The Revolutionary War has ended.

As the dust settles, there are thirteen different states, and thirteen different currencies.

State banks print money freely, often with nothing to back it up. Farmers drowning in debt are urging local governments to keep printing money to enable them to pay off loans more easily.
Of course (you sharp economics savant you!) inflation soars. But worse than that, it creates scenarios where a Rhode Island dollar might be worth only half of a Pennsylvania dollar.

Interstate trade is crumbling.

We’ve seen this story play out before under the Articles of Confederation, Congress had no real power to regulate money or taxes. Each state is on its own, issuing currency that others just refuse to accept. This created serious trouble, like farmers unable to pay their debts, turning to violence (Shays’ Rebellion).

Now with the Constitution a stronger framework exists, but some of the most pressing questions aren’t answered. How do you create financial stability without resurrecting the very tyranny everyone just fought to escape?

Enter Alexander Hamilton, the first Secretary of the Treasury, who presents a bold idea: a central bank. The plan is to consolidate war debts, stabilize currency, and serve as a secure depository for tax revenue. It would also underwrite government credit, giving the United States legitimacy at home and abroad.

But there are major hiccups. The power to create a central bank isn’t mentioned anywhere in the Constitution. And behind closed doors, rumors swirl Hamilton has a scandalous admiration for the British system and fears of recreating the same old aristocratic ties America just broke free from.

Despite these concerns, the First Bank of the United States comes into existence. Flash forward a few years and seventy percent of its stock ends up in British hands. Even though foreign investors can’t vote, the optics are terrible, a “national” bank, partly owned by the old adversary. State banks complain that their power is being encroached on. (Banks make money through loans, and naturally, most people prefer the more established national bank. It’s like when Walmart moves into a small town, massive scale chokes out local businesses.)

Then, in a wild turn, Congress lets the bank’s 20-year charter expire.

But before too long of a sigh can be let out, the War of 1812 breaks out, and suddenly, the country faces the same problem again: how to pay soldiers and finance a war without a centralized bank.

Ironically, James Madison, who once opposed the central bank, signs it back into effect out of sheer necessity.

Who has time to argue when you have an urgent need to pay your men to win a war, to ensure your country’s survival?