8.1 First and Second National Banks
8.1.3 Second Bank of the United States (1816–1836)
The Second Bank of the United States was established just a few years after the first Bank’s charter lapsed. Its establishment was largely due to the stress to the American economy from the War of 1812. Embargoes paired with heavy wartime resource demands had resulted in a considerable government deficit.46
Private investors, rather than the government, had purchased government loans taken out in connection with the war; when the value of those government loans fell, these investors lobbied for a new national bank as a means of enhancing the value of their holdings.47 By August 1816, after the British burned the White House and the Capitol, these investors—including John Jacob Astor, Stephen Girard, and later Treasury Secretary Alexander James Dallas—felt they could wait no longer and formed a plan for recouping their investments.48 As with the First Bank, speculation and arbitrage opportunities resulting from these private investors’ holdings were a driving force behind these wealthy, powerful individuals’ backing for the establishment of the central bank.49
These investors’ plans laid the basis for the Dallas–Calhoun bill that would charter the Second Bank of the United States. The Bank would be chartered for twenty years, with capital of $35 million. As the First Bank before it, the government would own 20 percent of the Bank’s stock, and the public would own 80 percent. Bank equity capital was paid for with one-quarter specie, three-quarters in government bonds.50 Although Madison had vocally opposed the First Bank during its congressional approval hearings twenty years earlier, as President he expressed no similar concerns in the second Bank’s ratification process.
Just like the First Bank, it was provided by legislation that the Second Bank must be able to pay its noteholders in specie at all times, although there was no explicit
requirement for minimum amounts of specie to notes issued. To allay Democratic- Republican fears that the large capitalization of the Bank would make it a “mammoth machine” working against the best interests of the nation’s economy, the institution’s
equity capital could never be raised above $35 million.51
With regard to ensuring that state banks maintained sufficient specie, the Second Bank’s approach was not consistent among all state banks.52 This is because banks located in metropolitan centers, like New York and Philadelphia, generally were much more reliable in their efforts to maintain sufficient specie to state bank note issuance than state banks located in country districts in the far south and west.53 As a result the Second Bank needed to carefully monitor the specie and note issuance by rural state banks and could take a more hands-off approach to the banks located in metropolitan cities.54
The first and second presidents of the Second Bank, William Jones and Langdon
Cheves,55 mismanaged the Second Bank by extending too much credit to state-chartered banks and individuals.56 By mid-1818 the Second Bank and its branches had issued such a large amount of US bank notes that its specie reserves were comparably low and there was a risk that the Second Bank would not have sufficient specie to meet redemptions by US bank noteholders.57
When Langdon Cheves became the second president of the bank at the beginning of 1819,58 he forbade the branches of the Second Bank to issue any more US bank notes.59 In order to increase its specie reserves, the Second Bank was required to collect payment of some of their loans. This shifted balance sheet pressure from the Second Bank to state banks in three important ways. First, for state bank notes held by the Second Bank as payment for taxes, the Second Bank simply redeemed such notes for state banks’ specie.60 Second, for Second Bank loans directly to state banks, the Second Bank asked for
repayment in specie, further draining the specie reserves of state banks.61 Third, many of the Second Bank’s loans to other borrowers were repaid by those borrowers in state bank notes, which the Second Bank would then convert to specie by taking the notes to the state bank for redemption in the state bank’s specie.62
Of course, state banks reacted negatively to this balance sheet pressure shift. For example, state banks in Georgia and North Carolina loaned extensively to land buyers, farmers, and country merchants during the late 1810s and early 1820s. Although these banks had sufficient specie for otherwise ordinary commercial transactions, they “could not withstand the claims which might be made by the (Bank of the United States) bent on obtaining specie.”63
The resulting contraction of credit was widely thought to have contributed to, or at least increased the hardship produced by, the recessionary Panic of 1819. Although the effect on the US economy was largely negative, the Second Bank was successful in raising its ratio of specie reserves to US bank notes from a low of 12 percent in 1818 to a high of 61 percent in 1821.64
After the specie crisis at the Second Bank was resolved, its third president, Nicholas Biddle, once again expanded the institution’s role as a provider of credit and stability
beginning in approximately 1822. Under Biddle’s direction, the Second Bank was effective in ensuring that state banks had sufficient specie to back note issuance.65 Jeffersonian
Albert Gallatin wrote that the Second Bank had “effectually checked excessive issues” by the state banks, and “that very purpose” for which it had been established had been
fulfilled.66 In 1833, he wrote to Bank of England director Horsley Palmer that “the Bank of the United States must not be considered as affording a complete remedy,” for the ills of overexpansion, “but as the best and most practicable which can be applied”; and its action “had been irreproachable” in maintaining a proper specie reserve position “as late as November 1830.”67
From 1831 to 1832, fluctuation in European exportation caused an unfavorable balance of trade with the United States, which caused a slowdown in the US economy. The Second Bank acted to mitigate the harm to the economy by expanding loans to state banks and other private entities.68 During this time the Second Bank allowed specie reserve to fall by 41 percent.69 The Second Bank did so “to relieve the community from the temporary
pressure to which it was thus exposed.”70
During the 1831–32 credit crisis, the Second Bank redeemed notes for specie from
banks in Boston, New York, Baltimore, and Philadelphia that had maintained large specie reserves.71 The specie that the Second Bank received from these efforts enabled the
Second Bank to expand loan making to banks in the west and southwest, where loan issuances had expanded beyond state banks’ capacity to repay with specie.72
The success of the Bank’s stabilization efforts during this crisis increased the Bank’s popularity even among state bankers that had been previously opposed to the Bank’s influence.73 Of the 394 state banks that existed in 1832, none petitioned Congress to withdraw the Bank’s charter; 61 sent memorials in favor of renewal.74
Like its predecessor, the Second Bank of the United States was also a controversial entity. Allegations of corruption at the Second Bank’s local branches began as early as 1825.75 Branch officials in South Carolina, Louisiana, New Hampshire, Georgia, and Virginia were accused of “unjustifiable political activity,” incurring suspicion that the Bank would engage in political favoritism by lending at disproportionately favorable rates to preferred borrowers.76 After investigation by Jacksonian officials, these charges were largely found baseless; no charges were ever levied against the parent board.77
Andrew Jackson and other Democrat-Republicans, who complained that the Bank posed a threat to states’ rights, were the primary source of Bank criticism. When Jackson
assumed the presidency in 1829, the Second Bank was thriving under Biddle’s leadership.
The dollar was in good health; the Supreme Court reaffirmed the Second Bank’s constitutionality;78 and the Treasury continued to use it as an official depository.79 However, Jackson’s first message as President was that “both the constitutionality and the expediency of the law creating the bank were well questioned by a large portion of our fellow-citizens.”80
In 1832, congressional hearings were called in response to the Second Bank’s actions during the 1831–32 crisis. At these hearings Biddle’s interaction with the legislature—one wary of the Bank’s overreach—exacerbated tensions. Biddle, citing the Bank’s 1831–32 specie outflow and loan issuance as a means of ameliorating the economic downturn,
asserted that the Bank’s decisions to provide credit to the market in times of crisis worked in the best interest of the entire market.81 Anti-Bank members of Congress viewed this statement as Second Bank management overstepping its mandate and threatening
congressional authority.82 One member of Congress expressed his trepidation at the link between the Bank and Congressional authority: “This vagrant power to erect a bank … has at length been located by [Secretary of the Treasury Crawford] on that provision to lay and collect taxes.”83 John Quincy Adams similarly remarked, “power for good is power for evil, even in the hands of Omnipotence.” He and many others in Congress believed that
“the soundest discretion may come to different results in different men.” Regardless of the Bank’s benevolent intent and, often, similarly benevolent results, Congress feared the Bank’s power and discretion in helping shape American markets.84
In 1832, Henry Clay, during his presidential campaign against Andrew Jackson (who was running for reelection), introduced a bill to renew the second Bank’s charter four years early.85 Introducing the bill during the campaign was intended to minimize the chance that Jackson would veto it, lest he provide his political opponents with grounds for criticism.86 However, Jackson not only vetoed the bill on July 10, 1832, but he used the veto message to send a strong populist message to his voters.87 The message focused on the “exclusive privileges” granted to the Bank and its stockholders and contrasted them with the experience of the ordinary American: “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.”88 In December 1832, shortly after the veto, President Jackson, now reelected, ordered the withdrawal of federal deposits from the Bank, instead moving them to a newly established group of “pet” banks that would serve as depositaries for federal government assets. Under President Jackson and newly appointed Treasury Secretary Roger Taney, President Jackson’s close ally, all government revenues were placed not with the Second Bank but in certain state banks they would select. The remaining
government assets within the Second Bank, in the tens of millions at the time, would be drawn upon for all government expenditures until that amount was exhausted.89
Less than a year after the Bank’s close, the United States experienced the Panic of 1837, in which money supply fell 34 percent between 1838 and 1842 and prices decreased 33 percent from 1839 to 1843.90 There was no Bank of the United States available to expand credit.
The Second Bank of the United States, much more than the First Bank, did, in effect, play the role of lender of last resort to the banking system, by forbearing specie
redemptions in weaker banks, and did so successfully to maintain financial stability. This accounted for its popularity with the states. However, there was a continued fear of the misuse of federal power. Again, the baby of lender of last resort was thrown out with the bathwater of such federal power.