Second Bank of The United States - Historical Context and Overview

Historical Context and Overview

Political support for the revival of a national banking system was rooted in the early 19th Century transformation of the country from simple Jeffersonian agrarianism towards one interdependent with industrialization and finance. In the aftermath of the War of 1812 the federal government suffered from the disarray of an unregulated currency and a lack of fiscal order; business interests sought security for their government bonds. A national alliance arose to legislate a central bank to address these needs.

The political climate – dubbed the Era of Good Feelings – favored the development of national programs and institutions, including a protective tariff, internal improvements and the revival of a Bank of the United States Southern and western support for the Bank, led by Republican nationalists John C. Calhoun of South Carolina and Henry Clay of Kentucky was decisive in the successful chartering effort. Subsequent efforts by Calhoun and Clay to earmark the bank's $1.5 million establishment "bonus", and annual dividends estimated at $650,000, as a fund for internal improvements, was vetoed by President James Madison, on strict constructionist grounds. The charter was signed into law by Madison on April 10, 1816.

Opposition to the Bank's revival emanated from two interests. Old Republicans, represented by John Taylor of Caroline and John Randolph of Roanoke characterized the Second Bank of the United States as both constitutionally illegitimate and a direct threat to Jeffersonian agrarianism, state sovereignty and the institution of slavery, expressed by Taylor's statement that "...if Congress could incorporate a bank, it might emancipate a slave". Hostile to the regulatory effects of the central bank, private banks – proliferating with or without state charters – had scuttled rechartering of the first BUS in 1811. These interests played significant roles in undermining the institution during the administration of US President Andrew Jackson (1829–1837).

The BUS was launched in the midst of a major global market readjustment as Europe recovered from the Napoleonic Wars The central bank was charged with restraining uninhibited private bank note issue – already in progress – that threatened to create a credit bubble and the risks of a financial collapse. Government land sales in the West, fueled by European demand for agricultural products, insured that a speculative bubble would form. Simultaneously, the national bank was engaged in promoting a democratized expansion of credit to accommodate laissez-faire impulses among eastern business entrepreneurs and credit hungry western and southern farmers

Under the management of the first BUS president William Jones, the Bank failed to control paper money issued from its branch banks in the West and South, contributing to the post-war speculative land boom. When the US markets collapsed in the Panic of 1819 – a result of global economic adjustments – the central bank came under withering criticism for its belated tight money policies – policies that exacerbated mass unemployment and plunging property values. Further, it transpired that branch directors for the Baltimore office had engaged in fraud and larceny

Resigning in January 1819 Jones was replaced by Langdon Cheves, who continued the contraction in credit in an effort to stop inflation and stabilize the Bank, even as the economy began to correct. The central bank's reaction to the crisis – a clumsy expansion, then a sharp contraction of credit – indicated its weakness, not its strength. The effects were catastrophic, resulting in a protracted recession with mass unemployment and a sharp drop in property values that persisted until 1822. The financial crisis raised doubts among the American public as to the efficacy of paper money, and in whose interests a national system of finance operated. Upon this widespread disaffection the anti-Bank Jacksonian Democrats would mobilize opposition to the BUS in the 1830s. The national bank was in general disrepute among most Americans when Nicholas Biddle, the third and last president of the Bank, was appointed by President James Monroe in 1823.

Under Biddle's guidance, the BUS evolved into a powerful banking institution that produced a strong and sound system of national credit and currency. From 1823 to 1833, Biddle expanded credit steadily, with restraint, in a manner that served that needs of the expanding American economy. In 1831, Albert Gallatin former Secretary of the Treasury under Thomas Jefferson and James Madison wrote that the BUS was fulfilling its charter expectations.

By the time of Jackson's inauguration in 1829, the national bank appeared to be on solid footing. The US Supreme Court had affirmed the constitutionality of the Bank under McCulloch v. Maryland, the 1819 case which Daniel Webster had argued successfully on its behalf a decade earlier, the US Treasury recognized the useful services it provided, and the American currency was healthy and stable. Public perceptions of the central bank were generally positive. The Bank first came under attack by the Jackson administration in December 1829, on the grounds that it had failed to produce a stable national currency, and that it lacked constitutional legitimacy. Both houses of Congress responded with committee investigations and reports affirming the historical precedents for the Bank's constitutionality and its pivotal role in furnishing a uniform currency. Jackson rejected these findings, and privately characterized the Bank as corrupt institution, dangerous to American liberties.

Biddle made repeated overtures to Jackson and his cabinet to secure a compromise on the Bank's rechartering (its term due to expire in 1836) without success. Jackson and the anti-Bank forces persisted in their condemnation of the BUS,provoking an early recharter campaign by pro-Bank National Republicans under Henry Clay. Clay's political ultimatum to Jackson – with Biddle's financial and political support – sparked the Bank War and placed the fate of the BUS at center of the 1832 presidential election.

Jackson mobilized his political base by vetoing the recharter bill and – the veto sustained – easily won reelection on his anti-Bank platform. Jackson proceeded to destroy the Bank as a financial and political force by removing its federal deposits,and in 1833, federal revenue was diverted into selected private banks by executive order, ending the regulatory role of the Second Bank of the United States.

In hopes of extorting a rescue of the Bank, Biddle induced a short-lived financial crisis that was initially blamed on Jackson's executive action. By 1834, a general backlash against Biddle's tactics developed, ending the panic and all recharter efforts were abandoned.

In February 1836, the Bank became a private corporation under Pennsylvania commonwealth law. It suspended payment in 1839 and was liquidated in 1841.