Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > State Regulation

A Tale of Origins

Your article was successfully shared with the contacts you provided.

When Alexander Hamilton and Aaron Burr dueled at dawn on July 11, 1804, the fight was not just between a former Treasury secretary and a sitting vice president, two political heavyweights of the early American republic. It was also between two founders of major financial institutions that are still in existence (following mergers and name changes) over two centuries later.

Indeed, the animosity that led to the duel that took Hamilton’s life and turned Burr into a political outcast was exacerbated by their respective roles in setting up some of America’s first financial firms.

Hamilton was the central figure in founding the Bank of New York, which now goes by the moniker BNY Mellon. Burr’s brainchild was the Manhattan Company, which later became Chase Manhattan and now carries the name JP Morgan Chase.

Banking was a new thing in America in the 1780s. The nation’s first institution chartered for such a purpose, the Bank of North America, got its start in Philadelphia in 1781. A few years later, factions vied to bring the new art of banking to New York state. One group wanted to start a “land bank,” capitalized largely by real estate. Hamilton opposed this, pointing out that banks require liquid assets, and led a push for a “money bank.”

In 1784, the future Treasury secretary drew up a constitution for the Bank of New York and became a director and attorney for the new institution. Hamilton pressed ahead with the project as an unincorporated business, after Gov. George Clinton (a leader of the emerging Republican faction that rivaled Hamilton’s Federalists) stalled on giving it a charter. Political fissures were growing over banking, with Republicans (later renamed Democrats) reflecting agrarian wariness of the new industry while Federalists catered to urban merchants eager to open bank accounts.

The Bank of New York finally got a charter in 1791 and the next year became the first company to have its stock traded on what would become the New York Stock Exchange. By this point, Hamilton was the Treasury secretary and had gotten Congress to establish the Bank of the United States, which was the nation’s central bank but also operated like a regular bank in doing business with the private sector.

For most of the 1790s, there were just two banks in New York City: the Bank of New York and the local branch of the Bank of the United States (which was headquartered in Philadelphia, then the nation’s capital). Both institutions were dominated by Federalists. Republicans, gradually warming to the concept of banking, disliked the hold their political rivals had on the industry. One rising Republican politician, Aaron Burr, planned to do something about it.

Watery Subterfuge

Burr realized that getting a Republican-friendly bank set up would boost his political standing, by appealing to Republican merchants worried that Federalist-dominated banks discriminated against them in lending. (Whether the banks did indeed put politics over profitable lending is hard to say.) It also would give Burr himself a ready supply of credit.

Hamilton and other leading Federalists held that a proliferation of new banks would result in a deterioration of credit standards. So it looked like Federalists in the state capital would put the kibosh on any application for a new charter, particularly if the proposed institution’s apparent purpose was to end the Federalists’ financial ascendancy.

However, Burr saw an opportunity to get around this obstacle. It came in the wake of a 1798 epidemic of yellow fever that killed over 2,000 residents of New York City.

Dr. Joseph Browne, Burr’s brother-in-law, correctly surmised that the city’s inadequate water supply, relying heavily on dirty wells, had much to do with the (mosquito-borne) disease. In early 1799, Burr, then a state assemblyman, proposed the creation of a private water company that would operate with a state charter. He criticized as unaffordable an alternative plan for the city to set up a water utility.

In promoting his proposed water company — the Manhattan Company — Burr was careful to get support from an impressively bipartisan lineup, including Hamilton. The former Treasury secretary saw Burr as unprincipled, and had been active in blocking Burr’s aspirations to climb to the vice presidency or higher. But Hamilton recently had cooperated with Burr in getting better fortifications for New York and was willing to work again with his rival on the imperative of bringing clean water to the city.

Indeed, Hamilton was so enthusiastic on that subject that he started thinking beyond the proposed waterworks toward future projects of draining swamps and building sewers. His memo supporting Burr’s water company plan was persuasive to Federalist legislators, and soon a bill granting the charter was signed by Federalist Gov. John Jay.

Yet unknown to Hamilton and many other people, Burr had inserted a last-minute provision allowing the Manhattan Company “to employ all such surplus capital as may belong or accrue to the said company in the purchase of public or other stock or in any other monied transactions of operations.” Meaning, the company could act as a bank, and unlike other banks of the era had no pesky expiration date in its charter.

Federalists were furious at Burr’s ruse, Hamilton later writing that Burr, formerly a skeptic about banking, “has lately by a trick established a bank, a perfect monster in its principles, but a very convenient instrument of profit and influence.” Some Republicans were displeased by Burr’s tactics as well. Burr lost his Assembly seat in an election that spring, but his political star soon resumed its rapid rise. Shares of the Manhattan Company sold well at a public offering, and the institution was here to stay.

Banking and Dueling

The Manhattan Company promptly established itself as a major provider of financial services. It never, however, accomplished much as a water company. Dr. Browne importuned his brother-in-law to fulfill the firm’s original stated purpose. “I expect and hope,” he wrote to Burr, “that enough will be done to satisfy the public and particularly the legislature that the institution is not a speculating job [but] an undertaking from whence will result immediate and incalculable advantages to the City of New York.”

But Burr’s lack of interest in water had become evident in his legislative editing, when he stripped out obligations (standard in other cities) to provide free water for firefighting and to fix streets damaged by pipe-laying. Now with the Manhattan Company up and running, its board of directors (which included Burr) abandoned plans to draw water from the Bronx River, instead relying on wells and wooden pipes. Yellow fever would ravage New York City recurrently over the next two decades.

Hamilton, unsurprisingly, never trusted Burr again. In 1800, as it became clear the next president would be a Republican, Hamilton rallied Federalists to back his longtime rival Thomas Jefferson over Burr, on the grounds that Jefferson at least had principles. Burr, under the quirky electoral process of the time, became Jefferson’s vice president. In 1804, Hamilton opposed Burr’s efforts to remain as vice president or become New York’s governor. The stage was set for the two men to meet at dawn.


What Happened Next

Political contention continued to swirl around banking in the early 19th century. Federalists sought to counter Republican Aaron Burr’s Manhattan Company with a new institution called the Merchants Bank, which after much wrangling got a state charter in 1805. That political rivalry didn’t last forever, as these two banks merged in 1920.

In 1811, the charter for the Bank of the United States expired after Vice President George Clinton broke a tie in the Senate by voting against renewal. In so doing, Clinton displayed a rogue streak hard to imagine in a vice president today. President James Madison’s administration, at the urging of Treasury Secretary Albert Gallatin, supported the renewal, having put aside traditional Republican qualms about central banking.

The demise of the Bank of the United States set off a scramble to build new financial institutions to manage capital once held in the central bank’s accounts. One institution founded in 1812 was National City Bank of New York, which later became Citibank and eventually Citigroup.

Also founded in 1812 was Bank of America, which began with $6 million in capital, several times that of other banks. This New York-based institution would later be outpaced by rivals and by the early 20th century was a relatively small player. Then in 1928 it was absorbed into the growing empire of California banker Amadeo Giannini, who wanted a foothold on Wall Street and a name to suit his national ambitions. Thus, the modern Bank of America was born.


Hamilton’s Trust

When Alexander Hamilton died in 1804, he left behind substantial debts totaling over $50,000, which he had hoped to cover with future income from his law practice. Now, his wife and children faced the bleak prospect of having to sell their home and everything else they owned — and at distress prices, even this might not cover the debts.

Hamilton’s friend Governeur Morris set up a fund to help the family, collecting some $80,000, plus some land in Pennsylvania, from dozens of friends and supporters. This money went into a trust at the Bank of New York and was managed quietly on the family’s behalf. So quietly, in fact, that Hamilton’s kids did not know about the money for years, and the trust’s existence remained a secret from the public until the late 1930s.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.