Bank War
The Bank War was a political struggle that developed over the issue of rechartering the Second Bank of the United States during the presidency of Andrew Jackson. This resulted in the shutdown of the Bank and its replacement by state banks.
The Second Bank of the United States was chartered for twenty years as a private institution with exclusive authority to operate on a national scale. While its stated purpose was to stabilize the American economy through a uniform currency and stronger federal presence, critics questioned whom it truly served. Supporters claimed that the Bank helped regulate prices, extend credit, provide a reliable currency, and offer essential services to the Treasury. However, Jacksonian Democrats and other opponents highlighted troubling examples of favoritism, alleging that the Bank catered to wealthy merchants and speculators while sidelining farmers, artisans, and small businesses. They pointed to the Bank's use of public funds for risky private ventures and its entanglement in political affairs as evidence of undue influence. For many, its blend of public authority and private profit was unconstitutional and eroded democratic ideals and state sovereignty. To its detractors, the Bank was a symbol of elite privilege and a potential threat to individual liberty.
In early 1832, the president of the B.U.S., Nicholas Biddle, in alliance with the National Republicans under Senators Henry Clay and Daniel Webster, submitted an application for a renewal of the Bank's twenty-year charter four years before the charter was set to expire, intending to pressure Jackson into making a decision prior to the 1832 presidential election, in which Jackson would face Clay. When Congress voted to reauthorize the Bank, Jackson vetoed the bill. His veto message was a polemical declaration of the social philosophy of the Jacksonian movement that pitted "the planters, the farmers, the mechanic and the laborer" against the "monied interest", benefiting the wealthy at the expense of the common people. The B.U.S. became the central issue that divided the Jacksonians from the National Republicans. Although the Bank provided significant financial assistance to Clay and pro-B.U.S. newspaper editors, Jackson secured an overwhelming election victory.
Fearing economic reprisals from Biddle, Jackson swiftly removed the Bank's federal deposits. In 1833, he arranged to distribute the funds to dozens of state banks. The new Whig Party emerged in opposition to his perceived abuse of executive power, officially censuring Jackson in the Senate. In an effort to promote sympathy for the institution's survival, Biddle retaliated by contracting Bank credit, inducing a mild financial downturn. A reaction set in throughout America's financial and business centers against Biddle's maneuvers, compelling the Bank to reverse its tight money policies, but its chances of being rechartered were all but finished. The economy did well during Jackson's time as president, but his economic policies, including his war against the Bank, are sometimes blamed for contributing to the Panic of 1837.
Resurrection of a national banking system
The First Bank of the United States was established at the direction of Treasury Secretary Alexander Hamilton in 1791. Hamilton supported the foundation of a national bank because he believed that it would increase the authority and influence of the federal government, effectively manage trade and commerce, strengthen the national defense, and pay the debt. It was subject to attacks from agrarians and constructionists led by Thomas Jefferson and James Madison. They believed that it was unconstitutional because the Constitution did not expressly allow for it, would infringe on the rights of the states, and would benefit a small group while delivering no advantage to the many, especially farmers. Hamilton's view won out and the Bank was created. More states and localities began to charter their own banks. State banks printed their own notes which were sometimes used out-of-state, and this encouraged other states to establish banks in order to compete. The bank, as established, acted as a source of credit for the US government, and as the only chartered interstate bank, but lacked the powers of a modern central bank: it did not set monetary policy, regulate private banks, hold their excess reserves, or act as a lender of last resort, and could issue only money backed by its capitalization and not fiat money.President Madison and Treasury Secretary Albert Gallatin supported recharter of the First Bank in 1811. They cited "expediency" and "necessity", not principle. Opponents of the Bank defeated recharter by a single vote in both the House and Senate in 1811. State banks opposed recharter of the national bank because when state bank notes were deposited with the First Bank of the United States, the Bank would present these notes to state banks and demand gold in exchange, which limited the state banks' ability to issue notes and maintain adequate reserves of specie, or hard money. At that time, bank notes could be exchanged for a fixed value of gold or silver.
The arguments in favor of reviving a national system of finance, as well as internal improvements and protective tariffs, were prompted by national security concerns during the War of 1812. The chaos of the war had, according to some, "demonstrated the absolute necessity of a national banking system". The push for the creation of a new national bank occurred during the post-war period of American history known as the Era of Good Feelings. There was a strong movement to increase the power of the federal government. Some people blamed a weak central government for America's poor performance during much of the War of 1812. Humiliated by its opposition to the war, the Federalist Party, founded by Hamilton, collapsed. Nearly all politicians joined the Republican Party, founded by Jefferson. It was hoped that the disappearance of the Federalist Party would mark the end of party politics. But even in the new single party system, ideological and sectional differences began to flare up once again over several issues, one of them being the campaign to recharter the Bank.
In 1815, Secretary of State James Monroe told President Madison that a national bank "would attach the commercial part of the community in a much greater degree to the Government interest them in its operations…This is the great desideratum of our system." Support for this "national system of money and finance" grew with the post-war economy and land boom, uniting the interests of eastern financiers with southern and western Republican nationalists. The roots for the resurrection of the Bank of the United States lay fundamentally in the transformation of America from a simple agrarian economy to one that was becoming interdependent with finance and industry. Vast western lands were opening for white settlement, accompanied by rapid development, enhanced by steam power and financial credit. Economic planning at the federal level was deemed necessary by Republican nationalists to promote expansion and encourage private enterprise. At the same time, they tried to "republicanize Hamiltonian bank policy." John C. Calhoun, a representative from South Carolina and strong nationalist, boasted that the nationalists had the support of the yeomanry, who would now "share in the capital of the Bank".
Despite opposition from Old Republicans led by John Randolph of Roanoke, who saw the revival of a national bank as purely Hamiltonian and a threat to state sovereignty, but with strong support from nationalists such as Calhoun and Henry Clay, the recharter bill for the Second Bank of the United States was passed by Congress. The charter was signed into law by Madison on April 10, 1816. The Second Bank of the United States was given considerable powers and privileges under its charter. Its headquarters was established in Philadelphia, but it could create branches anywhere. It enjoyed the exclusive right to conduct banking on a national basis. It transferred Treasury funds without charge. The federal government purchased a fifth of the Bank's stock, appointed a fifth of its directors, and deposited its funds in the Bank. B.U.S. notes were receivable for federal bonds.
"Jackson and Reform": Implications for the B.U.S.
Panic of 1819
The rise of Jacksonian democracy was achieved through harnessing the widespread social resentments and political unrest persisting since the Panic of 1819 and the Missouri Crisis of 1820. The Panic was caused by the rapid resurgence of the European economy after the Napoleonic Wars, where improved agriculture caused the prices of American goods to drop, and a scarcity of specie due to unrest in the Spanish American colonies. The situation was exacerbated by the B.U.S. under Bank President William Jones through fraud and the rapid emission of paper money. He eventually began to call in loans, but nonetheless was removed by the Bank's directors. Langdon Cheves, who replaced Jones as president, worsened the situation by reducing the Bank's liabilities by more than half, lessening the value of Bank notes, and more than tripling the Bank's specie held in reserve. At the same time, the prices of American goods abroad collapsed. This led to the failure of state banks and the collapse of businesses, turning what could have been a brief recession into a prolonged depression. Financial writer William M. Gouge wrote that "the Bank was saved and the people were ruined".After the Panic of 1819, popular anger was directed towards the nation's banks, particularly the B.U.S. Many people demanded more limited Jeffersonian government, especially after revelations of fraud within the Bank and its attempts to influence elections. Andrew Jackson, previously a major general in the United States Army and former territorial governor of Florida, sympathized with these concerns, privately blaming the Bank for causing the Panic by contracting credit. In a series of memorandums, he attacked the federal government for widespread abuses and corruption. These included theft, fraud, and bribery, and they occurred regularly at branches of the National Bank. In Mississippi, the Bank did not open branches outside of the city of Natchez, making small farmers in rural areas unable to make use of its capital. Members of the planter class and other economic elites who were well-connected often had an easier time getting loans. According to historian Edward E. Baptist, "A state bank could be an ATM machine for those connected to its directors."
One such example was in Kentucky, where in 1817 the state legislature chartered forty banks, with notes redeemable to the Bank of Kentucky. Inflation soon rose and the Kentucky Bank became in debt to the National Bank. Several states, including Kentucky, fed up with debt owed to the Bank and widespread corruption, laid taxes on the National Bank in order to force it out of existence. In McCulloch v. Maryland, the Supreme Court ruled that the Bank was both constitutional and that, as an agent of the federal government, it could not be taxed.
In 1819, Monroe appointed Nicholas Biddle of Philadelphia as Government Director of the Bank. In 1823, he was unanimously elected its president. According to early Jackson biographer James Parton, Biddle "was a man of the pen—quick, graceful, fluent, honorable, generous, but not practically able; not a man for a stormy sea and a lee shore". Biddle believed that the Bank had the right to operate independently from Congress and the Executive, writing that "no officer of the Government, from the President downwards, has the least right, the least authority" to meddle "in the concerns of the Bank".