The Day That Changed American Banking Forever

On this day in economic and financial history ...

The President, Directors, and Company of the Bank of the United States was established by federal charter on Feb. 25, 1791. It was the first central bank of the United States and is thus commonly simply referred to as the First Bank of the United States.

As a private corporation with shares held largely by the public, the bank was a contentious focal point of political debate between Alexander Hamilton's Federalists and Thomas Jefferson's small-government Democratic-Republicans. The Jeffersonians, concerned that the bank would bring unwelcome strength to the federal government, argued against any action not explicitly delineated by the Constitution. Hamilton countered with the argument that has fueled government expansion ever since, which is that the government's powers were only limited by what the Constitution explicitly withheld, not that which it failed to mention. This argument carried the day, and President George Washington signed the bank's bill into law.

For 20 years, the bank was entrusted with holding collected taxes and duties for the federal government, and the notes it issued were to be the only acceptable legal tender (besides gold and silver, which backed the bank's notes) for the payment of such taxes. It was also entrusted with safeguarding the country's systems of credit and strove to regulate state banks that overextended themselves.

The bank's initial public offering in July of 1791 was the largest such event in the young country's history, as the $8 million of offered shares were quickly snapped up by the nation's elite. The federal government held another $2 million in shares, and many Congressmen were among the first buyers, which made the bank's success inextricably linked to the fortunes of its governing body. A brief but intense bubble developed around the bank's stock, which rocketed from $25 per share at its IPO to more than $300, before plunging back to $150 per share in the course of a few days.

Despite its implied role as a central bank, the bank was devised far more in the style of a powerful merchant bank. It operated eight branches, in addition to its Philadelphia headquarters, all of which performed traditional banking functions in addition to the bank's taxing and depository functions for the federal government. When its branches first opened, they served many of the moneyed interests of the country, including landowners, merchants, manufacturers, and politicians.

The bank's size and scope in pre-industrial America made it the nation's largest enterprise, and its perception as a tool for wealth agglomeration in the hands of the already wealthy further hardened the Jeffersonian faction against it. The bank's rechartering was narrowly defeated in the Senate in 1811, and it ceased to operate as America's central bank thereafter. Its Philadelphia assets were purchased by banker Stephen Girard, who reopened the bank under his own name. It operated continuously as an independent bank until 1983, when it was bought by Mellon Bank.

Today, what remains of the First Bank of the U.S. is part of BNY Mellon (NYSE: BK  ) , which makes that bank not only the owner of what was once America's first central bank, but also the owner of the nation's first savings bank. BNY Mellon's lineage can be traced all the way back to the first publicly traded bank in the United States as well, which gives it a trifecta of firsts that no other bank can match.

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These notes are legal tender
In the thick of the Civil War, the Union government took the unprecedented step of decoupling banknotes from gold and silver by passing the Legal Tender Act of Feb. 25, 1862. Not only did this allow the federal government to issue notes by fiat for the first time, but it also marked the first time the United States issued a national currency as opposed to a merely first-among-many currency, as was the case with earlier central banking institutions.

This solved the Union's problem of paying its bills after the available stores of specie had been exhausted, but the "greenbacks" soon caused inflation. To counteract this problem, the first income tax was signed into law a year later, and excise taxes also increased dramatically. This first act allowed the issuance of $150 million in greenbacks, and by the end of the war two additional measures had swelled the amount of currency in circulation to nearly $450 million. At this point, the greenbacks were worth only about half their nominal value in gold.

The validity of fiat currency was fiercely debated, and a case filed after the end of the war brought the legal battle all the way to the Supreme Court. This case held against the greenback, with Chief Justice Salmon P. Chase taking a position opposite the one he'd held during the war, when he was President Lincoln's Treasury secretary in charge of the currency. The appointment of two new Supreme Court justices the day that this precedent-setting case was decided led to a reversal in a subsequent case, and the right of the federal government to print money has been broadly upheld ever since.

But we need banks to take these notes ...
Exactly a year after the Legal Tender Act became law, the National Banking Act was signed into law on Feb. 25, 1863. This act sought to support the new national currency with a system of national banks, which could gain charters from the federal government rather than states for the first time. The national banks were to be chartered and overseen by a newly created Office of the Comptroller of the Currency and were expected to back their currency reserves with federal government bonds and other securities. This marked the first time that the federal government attempted to enact uniform banking policies nationwide.

Thousands of nationally chartered banks arose in the years between this act's passage and the creation of the Federal Reserve in 1913. Unfortunately, the lack of a central banking authority during these years led to a system of powerful banks with little control over the stability of their own reserves, which returned to the gold standard following the war. A number of financial panics arose in the latter half of the 19th century and during the early years of the 20th century, particularly as a result of railroad speculation and overinvestment.

Although banks became more stringently regulated with the passage of Glass-Steagall during the Great Depression, national charters continued, and the charters first granted in 1863 are still valid today. The very first such national bank charter was issued to The First National Bank of Philadelphia, which later merged with the Bank of North America, America's first commercial bank. Today, Wells Fargo (NYSE: WFC  ) holds Charter No. 1  as a result of several further mergers, granting it nearly as much historical prestige as BNY Mellon.

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A revolutionary patent
The first electric motor was patented on Feb. 25, 1837. Built by Vermont blacksmith Thomas Davenport, this amazing device used currents from batteries to move electromagnets mounted to a wheel opposing a fixed set of permanent magnets, creating circular motion. Davenport first developed the motor in 1834, but it was so advanced that patent examiners couldn't understand it, and his initial application was rejected. It was only after constructing multiple working models and earning major scientific endorsements that the patent office granted his application.

Unfortunately, Davenport was simply too far ahead of his time. Primitive batteries couldn't power intense industrial processes in the 1800s, and Davenport never found financial success with his motor. It was not until the mechanism was reversed -- generating power from steam or water instead of using it from batteries -- that the system began to catch on. Electric generators began powering modern electric motors in the late 1800s, and the mechanical world Davenport envisioned from behind his anvil finally began to take shape.

Annie get your gun
On Feb. 25, 1836, Samuel Colt received the first U.S. patent ever issued for a revolving gun, commonly known as a revolver. Although earlier attempts had been made to manufacture firearms with cylindrical ammo chambers, Colt's marriage of the percussion cap (precursor to today's bullet cartridges) with the revolver made it easier to fire and more reliable, and he is now credited with making its mass production commercially viable.

Colt became one of America's wealthiest men by the time he died in 1862 as a result of his revolver developments. His company was one of the first to use an assembly line, and Colt also employed innovative advertising and marketing tactics that would be familiar to any corporate brand manager today, such as the product placement and the celebrity endorsement.

Revolvers have since been superseded by semiautomatic pistols in military and law enforcement, but this style of firearm remains popular among both recreational shooters and collectors. Smith & Wesson (NASDAQ: SWHC  ) was the first to produce modern-style bullet cartridge revolvers, and remains a major manufacturer of revolvers to this day. Sturm, Ruger also manufactures a variety of revolvers, though none of them has the cachet of either a classic Colt or an iconic Smith & Wesson.

A history of gas taxes
Oregon implemented the first per-gallon gas tax on drivers on Feb. 25, 1919. It was only $0.01 per gallon, which worked out to about 4% of the purchase price of a gallon in those days, and was quickly followed by taxes in other states. By the end of the following decade, every state had instituted gas taxes, with the intent of using these funds for road improvements. The federal government eventually implemented a national gas tax in 1932. At this point, there were perhaps 25 million passenger autos on American roads, but the need for road improvement was undoubtedly necessary as the number of motorists continued to grow.

Today, the average of all state and federal gas taxes across the United States comes to nearly $0.50 per gallon, with diesel fuel taxed at approximately $0.55 per gallon. Americans used about 134 billion gallons of gas in 2011, which resulted in approximately $67 billion in taxes for federal and state governments.

The birth of (really) big steel
United States Steel (NYSE: X  ) was born on Feb. 25, 1901, in one of the greatest mergers in business history. Powerful financier J.P. Morgan brought together three major steelmakers -- Andrew Carnegie's Carnegie Steel Company, the Federal Steel Company, and the National Steel Company -- and a number of smaller producers, at a cost of nearly $500 million to create a titanic steelmaker valued at $1.4 billion. It was the world's first billion-dollar corporation, eclipsing even John D. Rockefeller's Standard Oil monopoly.

The merger immediately catapulted U.S. Steel into the realm of business legend. Within two months it was part of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , becoming the only company to have both its common and preferred shares listed on the index at the same time. There was good reason for this. In its first year, U.S. steel made two out of every three tons of steel produced in the United States. However, U.S. Steel was not a nimble giant. Burdened by debts from its creation and always fearful of antitrust litigation, U.S. Steel's share of the steelmaking pie slipped to half the American total within a decade. This didn't stop its expansion in other directions, as a 1907 acquisition of Tennessee Coal, Iron, and Railroad caused a further shakeup in the Dow by absorbing a major direct competitor and fellow index component.

U.S. Steel reached its height during and after World War II. In 1943, the company employed 340,000 workers. A decade later, it produced 35 million tons of steel, its all-time record. It would remain part of the index until 1991, which is one of the longest streaks of uninterrupted membership in the Dow's history, but was removed because of the reduced impact of steelmaking on American industry, and more importantly, because of its own ongoing weakness in a post-industrial world. Today, U.S. Steel is still the largest American steelmaker, but it's only the 13th largest steelmaker in the world, with roughly a fourth of the production capacity of global leader ArcelorMittal.


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