October 1798, Mount Vernon
George Washington needed money. Specifically in the form of a bank loan. At one time, he considered taking out a loan for a big purchase but couldn’t recall what he had wanted to buy. However, he was thinking about the Federal City aka Washington D.C. As the nation’s capital city was being developed in the 1790s, Washington anticipated property values near the U.S. Capitol would increase.
So Washington reached out to the president of the Bank of Alexandria, William Herbert. He had known Herbert for many years, and had a lot of admiration for his father-in-law, John Carlyle from Alexandria. By 1798, Herbert was leading the Bank of Alexandria, which claimed the distinction of being the first chartered bank in Virginia and the second bank south of Philadelphia.
In coming to Herbert for a bank loan, Washington was planning to build two townhouses in Washington D.C. He had purchased several lots and selected a location west of North Capitol Street.[i] Herbert delivered Washington good news. He could extend a loan in the amount of $6,000 to $10,000. He assured America’s first president that his credit was good. Not long after this assurance in October 1798, construction began on George Washington’s townhouses in Washington D.C.
The Bank of Alexandria's Creation
In 1792, the Virginia General Assembly approved a charter for the Bank of Alexandria. The Bank officially opened for business in 1793. Its initial location was on 305 Cameron Street in a brick building that had formally been a tavern run by William Duvall. In fact, it was the same tavern in which General Washington celebrated the end of the Revolutionary War with his Alexandria friends and neighbors. The celebration occurred on December 31, 1783.
The Bank of Alexandria was issued a ten-year charter. The Virginia General Assembly authorized $150,000 in capital.[ii] Today, companies go public by selling shares to investors through an initial public offering, which is referred to as an IPO. During the IPO process, intermediary banks called underwriters solicit orders from investors and determine a share price based on demand for the company. If a company is trying to sell 20 million shares and the underwriters take in 40 million in orders, then the deal is oversubscribed. With exciting new companies, deals tend to be bought quickly and the subscription books will have more demand for shares than supply.
The Bank of Alexandria IPO took place on December 7, 1792. Demand for shares outstripped supply. The books were filled within two hours at the Alexandria Court House, which was across the street from the historic Carlyle House. After the IPO, the stockholders met and elected directors of the bank which included many of George Washington’s friends and business associates such as Richard Conway, William Hartshorne, Robert T. Hooe, and, eventually, John Fitzgerald.[iii]
Finally, on April 9, 1793, the Bank of Alexandria officially opened for business and allowed “discounts” to be issued. A discount was a form of lending in which a borrower could borrow cash at a discounted rate and pay back the principal amount at the end of a specified period. The interest rate was typically 6% annualized and the initial discount period was 30 days. This was a way for Alexandria’s businesses and merchants to conduct business more easily. They could use a discount from the bank to make a supplier payment while anticipating cash from a customer.[iv]
One of the present-day equivalents of this type of activity is the way that corporations use commercial paper. It is the same principal of using short term discounted notes that are expected to be paid off within a period that is typically about 30 days. (If you want to get even more technical with the accounting, see my note at the end of this article.)
As an example of how the discount worked, take a 30-day loan of $1,000, which is issued at a 6% annualized rate. This would be a .5% rate for 30 days (6% divided by 12), then the borrower would get $995 in cash and then pay back the principal $1,000 at the end of 30 days. In 1793, if a discount was issued at $995, then the bank would get paid back $1,000 in 30 days. The $5 spread was the bank’s commission. In today’s dollars, that is worth $156.73. The Bank repeated this procedure many times with the merchants and businesses in Alexandria. The Bank sought to make enough money from the volume of transactions to expand their balance sheet to make more loans and also pay dividends to their shareholders.
George Washington Buys Bank of Alexandria Stock
The Bank of Alexandria got off to a strong start. The shares were in high demand both for buy and hold investors and also speculators. While he was President of the United States, George Washington also became a stockholder in the Bank of Alexandria. Since he was not an investor in the IPO, he had to buy shares in the secondary market. This is similar in principle to how stocks are bought and sold today albeit with some significant technological differences.
In a series of letters with his secretary, Tobias Lear, Washington authorized the purchase of stock in the bank. From a letter dated May 20, 1795, Lear told Washington that shares in the Bank of Alexandria could be purchased at par for $200 dollars each. The shares paid a dividend every six months at an annualized rate of 9-10% of par value. Thus, with par being $200, every six months Washington could expect to receive $9 for each share that he owned. Lear advised Washington to buy shares in both the Bank of Alexandria and the Bank of Columbia.[v]
On May 26, 1795, Lear followed up the letter to Washington and was hopeful that he would quickly hear from the president on the subject of buying the shares.[vi] The reason is that the price of the shares was going to rise in June and Lear wanted Washington to get in before they did.
Washington did eventually respond to Lear, and purchased 5 Bank of Alexandria shares at $200 per share, which amounted to $1,000, which is $24,695.05 in 2024. In terms of the dividend, Washington's five shares would have been a semi-annual payment of around $45, which is about $1,108.31 in 2024. Not a bad investment!
As a result, Washington did not want to stop at $1,000. In fact, Lear mentioned a payment from David Stuart of $3,000 and was willing to allocate a portion of the money for the purchase of more stock. Washington wrote him a letter on June 4, 1795, and said, “I pray you to continue your purchases in either of the Banks of Alexandria, or Columbia, or both; as you shall deem best; so far as the appropriated sums in your hands, belonging to me (to which add the three thousand dollars received from Doctr Stuart) will go.”[vii]
With these instructions, Lear determined to purchase shares in the Bank of Alexandria. He stated his reason as twofold:
I should prefer vesting it in Shares of the Alexandria Bank as the property is equally as good as that in the Bank of Columbia, and a dividend is to take place there shortly. It will also bring the stock you may hold in each bank to nearly the same sum.[viii]
Lear did add one disclaimer on the purchase. The shares were currently being sold at a premium to par. However, Lear hoped that the price might come down and wrote that “there are moments when a want of money may induce a sale on better terms for the purchaser, and these shall be attended to.” Thus, we see how stock was traded in the Bank of Alexandria. When demand was high, the price of the shares was quoted at a premium to par. When people had to sell their shares to raise cash, the stock was quoted at par or at a discount to induce buyers to step in and purchase.[ix] Furthermore, Lear rightly anticipated the rise in the price of shares. His letter also indicates his financial acumen in terms of portfolio diversification as he wanted Washington’s funds to be balanced between the two banks.
The letters between Lear and Washington provide an extraordinary glimpse into American capital markets. There have been countless biographies written about George Washington. Most of them focus on George Washington’s finances in terms of his farming and land speculation. However, his letters with Tobias Lear reveal a different side of Washington’s financial profile. This is one of the first instances in which Washington was able to reinvest his cash in stock. In doing so, he could earn a dependable return on his capital. In fact, this was a seismic shift in the American economic system. Institutions like the Bank of Alexandria transformed America’s economy and modernized the financial system in the early republic. In fact, the purchasing of stock that Lear and Washington discussed is perfectly recognizable in the stock market today.
How did Washington feel about buying the shares at a premium? He told Lear to buy them. Clearly, he felt the urgency to put his cash to work and did not want to miss the opportunity to get the shares and benefit from the dividend. Washington wrote the following:
Unless you have very good reasons to believe that the shares may be had at par by delaying the purchase of them, it might be as well perhaps to buy at the prices now going (especially if the overplus will meet compensation in the dividends) as to await for a fall.[x]
Finally, on June 19, 1795, Lear wrote to Washington that he would go ahead and buy more shares in Bank of Alexandria stock in spite of the rising price. Lear hoped for a fall in the price to get the shares at par, but he was not certain that would happen with the upcoming dividend. Lear wrote:
As the time of dividend draws so near I doubt whether they will be much below the principal & 4½ pr Cent Interest— and if they are to be had for about that price I shall buy.[xi]
In an earlier letter, Lear had mentioned that the dividend was between 9-10% annually. Thus, his discussion of the 4.5% interest rate refers to the semiannual dividend payment. Washington ended up owning 25 shares of Bank of Alexandria stock, which amounted to a $5,000 investment. With a 4.5% semi-annual discount on $200 and 25 shares, this equaled $225 every six months, which is the equivalent to around $5,500 in 2024. Thus, Washington expected to receive today's equivalent of $11,000 per year from his ownership in Bank of Alexandria stock.[xii]
The Bank of Alexandria’s Follow-On Offering
Demand for Bank of Alexandria shares was high enough that the directors decided to expand their capital base with new shareholders. In today’s capital markets, publicly traded companies raise additional capital through a follow-on sale of stock. This should not be confused with a secondary offering in which current shareholders sell their shares to investors. Companies will typically sell shares when the stock has appreciated in value, and they are able to raise cash to capitalize on the high demand. In 1795, the Bank of Alexandria was planning to capitalize on the demand for its stock with a follow-on offering.
Unfortunately, the follow-on offering was less successful than the IPO. The directors of the Bank tried to sell too much stock. They were authorized to sell 1,750 shares at $200 per share for a total of $350,000. By contrast, the IPO sold only 750 shares at $200 and raised $150,000. The directors were trying to more than double their capital base. Out of the 1,750 shares authorized, only half the amount was sold. As a result of the excess supply which outstripped demand, the stock price declined in the secondary market. In fact, one data point that speaks to the possible problems includes an abnormal dividend payment of $17 per share in January 1796. This was an 8.5% dividend and 17% at an annualized rate. Perhaps the unusual dividend was meant to entice buyers and create demand for the stock. Maybe it was meant to keep people from trying to sell their stock. Either way, it appears to have been a mistake at least for the bank president, William Hartshorne.[xiii]
New Bank Leadership Raises Questions
One of the risks of a follow-on offering is that it can raise questions about why the company needs to raise cash. Is the company in a cash crunch? Is their not enough cash from operations? As a result, publicly traded corporations have investor relations teams that help management talk to investors about these issues.
The Bank of Alexandria could have used an investor relations team in 1795 and 1796. The unsuccessful stock sale combined with the unusually large dividend payment led to a shake-up in the Bank’s leadership. In 1796, the bank directors voted for William Herbert to replace William Hartshorne as president. Hartshorne was incensed at suddenly being fired and pressed his case to the directors. As the new president, Herbert was put in the awkward position of responding to Hartshorne on behalf of the directors. Herbert assured an embittered Hartshorne that the directors simply wanted a change and that his removal was not a reflection of Hartshorne’s character or conduct while president. However, Hartshorne was not convinced and predicted that the sudden removal would raise questions about both his character and the Bank’s operations. Hartshorne wrote the following:
I cannot but think the change will excite much enquiry, and, perhaps, some uneasiness, which in a business of this kind, and at this juncture, may be a disadvantage to the Bank, and should not have been made without good cause.[xiv]
Hartshorne’s prediction came true. Stockholders were uneasy over the bank’s operations. What evidence do we have that this was the case? We have several letters written by the Bank of Alexandria’s new president, William Herbert, to its most prominent stockholder, George Washington.
Herbert wrote to Washington on October 9, 1797, and informed him of an upcoming dividend. Furthermore, he also provided Washington with a price quote for the current shares of Bank of Alexandria stock. The quote was ninety cents on the dollar or $180. Considering par value of the stock was $200, the stock traded at a 10% discount from where it had been issued. Herbert explained to Washington, “Such is the Scarcity of Cash & the Sacrifices that are daily making by Individuals to meet their Engagements.”[xv] The bottom line was that demand for the shares was down as stockholders sold their stock to raise cash. The discounted price is one strong data point that suggests serious investor unease.
Furthermore, Herbert continued to play the investor relations role by attempting to assuage Washington’s misgivings about the bank’s operations. Unfortunately, Washington’s reply to Herbert has been lost. However, Herbert sent a letter on October 10 in which we can only conclude that Washington had raised concerns about the “stability” of the Bank. Herbert replied as follows:
As to the Stability of our Bank, I feel no Difficulty in giving you as my decided opinion, that it is perfectly Safe, this Arises, from the Mode of doing Business, which Requires an Approved Endorser on every Note that is Discounted. Since the first Establishment of it, to this period, there has not been one Dollar of a bad Debt Made.[xvi]
Washington must have been worried about the Bank’s operations. Herbert had to reply to let him know that the Bank was fine, and its loans were being paid back by trustworthy borrowers. Furthermore, risk was mitigated with an approved endorser for every note.
With time and Herbert’s assurance, Washington was satisfied that the Bank would continue as a going concern. He did not pull his funds from the Bank or sell his shares. In fact, his relatives continued to buy stock. On October 27, 1797, Herbert wrote to Washington that he had bought shares of Bank of Alexandria stock for Miss Custis, who was Eleanor Parke Custis, George Washington's step-granddaughter.[xvii] Furthermore, in May 1798, Washington directed Herbert to make deposits in the Bank for him.[xviii] It is clear that his misgivings had disappeared by 1798.
Thus, with confidence in the Bank’s operations, Washington was ready to start thinking about his speculative real estate venture in the Federal City. He was confident that the Bank of Alexandria would be able to help him finance the construction of two brilliant townhouses in the heart of America’s capital.
In part two, we will cover how the Bank of Alexandria helped Washington with the construction of his Washington D.C. townhouses.
Want to get a little more technical with the accounting?
In terms of accounting, there are two concepts to understand: Accounts receivable and accounts payable. If a business is paid in credit, then they will book the revenue and record it as an accounts receivable until they receive the cash. Accounts receivable will be an asset on their balance sheet. Simultaneously, if they pay a supplier on credit, then they will record this transaction as an accounts payable. This will become a liability on their balance sheet. With the discount system, a merchant could pay off their suppliers and, thus, remove the accounts payable liability and replace it with a loan outstanding liability on their balance sheet. When they receive the cash payment from their customer, they could then pay off the loan and remove the liability. At the same time, if the customer was late in making the payment, they could renew the discount and extend it for an additional 30 days. As a result, we see how the early banking system spurred the advent of a credit based economic system based on accrual accounting, which is when revenue is recorded as the transaction takes place but not always when the cash is received.
Sources Cited:
[ii] An Architectural and Documentary Study the Bank of Alexandria. Fairfax and Cameron Streets. Alexandria, Virginia. January 1974.
[iii] Ibid.
[iv] Ibid.
[v] “To George Washington from Tobias Lear, 20 May 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0118.
[vi] “To George Washington from Tobias Lear, 26–27 May 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0133.
[vii] “From George Washington to Tobias Lear, 4 June 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0147.
[viii] “To George Washington from Tobias Lear, 9 June 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0158.
[ix] “To George Washington from Tobias Lear, 9 June 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0158.
[x] “From George Washington to Tobias Lear, 15 June 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0176.
[xi] “To George Washington from Tobias Lear, 19 June 1795,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-18-02-0186.
[xii] An Architectural and Documentary Study the Bank of Alexandria. Fairfax and Cameron Streets. Alexandria, Virginia. January 1974.
[xiii] Ibid.
[xiv] Ibid.
[xv] Ibid.
[xvi] “To George Washington from William Herbert, 10 October 1797,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/06-01-02-0354.
[xvii] “To George Washington from William Herbert, 27 October 1797,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/06-01-02-0387.
[xviii] “From George Washington to William Herbert, 8 May 1798,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/06-02-02-0190.