Bank War

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President Andrew Jackson's (182937) struggle against the Second Bank of the United States, known as the "Bank War," was the major national financial issue during his tenure in office. The Second Bank's policies were blamed for starting the economic crisis known as the Panic of 1819, while its dissolution by Jackson was blamed for the Panic of 1837. At odds with the Bank's president, Nicholas Biddle (17861844), Jackson decided to remove federal funds from the Second Bank of the United States and put them on deposit with selected state banks. This action led to accusations that Jackson was using his powers arbitrarily and acting contrary to the Constitution. On March 28, 1834, the U.S. Senate formally voted to censure Jackson for his actions.

The Second Bank of the United States was chartered by the U.S. government in 1816, partly to help manage the federal debt left by the War of 1812 (181214), and partly to curb inflation brought on by unregulated state banks. In the early nineteenth century there was no standardized national currency. Instead, because most banks were privately owned and operated for commercial purposes, they issued their own paper money. (In reality, this paper money was imprinted with a promise to pay in gold or silver on demandan action known in financial markets as specie.) These banks were necessary in order to supply the credit needed to buy land, finance businesses, and create economic growth. However, they tended to lend more paper "money" than they had the specie to cover. Thus, if several large creditors demanded payment in cash at the same time, the result was called a "run" and usually led to the bank's failure. If several banks failed at the same time the result was a financial panic, such as the panics of 1819 and 1837. Both of these events led to high rates of inflation and national depressions.

Because of the large cash resources available through federal deposits, the Second Bank of the United States could discipline state banks and force them to limit the credit they supplied to borrowers to the amount of specie they kept in their vaults. The Second Bank also competed with state banks by agreeing to pay in specie any of its drafts, no matter where the draft was originally issued. For that reason it was unpopular with shareholders in the state banks, who felt the national bank limited their ability to profit from their investments. The Bank's competition with statechartered institutions also led to a celebrated Supreme Court case: McCullough v. Maryland (1819), in which Chief Justice John Marshall (1755-1835) established that Congress had the right to charter a national bank and that states had no power to tax federal institutions.

The Second Bank of the United States faced many of the problems that plagued state institutions. Between 1816 and 1818, for instance, dishonest managers of the Baltimore, Maryland, branch of the Second Bank swindled investors out of more than $1 million before they were caught. The following year this scandal forced the resignation of Bank President William Jones. The reputation of the Second Bank was restored by Jones' successor, a South Carolina lawyer named Langdon Cheves. Cheves brought discipline to the Bank's dealings, sharply reducing the number of loans issued and aggressively pursuing individuals and banks that defaulted on loans. Cheves' policies helped place the Bank on a sound financial footing, however, they also caused a number of bank failures that led directly to the Panic of 1819.

When Jackson was elected president in 1828 the Second Bank, under Nicholas Biddle, was exercising considerable influence over the nation's financial affairs. By 1828 the Bank had built up a surplus of $1.5 million and it was paying its stockholders an annual dividend of seven percent. It also helped stabilize a national currency and provided credit and cash in areas of the West and South where financial resources were scarce. By doing so it made development on the American frontier easier and faster. However, to President Jackson the Bank was a tool of Eastern economic privilege, which enabled speculators, monopolists, and moneyed interests to take advantage of farmers and mechanics. Jackson also believed, despite Chief Justice Marshall's ruling in McCullough v. Maryland, that Congress had no right under the Constitution to charter a bank.

In 1832a presidential election yearHenry Clay and Daniel Webster, two of Jackson's most vocal opponents in Congress, decided to challenge the president. Even though the Bank's charter was not due to expire for four years, they promoted a bill that renewed the charter of the Second Bank of the United States. Clay and Webster believed that, whether Jackson signed the bill into law, the president would alienate a significant number of voters and risk his chance of a second term. Jackson vetoed the bill on July 10, 1832, in one of the most strongly worded messages ever sent to Congress. Although Clay tried to make the veto an issue in his campaign for the presidency later that year, Jackson easily won reelection, defeating Clay by a margin of 219 electoral votes to 49.

Jackson believed his reelection represented a mandate from the American people to destroy the Second Bank of the United States. In 1833 he instructed his Secretary of the Treasury, Louis McLane, to prepare for the expiration of the Bank's charter by removing the government's deposits to certain state institutions, known as "pet banks." McLane refused and was moved to the position of Secretary of State. His successor, William Duane, also refused and resigned. Jackson did not find a pliable Secretary of the Treasury until former Attorney General Roger B. Taney (17771864) took the position.

The removal of the government's deposits brought Jackson into conflict with Nicholas Biddle, who was as strongwilled as the president. Biddle felt that Jackson's actions exceeded his constitutional authority and tried to force the president to renew the Second Bank's charter by sharply reducing the number of loans and also by vigorously collecting outstanding debts. Biddle's actions, however, failed to deter the president. Biddle succeeded only in causing a financial crisis for American business in the summer and autumn of 1834. Worse, he alienated some of his strongest supporters.

Despite Biddle and censure by the Senate, Jackson continued his policy of placing funds in statechartered banks. When Biddle discovered his policies were ineffective, he reversed himself and launched an even more extensive program of lending. For his part, Jackson made a determined effort to eliminate the extension of credit by forbidding banks with federal deposits from issuing banknotes of less than $5 denominations. In 1836 he issued the presidential order known as the Specie Circular, which required purchasers of public lands to pay in cash. By the time Jackson left office the Second Bank of the United States credit system had been severely crippled.

The Specie Circular was the final salvo in the Bank War, which ended in victory for Jacksonian principles. When the Bank's charter expired in 1836, it sought and received a charter from Pennsylvania, the state in which the main branch of the Bank had always been housed. It then operated under the name of the United States Bank of Pennsylvania. In 1839 the Bank found itself with too little specie to cover its loans. It went into receivership and was dissolved in 1841.

Jackson's victory left a questionable legacy. A boom in public works, such as canal construction, manufacturing, cotton production, and land sales, followed Jackson's decision to remove funds from the Second Bank of the United States. However, soon after his handpicked successor Martin Van Buren took over in 1837, the country experienced a severe depression, marked by high rates of inflation and large public debt that lasted for nearly a decade. Many historians argue that by eliminating the Second Bank of the United States, Jackson removed an institution that might have eased the Panic of 1837.

See also: Nicholas Biddle, Panic of 1819, Panic of 1837, Bank of the United States (Second National Bank), Specie, War of 1812


McFaul, John M. The Politics of Jacksonian Finance. Ithaca, NY: Cornell University Press, 1972.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York: Johnson Reprint Corp., 1968.

Rockoff, Hugh. The Free Banking Era. New York: Arno Press, 1975.

Timberlake, Richard H., Jr. The Origins of Central Banking in the United States. Cambridge, MA: Harvard University Press, 1978.

Wilburn, Jean Alexander. Biddle's Bank: The Crucial Years. New York: Columbia University Press, 1967.

Andrew Jackson, Veto message to Congress 1832">

(the second bank of the united states is) . . .unauthorized by the constitution, subversive of the rights of the states, and dangerous to the liberties of the people.

president andrew jackson, veto message to congress 1832

Panic of 1819

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Financial panics have been known since the introduction of modern capitalism in the eighteenth century. Excessive speculation in the stock of a European colonizing company in 1720 led to a panic in France and England. In North America the newly formed United States quickly began experiencing the financial business cycles of booms and crises. A business boom driven by optimism over the nation's future immediately followed victory in the American Revolution (17751783), however, economic crises soon followed. Business over-expansion, personal extravagance in spending, the end of military contracts that had inflated prices, and an inability of the United States to establish a treaty regulating trade with Britain, led to widespread debt in the aftermath of the war. British textile products flooded the U.S. market causing domestic agricultural and industrial prices to substantially drop.

Distrust for any form of centralized government activity also pervaded the largely agrarian society. Yet the lack of a centralized government allowed an unsound money system to come into existence which destabilized foreign trade. The stage was set for the financial panic in 1785.

The establishment of a centralized federal government in the 1787 Constitutional Convention brought back optimism for economic prosperity. To institutionalize economic stability in the young country, Congress created the Bank of the United States in 1791. The Bank instantly became not only the largest bank in the nation, but the largest corporation at the time. Functioning as both a commercial and central bank, its chief political objective was to regulate lending practices of state banks. The state banks were issuing their own paper money in the form of bank notes with the promise they could be exchanged for gold or silver coins upon request. The central bank, though effective in achieving its goals, attracted substantial opposition. Western agrarian communities demanded an inflated money system, opposed by the National Bank, to keep agricultural prices high and to pay off debts with cheap money. Responding to public dissatisfaction over the centralized power of the Bank, Congress allowed its charter to expire in 1811. With the National Bank gone, state banks expanded quickly and returned to the practice of issuing paper notes.

The problems associated with the national debt from the War of 1812 (18121814) led to chartering of a Second Bank of the United States in 1816. This again attracted the ire of the small farmers. Following victory in the War of 1812 western land speculation rose sharply. State banks and even some branches of the U.S. Bank encouraged the wave of speculation. However, fewer gold coins and silver dollars were in circulation, and currency speculators were hoarding the specie (gold or silver). As a consequence such coin was used primarily for large transactions, bank reserves, and foreign payments. Domestic land and commodity speculation was commonly in the form of paper bank notes printed by wildcat (unregulated) banks. In the South, following invention of the cotton gin in 1793, cotton plantations and exports expanded rapidly, reaping huge profits. The new cotton aristocracy engaged in "conspicuous consumption" and proceeded to spend money lavishly.

The managers of the Second Bank of the United States feared a shortfall in the specie backing up the bank notes, given the unchecked speculation and growth based on a nondescript system of currency. In 1819 the Second Bank decided to initiate a sharp contraction of credit by refusing to make loans. There were "bank runs" where depositors rushed in a panic to banks to have their notes converted to coin. Lacking suitable reserves, many state banks failed. With the banks closing their doors, millions of dollars owed to the federal government for sale of public lands went uncollected. The Second Bank's action led to a severe depression, particularly in the South and West. Prices, such as on the commodity market for cotton, declined sharply. With cotton income down, the South decreased their purchases of manufactured goods from Northern industry. Also, the South was sending much less cotton north to the Northern mills (which had been ultimately exported overseas by Northern shipping companies). The North lost both its Southern and foreign markets.

In the aftermath of the panic, Congress conducted investigations of alleged mismanagement of the federal banking system which, most people thought, had derailed an otherwise booming economy. Manufacturers also lobbied for better protection through tariffs and excise taxes. To the rescue of individual debtors who were victims of the panic, several states passed legislation relieving them of their debts. The depression lasted until 1823 when commodity prices and the economy in general began picking up again and public confidence in the banking system was restored. However, the Panic of 1819 presaged many other financial panics throughout the nineteenth century as the nation sought ways of balancing free market capitalism with economic stability.

Topic Overview

Nicholas Biddle inherited a bank (Second Bank of the United States) whose previous leaders had proved incapable of their tasks. William Jones, the first president, had . . . been a political choice; he was a man who knew nothing of banking, and to make things worse, was venal as well. During his years as president, the bank caused distress in all parts of the country through speculation on the part of its leaders . . . and unwise loan policies. After a Congressional investigation, Jones resigned, and was replaced in 1819 by Langdon Cheves . . . (who) was determined to put the (Bank's) affairs in order, and to do so called in many loans and advances. The result was . . . the abrupt end of a period of wildcatting.

robert sobel, historian, 1969

See also: Panic of 1837, Panic of 1907, Panics of the Late Nineteenth Century


Cohen, Bernice. The Edge of Chaos: Financial Booms, Bubbles, Crashes, and Chaos. New York: John Wiley and Sons, 1997.

Gilbart, James William. The History of Banking in America. New York: A. M. Kelley, 1967.

Rothbard, Murray N. The Panic of 1819: Reactions and Policies. New York: Columbia University Press, 1962.

Sobel, Robert. The Money Manias: The Eras of Great Speculation in America, 17701970. New York: Weybright and Talley, 1974.

White, Eugene N. Crashes and Panics: The Lessons from History. Homewood, IL: Dow Jones-Irwin, 1990.

Panic of 1819

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Those living at the time of the Panic of 1819 indicated that it was a traumatic experience for the new Republic. In one representative conversation, John C. Calhoun, discussing the situation with John Quincy Adams in 1820, said, "There has been within these two years an immense revolution of fortunes in every part of the Union: enormous numbers of persons utterly ruined; multitudes in deep distress; and a general mass disaffection to the government" (Rezneck, "The Depression of 1819–1822," p. 29).

What historian Charles Sellers has called the young nation's "traumatic awakening to the capitalist reality of boom-and-bust" was a complex combination of financial market volatility, swings in international market demand, and the financial activity of the federal government (Market Revolution, p. 137). The panic and the following depression saw output stagnate, exports decline 34.5 percent, imports fall 48.9 percent, and a dramatic deflation as prices fell 30.6 percent.

The panic had its origins in the War of 1812 and the boom following the end of hostilities. With the opening of British and European markets in 1815, demand for American commodities soared. As farmers benefited from increased incomes, so did the cities and towns that served them. The only sector not sharing in the boom was the nation's nascent manufacturing firms, which had blossomed during the embargo and the war. The end of the war meant America was open to British manufacturing goods, which flooded the market and drove prices down sharply. Unable to compete, American manufacturing stumbled as factories closed and unemployment in manufacturing areas rose.

In studies of the panic, the actions of the second Bank of the United States, along with those of a number of state chartered banks, has received much attention. And the monetary collapse of 1818–1819 sounded the alarm for an economy rife with speculation and brought the economic optimism that fueled such speculation to an end. Although dramatic monetary changes were an important component in generating panic across the nation and certainly made conditions difficult for businesses and farmers, ultimately two factors were responsible for the downturn. The most important was the collapse of the strong foreign markets for commodities that had fueled the American economy in the years following the War of 1812. To a lesser extent, the repayment of federal debt, much of it to foreign bondholders, was also a proximate cause of the country's first modern business cycle.

The banking system played a critical role in the events leading up to the Panic of 1819. In exchange for a return to specie convertibility by state banks, the newly formed second Bank of the United States proceeded to expand credit dramatically. This expansion, combined with a marked increase in western land sales, created a situation in which, despite large imports of specie, the bank could not continue to meet the demand for redemption of its notes. Thus, in July 1818 the directors ordered credit reduced by a total of $5 million at its Philadelphia, Baltimore, Richmond, and Norfolk offices.

Further complicating the financial picture at the time was the retirement of Louisiana bonds of 1803 scheduled to begin in 1818. Such fiscal action, on top of the over $20 million in federal debt retired during 1817, meant that substantial government revenues did not reenter the economy directly, particularly the more than half of the bond retirement that went to foreigners. This outflow from the domestic economy decreased potential spending at a critical time and placed additional strains on the second bank as Treasury deposits held there dropped significantly.

With a monetary contraction under way, along with the continued retirement of federal debt, much of it to foreigners, the collapse of the markets for American staples meant the U.S. economy was headed for disaster. Led by an economic downturn in Great Britain, reinforced by recession in Europe, and adversely affected by the operations of the British Corn Laws, the demand for American staples dropped significantly beginning in 1819. The combined circumstances of a sharp credit contraction followed by the evaporation of markets for the nation's products created hardships for Americans of all classes as businesses closed, land values plummeted, and farmers were forced to abandon their activities.

The Panic of 1819 affected the nation in a variety of complex ways. Because of its origins in contractions by both state banks and the new Bank of the United States, hostility towards banking in general, and towards the second bank in particular, intensified. Political controversy regarding the bank and its power grew, and many of the anti-bank leaders of the Jacksonian period came to their positions as a result of the panic and subsequent depression.

Also, demands for tariffs to protect American businesses were intensified by the downturn, and while efforts to increase tariffs in 1820 failed by the narrowest of margins, in 1824 protection was increased. The movement for higher tariffs led ultimately to the record high Tariff of Abominations in 1828.

Public policy regarding debtor relief also took center stage, as did concern for the rising cost of poor relief. At the federal level, Congress postponed forfeiture for debt on public lands in 1818, 1819, and 1820 before providing permanent relief in 1821. Debt relief measures were hotly debated in virtually every state as well, with many passing some form of relief. Following the lead of New York, many states also began to review their poor relief systems, which led to substantial changes in most by the 1830s.

In addition, the upheaval of the panic served to strengthen the positions of states' rights advocates and to increase calls for expanding internal improvements. It also sparked a heightened interest in economic thinking, reflected for example in the publication in 1820 of the first American book on economics.

See alsoBank of the United States; Debt and Bankruptcy; Economic Development; Manufacturing; Poverty; Tariff Politics .


North, Douglass C. The Economic Growth of the United States, 1790–1860. New York: Norton, 1966.

Rezneck, Samuel. "The Depression of 1819–1822, A Social History." American Historical Review 39 (1933): 28–47.

Rothbard, Murray. The Panic of 1819: Reactions and Policies. New York: Columbia University Press, 1962.

Sellers, Charles. The Market Revolution: Jacksonian America, 1815–1846. New York: Oxford University Press, 1991.

Temin, Peter. The Jacksonian Economy. New York: Norton, 1969.

Clyde Haulman