America’s Long Journey: Jackson and the Bank

When we have worked our way back to the earliest days of the new republic, we will find George Washington’s cabinet of only four men bitterly divided between the views of Thomas Jefferson and Alexander Hamilton. The two had very different visions of America’s future: Jefferson’s, a predominantly agricultural America, with few great cities; Hamilton’s, an urban America centered on vibrant commerce and industry.

We know which vision prevailed, and perhaps this lends a sense of inevitability to the outcome of the argument. But in Jackson’s day, the two forces were still contending, and it was Old Hickory who dealt the Hamiltonian vision one of its few setbacks. He did it in the year of his re-election campaign, and did it regardless of political consequences, and did it in characteristically forthright, uncompromising fashion. The electorate, as usual when they witness that kind of determination, approved. Jackson won re-election with 55% of the votes in a four-man race, and 219 electoral votes to Henry Clay’s 49), and perhaps he owed that victory partly to the Second Bank of the United States.

”The Bank,” as it was called, was a private corporation centered in Philadelphia (but with 25 branch offices elsewhere) that handled fiscal transactions for the federal government. The second such federally authorized Hamiltonian bank, it was given a 20-year charter in February, 1816, at the end of James Madison’s second term. The bank issued credit to government and private concerns, served as a depository of government revenues, and was supposed to maintain a sound and stable national currency. Theoretically accountable to Congress and the US Treasury, which held 20% of its shares, in fact the bank management was accountable to no one. The federal investment was far outvoted by the other 80%, which was owned by a few hundred wealthy Americans and a thousand European investors.

Although the Bank of the United States was a depository for federal funds and paid national debts, it answered only to its directors and stockholders and not to the electorate.

In January 1832, the Bank’s charter had four years to run, but banker Nicholas Biddle and his Congressional supporters thought they’d put one over on Jackson. Knowing that the existing Congress would vote to recharter the bank, they calculated that Jackson would not dare veto the bill for fear of jeopardizing his re-election. Daniel Webster and Henry Clay introduced the Bank Recharter Bill and got it through both houses.

Imagine counting on putting one over on Jackson! Imagine expecting Jackson to flinch from a confrontation! On July 10, 1832, Jackson vetoed the bill and sent it back to the Hill with a stinging message spelling out the reasons the institution deserved to die, labeling the Bank elitist and anti-republican, arguing that the Bank was unconstitutional and that it was neither necessary nor proper for the federal government to authorize and permit the existence of a big and powerful institution that directly benefited only a privileged few. (Where is Jackson today, when we need him?)

The following September, he issued an executive order ending the deposit of federal funds into the Bank, instead placing them in selected state banks. Biddle retaliated by tightening the money supply, causing an economic contraction. The financial crisis was initially blamed on Jackson, but by 1834, Biddle’s tactics had backfired, as the people concluded that the Bank was every bit as powerful and dangerous as Jackson had been saying right along. People had blamed the Bank for the Panic of 1819, and here it was doing the same thing again. The panic was short-lived, the cause of recharter was abandoned, and, in February, 1836, Biddle turned the Bank into a private Pennsylvania corporation. Only three years later, its insolvency caused it to suspend payments. It was liquidated in 1841, and the bank’s critics felt vindicated by events.

The Bank was dead. That doesn’t mean that everyone lived happily ever after. At first, yes. Money withdrawn from the Bank went to state and local banks, all of whom were ready and willing to lend to investors. As we saw in the section on the Panic of 1837, which was soon to follow, easy money led to speculation and over-investment as usual – in land, canals, cotton, factories. While credit kept expanding, everybody was smiling. But in 1836, Jackson issued the Specie Circular, requiring buyers of government lands to pay in specie, and that sobered up the party in a hurry.

We don’t much use the word “specie” any more. It means hard money — silver or gold coins – as opposed to soft money, basically paper. Today, the overwhelming majority of money isn’t even paper, but is digital, a computerized accounting that may or may not have anything tangible backing it. And what digital money is to us, paper money was to the nineteenth century. Many people didn’t trust paper money, for the simple reason that it wasn’t trust-worthy. Paper money is a promise to pay; specie, by contrast, is itself valuable. If you have a ten-dollar bill, you have a promise that what you hold is redeemable for ten dollars’ worth of value. If you have a ten-dollar coin, you hold (assuming honest coinage) ten dollars’ worth of gold or silver.

State and local banks were issuing painless paper dollars with abandon, and people were using this paper money to buy government land, particularly in the West and South, where most of the available land was.) By issuing the Specie Circular, Jackson said, in effect, “Sorry, boys, to buy government land you’re going to need real money, not paper money.” The natural (but apparently unforeseen) result was a great demand for specie in exchange for paper notes. Many banks didn’t have enough specie to cover their paper, and these banks collapsed, which led directly to the Panic of 1837.

Does that mean Jackson was wrong to issue the circular? Wrong to kill the Second Bank of the United States? Or were other factors more to blame for the financial chaos that followed? Really, no one knows. As to what would have happened on the road not taken – no one can say. Economists still argue the question up one side and down the other.

The danger on the one side is wild, runaway inflation, that destroys the value of money as a store of value, and the danger on the other side is a grinding, intensifying economic contraction, crippling society’s ability to produce and distribute goods and services. We’ve experienced each, at one time or another. About the only thing we can say for sure is that if there is any financial arrangement that guarantees perpetual prosperity in reality (as opposed to in theory), the economists don’t seem to have discovered it.

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