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By Claes Bell, Bankrate.com
If you're a fan of the musical "Hamilton," which is up for an unprecedented 16 Tony Awards this week, you probably know more about founding father Alexander Hamilton than you did a few years ago. But what you may not know is that 2 of the biggest names in US banking, JPMorgan Chase and BNY Mellon, owe their existence to Hamilton and his rival, Aaron Burr.
Hamilton and the 1st bank in New York
We usually think of megabanks as products of the modern age, but The Bank of New York, which became part of BNY Mellon in a 2006 merger, is the very same institution founded by Alexander Hamilton in 1784.
At the time of the bank's founding, Hamilton had recently moved to the city to practice law following his time serving in the Congress of the Confederation.
Realizing that merchants in the rapidly growing city would need access to credit, he founded a publicly owned bank modeled after the Bank of North America in Philadelphia (which was also the first U.S. initial public offering, or IPO), says Robert E. Wright, Nef Family Chair of political economy at Augustana University and author of several books on Hamilton and other Founding Fathers pivotal in creating the US financial system.
"The Bank of North America was quite successful. There was no reason, once the (Revolutionary War) concluded, why people in other cities, which at this time are just all big urban international points, shouldn't start up banks of their own," Wright says. "There was one set up in Boston and then Hamilton said, well of course, New York needs one as well."
Hamilton himself wrote the charter, and it was approved by the New York legislature in 1791. The bank's impact was immediate, not only in lending but in all kinds of economic activity. At that time, money issued by government entities was mostly good only for paying taxes, so if you wanted practical paper currency you could use, you turned to banks, which would issue notes you could convert to gold or silver at fixed rates, Wright says.
No loans for political opponents
One thing The Bank of New York wouldn't do? Lend money to members of the Republican political faction led by Thomas Jefferson.
We may think we live in a politically divisive time now, but in those days, being in the wrong political party could cost you access to credit, says David Cowen, president of the Museum of American Finance, which now occupies The Bank of New York's original site.
"The head of that bank and the board of directors of that bank were Federalists, which meant that Federalists got loans from that bank," says Cowen. "This is really irksome for the other side."
From Hamilton's point of view, lending to Federalists made sense, Wright says. The bank's charter put a limit on the amount of capital it was allowed to hold -- $1,000,000 -- so the demand for loans quickly outstripped the amount the bank could afford to lend. And since the rate the bank could charge on loans was capped by usury laws at 7%, they couldn't raise interest rates to reduce demand for loans. So bank officers resorted to lending to people they knew and trusted -- and that was typically other Federalists.