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In its first years, the Second Bank of the United States weathered an economic panic and an important court case. These were not, however, to be the last of its troubles. Other forces were at work that would oppose and eventually destroy the Second Bank of the United States.

Early in the 1820s, Henry Clay, a representative from Kentucky and political rival of Jackson, advocated and helped implement what became known as the American System for developing a strong national economy. This system had three parts: tariffs to generate income and protect U.S. businesses, a transportation system of roads and canals, and a strong banking system that could make loans for large projects. Clay felt that the Second Bank of the United States was an indispensable part of this plan, and he approved the Bank’s now-cautious approach to credit and banking.

Following the Panic of 1819, the Second Bank of the United States functioned to stabilize the economy. It prevented the worst of the cycles of boom and bust that characterized this volatile period, by restraining unsound lending practices of smaller banks, especially the frontier wildcat banks. Since the Federal government deposited its substantial revenues of gold and silver in the Bank of the United States, the notes that the Bank issued were more uniform and stable in value than the notes of other banks.

The Second Bank of the United States was not a government-owned bank, but a privately chartered institution headed at that time by Nicholas Biddle. Through his policies, Biddle was able to force smaller banks to refrain from excessive printing of banknotes, which was a major contributor to inflation. Requiring other smaller banks to maintain adequate reserves prevented bank failures that were ruinous to businesses and individuals alike. Though restrained from potentially making larger profits, the banking industry was healthier overall, which helped to insure public confidence in the financial system and uninterrupted growth of the economy.

Some people, however, felt that the Bank, and in particular its president Nicholas Biddle, had too much power to restrict the speculative and potentially profitable business dealings of smaller banks. Westerners were especially critical of the Bank because they felt it suppressed their opportunities while it bolstered the economy of the manufacturing East. Many people also believed that the Bank had the potential to be abused since a private bank is not accountable to the people. Its size and its favored status as the repository of Federal funds enabled the Bank to reap substantial profits for itself through loans to large businesses. The idea of the citizens’ money going into a private bank to be lent out for a profit for the bank’s owners seemed undemocratic and contrary to the ideals of the new Republic. Resentment was also high that the federal deposits that made the Bank so much money did not earn the public coffers any interest.

Many people also disapproved of the fact that the Bank’s stockholders included a substantial number of foreign owners. The idea that foreign nationals could wield political and economic power in the United States due to their influence over the Bank, and consequently over the U.S. economy, was a powerful argument against the Bank. The fact that the Bank had made loans and provided other advantages to politicians who supported it added to public worries over the wisdom of such a national bank.

In 1828, Andrew Jackson was elected president on the Democratic Party ticket. He was a war hero and, though he began life in poverty, by the time he moved to Washington he was a wealthy plantation owner in Tennessee. Jackson was often portrayed as a rude backwoodsman, but in fact he was neither ignorant nor crude. His sympathies were with those who lived in the south and the west, in diametric opposition to those in the north and the east.

New Englanders were suspicious of Jackson because their livelihood and future lay in manufacturing, which benefited from high tariffs and financial coordination through central authority. The South, where there was little manufacturing, suffered high prices on account of import tariffs, and the West chafed under the regulatory thumb of the Second Bank of the United States. To frontier businessmen, the Bank was stealing their financial resources by demanding specie payments for the banknotes of frontier banks. They also resented what they considered to be the Bank’s stifling of opportunity. If they engaged in speculation that might be highly profitable but also included risk, they felt this was their business and they should be free to do as they wished.

Frontiersmen felt a government that was so far away and had so little to do with their lives should not be able to dictate business practices to them. They found the idea of loose interpretation of the Constitution as defined by Chief Justice John Marshall to be repellent and dangerous. Westerners felt they were on the losing side of loose construction and heartily believed the government should stick to exactly what was enumerated in the Constitution and no more. Jackson agreed with the Westerners that the lives and fortunes of Americans should not be dictated by government let alone a bank, and especially one that was not even a public entity.

Americans’ strong and opposing opinions over the Bank of the United States made for an ideal political rallying point. Years before, Henry Clay had endorsed the Bank as one of the pillars of the American System of economic growth and nation building. He now had aspirations for the presidency in 1832 on the Whig ticket, and the Second Bank of the United States became a pawn in the game of election politics.

Predictably, for both philosophical and political reasons, Jackson came down against the Bank, calling it “the moneyed monster.” He claimed the Bank was an illegal monopoly, and vowed that if he were re-elected he would not renew the Bank’s charter when it ran out in 1836. The stage was set for a political battle, called the Bank War, over the Bank of the United States.

Though the Bank’s 20-year charter would not end for more than four years, Daniel Webster and Henry Clay sent a bill through Congress in 1832 to renew the Bank’s charter immediately. Clay felt that this would hurt Jackson’s chances for re-election because if Jackson signed the bill and renewed the charter, he would anger his powerful western constituency, which felt economically restrained by the Bank. But if Jackson refused to sign the bill, he would lose the support of wealthy eastern businessmen. Jackson bitterly commented, “The Bank is trying to kill me, but I will kill it!”

The bill to renew the Bank’s charter passed Congress, but Jackson refused to sign it, calling the Bank unconstitutional even though the Supreme Court had upheld the Bank’s constitutionality thirteen years before in McCulloch v. Maryland. Until this time, U.S. presidents had made a point to defer to the intent of the Founding Fathers for equality among the executive, legislative, and judicial branches. By vetoing the recharter bill, and thus dooming the Bank, Jackson rejected the decision of the Supreme Court and overrode the will of the Congress. In this way he exercised the innately greater power of the executive branch of government over the other two branches and coincidentally earned himself the nickname of King Andrew I. Ironically, Nicholas Biddle, president of the Bank, had earlier been labeled Czar Nicholas I. Thus the two presidents, one of government and one of business, were metaphorically criticized for their arrogance in wielding power.

Andrew Jackson’s presidential victory over Henry Clay in 1832 led him to believe that the people had given him a mandate concerning immediate destruction of the Bank. Though its charter would not run out until 1836, in 1833 Jackson ordered Secretary of Treasury Roger B. Taney to methodically remove all federal funds from the Bank by using them as the government’s operating capital. In addition, no new government funds were to be deposited with the Bank. Instead, new funds were to be deposited in various state banks, which came to be known as “pet banks.”

Within just a few months, federal deposits in the Second Bank of the United States dropped by half. Fearful that the Bank now had more notes circulating than could be supported by its deposits and desperate to save the Bank, Biddle called in many of the Bank’s loans, especially those to other banks. This unexpected demand placed a hardship on smaller banks and businesses, driving some to bankruptcy and causing a minor financial downturn called “Biddle’s Panic.” Biddle was criticized for the severity of his actions, but even so the Bank was nearly failing by the time its federal charter ran out in 1836. It was then rechartered as the State Bank of Philadelphia.

With the stabilizing influence of the Second Bank of the United States gone, many banks resumed their old habits of overextending credit and printing too many banknotes. This caused paper currency to become unreliable, and speculative loaning, especially in the West, mushroomed to dangerous levels. In order to rein in this printing and lending spree, Jackson had the Treasury issue a Specie Circular—an order to other banks that only specie (metallic gold or silver money) might be used to purchase public land on the frontier. The Specie Circular had such a negative effect on land sales that it triggered a recession in 1837.

Jackson’s presidential term ended in 1836. Popular with the people to the end, his immediate economic legacy was fiscal instability for the country, which resulted in the Panic of 1837 during his successor, Martin Van Buren’s, presidency. His unshakable opinion remained, however, that over the long term an immensely powerful national bank held in private hands was a danger to democracy.

After the Panic of 1837, Van Buren separated government from banking by creating a government treasury to safeguard federal money. This move was generally unpopular since it removed federal funds from the state banks and reduced the pool of capital available for lending. Nevertheless, the Independent Treasury Bill passed Congress in 1840, and the institution continued until the twentieth century when it became part of the Federal Reserve System.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education