The Second Bank of the United States


Biddle thou monster avaunt!!” Jackson Slaying the Many Headed Monster (of the Second Bank of the United States). Source: Wikipedia


Chartered in 1816 (for 20 years), the Second Bank of the United States (BUSII) was headquartered in Philadelphia with branches nationally. Notwithstanding opposition from the Jeffersonians, the daunting challenges of paying for the War of 1812 were sufficient to overcome opposition to the chartering of a national bank. The bank got off to a rough start under poor management that helped worsen the Recession of 1819 that lasted for five years. The bank and the economy stabilized after Pennsylvania banker Nicholas Biddle was appointed to head the bank in 1822. For the next decade, BUSII was a positive force for economic stabilization. Although Biddle was a supporter of President Andrew Jackson’s election in 1828, Jackson was a BUSII opponent and slowly built a strategy for reining in its power.

The Federal Reserve Bank of Minneapolis summarizes the history of The Second Bank of the United States, this way:

The Second Bank of the United States: 1816-1836

With the War of 1812, federal debt began to mount again. At the same time, most state-chartered banks, which were issuing their own currency, suspended specie payments. So public opinion again became favorable toward the idea of a national bank, and Congress chartered a new one, charged primarily with promoting a uniform currency by getting banks to resume specie payments. The Second Bank functioned as a clearinghouse; it held large quantities of other banks' notes in reserve and could discipline banks that it was concerned were over-issuing notes with the threat of redeeming those notes. In this way, it functioned as an early bank regulator, a crucial function of the modern Fed.

The Second Bank was similar in structure to the First Bank, but bigger; it had capital of $35 million, with the government again holding one-fifth of the shares. Like the First Bank, it was headquartered in Philadelphia; over the time it operated, it had offices in 29 major cities around the country. Unlike the First Bank, however, the Second Bank was poorly managed at its outset and was on the verge of insolvency within a year-and-a-half after it opened. But after a congressional inquiry into the Second Bank's problems, Langdon Cheves was brought in as president in 1819 and saved it from collapse. Cheves was succeeded by Nicholas Biddle in 1822, and the Second Bank is generally considered to have operated effectively under their leadership.

However, the Second Bank still had powerful opponents, primarily in the form of President Andrew Jackson. Jackson hadn't forgotten the lessons from the early years of the Bank's existence—that such a powerful private institution was susceptible to corruption and would be difficult to control. At the time Jackson was elected, the Bank was operating successfully and was one of the most powerful organizations in the country. Jackson made his opposition to the Bank clear from the beginning. When Bank President Nicholas Biddle heard Jackson intended to close the Bank, he began to use the Bank's resources against Jackson, which ignited a bitter struggle. When Jackson refused to renew the Bank's charter in 1832 and later began to pull federal deposits from its vaults, it was effectively crippled and withered until the charter expired in 1836.

Prof. Robert E. Wright, of the University of Virginia, makes this observation at the Economic History Association’s online encyclopedia of economic history

“Despite the efforts of a few critics, most Americans rejected anti-bank rhetoric and supported the controlled growth of the commercial banking sector. They did so because they understood what some modern economists do not, namely, that commercial banks helped to increase per capita aggregate output. …

“… At first glance, intermediation may seem a rather innocuous process -- lenders are matched to borrowers. Upon further inspection, however, it is clear that intermediation is a crucial economic process. Economies devoid of financial intermediation, like those of colonial America, grow slowly because firms with profitable ideas find it difficult to locate financial backers. Without intermediaries, search costs, i.e. the costs of finding a counterparty, and information creation costs, i.e. the costs of reducing information asymmetry (adverse selection and moral hazard), are so high that few loans are made. Profitable ideas cannot be implemented and the economy stagnates.

“By lowering the total cost of borrowing, commercial banks increased the volume of loans made and hence the number of profitable ideas that entrepreneurs brought to fruition. Commercial banks, for instance, allowed firms to implement new technologies, to increase labor specialization, and to take advantage of economies of scale and scope. As those firms grew more profitable, they created new wealth, driving economic growth.”

The Bank is widely seen as having created a massive real estate bubble — with attendant fraud — leading to the Panic of 1819. Using anti-banker rhetoric very much anticipating that of the modern critics who wish to “End the Fed,” President Andrew Jackson determined to shut down the Second Bank even before its charter expired on the grounds of political corruption and a threat to liberty. Jackson vetoed an extension of the Bank’s charter.

As described by Daniel Feller in King Andrew and the Bank the January/February 2008 issue of Humanities

“Opening for business in the midst of a postwar boom, the Second Bank promptly discredited itself by speculation, stockjobbing, and, at some branches, outright fraud. But under the discreet management of its second president, Langdon Cheves, and his successor, Nicholas Biddle, it soon repaired its condition and reputation. By the end of the 1820s it had proved not only useful but, to many eyes, indispensable.

“But not to Andrew Jackson. Jackson came to the presidency with a deep sense of grievance against his enemies, real and imagined, in the existing political establishment and with a conviction that the government had fallen from Jeffersonian austerity into profligacy and corruption. This he was determined to reverse. The Bank was barely mentioned in Jackson's 1828 successful campaign against incumbent John Quincy Adams. But, after assuming office, Jackson learned of branch officers using the Bank as what one Jackson partisan called “an engine of political oppression” against his followers. Asked to explain, Bank president Biddle pronounced the charges “entirely groundless.” He affirmed the Bank's forbearance from politics-and its complete independence from executive control.

“Then, in November 1829, Biddle approached Jackson with a proposition. The Bank would assume the last of the dwindling national debt to enable its full discharge before the end of Jackson's term, an object that Biddle knew was dear to the president's heart. The quid for this quo was an early recharter for the Bank, which would send its stock soaring and provide a windfall for shareholders.

“Intended to placate Jackson by showing the Bank's friendship and usefulness, Biddle's offer had the opposite effect. To Jackson it was a backstairs deal smelling of privilege and corruption, something close to a bribe. Already suspicious of the Bank, from that moment he turned irrevocably against it. In his first annual message to Congress just a few weeks later, he startled everyone by raising the question of recharter and declaring his opposition. The Bank's constitutionality and expediency were “well questioned,” said Jackson, “and it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency.” It was a statement at variance with facts. The Bank's notes, unlike those of many state-chartered banks, circulated everywhere at face value, their integrity unquestioned. They were as good as gold.

“To Jackson it did not matter. In the Bank, Jackson found a concrete focus for all his fears of aristocratic subversion—fears he shared with many citizens. ‘I was aware that the Bank question would be disapproved by all the sordid, & interested, who prised self interest more than the perpetuity of our liberty, & the blessings of a free republican government,’ he confided shortly after the annual message. ‘This monied aristocracy’ was everywhere at work, buying up voters and lawmakers and “silencing opposition, by its corrupting influence, & preparing for a renewal of its charter, which I viewed as the death blow to our liberty.”

Jackson’s ringing veto message was a militant defense of the 99% against the privileged:

“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society-the farmers, mechanics, and laborers-who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing.”

Blessing or not, many students of the era believe that the destruction of the Bank led to worse, not better, conditions for workers — setting the stage for the 1837 crash and an ensuing severe deflation and depression.

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