Gareth Davis
Senior Sophister

I have always been afraid of banks Andrew Jackson

Few greater enormities are chargeable to politicians than the destruction of the bank of the United States R Caterall

The motivation behind this paper is to analyse from the perspective of a historian of economic thought and policy the rationale and implications of the destruction of the Second bank of the United States. The account is valuable as an account of the way in which economic thought, political ideology and vested interests can combine to shape policy. The debate also raised issues which are relevant to our modern economic system. The case for state supervision over the banking system is considered by almost all economists as to be so self-evident. But this has not always been the case and the debate over the banks future is a pointed reminder of this fact. Some of the arguments furnished against the bank may challenge some of the complacently held axioms of modern thought.

Other issues of this period relevant today include the benefits or otherwise of inter-regional monetary union. (Frass (1974) has shown how the BUS acted to standardise local regional exchange rates and nominal price levels and the effect which this had on peripheral areas.) Likewise the conflict laid bare some differing, and still widely held, preconceptions regarding both the optimal and the legitimate magnitude of government intervention. This account may not offer exact policy prescriptions for modern economists, since the economy, society and prevailing values have changed so much, but they can offer fresh perspectives to modern thinkers.

The Banks Destruction In Historical Context

The second Bank of the United States (BUS) was founded in 1816 on the basis of a twenty year charter. This charter empowered the bank to act exclusively as the federal governments fiscal agent, holding its deposits, making inter-state transfers of federal funds and dealing with any payments or receipts with which the federal authorities would be involved. Like all other chartered banks, the BUS also had the right to issue bank notes on the basis of a fractional reserve system and to carry out the usual commercial banking activities. In return for these privileges certain conduct of a central bank-like nature was expected of this institution: in the words of the charter the bank will conciliate and lead the state banks in all that is necessary for the restoration of credit, public and private.[45] Despite being 80% privately owned, its operations were subject to supervision by Congress and the President. Pessen gives details which show the banks size and the nature of the activities immediately prior to the assault on it in 1830. It was large relative to other banks, responsible for 15-20% of bank lending in the USA and accounting for 40% of the bank notes then in circulation. It was cautious in its note issuing function, holding a specie reserve of 50% of the value of its notes whilst the norm for the remainder of the banking system was 10-25%.

The 1820s and 1830s in the United States were a time of extremely rapid, but also volatile economic growth. New natural resources were being exploited as the frontier expanded and the new techniques of the industrial revolution were being introduced. The old money supply of gold and silver specie was stretched and found inadequate for the liquidity needs of the growing economy. (Temin indicates that in 1830 the total value of the gold and silver specie in circulation in the economy amounted to only l/30th to l/50th the value of GNP.) The emergence of a number of banks operating fractional reserve note-issuing systems was the result. The notes were underwritten by varying proportions of specie and although not legal tender were widely accepted in payment for debts, although usually discounted below their par value.

The quality of bank notes varied. Fraud was commonplace by unscrupulous bankers who could persuade or bribe the local state legislature to grant them the charter necessary to commence a banking business. For instance Pessen notes that in 1828 the 17 banks chartered in Mississippi circulated notes with a face value of $6 million from a specie base of $303,000. It was in such an environment that the Bank of the United States operated. One of its functions was to discipline and support state banks. As the federal governments fiscal agent it received bank notes in payment for taxes. The BUS would then present these to the issuing state bank in order to redeem them for the gold necessary to pay the taxes it had collected to the federal treasury. In this way state banks were forced to keep a higher stock of specie on reserve than would otherwise be necessary.[46] Conversely the U.S. could also act as a lender of last resort to banks in trouble by not presenting these notes for redemption but rather allowing these banks to run into debt to it.

The political environment of that period was marked by the ascendancy of an ideology termed Jacksonism. Focused around Andrew Jackson, elected president in 1828, this ideology was an uncomfortable, perhaps inconsistent, mixture of agrarianism, nationalism, populism and libertarianism. However the one element which unified this group was a deep hostility to a privileged east-coast based aristocracy. The Philadelphia-based bank of the United States with its obviously patrician president, Nicholas Biddle, could hardly prove to be popular with this new regime.

The Jackson administrations assault on the bank began in 1830. In 1832 Jackson used his presidential veto to thwart the Banks supporters attempt to use Congress to enact a new charter for the Bank. Jackson then used his second presidential election victory later that year as a mandate to order the withdrawal of all federal funds from the bank in 1833. When the Banks original charter expired in 1836 it succeeded in being re-chartered, albeit now only on as a much reduced state bank under the auspices of the Penneslvyania state legislature as the United States bank of Penneslvyania. In 1841 it went bankrupt as a result of speculative dabbling in the cotton market. I shall now consider the motives which inspired the attack on this institution.

The Anatomy Of The Anti-Bank Forces: Vested interests

The role played by vested interests in motivating the anti-bank forces has been given particular emphasis by both Caterall (1902) and Hammond (1947). They point to the substantial personal gains which would accrue to key members of Jacksons administration should the bank be destroyed. Hammond ascribes an important role to the New York financial community which at the time was competing with Philadelphia to be the countrys premier commercial centre. Martin Van Buren, Jacksons 2nd vice-president and eventual successor was particularly identified with the Wall Street element in this Wall Street (New York) versus Chestnut Street (Philadelphia) battle.

Both Pessen and Hammond add an additional group to this coalition; the state banks, who disliked being constrained by the BUSs policy of redeeming their bank notes. This enforced a much higher reserve ratio and hence restricted their lending activities. Hammond also adds to this element the class of nouveau riche entrepreneurs and speculators, a class to which, he maintained, Jackson and many of his associates belonged, and which also disliked the restriction of credit. However, I would argue that the importance of this proposed group in effecting the banks destruction has been over-emphasised by pro-BUS writers such as Hammond and Caterall.

Firstly, the actual existence of such a coalition is questionable. Pessen gives evidence that the New York financial community were divided over the question of the wisdom of the attack on the Bank. Also he shows that at least some of the state banks grudgingly acknowledged one banks role in disciplining the banking system and its activities as a lender of last resort. The homogeneity of Hammonds speculative entrepreneurial class is one for which he offers merely anecdotal evidence and no quantitative evidence. Secondly, to concentrate upon vested interests is to ignore the other influences on political action. Ideologies and economic logic also play a role. Hammond, the primary exponent of the self-interest theory, fails to explain satisfactorily why the measure was extremely popular.[47] Only a tiny proportion of the population would have gained directly and immediately from the destruction of the institution. We must examine the political philosophy and economic logic behind the opposition of the bank. These arguments had much public support which was vital to Jacksons destruction of the bank.

The Political Ideologies

The ideology which underlay the struggle is a highly variegated, and perhaps ultimately inconsistent one. It was a blend of moral judgements, economic argument and populism to attack both the political legitimacy of the bank and its economic rationale.

One branch of the school consisted of states rights advocates, who strongly opposed the substantial power wielded by the federally-chartered bank.[48] Many considered the chartering of the bank an unconstitutional extension of the power of the federal congress. Their position was summarised by Jackson who described the bank as a threat to democratic institutions by the federal authorities. With the destruction of the bank, the power of intervention in the banking and monetary system was left in the hands of individual states until the civil war.

Another stream within the anti-bank framework were the libertarian thinkers. They postulated the illegitimacy (on moral grounds) of any government intervention in the economy or in society beyond a bare minimum. This period was the golden age of Laissez Faire. This group was related to and associated with the Free Banking school which challenged on economic grounds the necessity of government intervention in the monetary system.

The Free Bankers

This group were in favour of a paper currency based on a fractional reserve system. They argued that the banks regulatory function was unnecessary and inefficient because in a completely unregulated financial system free competition would ensure that the public receives whatever security against fraud it so desires.[49] They argued that what was wrong with the banking system was that free competition was obstructed by the monopolistic privileges granted to the BUS in its charter. It is important to place these views in the context of the dominant economic paradigm of the day. Today as I have outlined, the importance of the states role in regulating the money supply is considered self-evident by most economists. (Hayek, Glasner and Greenfield and Yeager being some noteworthy exceptions to this consensus.)

This was not the case in 1832. We have Schumpeters (1954) comment that in the first part of the 19th century most economists believed in the merit of a privately provided and competitively supplied currency. Glasner shows how Smith differed from Hume in advocating state non-intervention in the supply of money. Smith argued that a convertible paper money could not be issued to excess by privately owned banks in a competitive banking environment. Today we see money as a natural public good owing to the externalities caused by variations in its quantity. So the free bankers views were consistent with economic logic of the day.

The Hard Money School

The anti-monopolistic and anti-regulatory free banking school were joined by unlikely bed fellows from the opposite end of the spectrum of economic ideas, agrarian and proletarian mistrust of banks in general and paper money in particular. This mistrust may have been justified in the context of the widespread level of fraud within the system, relative to today. Many saw paper money as a tool used by employers and rich financiers to trick working men and farmers out of what was due to them.

This groups most prominent exponent was Andrew Jackson himself. In his farewell speech he refers to the paper money system and its natural associates monopoly and exclusive privilege. The value of paper, he states, is liable to great and sudden fluctuations and cannot be relied upon to keep the medium of exchange uniform in amount. Jacksons views on this topic may be due to an incident early in his career when he was almost bankrupted after accepting bank notes which turned out to be worthless in return for a debt.

In contrast to the free-banking school this group could be termed conservative, wishing to destroy the system of fractional reserve paper money by removing the kingpin of the banking system which produced it; the Bank of the United States. Even within this group there was a severe division between those advocating gold specie, those advocating a silver specie, and those advocating a bi-metallic medium of exchange.

The Battle Of Ideas And Its Outcome

Thus, was the coalition against the bank of the United States. Both advocates of the free banking (or soft money) school and proponents of a return to a specie economy (or hard money) saw the destruction of the bank as very important, but for both of them, its destruction was a means to divergent and conflicting ends. Against this coalition supporters of the bank such as its president Nicholas Biddle and politicians such as Henry Clay and John Quincy Adams were placed in extreme difficulty. Both anti-federalism and laissez-faire were in the ascendancy at the time.[50] On the economic front the bank was being assaulted from both the left (free-banking advocates) and from the right (anti-paper advocates).

Advocates for the bank did emphasise its moderating role in regulating, informally, the fractional reserve system and hence its publicly-interested central-bank type nature. Such arguments were almost certain to fall on barren ground. Only two major institutions were available for comparison. The first one was John Laws bank from early 18th century France, and the chaotic and inflationary experience of this scheme was hardly one to inspire confidence. The other example was the Bank of England which was at the time subject to scathing attacks during the bullionist controversy, (Hammond (1947) and Glastner (1989)).

Evaluating The Arguments

The final verdict on the validity or otherwise of the differing arguments must wait until the consequences of the banks destruction have been fully considered. However the following points can be made at this stage. Firstly, the arguments of those opposed to the banks existence on ethical grounds, namely the classic libertarians and the states rights advocates, cannot be assailed on empirical grounds given that they are normative judgements.

Secondly, those who attack the bank on the grounds that it was a predatory monopolist within the banking system have had their arguments somewhat refuted by the evidence garnered by Highfield, OHara and Wood, who carried out a systematic econometric survey with regards to the banks decision variables during its existence and found no evidence that its dealings with its competitor banks or with its markets were marked by any of the predatory practices associated with monopolists. However perhaps the anti-bank forces could argue that it was the banks potential as a monopolist rather than its actual behaviour which justified the withdrawal of its charter. The methodology of such evidence and the quality of the data upon which they are based may also be attacked but such studies must be considered none the less.

The Implications Of The Banks Destruction For Output And Employment

Firstly, over the period 1790 to 1860 the general movement in the price level was downwards (with some fluctuations). Output followed a similar fluctuating and variable pattern over the same period, albeit with a strong upward trend. The pattern over the 1830s and 1840s diverges somewhat from this . The period 1830 until end of 1833 was marked by a slight though pronounceable upward trend in prices. 1833 marked the withdrawal of federal deposits from the bank and in early 1834 Nicholas Biddle, trying to convince the government of the need for the bank, massively contracted credit. The result was a short sharp fall in prices and output in what was termed Biddles contraction. However, by late 1834 prices, output and the money supply were strongly rising as boom-like conditions prevailed once again. In 1837 this upward movement was again sharply reversed. It was not until the early 1840s that output began to expand significantly once again. Over this period of the 1840s the money supply also began to grow once again, although more moderately such that the extra output seemed sufficient enough to soak it up, and so the price level resumed its long term downward path.

There are two different interpretations of these events. The first one, expounded by Hammond and Caterall, blames Jacksons actions in destroying the bank for the inflationary boom and resultant recession over the period 1834 to 1837. In their view, dismantling the BUS took a restraint off the fractional reserve system and led, post-1834, to an increase in the money supply which caused the boom. Of course, this was checked in 1837 by a downturn, a downturn made worse by the fact that at this stage the banking system, due to its low reserve ratio, was now very unstable and experienced significant levels of bank collapse. On the face of it the hypothesis has some factual support. Over the period 1833 to 1837 the amount of bank notes in circulation rose from a value of $10.2 million to $149.2 million.

However data from Temin and Engerman show that the banks aggregated reserve ratio did not fall over 1834-1837. It had remained steady from the mid-1820s. Thus, the BUSs demise had not caused the money supply to rise by allowing reserve ratios to fall.

An alternative hypothesis was advanced by Temin. He argued that monetary expansion did not come from a falling reserve ratio but rather from an inflow of silver into the United States in the 1830s. He backs his argument up by showing how this inflow in the 1830s would have resulted from increased silver production in Mexico, from an increase in British investment in America and from the fall in US imports of opium from China, which stopped the outflow of silver. So it is possible to dismiss the relationship between the Banks demise and the panic of 1837 as a coincidence.

The Regional Dimension: Monetary Union For The USA

Frass (1974) notes how the bank acted under a congressional mandate to establish and maintain a uniform national currency by policing the state banks to ensure that convertibility was maintained at a high level. Using data from Ohio, Frass argues that this involved restricting the lending of banks along the western frontier in particular. This, as well as having adverse effects in itself in a capital-scarce region, depressed the general price level in this area relative to the price of unsettled land (which was set arbitrarily by Congress), and discouraged movement to settlement in these areas.

Frass study does not extend beyond 1834 but we can assume that the removal of the bank led to the cessation of these harmful activities. However, we must note that a trade off would have had to be made. A higher level of financial instability may have been the price paid for freer availability of capital and cheaper land in these peripheral regions.

The Long Term Impact On Americas Monetary And Financial Structure

Ultimately the Banks destruction marked a pyhrric victory for the hard money forces. Van Buren, Jacksons successor, was no supporter of a purely metallic currency. Return to a purely metallic currency would have met severe opposition from their former allies, the free banking and libertarian schools (the latter felt that the state had no ethical right to regulate any commercial transactions between consenting individuals including paper currency). The changing economic and social structure would have made it unfeasible to return to a purely specie exchange economy. Cameron posits that a medium of exchange based on bank liabilities and a fractional reserve system and/or government taxable capacity is essential to an industrialising economy. Abolishing paper money could be considered, the modern economic equivalent of attempting to dis-invent the wheel. The true victors then in the struggle were soft money or free banking advocates. Instead of destroying the fractional reserve system the hard money men had removed a force which acted to restrain it.

Similarly, after 1837 the reserve ratio of the banking system was much higher than it had been during the period of the BUSs existence. This reflected public mistrust of banks in the wake of the panic of 1837 when many banks failed. This lack of confidence in the paper money system, could have been ameliorated by a central-bank type institution. Hence one result of the demise of this bank may in fact have been a higher reserve ratio, less availability of credit and a lower money supply during the 1840s and 1850s. The evolution of the American banking system was also probably affected. The BUS was one of the first and last banks chartered by the federal authorities for commercial banking activities nation-wide. Had it survived it is unlikely that Americas retail banking market today would have been so localised and fragmented in a way which is extremely uncharacteristic of other large industrialised economics. After the banks destruction, banking returned to being a decentralised business in which institutions were chartered by the individual states.

The banks defeat also had profound implications for the role of the state in America in managing monetary policy. Large scale Federal intervention in the supply of money did not take place again until the American Civil War. However Jacksons victory had imbued US political culture with dislike of centralised institutions with large influence over the banking system. The United States did not develop a central banking agency until 1913. This institution was highly decentralised consisting of twelve autonomous components one in each of Americas largest cities. One result of this de-centralisation may have been the incoherent response of the monetary authorities to the 1929 crash and the resultant run on the banking system, possibly one cause of the 1930s great depression. Hence one interpretation might see the destruction of the bank of the United States as leading to the worlds most severe economic recession a century later.

Conclusion: The Case For Further Study

This topic offers an area where rich analytic rewards may be reaped by further studies which employ modern economic techniques. The episode marks a crucially formative event during the nascent period of the monetary system of what is currently the worlds dominant economy. In spite of these facts this subject has been much neglected, the attention given to the English Bullionist controversy. In over twenty-five years not one book has been published dealing specifically with this topic. This paper, I hope, contributes to correcting this deficiency.


Cameron, R (1967) Banking In The Early Stages Of Industrialisation

Dorfman, A (1957) The Economic Mind In American Civilisation

Caterall, R (1902) The 2nd Bank Of The United States

Engerman, P (1970) Economic Consequences Of The 2nd Bank Of The United States in the Journal of Political Economy, 78(4)

Frass, A (1974) The Second Bank Of The United States: An Instrument For Inter-regional Monetary Union in the Journal Of Economic History, 34(2)

Glasner, C (1989) Free Banking And Monetary Reform

Greenfield & Yeager (1978) A Laissez-Fairez Approach To Monetary Stability in the Journal Of Money, Credit And Banking

Hammond, B (1947) Banks And Politics In America From The Revolution To The Civil War

Hayek, F (1967) The Denationalisation Of Money

Highfield, OHara & Wood (1991) Public Ends, Private Means: Central Banking And The Profit Motive 1823-1832 in The Journal Of Monetary Economics, 28(2)

Pessen, E (1985) Jacksonian America: Society, Personality And Politics

Schumpeter, J (1954) A History Of Economic Analysis

Temin, P (1968) The Economic Consequences Of The Bank War in the Journal Of Political Economy, 76(2)

White, L (1986) William Leggett: Jacksonian Columnist As Classical Liberal Political Economist in the History Of Political Economy, 18(2)