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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.
Biddle did nothing to placate the new administration. Rumors spread that Bank branch directors in New Hampshire, Kentucky, and Louisiana had used their money and influence to back anti-Jackson candidates in 1828. When Jackson directed a cabinet officer to ask Biddie for an investigation (and recall that the United States was a stockholder in the Bank), Biddle’s refusal was unambiguous. He and his directors acknowledged “not the slightest responsibility of any description whatsoever to the Secretary of the Treasury touching the political opinions and conduct of their officers.” Jackson was not a man to take lightly a command to mind his own business. He soon let it be known that he wanted Congress to consider possible alternative arrangements for the country’s fiscal affairs, but he did not make a flat commitment to block a renewal of the Bank’s charter, for he did not want to face the issue in an 1832 campaign for a second term.
But Biddle then unwisely took the offensive. If Jackson chose to fight, he said, “he may perhaps awaken a spirit which has hitherto been checked & reined in.” Biddle subsidized pro-Bank newspapers, speakers, and candidates, and succc’eded in having a recharter bill introduced in 1832. The measure passed the Senate 20-8 and the House 107-85.
But he had turned from a mere opponent into a mortal enemy of Andrew Jackson, a role that few survived. “The Bank,” Jackson told Martin Van Buren in May 1832, “is trying to kill me, but I will kill it.” He pounced on the opportunity to use the veto power rarely- employed by the six previous Presidents (only ten times, all on constitutional grounds), and his veto message was a rallying cry for what historians came to call “Jacksonian democracy.” The Bank became a symbol for anti- Americanism, for the arrogance of privilege and the corrupting influence of money. Eight million of the Bank’s stock privately held was in the hands of foreigners. Recharter would boost its value, so by the bill “the American Republic proposes virtually to make them a present of some millions.” And as the recharter bill showed, “the rich and powerful too often bend the acts of government to their selfish purposes.”
Some historians charge that Jackson was demagoguing. The foreign-held stock did not have voting rights and the twenty million dollars held by Americans (excluding the government’s seven million) were, according to one scholar, “widely distributed and actively traded.” What is more, anti-Bank voters were not all commoners; many were themselves capitalists who wanted the Bank’s chokehold on credit broken for their own selfish advantage. Nonetheless, the message was a landmark use of presidential power. Jackson had ranged himself as champion of the entire American people against what a later popular President (FDR) would call economic royalists. He had also managed to take on Congress itself and indirectly the Supreme Court.
The veto was upheld, and what was more, Jackson was re-elected. But the war wasn’t quite over. Jackson was now determined not to wait until the charter expired. He ordered that the government’s deposits be removed from the Bank and distributed to state banks of his choosing. It was a highly questionable action under the law, and the Senate voted to censure him for it. Then Biddle retaliated, saying: “This worthy- President thinks that because he has scalped Indians and imprisoned Judges he is to have his way with the Bank. He is mistaken.”
Biddle had the Bank curtail loans throughout the nation—they went down by eighteen million dollars in a few months—and demand the immediate redemption of state bank notes in specie as fast as possible. He hoped to create a depression that would show America what it was losing if the Bank went down. But once more he had miscalculated. The hard times following the contraction turned people against the Bank, not against Jackson, and his handpicked successor, Van Buren, won the election of 1836. Jackson exulted: “I have obtained a glorious triumph … and put to death, that mamouth of corruption.”
On a personal level Biddle was the heaviest loser. After 1836 he got the Bank chartered to operate in Pennsylvania but then indulged in some questionable speculations to sustain its solvency. He was forced to resign under a cloud in 1839, was sued by irate stockholders, and was even arrested on a criminal conspiracy charge but later freed. He died in 1844 at the age of fifty-eight. Jackson, though nineteen years his senior, had the satisfaction of outliving him by a year.
Some contemporary economists think that Biddle was right on the issue if wrong on the tactics. Without a central bank like those of European powers, the United States struggled through a series of booms and busts during much of the nineteenth and early twentieth centuries. But whether or not that is true, the question that Jackson raised —how to control the power generated when big government and high finance become partners instead of adversaries —is still very much alive.