Second Bank of The United States - BUS Regulatory Mechanisms

BUS Regulatory Mechanisms

The primary regulatory task of the Second Bank of the United States, as chartered by Congress in 1816, was to restrain the uninhibited proliferation of paper money (bank notes) by state or private lenders, which was highly profitable to these institutions.

In this capacity, the Bank would preside over this democratization of credit, contributing to a vast and profitable disbursement of bank loans to farmers, small manufacturers and entrepreneurs, encouraging rapid and healthy economic expansion.

Historian Bray Hammond describes the mechanism by which the Bank exerted its anti-inflationary influence:

Receiving the checks and notes of local banks deposited with the by government collectors of revenue, the had had constantly to come back on the local banks for settlements of the amounts which the checks and notes called for. It had had to do so because it made those amounts immediately available to the Treasury, wherever desired. Since settlement by the local banks was in species i.e. silver and gold coin, the pressure for settlement automatically regulated local banking lending: for the more the local banks lent the larger amount of their notes and checks in use and the larger the sums they had to settle in specie. This loss of specie reduced their power to lend.

Under this banking regime, the impulse towards over speculation, with the risks of creating a national financial crisis, would be avoided, or at least mitigated. It was just this mechanism that the local private banks found objectionable, because it yoked their lending strategies to the fiscal operations of the national government, requiring them to maintain adequate gold and silver reserves to meet their debt obligations to the US Treasury. The proliferation of banking institutions – from 31 banks in 1801 to 788 in 1837 – meant that the Second Bank faced strong opposition from this sector during the Jackson administration.