Difficulties in financing the War of 1812 and the sharp inflation following the suspension of specie payments in 1814 convinced many people of the need for a Second Bank of the United States. It took two years of congressional wrangling and consideration of no less than six separate proposals before a bill to charter such a bank was passed. The Second Bank was finally chartered in 1816, again for a period of 20 years.
The charter of the Second Bank of the United States resembled that of its predecessor. The capital was set at $35 million, four-fifths of it to be subscribed by individuals, firms, or states and the remaining one-fifth by the federal government. Most of the capital was to consist of government bonds, but one-fourth of the private subscription ($7 million) was to be paid in coin. The Bank was to have 25 directors, 20 elected by private stockholders and 5 appointed by the president of the United States. The main office of the Bank was to be located in Philadelphia, with branch offices to be established on the initiative either of the directors or of Congress.
President of the second Bank of the United States, archfoe of Andrew Jackson, and advocate of central-bank controls was Philadelphia aristocrat Nicholas Biddle (1780-1844). Some argued that his hauteur cost the bank its charter; others believed that Wall Street would have done in Chestnut Street anyway.
The greatest contributions of the Second Bank of the United States came after 1823, the time of the appointment of Nicholas Biddle as its third president. Sophisticated, widely traveled, and well educated, Biddle typified the early American aristocrat. He had wealth, power, and a mind that enabled him to successfully run the nation’s largest enterprise. He was also arrogant and out of touch with the fears and aspirations of the average citizen.
Under Biddle, a conscious attempt was made to regulate the banking system according to certain preconceived notions of what ought to be done. In the first place, the Bank soon became the lender of last resort to the state banks. State banks did not keep their reserves as deposits with the Bank of the United States, but they did come to depend on it in times of crisis, borrowing specie from it to meet their obligations. The Bank was able to meet such demands because it kept a much larger proportion of specie reserve against its circulation than other banks. The Second Bank also assisted in times of stress by lending to business firms when other banks could not or would not. Because of these practices, many came to regard the Bank as the holder of ultimate reserves of the banking system.
The Bank developed a policy of regularly presenting the notes of state banks for payment. By presenting the notes of state banks for payment in specie, it kept their issues moderate. The Bank not only furnished a currency of its own of uniform value over the entire country, but it also reduced the discount at which the notes of state banks circulated to a nominal figure. By the late 1820s, the paper money of the country was in a very satisfactory state. Biddle also tried to affect the general economic climate of the
A bank note issued by a private bank before the Civil War. Notes like this one circulated from hand to hand as money.
United States by alternate expansion and contraction of the Bank’s loans. Furthermore, he made the Bank the largest American dealer in foreign exchange and was able to protect the country from severe specie drain when a drain would have meant a harmful contraction of monetary reserves. In the 1820s, the problem of making payments over considerable distances within the country was not much different from the problem of effecting remittances between countries. There was a flourishing business in “domestic exchange,” and the Bank obtained a large portion of it.
By 1829, the position of the Second Bank seemed secure. It had grown and prospered. In many ways, it had become a central bank. It had attained a shining reputation abroad— so much so that when the Bank of Spain was reorganized in 1829, the Bank of the United States was explicitly copied. Although the Bank had made enemies, the idea of a “national institution” was widely accepted, and even those who persistently opposed “the monster” grudgingly admitted that it had been good for business. Congress had made sporadic attacks on the Bank, but these had been ineffective. Yet the apparent permanence of the Bank was illusory.
In 1828, Andrew Jackson was elected to the presidency. Beloved by the masses, Jackson had the overwhelming support of the people during two terms in office. Long before taking office, he had decided against supporting banks in general and “The Bank” in particular. As a young man in Tennessee, Jackson had taken the notes of a Philadelphia merchant that passed as currency in payment for 6,000 acres. When he tried to use these notes, he found that they were worthless because the merchant had failed. To make his obligations good, Jackson suffered years of financial difficulty in addition to the loss of his land. Later, he and his business partners often found themselves victims of exorbitant charges by bankers and bill brokers in both New Orleans and the eastern cities (see Campbell 1932). On one occasion, Jackson bitterly opposed the establishment of a state bank in Tennessee, and as late as 1826, he worked against the repeal of a law prohibiting the establishment of a branch of the Bank of the United States in his home state.
In his first annual message to Congress, seven years before the charter of the Bank was to expire, Jackson called attention to the date of expiration, and stated that “both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens,” and speculated that
If such an institution is deemed essential to the fiscal operations of the Government, I submit to the wisdom of the Legislature whether a national one, founded upon credit of the Government and its revenues, might not be devised which would avoid all
In this cartoon, Andrew Jackson (left) attacks the many-headed serpent (the second Bank of the United States) with his walking stick (his veto). The largest head is Nicholas Biddle, the bank’s president. The remaining heads represent other officials of the bank and its branches. Jackson is assisted by Martin Van Buren (center).
Constitutional difficulties and at the same time secure all the advantages to the Government and country that were expected to result from the present bank.
We have the great Democrat’s word for it that his statement was toned down by his advisers. It was the beginning of the “Bank War.”
Biddle initially tried to win Jackson’s support, but his efforts failed. Henry Clay, charming and popular presidential candidate of the National Republicans (Whigs), finally persuaded Biddle to let him make the question of recharter a campaign issue in the election of 1832. During the summer, there was enough support in Congress to secure passage of a bill for recharter—a bill that Jackson returned, as expected, with a sharp veto message prepared by presidential advisers Amos Kendall and Roger Taney. In the veto, the president contended that (1) the Bank was unconstitutional, (2) there was too much foreign ownership of its shares, and (3) domestic ownership was too heavily concentrated in the East. A central theme ran through the message: The Bank was an instrument of the rich to oppress the poor; an institution of such power and so little responsibility to the people that could undo democracy itself and should be dissolved.
Agrarians of the West and South felt that the Bank’s conservative policies had restricted the supply of credit to agriculture.56 But Wall Street also opposed the Bank;
Wall Street wanted to supplant Philadelphia (where the home office of the Bank was located) as the nation’s financial center. Economics makes for strange bedfellows.
After a furious presidential campaign, Jackson won by a substantial margin. He considered his triumph a mandate on the bank question, and the acclaim he was receiving due to his masterful handling of the problem of nullification strengthened his resolve to restrict the Bank’s activities at once.57 In the fall of 1833, the government discontinued making deposits in the Bank, and editor Greene of the Boston Post was moved to write its epitaph: “Biddled, Diddled, and Undone.”
Biddle was not through, however. Beginning in August 1833 and continuing into the fall of 1834, the Bank contracted its loans sharply and continued its policy of presenting the notes of state banks for payment in specie. Biddle maintained that contraction was necessary to prepare the Bank for liquidation, although there was doubtlessly a punitive motive in the vigor of his actions. In any case, his actions contributed significantly to the brief but definite financial stringency of 1834.
The administration, however, remained firm in its resolve to end the Bank, which became a state bank chartered under the laws of Pennsylvania in 1836. Although stripped of its official status, the U. S. Bank of Pennsylvania remained the most powerful financial institution in America for several years. With its resources alone, Biddle engineered a grandiose scheme to support the prices of cotton and other agricultural staples during the nation’s economic troubles of 1837 and 1838. Biddle, in other words, “bet the bank” on a final gamble that the price of agricultural products would rise. If they had, the bank would have made a tremendous amount of money, farmers would have credited the Bank with raising farm incomes, and Biddle would have been a hero. But this last convulsive effort started a chain of events that led to the Bank’s failure in 1841, two years after Biddle’s retirement.
World History
