In spite of, if not because of, their importance, banks are not usually popular. They are frequently the target of zealous reformers. Yet, bold policies rushed into enthusiastically should be the most worrisome. Campaigning against any institution in the name of progress should bring into question what exactly will replace it. Left unaddressed or poorly planned, even principled, well-meaning reforms can backfire spectacularly, not just causing collateral damage but even leaving reformers further away from their initial goal than where they started. This is what happened during the so-called Bank War in 1830s America.
Creating the Second Bank
The Second Bank of the United States has its origins in the War of 1812. The war had further indebted the new country and weakened its trade. Under blockade, exports had fallen from $61 million to $7 million. This reduced revenues from customs duties, the principal way in which the federal government was funded, damaging the public finances. The evaporation of foreign trade hurt domestic industries from shipbuilding to agriculture. Especially relevant to the government, no bank existed to help it manage its growing debt or make its payments. Even private banks were few.
The founders of the Second Bank of the United States believed a new national bank would help restore the economy’s health. Leaders in the creation of the Second Bank included John Jacob Astor, the future senator John C. Calhoun, a Treasury secretary, and several other financiers. Advocates even included 150 New York businessmen who signed a petition calling for the creation of the bank. The cause had no shortage of supporters.
This was significant since, at the time of this bank’s creation, there were no other federally chartered banks. The charter of the old national bank, the First Bank of the United States, had not been renewed in 1811. So, all that remained in the country were state-chartered banks, some of which had suspended the redemption of their banknotes amidst an economic downturn and shortages of precious metal reserves. The existing system looked inadequate.
James Madison, then President of the United States, gave his assent to an act establishing the Second Bank in April 1816. He had been skeptical of such a project but came to see value in a national bank as a means of funding wars and providing a more stable alternative to state-chartered banks which struggled during the post-war slump. In any case, the Second Bank of the United States opened for business in January 1817.
Function and Structure
The bank served many functions. It was the financial agent of the federal government, managing its deposits, making its payments, and issuing its debt to the public. It also had private functions; the bank accepted deposits, issued banknotes, and made loans to individuals and businesses up to a maximum interest rate of 6%. These public and private functions overlapped; its banknotes were the only ones accepted for payment of federal taxes, for example. The bank and its twenty-five branches were led by twenty-five directors, five of which were selected by the government and the rest by private shareholders. Its branch network, large for the time, gave the bank enviable reach, allowing it to facilitate the transfer of money and credit across regions, just as a ‘national’ bank should.
Once authorized, the Second Bank raised $35 million in capital in just three weeks during the summer of 1816. This was a sum three-and-a-half times larger than the capitalization of the old First Bank of the United States. It would set aside some of this in gold reserves to back its banknotes. Of the $35 million, the government put up 20% and private investors the rest in shares starting at $100. One-fourth of the equity was to be paid in precious metal specie and the rest in government bonds.
While not a central bank as we think of today, the Second Bank of the Unites States did regulate the money supply in practice and not just through its own credit. The bank routinely held the banknotes of state-chartered banks and it could curtail their creation of credit by presenting these notes for redemption, reducing the reserves of the state banks and their ability to create more deposits and extend more credit. To facilitate larger credit creation by contrast, the Second Bank would hold on to more banknotes issued by other banks.
The national bank could also discriminate between banks. If it found itself possessing too many notes from one particular bank, suggesting that firm was increasing its emission of banknotes, the Second Bank of the United States could take action against such bank specifically through redemption of its notes. In this way, the Second Bank did act as a regulator of the country’s money and credit systems.
The national bank’s first president was William Jones, a political appointee and former bankrupt whose management of the bank was short but not so short to relieve him of blame for a financial panic in 1819. This panic led to his resignation that same year. The bank’s second president, Langdon Cheves, sought to reverse the extension of credit that was seen as responsible for the crisis but this came hopelessly late and only contributed to the downturn.
After two mediocre managers, administration of the Bank of the United States was handed over to Nicholas Biddle, its most famous manager, in 1823. Already a director at the bank, Biddle was a member of a wealthy and well-known Philadelphia family.
He was an intelligent and accomplished man. Biddle had been admitted to the University of Pennsylvania at age ten. When unable to graduate because of his age, he transferred to Princeton where he graduated at 15, top of his class. Nicholas Biddle had been a lawyer and an editor, editing a literary journal and the journals of the western explorers Meriwether Lewis and William Clark. Perhaps inspired by his own travels, Biddle was also a collector of art and sculpture, which he kept at his estate Andalusia, just outside Philadelphia.
His management of the bank, which saw credit extended anew, was largely successful, to the benefit of both the bank and the American economy. The bank’s profitability stood at more than $3 million a year on assets of $80 million and liabilities only about half as large. It had a market share of perhaps 20%. The Second Bank was large enough, and managed conservatively enough, that its banknotes were widely accepted, even abroad.
In 1832, the bank became preoccupied with the renewal of its charter. The twenty-year charter of the Second Bank would be up for renewal in 1836. There was a problem though; Andrew Jackson, President of the United States since 1829, had just been reelected and Jackson was decidedly ‘anti-bank’. In an election where the Bank of the United States became the subject of debate, he defeated Henry Clay, who supported the bank in Congress and who also served as its legal counsel.
Indeed, Jackson stood opposed on this issue by all three of the ‘Great Triumvirate’ of prominent American congressmen, of which Clay was one. Between Clay, John C. Calhoun and Daniel Webster, these statesmen would rarely be on the same side of the issues of the day. However, they were united in their support for the bank. Curiously enough though, Biddle of all people had previously supported Jackson, even voting for him in the elections of 1824 and 1828, when the Second Bank had not yet been a contentious issue.
Jackson’s opposition to the bank was more likely driven by a mix of populism and by his own opinions of money and credit than driven by the management of Second Bank specifically, where he himself was a personal customer. Andrew Jackson regarded credit as enabling bad habits and paper money as inherently unstable and unneeded. He was likely reinforced in this view by his own reading on the history of the South Sea Bubble in early 18th century Britain.
Nevertheless, at least some of the President’s hostility was specific to the Second Bank because this was a federal institution impeding on what he saw as a prerogative of state governments. Jackson also believed the Second Bank concentrated power in the hands of a few bankers outside the oversight of Congress. Indeed, Biddle himself was not above favoring friends in the bank’s lending decisions. The President was also suspicious of its foreign owners who held one-third of the bank’s stock and may have believed rumors that the bank was basing its credit decisions on political factors so to benefit administrations it favored. If this all wasn’t enough, Jackson also blamed the bank for the financial panic that occurred under its earlier president, William Jones.
In any case, though the bank’s supporters in Congress possessed a majority, they did not number two-thirds, the proportion needed to override the President’s veto of the charter renewal. While the bank still had four years to find a way through the renewal impasse, Jackson was impatient. The President withdrew federal deposits from the bank in 1833, against the wishes of his Treasury Secretary who was dismissed. The money was placed with certain state banks, some of which were far more speculative and, rather curiously, embodied the ills Jackson abhorred in even greater degree than the Second Bank had.
At the Bank of the United States meanwhile, rather than shift its funding sources to private deposits, Biddle contracted the bank’s credit in response to the federal government’s withdrawals. The loan book shrank by $5 million. While a natural consequence of Jackson’s actions, the contracting credit damaged the bank’s own reputation, in part because Biddle’s decision not to seek more private deposits was seen, perhaps rightly, as a political decision to engineer a crisis. By 1834, the defeat of the ‘pro-Bank’ Whig Party in congressional elections and the weakened condition of the bank meant that support for it had never looked weaker. In the end, the bank’s charter went unrenewed, expiring in 1836.
The Bank of the United States managed to obtain a state charter in Pennsylvania with the help of Brown Brothers, which was then a rapidly growing investment bank. Biddle left the Second Bank in 1838 but returned when the bank found itself in trouble from speculative cotton investments it had made in the closing years of his management. He was unable to save the bank though and resigned just before it came crashing down. A criminal indictment was brought against him and his fellow directors though this would later be dismissed.
For the broader economy, Jackson’s victory in the ‘Bank War’ ushered in an economic depression, one of the worst in American history. The President’s decision to move deposits to state banks caused those institutions to begin lending more money more rapidly and many did a poor job of this. Jackson then engaged in other measures to replace paper with hard money. These measures contracted the supply of money and credit, endangering the very banks he had earlier allowed to lend more enthusiastically by shifting deposits towards them.
During the resulting crisis, several banks went under besides the old Second Bank of the United States. Losses amounted to the tens of millions of dollars. Commodity dealers and brokerages also failed. The federal government itself struggled to get its deposits out of the state banks. So much for the ‘hard money’ President. The Panic of 1837, deepening just as Jackson left office, would last until 1843. Neither Biddle nor Jackson outlived the crisis by much, dying in 1844 and 1845 respectively.
Biddle may have been the villain of the 1832 Presidential election, an easy target of the populist President. Andrew Jackson may have succeeded in that election, enabling him to ruin Biddle’s bank. Yet, Jackson hardly achieved his own vision of a stable utopian finance of hard money and responsible credit. Indeed, he made achieving that goal an even fainter and more distant possibility than it was when he came onto the scene. Financial panics would litter the remainder of the century with no men possessing the means of curing them.
This was hardly a surprise. Many contemporaneous defenses of the Second Bank of the United States were willing to admit there may very well have been faults with it, maybe even many, if not all, of the faults foes saw in it. Still, it was better than the alternatives, they argued. In the end, however well put, these warnings were not heeded, as they often aren’t when popular passions are allowed to influence financial policies.
More from the Tontine Coffee-House
1. Goldstein, Jacob. Planet Money Episode 761: The Bank War. National Public Radio, 24 Mar. 2017.
2. Hill, Andrew T. “The Second Bank of the United States.” Federal Reserve History, Federal Reserve Bank of St. Louis, 5 Dec. 2015.
3. Markham, Jerry W. “Chapter 3: Finance Before the Civil War / Section 1: The Bank Fight.” A Financial History of the United States, M. E. Sharpe, Inc., 2002, pp. 141–153.
4. The Second Bank of the United States: A Chapter in History of Central Banking, Federal Reserve Bank of Philadelphia, 2021.
5. Wallace, Dan, and Paul Kahan. The Bank War: Interview with Paul Kahan. Dig: A History Podcast, 26 May 2016.