A Tale of Origins

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.