefferson was both a stockholder and depositor in the first central bank of the US.
(This is from a banking exhibit in the Chicago suburbs of checks written by Presidents ranging from George Washington to George W. Bush. In the exhibit are checks from John Quincy Adams and James K. Polk issued by the Second Bank of the United States. A number of Presidents ( and remarkably, perhaps some wives - see below) were stockholders and depositors in the central banks of the US until their demise in 1836 - also more on this below).
The United States 1785 - 1787
Even though the Revolutionary War had been over for five years, British Rangers still occupied the Ohio Valley and routinely raided American settlements. Spain, France and Britain had embargoed all American shipping. The United States government was broke. There were
only three banks in the entire 13 states. There were over fifty currencies and foreign coinages in circulation. Nobody knew what the exchange rates and assay values were. The US dollar was worthless and the phrase "not worth a continental" comes from this era not the war. The Congress was totally ineffectual. The states were broke and were levying confiscatory taxes on farmers which led to Shay's rebellion. Patriots who had financed the revolution were bankrupt and in debtor's prision. Pennsylvania was considering secession. Naval skirmishes, while infrequent, were still occurring. Newspapers, (financed by Jefferson and others of his new political party) were suggesting that Washington had dimentia and that Adams was a drunk who was in bed with the British Parliament.
In short --- the US was in near chaos and near dissolution.
The United States 1791-1793
All British troops had been relocated to Canada. All embargoes on American shipping had been removed. The US government was solvent. The states were solvent. The US dollar was completely backed by gold and became a reserve currency accepted throughout Europe in exchange for gold backed bonds. Some ten million in gold bullion and gold backed bonds (roughly equivalent to $750 million in today's terms) had flowed into the Bank of the United States which backed the newly formed US minting operation of the US Treasury. The population in the US at the time was about 3.25 million. The standard of living, in the US again became the highest in the western world as it was in 1776. The US government was collecting duties on all imports and an excise tax on all spirits. The newly formed US Coast Guard, instituted by Hamilton, was enforcing the collection of duties on all foreign shipping. The excise tax on spirits led to the short lived Whiskey Rebellion in western Appalachia which petered out without any major military confrontation. Citizens accepted that the US government under the new Constitution had national authority over certain areas of taxation not under the authority granted to individual states under the Constitution. A completely solvent local banking system was established across the thirteen states. Liquidity for local commercial development and infrastructure became a new national force in the country. Lastly, bankrupt patriots were reimbursed for the fortunes they had sacrificed for the Revolutionary War and paid interest of about 5%.
No country in the history of the world had gone through so miraculous a transformation in so short a period of time. How?
The Banking System of 1791
Alexander Hamilton was one of the most remarkable men in the history of the US. His understanding of commerce, finance and banking was far more sophisticated than most of the founding fathers and far more sophisticated than most people's today. He had an intimate understanding of the role of the BOE in concocting the Southseas Bubble of 1720, and the ensuing continental depression in Europe and, more importantly, its role in controling British colonial policy.
In 1776, the roughly 6,000 British troops in the colonies beat a hasty retreat to Canada. Throughout the Revolutionary War the ranks of the regular American Continental Army would fluctuate roughly between 4,000 and 17,000 (not including state militias) even though the population of colonies was originally over 4 million. In 1777, the British navy landed 40,000 regular troops in New York in a period of about six hours. For the time, the logistics to move such a force, in a single wave, over thousands of miles of ocean cannot be comprehended. In relative terms, the logistics of the Normandy invasion of 1944 were far less rigorous in comparison. (The initial landings were about 130,000 troops but they were only moving about 100 miles and multiple modern countries and central banks were involved).
No single government treasury in the world, in 1777, could afford such an undertaking. This scale of invasion of the American colonies was entirely financed by the BOE and the banks of Europe.
Hamilton, above all others, understood that the long term threat to the US and the Constitution was, in fact, the monied interests of the world in the form of international banking.
The banking system Hamilton designed consisted of three components. A central bank, the Bank of the United States and local banks designated National Banks and Banks of Commerce.
Hamilton recognized that the US would always need a central bank function for two fundamental reasons. First, as a backup emergency funding source for the government in times of crisis like war and invasion, particularly, if foreign central banks were financing the aggression. Second, as an investment development source for infrastructure projects which were beyond the scope of individual states and, from time to time, beyond the budget of the federal government (Louisianna Purchase under the First Bank of the US and Erie Canal under the Second Bank of the US).
Above all of this, Hamilton recognized key structural concepts that were absolutely critical to the preservation of the US Constitutional system.
First and foremost, management of the bank, in terms of voting rights for its board and its policies and its expenditures had to be entirely controlled by the US Treasury and private US citizens. No foreign national or foreign
bank, irrespective of their investment in the bank, could ever have voting rights. No US citizen who was an agent of a foreign bank could have voting rights, irrespective of his investment in the bank. Profits from the bank were distributed on a pro rata basis based on investment in the bank but voting rights were split equally amongst all stockholders. There was a minimum investment in the bank but it was very low to insure widespread participation and control. I have conflicting numbers on this issue but it may have been in the two hundred dollar range (approximately $15,000 in today's terms). Investment in the bank had to be in gold, 40% in the form of bullion coins and 60% in the form of gold backed bonds. These were primarily Dutch, Spanish, British and some private bank issued bonds. The bulk of the bonds were converted into bullion.
Other key issues Hamilton recognized included how the bank would interact with the government and the necessity of complete isolation from funding long term government debt. The bank was totally precluded from buying any US bonds or notes. This primarily to prevent the bank from having any voice in government policy. Secondly, the US Congress had no control in the disbursement of funds of the bank. This to prevent the bank's funds from being used for "porkbarrel" projects. Overall control of the bank was split between the US Treasury (20% of the voting stock) and private US investors (80% of the voting stock). The board of directors was determined by the voting stock and the board was changed every two years. No member of the board could serve for more than one term. The bank was audited on a weekly basis by the Treasury, and the report was presented to the finance committees of the Congress. The bank was originally chartered in 1791 with a term of 20 years and an initial capitalization goal of $10 million (about $750 million in todays terms). In its original announcement it outlined the plan to save American currency with the financing of the issuance of Treasury notes completely backed by gold and silver and the issuance of bullion coinage and absorb and cover the debts of individual states. Additionally, all future outlays from the Federal and state governments would be paid in gold or gold backed currency and bullion coinage. The capitalization goal was met extremely quickly from both domestic and foreign investment accounts primarily because of the implied safety and stability. This was a radical change in the US financial system and to some degree even in Europe which had experienced wide ranging bank failures. The newly formed US mint immediately issued gold and silver treasury notes and silver bullion coinage. Gold notes were backed by about a 1/20 ounce of gold and silver certificates by about an ounce of silver. The purchasing power of this new currency was enormous.The gold to back this new currency was loaned to the US Treasury at three percent interest which was paid by the new import duties and whiskey tax. Since the states were again solvent, they raised large militias and drove all British soldiers out of US territory and into Canada. Lastly, American patriots that had sacrificed their fortunes in the Revolution were reimbursed by the US Treasury. A quick side note which speaks to the feminine psyche. It is thought, today, that Abigal Adams was a fairly substantial investor in the bank particularly based on her son's (John Quincy) holdings in the Second Bank of the US. She was extraordinary. She and John were separated for great lengths of time when he was in Europe as an ambassador to France and personally securing Dutch financing of the Revolution. She raised a family, including Jefferson's daughter, managed the family farm and carried on a huge correspondence. When John was away, he thought she was using her "pin" money and the profits from the farm to buy additional land. She was in fact, a substantial bond trader. She had to use her uncle as a face man because women weren't allowed to deal in securities in that day and age. She never lied to John but she never let on to what she was doing until he came home to find that she was a little more than moderately wealthy. He was first peeved and then shocked.
  This is an exhibit at the American Museum of Finance honoring Abigail as the first woman bond trader in the US and a receipt for her purchase of about $3,200 (about $240,000 today) of US Treasury bonds in 1792, in her name. Unheard of in 1792. One last point on the central bank. Most modern writers make a big point that Madison broke with Hamilton and went with his southern constitiuents and Jefferson and opposed the banking system that Hamilton instituted. The charter of the original bank expired in 1811 and was not renewed do to southern oppositon. The ensuing War of 1812 was a financial disaster for the US. Everything that Hamilton had imagined, in terms of the lack of emergency financing occured. The US government again went bankrupt and the overall economy was in as bad a financial position as 1785. Madison, as President in 1816, finally understood the real necessity of Hamilton's banking system, and rechartered the Bank as the Second Bank of the US. Even southern Congressmen, who had formally opposed its recharter became supporters. Madison enacted this policy over the objections of Jefferson and Andrew Jackson. The Local Banking System There were two key fundamental concerns in Hamilton's design of local banking. First, there had to be the availability of complete safety for the savings of individual citizens and local commercial enterprises. There had to be a banking entity that was impervious to runs on banks. And second, there had to be the availability of higher risk liquidity (and profitability) for investment in commerce and local infrastructure. Under the Bank of the United States, Banks of Commerce and National Banks were chartered. These were local private banks but subject to monthly audit by the US Treasury and structural rules of the US Treasury. Banks of Commerce were for all practical purposes, safety deposit boxes. They could not make loans or disperse any funds except as withdrawals from their depositors. 100% of depositors funds had to be held in their vaults for which they charged a monthly security charge. Additionally, they were the primary assay and conversion agency for the exchange of foreign bullion coinage and currency for gold and silver backed US Treasury notes. In 1791, this was both a monumental task and a overnight solution to cleaning up the currency chaos in the country. On a fee based basis, charged by both the Commerce bank and the Central bank, these foreign funds were transfered to the central bank where they were converted to bullion and deposited into the US Treasury account and replaced by US notes and bullion coinage. Lastly, these banks provided a checking account sevice to their depositors. The checks were like travelers checks and had stringent regulation of their maximum individual value and the number that were issued. They were completely covered by deposits and were in essence "good as gold." Generally, issuers and recipients were both account holders in the bank and this facilitated transfer of funds between retail and manufacturing and goods and material suppliers. Lastly, in the event of natural disaster, deposits held in these banks in the form of Treasury notes were guaranteed by the central bank. Loss of bullion coinage was not guaranteed. National banks were instituted primarily to provide liquidity for the development of local commerce and infrastructure. Up to 60% of their deposits could be loaned out and depositors were paid interest on their accounts. National banks could only loan money on projects that were collateralized by hard assets (property, structures, raw material or inventory). They were prohibited from investing in any derivative instrument or any foreign bond or any type of promisory note. National banks were also audited by the US treasury on a monthly basis and these audits and their balance sheets had to be made available to the public on a continuous basis. National banks, that were part of the central banking system had a distinct advantage over other private banks in that very large projects could be jointly funded by local national banks and jointly funded by the central bank after a proposal and review process. This gave them the capability initiate larger projects and "a piece of the action." Lastly, National banks were agents for the US Treasury, in that they were the primary sellers and redeemers of US Treasury bonds. They were paid a fee for this service by the US Treasury. Deposits in National banks carried no guarantee from the central bank as far as is known. There are some side notes to the preceeding. Today, there are a limited number of private Swiss banks that are modeled on the design of the National banks above. In today's world they are considered the most solvent and most safest banks. Secondly, with the charter of the National and Commerce banks, Jefferson's worst fears were realized. Liquidity for the southern cotton market began to ebb. In particular, the restriction on investment in derivatives initially reduced investment in the primative cotton futures market. The result was the rise of inumerable small private banks that were very similar to today's present investment banks in that they were a mix of savings banks and trading operations. They generally operated in the most riskiest niches of the commercial market. Throughout the nineteenth century they would rise and fall on a moments notice and go from one bubble to the next. In 1837, they would prove to be a disaster for the US economy (see epilogue below). Epilogue Between 1807 and 1929, the US suffered five depressions. With the exception of the 1807 depression, all of the rest were caused by the collapse of financial bubbles engineered by investment banking and all were caused because Hamilton's banking system was finally overturned by Jackson in 1836. The depression of 1807, which was political in nature, was personally caused by Jefferson. He was enamoured with the French Revolution even after its excesses were widely known. In 1805, he tried to, place an embargo on all shipping to Britain. When Congress resisted he placed an embargo on all shipping to Europe and the US economy went into a severe depression in 1807 that lasted for seven years. Jefferson's reputation with the public was destroyed and was not rehabilitated until 1930's. In 1836, Jackson dissolved Madison's Second Bank of the US. He transfered the entire funds of the US treasury to what are refered to as "pet" banks in the south. These were fly by night investment bankers that were involved in kiting a wide range of bubbles. They went broke overnight and the US Treasury went into bankruptcy. Almost overnight the US went into the Panic of 1837. Jackson was censured by the Congress and missed impeachment by one vote. If Jackson had faced trial in the Senate, he would have likely been charged with criminal idictments. Hamilton's original banking system was never re-instated and the US never recovered. In 1913, we did in fact, get a central baking system that was a copy of the BOE. In fact, it has the same owners. AHF
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