The Bank War


The alarm bells are ringing for Social Security again. That’s not exactly news— predictions of the exhaustion of its trust fund have been made before. Earlier this year some members of yet another panel of experts proposed a new remedy: to wit, the investment of a part of those reserved billions in private securities instead of lesser-yielding but safer government bonds. That, of course, would make the United States of America a direct player in the market. Nobody knows exactly what consequences would flow from such a step, but it is a fact that early in the history of the Republic, the government of the United States was formally and actively a player in the banking business and therefore in the capital market. Indeed, it ran its financial affairs through a bank primarily owned by private investors. That curious marriage ended in a tempestuous and consequential divorce.

The bank in question was the Second Bank of the United States, hereinafter referred to simply as “the Bank.” Chartered by Congress for twenty years in 1816, it carried on regular commercial functions but also acted as the collecting and disbursing agent for the federal government, which held one-fifth of its thirty-five-million-dollar capital stock. There had been a First Bank of the United States (1791–1811) that worked the same way. It was the brainchild of Alexander Hamilton, who shrewdly realized the advantages of tying the fortunes of the financial community to those of the infant Republic.

From the moment of its creation the Second Bank of the United States faced a problem. Its private business couldn’t easily be separated from its public functions. As the holder of the fast-growing nation’s swelling revenues it had the biggest reserves and readily became the most powerful lending institution in the land—a central bank, in effect, with a determining influence on the amount of available credit in the economy. From a fiscal-stability point of view, this was not a bad situation at all, but in the United States of the 182Os it was politically explosive.

To begin with, there was no U.S. currency other than silver and gold coin, which was not nearly enough to satisfy the demands of growth. Economics 101 reminds us that when money is scarce and therefore “expensive,” prices and wages fall, interest rates jump, new enterprises languish, and stagnation casts its pall. The shortage was partly made up, however, by the “notes” of various denominations that banks chartered by the states issued when making payments and loans. But thanks to inconsistent and easygoing state banking laws, these gaudily printed bills fluctuated wildly in value. Their only virtue was that they were plentiful.

As collection agent for the Treasury, the Bank accumulated millions in these notes, and it could either hold on to them, thereby encouraging credit expansion, or promptly present them for redemption, driving weaker institutions out of business and starting a contraction and panic. It did exactly the latter in 1819.

The Bank also issued notes of its own, which, being much more stable and acceptable, tended to drive the funny money out of circulation. From one point of view, the Bank was providing the country with a stable and uniform currency and centrally, sensibly controlling the pace of growth. That was how it looked, generally speaking, to the investing communities concentrated in the North- east’s major cities (the Bank’s headquarters were in Philadelphia). But from another angle the Bank looked like a state- protected monopoly enriching itself and its friends without a shred of accountabilitv to voters. That was how it appeared to potential borrowers in the South and especially in the developing West.

In the emerging political fight with its opponents, the Bank won the early rounds. Its branches multiplied—eventually there were twenty-nine of them —and when states tried to tax these, John Marshall’s Supreme Court (in McCulloch v. Maryland , 1819) said that the Constitution forbade it. Near the end of the 182Os the Bank was doing seventy million dollars a year in business and circulating twenty-one million dollars of its own notes. But by that time the battle had become a war, a personal grudge match between two great and colorful egotists whose unbending wills turned politics into theater. In 1823 Nicholas Biddle was named president of the Bank. Five years later Andrew Jackson was elected President of the United States, an office that Biddle seems to have thought inferior in distinction to his own.

Biddle was a true American aristocrat. Born to an old Philadelphia family, he was a prodigy who was valedictorian of his Princeton graduating class at the age of fifteen. He married an heiress, read the classics in the original, collected art, and was as dramatic an antithesis as could be imagined to Jackson, the self-educated frontier soldier who had become the people’s idol.

Jackson came into office without any immediate plan to attack the Bank but with a general attitude that he expressed to Biddle at one point with the words “I do not dislike your bank any more than all banks.” He distrusted all forms of paper currency, which he believed could be manipulated by insiders, and he likewise doubted the constitutionality of Congress’s chartering a bank anywhere but in the District of Columbia.