The National Bank
The National Bank
Monetary Problems. The period between 1815 and 1850 witnessed a market and transportation revolution resulting in tremendous economic growth. Credit was a desperately needed commodity. Americans relied on paper currency to facilitate commercial exchanges, though many, especially hard-money Democrats, feared the inflationary effects of paper and preferred to use specie (gold and silver money) in transactions. Dependence on paper money was risky. Many local banks issued paper notes in a variety of denominations. Banks were supposed to keep a certain percentage of specie on hand in the event customers wanted to exchange paper for metal, but few banks were able to meet their total paper obligation, and a run on the bank often resulted in the suspension of specie payments. As long as there was a national bank, such as the Second Bank of the United States, to control smaller banks by buying up their notes and exchanging them, the country’s financial system maintained some stability. Unfortunately, the national bank itself soon became part of the problem. Immediately after being rechartered after the War of 1812, the Second Bank of the United States began speculating in western land. Branches in Cincinnati, Lexington, and Baltimore all had employees who sought to profit from criminal schemes. William Jones, the bank’s president, resigned and was replaced by Langdon Cheves. To control speculation Cheves curtailed credit and called in state bank loans. The state banks, in turn, called in many of their outstanding loans, ruining those who could not immediately
repay what they had borrowed. Cheves had saved the bank at the people’s expense.
Rechartering the Bank. After Cheves resigned in 1823, Nicholas Biddle assumed the presidency of the bank. Bi4dle’s sound monetary policies restored faith in the bank and gave order to America’s economic system. The bank’s charter, issued in 1816, was to last twenty years, and She bank’s reputation for fiscal soundness made renewal of the charter in 1836 likely. Unfortunately for the bank, one of its strongest supporters, Henry Clay, decided to use its recharter as a political issue in the presidential campaign of 1832. Biddle and Clay, the Whig candidate, sought a new charter for the bank four years early, in order to force President Andrew Jacks’n either to concede the bank’s utility or vet) the recharter. If Jackson vetoed the bill, Clay believed the bank’s supporters would flock to him. If Jackson supported the bank, he would alienate much of his own party. Jackson himself firmly opposed banks and had once told Biddle that he did not just hate the Second Bank of the United States, he hated all banks.
Bank War. In early 1832 Clay maneuvered a recharter bill through Congress. Shortly after the bill passed, Martin Van Buren visited Jackson, who was sick and in bed. Jackson took Van Buren’s hand and said, “The Bank, Mr. Van Buren, is trying to kill me, but I will kill it!” Jackson promptly vetoed the bill. His 10 July 1832 veto message argued that the bank was “unauthorized by the Constitution, subversive of the rights of the states, and dangerous to the liberties of the people.” The bank was a monster, Jackson argued, and a monopoly with special privileges that only benefited wealthy northeastern stockholders at the expense of farmers and workers. In the election of November 1832 Jackson soundly defeated Clay. He believed that his victory was a reward from voters who favored his attack on the bank.
Removing Government Deposits. Jackson’s veto killed the recharter but not the bank, whose original charter still had four years left. The bank served as the repository for federal deposits, so to deliver the final blow Jackson decided to end the government’s relation with the bank. Jackson’s plan was to remove the deposits and place them in selected state banks, known as “pet banks.” However, Jackson’s secretary of the treasury, Louis McLane, was the only person with the authority to remove the deposits. He refused to do so and suggested that a new, modified bank be chartered instead. Jackson promptly made McLane secretary of state and brought William Duane into the cabinet as the new secretary of the treasury. Duane also refused to remove the funds, seeing no reason to transfer money from a relatively sound national bank to several weaker state banks. He, too, was dismissed and replaced by Jackson’s loyal attorney general, Roger Taney. Taney removed the deposits and sent them to twenty-three state banks. Biddle was forced to contract the bank’s loans by nearly $10 million, partly in an unsuccessful effort to pressure Jackson to reconsider. The pet banks, now with a secure flow of money, began to increase their own loans. The Senate eventually censured Jackson for arbitrary and unconstitutional
actions, but this hardly mattered. Jackson had killed the Second Bank of the United States.
Specie Circular. After destroying the “monster bank” Jackson continued his hard-money economic policy. First, he prohibited the pet banks from issuing paper notes of less than five dollars. Jackson also issued the Specie Circular, which required purchasers of large plots of western land to pay in gold or silver. The intent of the Specie Circular was to force speculators out of the land market, but since few settlers had enough gold or silver to purchase land, the edict ironically favored speculators, who were in the best position to buy with specie.
John M. McFaul, The Politics of jacksonian Finance (Ithaca, N.Y.: Cornell University Press, 1972).