The National Bank was a federally chartered institution that held government deposits and managed the nation's money supply
The United States had two National Banks, each chartered by Congress for a limited term. The First National Bank (1791–1811) and the Second National Bank (1816–1836) were not central banks in the modern sense—they were private corporations that received a federal charter and special privileges in exchange for handling government finances. They accepted deposits, made loans, and issued their own banknotes, but they operated alongside thousands of state-chartered banks and did not have the monopoly on money creation that a true central bank holds today.
The National Banks were controversial from the start. Supporters saw them as necessary to stabilize currency and credit. Opponents viewed them as unconstitutional concentrations of power that favored wealthy merchants and threatened state sovereignty. This tension shaped early American finance and ultimately led to the collapse of both institutions.
Key Takeaways
- The First National Bank (1791–1811) and Second National Bank (1816–1836) were private corporations chartered by Congress, not government agencies.
- Both banks held federal deposits, issued banknotes, and made loans, but competed with state-chartered banks rather than controlling the entire money supply.
- The Second National Bank's charter was not renewed in 1836 after President Andrew Jackson vetoed its recharter, citing concerns about concentrated power.
- The absence of a national bank after 1836 contributed to banking instability and currency chaos until the Federal Reserve was created in 1913.
How the First National Bank operated (1791–1811)
Alexander Hamilton, the first Secretary of the Treasury, proposed the First National Bank to Congress in 1790. The bank received a 20-year charter and was capitalized at $10 million—an enormous sum at the time. The federal government purchased one-fifth of the bank's stock, and private investors bought the rest. The bank's main job was to hold government tax revenue and pay government bills, but it also accepted deposits from merchants and made commercial loans.
The bank issued its own banknotes—pieces of paper backed by the bank's capital and reserves. These notes circulated as currency alongside coins and notes issued by state banks. Because the National Bank was seen as stable and backed by federal authority, its notes were trusted and widely accepted. This gave the bank enormous influence over credit and the money supply, even though it was not the only bank in the country.
When the charter expired in 1811, Congress did not renew it. The vote was close, and opponents argued that the bank had too much power and that a national bank was unconstitutional. Without a central institution to manage government finances, the War of 1812 created severe banking chaos. State banks proliferated, many issued worthless notes, and the federal government struggled to borrow money.
The Second National Bank and its conflict with Andrew Jackson
In 1816, Congress chartered a new National Bank with a 20-year term. The Second National Bank was larger than the first—capitalized at $35 million—and took on an even bigger role managing federal finances and regulating state banks. It had branches in major cities and became the largest financial institution in the country.
The Second National Bank's power made it a target for political attack. President Andrew Jackson opposed it on principle, arguing that it concentrated too much wealth and power in private hands and that its charter was unconstitutional. Western farmers and small merchants resented the bank's control over credit and its ability to call in loans from state banks. In 1832, Jackson vetoed Congress's bill to recharter the bank, and in the 1832 election, voters supported him.
Jackson then ordered the federal government to withdraw its deposits from the National Bank and place them in state banks—a move called the "removal of deposits." Without federal money, the National Bank's power collapsed. Its charter expired in 1836, and the bank ceased operations. No national bank replaced it for nearly 80 years.
What happened to banking after 1836
The period from 1836 to 1913 is sometimes called the "free banking era," though it was neither free nor stable. Without a national bank to manage the money supply or regulate state banks, the banking system fragmented. Thousands of state-chartered banks issued their own banknotes with no central oversight. Many banks failed, and their notes became worthless, leaving depositors with losses they could not recover.
Banking panics—sudden runs on banks when depositors lost confidence—occurred repeatedly: in 1837, 1857, 1873, 1893, and most severely in 1907. Each panic wiped out savings and froze credit. Businesses could not borrow, and the economy contracted sharply. The 1907 panic was so damaging that Congress finally acted to create a new institution: the Federal Reserve System, established in 1913.
The Federal Reserve was designed to avoid the mistakes of the National Banks. Instead of being a single private corporation, it was a network of regional banks overseen by a central board. Instead of competing with state banks, it served as a "bank for banks"—holding reserves, making emergency loans, and managing the money supply. The Federal Reserve still operates today and is the closest thing the United States has to a true central bank.
Why the National Bank mattered to how money moved
The National Banks controlled a large share of the money supply through the banknotes they issued. When the National Bank issued notes, it increased the amount of currency in circulation. When it called in loans or refused to accept notes from other banks, it tightened credit. This power to expand or contract the money supply made the National Bank a de facto regulator of the entire banking system, even though it had no legal authority to do so.
The National Bank also set the standard for what a banknote should be. Its notes were backed by capital and federal authority, making them more trustworthy than notes from smaller state banks. Merchants and depositors preferred National Bank notes, which gave the bank leverage over other banks. If a state bank's notes were not accepted at full value, that bank lost business.
The absence of a national bank after 1836 meant that money supply management fell to thousands of competing state banks with no coordination. During booms, banks issued too many notes and made reckless loans. During panics, they called in loans and refused to honor notes, making the crisis worse. The Federal Reserve was created to restore the stabilizing function that the National Banks had provided, but with better safeguards against abuse.
The constitutional debate that never fully ended
From the start, opponents of the National Bank argued that Congress had no power to charter a bank. The Constitution does not explicitly mention banking, and strict constructionists believed that the federal government could only do what the Constitution explicitly authorized. Alexander Hamilton countered that Congress had the power to do whatever was "necessary and proper" to carry out its constitutional duties—including collecting taxes and managing federal finances.
The Supreme Court settled the question in McCulloch v. Maryland (1819), ruling that Congress did have the power to charter a national bank under the Necessary and Proper Clause. But the political opposition never went away. Andrew Jackson and his supporters continued to argue that the bank was unconstitutional and dangerous, regardless of what the Court said. Jackson's veto message in 1832 is still cited by those who distrust concentrated financial power.
Frequently Asked Questions
Was the National Bank the same as the Federal Reserve?
No. The National Banks were private corporations chartered for limited terms and competed with state banks. The Federal Reserve, created in 1913, is a system of regional banks overseen by a central board and serves as the nation's central bank. The Federal Reserve has permanent authority to manage the money supply and regulate banks, while the National Banks had only the power their charter granted.
Did the National Bank print money?
The National Bank issued banknotes—paper currency backed by the bank's capital and reserves. These notes circulated as money, but they were not legal tender in the way modern Federal Reserve notes are. State banks also issued notes, and all of them competed in circulation. The National Bank's notes were trusted because of the bank's size and federal connection, but the bank did not have a monopoly on currency.
Why did Andrew Jackson oppose the National Bank?
Jackson believed the bank concentrated too much power in private hands, favored wealthy merchants over farmers and workers, and was unconstitutional. He also resented the bank's influence over state banks and credit. His veto of the bank's recharter in 1832 reflected a broader political movement against what opponents called "monopoly" and "aristocracy" in finance.
What replaced the National Bank after 1836?
Nothing, for 77 years. State banks took over, but without coordination or oversight. This led to repeated banking panics and currency chaos. The Federal Reserve System, created in 1913, finally restored a central institution to manage the money supply and regulate banks, though with a different structure and purpose than the National Banks had.
Did people lose money when the National Bank closed?
The Second National Bank's closure in 1836 did not cause immediate losses for depositors, because the bank paid out its obligations. However, the absence of a national bank after 1836 made the banking system unstable. Depositors lost money in the many bank failures and panics that followed, particularly in 1837, 1857, 1873, 1893, and 1907.