Andrew Jackson and the Bank of the United States (or, “the Hydra-headed monster’)
Charter of first bank expired 1811 (Hamilton’s bank). State banks went wild – from 88 to over 200-- issued huge quantities of bank notes which circulated as regular currency to make loans and pay debts (bank note: piece of paper carrying a bank’s promise that upon request the bank would give to the bearer of the note an amount of money in specie (gold or silver) equal in value to the sum printed on the note). Storekeepers, merchants accepted the notes. A bank’s ability to issue notes allowed it to make more loans, pay more debts, and in general nourish more business than it could do if its activities were restricted to what its holdings in specie alone could accomplish Problem: As long as there was plenty of reliable specie in the banks—enough to cover a comfortable portion, if not all the bank notes in circulation in case many holders of notes became hungry for metallic money, then notes were successful. BUT—If the bank notes got far out of proportion to the specie on which they were supposed to be based, the public would cease to trust them as currency, they would depreciate in value, and business would suffer from the uncertainty. A mass of currency (depreciated paper money) worried businessmen and pleased counterfeiters. The lack of a national currency such as a Bank of the U.S. could have issued made it difficult to carry on business among different parts of the country. II. War of 1812 In 1811, with the expiration of the charter of the first national bank, Secretary of Treasury Albert Gallatin had arranged for state banks to carry on the business of the government. The Treasury had no bank to look to for quick loans, but had to negotiate here, there, everywhere. The government was borrowing more than it was receiving, plus paying soldiers in depreciated money that it would not itself accept. Summer of 1814 – every bank outside New England had suspended the practice of paying specie to holders of notes who demanded payment. The dollar was worth different amounts in different states. Country’s credit practically vanished overnight. 1815 – Madison asks Congress to charter a new bank – the question of constitutionality was not raised. III. 1816 – Second national bank chartered for 20 years. Located in Philadelphia and capitalized at $35 million-government puts up $5 million. President appoints 5 government directors, stockholders appoint another 20. --served as a repository of government funds --could establish branches as directors saw fit --could issue own bank notes --could regulate state banks IV. Panic of 1819 – a financial collapse of the greatest magnitude the nation had yet known. The panic was a result of a buoyant but unhealthy expansion of the American economy during the years immediately after the war, an expansion that economic dislocations in Europe had encouraged. In 1816 and 1817 Europe suffered widespread crop failures. These created a large and high-priced market for American rice, corn, wheat, and meat. British cotton textile manufacturers, moreover, having done without American cotton for three years, had accumulated a great backlog of demand for it. The price of cotton, which had fluctuated around fifteen cents a pound before the war, now rose to twenty-five and thirty cents. Americans responded in typical American fashion. On the one hand, they grossly over-expanded production, especially of cotton: in the years 1816-1819 annual production of cotton more than doubled over that of 1814. The production of other American staples likewise increased rapidly, though not so spectacularly as that of cotton. On the other hand, Americans by the thousands succumbed in these prosperous times to what had been, since colonial days, practically a national disease: speculation in land. Instead of paying attention first to farming and profiting from the inflation while they could, vast numbers of people put every spare cent into land. To accommodate demand, the federal government threw vast tracts of public land on the market. Auctions at the district land offices attracted eager crowds, including squatters hoping to buy the lots they had already occupied and speculators seeking choice tracts for resale at inflated prices. Much of this land was purchased with credit I.
supplied by the steadily increasing numbers of state banks. The new Bank of the United States (BUS) not only made little effort at first to check this speculation, but itself proved a major source of credit expansion. For a while it exchanged Bank stock for IOUs instead of specie. Supervision over Bank branches was notoriously lax. Those in the South and West greatly over-expanded their loans and their issues of bank notes. The officers of the Baltimore branch engaged in embezzlement. By 1818 the Bank had loaned out over $41 million. Some of it was invested in canals, turnpikes, and farm improvements; much more, however, went for speculative ventures in urban real estate, cotton futures, and western land. Indebtedness mounted, but as long as prices and rents increased, farmers and speculators would hope to meet their obligations. Suddenly the economy collapsed. With the return of good harvests abroad in the fall of 1818, demand for American grain fell sharply. At the same time, British manufacturers finally reduced their imports of American cotton: prices for the South’s great staple dropped by over one half in 1819. Planters and farmers who had borrowed heavily to expand production could not repay their loans. This reversal left the Bank of the United States in desperate straits. Its liabilities exceeded its specie reserves by a ratio of ten to one, double the limit allowed by law. The Bank then called in the loans of state banks, which forced them in turn to call in their loans. A wave of bank failures followed, most of them in the South and West; money disappeared and credit dried up, spreading economic distress throughout the country. Speculators who had purchased public land were stuck with it. Agricultural prices sank so low that many farmers resorted to barter. Merchants sold their stock at high losses or declared bankruptcy. In Philadelphia County alone, over 1,800 people went to prison for debt during 1819. Thousands were thrown out of work: in Pittsburgh, thirty percent of the population went back to the country. A traveler remarked on “great numbers of strangers lately camped in the open field near Baltimore, depending on the contributions of the charitable for subsistence.” Americans for the first time confronted a nationwide depression – the Panic of 1819. V. McCulloch v. Maryland, 1819 Marshall’s opinion supported the loose construction theory of the Constitution and gave a broad interpretation to the last clause of Article I granting Congress the power to make laws “necessary and proper’ to carry out its delegated powers (Art. I, Sect. 8, Clause 18). “Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the Constitution, are constitutional.” No state had the right to hinder or control any national institution established within its borders. “The power to tax is the power to destroy.” Andrew Jackson’s interpretation of the ruling: “The opinion of the judges has no more authority over Congress than the opinion of Congress has over the judges, and on that point the president is independent of both.” VI. Nicholas Biddle – became president of the BUS in 1823 and began to clean it up: --Increased BUS specie reserve making the paper money issued by the bank “good as gold.” --Worked to control the amount of money in circulation by regulating notes issued by state banks. --Provided credit for growing enterprises. VII. Criticism of the BUS --Blamed for the Panic of 1819. --New York did not like the restrictions imposed by Philadelphia (Wall Street vs. Chestnut Street). --The constitutionality of a private bank as the depository of public funds questioned. --Advocates of cheap money resented the bank’s restrictions. --Advocates of hard money condemned the bank issuing notes as speculation. --Tended to drain specie from the South and West to the North. --Enjoyed a monopoly of government business. --Could and did show favoritism in the granting of loans. --Did meddle in politics. VIII. Northeast strongly supported the Bank – manufacturers and bankers benefited from available investment capital and a stable currency South and West opposed the Bank – planters, farmers, debtors preferred state banks (easy credit, cheap money, high agricultural prices)
IX. Andrew Jackson and the BUS In 1829, in his inaugural address, Jackson questioned the constitutionality, the expediency, and the success of the national bank. Biddle initially tried to placate Jackson, but eventually turned to Jackson’s enemies for support. He extended generous loans to Clay, Webster, and other influential politicians and newspaper editors. In 1832 he reluctantly acquiesced to their plan to seek a recharter well in advance of the expiration date. It was an election year, and the Bank’s friends reasoned that Jackson would hesitate before vetoing a recharter bill. If he did veto it, they would have a good issue in the presidential campaign. The bill renewing the bank’s charter cleared Congress in July 1832, with nearly a third of the Democratic representatives voting in favor. Jackson was enraged. “The Bank,” he told Martin Van Buren, “is trying to kill me, but I will kill it.” He sent the bill back to Congress with a blistering veto message. Source of Jackson’s hostility to the bank?? Perils of Prosperity reading Points of the veto message: At first, Jackson’s enemies rejoiced over the message. Biddle compared the President to a “chained panther biting the bars of his cage” and called the veto “a manifesto of anarchy.” But in November 1832 Jackson, with Van Buren as his running mate, overwhelmed the National Republican candidate, Henry Clay, by a margin of four to one in the Electoral College. Jackson took his decisive victory as a mandate to destroy the Bank even before its charter expired. As soon as the nullification crisis passed, he set out to remove the government deposits from the bank and place them in selected state banks. By law, it was the Secretary of the Treasury who had to give the actual order for removing them. When he refused, Jackson “promoted” him to the State Department and named a new treasury secretary. This official, too, refused to do Jackson’s bidding, citing the “irresponsible” policies of the state banks. Jackson then replaced him with Roger B. Taney, formerly the Attorney General. The faithful Taney continued drawing on the government’s funds in the Bank to meet current expenses, but he began depositing the incoming receipts in certain state banks. These banks were supposedly chosen for their fiscal soundness, but political considerations were not overlooked. Prior to 1836 over seventy-five percent of the officers in these banks were Democrats. The administration’s critics nicknamed them the “pet banks.” Jacksonians united five important elements in their assault on the bank: 1. Wall Street’s jealousy of Chestnut Street 2. The businessman’s dislike of the federal bank’s restraint upon bank credit 3. Politician’s resentment at the Bank’s interference with state’s rights 4. Popular identification of the Bank with the aristocracy of business 5. Direct agrarian antipathy away from banks in general to the national bank in particular Biddle’s response: Biddle’s Depression 1834 1836 – Pennsylvania state government rechartered the bank for five years 1841- bank closed Ultimate repercussions for Van Buren:
Burner, David, Virginia Bernhard, and Stanley I. Kutler. Firsthand America: A History of the United States. Brandywine Press: St. James, New York, 1996.