Perils Of The Surplus

PrintPrintEmailEmail

Once the debt was paid off, however, there was a serious problem as to what to do with the continuing surpluses. In 1835, while the government spent $17,573,000, it ran up a surplus of equal size, $17,857,000. The next year, despite a spending increase of fully 75 percent, to more than $30 million, it ran a surplus of $19,959,000.

Even where to park the money was a problem. While Jackson regarded all banks as no better than necessary evils, he had a particular hatred for the Second Bank of the United States, the nation’s central bank. A central bank’s job is to regulate the money supply, act as the government fiscal agent (accepting tax payments, selling government bonds, and paying out interest on them, for instance) and as the lender of last resort during economic crises. Being the only nationally chartered bank, the Second Bank of the United States was the nation’s largest as well as its most powerful, and its head, Nicholas Biddle, used that power to advance his own political ambitions. Tackson was determined to destroy the bank, and destroy it he did.

The bank’s 20-year charter, from 1816, was up for renewal in 1836, and a Jackson veto of any renewal was a foregone conclusion. But even before the charter expired, Jackson moved against the bank. In 1833 he decided to withdraw the government’s deposits and place them in various state banks. Since these deposits were very large, thanks to the increasing surplus, they allowed the state banks to issue more bank notes. But when the Second Bank of the United States ceased to be the nation’s central bank in 1836, it lost its ability to discipline the other banks by refusing to accept their notes in payment of taxes if it thought the issuance of such notes excessive. State banks began to issue more and more bank notes, often using them to create loans on undeveloped land.

The result was a considerable increase in the nation’s money supply, which fueled speculation in land and securities. Wall Street saw its first great bull market in 1836 (the year Wall Street entered the American lexicon as a synonym for the nation’s financial community). Meanwhile, land sales on the frontier soared. The federal government had taken in a total of $2.5 million from land sales in 1832, but its income from this source had reached $5 million a month by the summer of 1836. Indeed, this is the origin of the phrase doing a land-office business .

Jackson, horrified by the speculation and paper money (and doubtless not understanding how much they were the result of his own policies), acted to bring matters under control. Congress and the President had already decided that much of the surplus should be given to the states through the Deposit Act, signed into law on June 23, 1836. It called for all money in the Treasury in excess of five million dollars to be distributed quarterly to the states, according to population. Moreover, after Congress had adjourned for the year, in July, Jackson issued the Specie Circular. This required that all land sales by the federal government be paid for with gold and silver ( specie in economic terms), except for land up to 320 acres that was intended to be occupied by the purchaser.

These two measures certainly brought the speculation and excess paper-money creation to a screeching halt. Unfortunately, this in turn caused a cascade of disastrous economic consequences. The demand for specie by Western banks drained gold and silver out of the Eastern states, slowing the economy in those areas. Land prices fell sharply, resulting in defaults on loans collateralized by land, which caused badly managed banks to fail. As banks called in their loans so as to be able to meet the impending withdrawals by the federal government, the money supply contracted further, creating a vicious circle. With no central bank, there was no mechanism to save solvent banks that were temporarily short of cash. They closed by the hundreds.

Although the government distributed the surplus to the states in January of 1837, that was the only distribution. In April, Wall Street crashed, and the federal budget surplus disappeared, not to be seen again in large amounts for 30 years. Government revenues, which had been $50 million in 1836, were half that in 1837, and the great depression of 1837 to 1843 was under way.

But by that time, Andrew Jackson, with the luck of a great politician, was out of office. It was his hapless successor, Martin Van Buren, who would get most of the blame for the debacle.