Charges that the Second Bank of the United States (BUS) had fallen into the hands of “moneyed interests” (an unusual choice of labels, given that it was a bank) had led to growing hostility and opposition to the Bank by some Americans during the Jackson era.
There were already many who still remembered the panic of 1819 and the severe contraction initiated by the president of the Second BUS, Langdon Cheves, in an effort to save the institution.
He succeeded by calling in loans and foreclosing on property, then selling the land when prices returned. Cheves’s efforts, though, alienated many toward banks altogether. One of those who blamed banks for his own financial misdealings was Andrew Jackson, elected president in 1828.
Jackson, the “Hero of New Orleans,” had grown up with a hatred for the British, suffering a wound as a teenager from an English officer during the Revolution. Most of Jackson’s career had taken place in Tennessee courthouses or on campaigns with the army against American Indians or British troops.
He thus had orchestrated a strong anti-Washington sentiment in the nation, which he translated into a suspicion of anything big and powerful. In a sense, he was the first populist president, who saw evil in moneyed elites, big business, and above all large financial institutions.
Jackson’s understanding of economics and finances largely came from reading a book on the South Sea Bubble and from the advice of William Gouge in his Short History of Paper Money and Banking in the United States (1833). Gouge was convinced that paper money was an intrinsic evil, and that only “hard money,” or a gold circulating medium, would engender prosperity.
By the time Jackson won the presidency, the number of banks in the United States had grown almost geometrically. Under most circumstances, a bank received its charter (its right to conduct business) from the state legislature after submitting a petition from citizens explaining the “public good” such a business would bring to local communities.
Charters at the state level no longer automatically entailed monopoly status for the bearer, but did carry important advantages, such as limited liability and, for banks, the authority to issue paper “notes” or money.
Each bank could (in theory) print notes in proportion to its paid-in capital, which (again, in theory) consisted of gold and silver coin, called “specie.” But banks routinely issued far more notes than they had specie in their vaults. It was, after all, how they turned a profit, by issuing the notes in the form of loans whose repayments exceeded the small interest they paid on deposits.
Few—especially Jackson—understood banking as it operated at that time. Banks maintained some specie reserve, because at any time customers might demand their notes be “redeemed” in specie.
Any bank that could not redeem its notes was subject to immediate closure by the state legislature, although few banks were ever required to shut down, mostly because when one bank was in trouble, all of them were in trouble, and no legislatures (except Arkansas and Wisconsin, in 1837) banned banks altogether.
What kept the system running was trust in the bank’s notes, not the actual gold or silver in the safe. Thus, in an ironic twist, the healthier a bank, the lower its specie reserves, while banks that were more suspect to runs would have to maintain more specie in their vaults.
One exception to this state-governed structure stood out: the Second Bank of the United States, which, like its predecessor, had numerous important advantages over its state-level competitors. As the depository for the funds of the United States government, the BUS had an enormous deposit base, which meant that it had far more money to lend than any other bank.
It also was empowered to open branches in states designated by Congress: the Second BUS had branches in Chillicothe, Ohio, New Orleans, Louisiana, Philadelphia, Pennsylvania, New York, and so on. The advantages offered by branches were twofold. First, branches made the bank truly a national institution.
When it came to currency, this gave it a significant edge, in that, for example, a local New Orleans bank’s notes might trade “at par” (face value) in New Orleans and the surrounding area, but the further one got from the bank, the more difficult it became to redeem the notes, making them trade at a “discount.” This was not the case with BUS money.
Since BUS offices were relatively well distributed throughout the country, it was not difficult to redeem BUS notes in any region. Likewise, the ubiquity of BUS notes gave them more credibility and popularity than local banknotes, which added a premium to their value.
One might think that these advantages over state banks would have made the BUS an enemy of local institutions, and thus fair game for Andrew Jackson’s campaign to destroy it. In reality, however, most state banks saw the BUS as a source of stability that kept out poorly capitalized or badly run banks.
The BUS could police the system to a degree, by staging “raids” in which a local BUS cashier might, in the process of exchange, collect the notes of a state-chartered bank and then surprise the local bank’s staff by presenting a large amount of notes for redemption.
The local bank would have to have BUS notes or specie equal to the amount demanded, or risk charter revocation by the state legislature. Some have argued that the discipline brought on by this threat fostered hostility to the BUS by state-chartered banks, but the large numbers of petitions that came into Congress by such local banks during the Bank War testify to the contrary: by and large, local bankers liked the presence of the BUS.
Within this context, the actual causes of the Bank War lay in the personalities of Jackson and the president of the Second BUS, Philadelphian Nicholas Biddle, who had succeeded Cheves. Biddle had built the BUS into a powerful force, which made it a prominent target for Jackson.
An excellent banker, Biddle had the support of the most powerful men in the Senate—Henry Clay, Daniel Webster, and John Calhoun—but misjudged the popular appeal that Jackson could muster against an “elite” institution. Thinking Jackson, in an election year, would not dare oppose a solid institution that had meant much to U.S. business, Biddle’s supporters submitted a recharter bill for the Bank four years before the charter expired.
Where Biddle saw economic reason and common sense, the emotion-driven Jackson saw an election issue. He vetoed the recharter bill, calling the Bank a “monster.” Claiming that “The bank, Mr. Van Buren, is trying to kill me, but I will kill it,” he railed against “monopolies and exclusive privileges”.
Playing on popular sentiment against “moneyed men,” Jackson claimed that Clay, among others, had received BUS loans, while other Jackson supporters raised the canard used against the First Bank of the United States that control of the Bank was in the hands of “foreign” (largely British) investors. Cartoons portrayed Jackson as the champion of the common man battling a many-headed hydra of wealthy-looking men in top hats.
The stunned Bank forces found that they did not have the votes to override Jackson’s veto, and while they were still reeling from that setback, Jackson delivered another. He withdrew all government deposits from the Bank, stripping it of its most important competitive advantage.
Jackson stuffed those funds in state banks whose management was loyal to him, known as “Pet Banks.” Now a shell, the BUS could do little, and in 1836, when its national charter expired, Biddle obtained a charter from the State of Pennsylvania, only to have the bank hammered in the panic of 1837, and eventually close.
For more than a century, pundits and historians accepted that what happened next was the result of Jackson’s “war.” Land prices shot up, which scholars attributed to the inflationary issues by the local banks now unrestrained by the threat of BUS “raids.”
Jackson responded to this inflation by passing the Specie Circular (1836), which required that all federal land be paid for in specie. This, in turn (according to the long-held view) caused a crash in land values and brought on the panic of 1837. The story was internally consistent, and was generally accepted by virtually all U.S. historians well into the 1960s.
Indeed, Robert Remini’s classic on the affair, Andrew Jackson and the Bank War, still accepted this view as late as 1967, even when other evidence had become available. In the early 1960s, new economics approaches, called econometrics, that used large data samples manipulated by computers, made it possible to examine the claims about the BUS and Jackson’s role with statistical evidence.
Richard Timberlake, Jr., and then Peter Temin discovered independently that the inflation had occurred completely apart from the activities of the Bank War—that Mexican silver imports that formed the specie reserve in banks had soared in the early 1830s. Likewise, they showed, those silver inflows dried up quickly by 1836, instigating the panic.
The Bank War made good theater, and enabled pro-Jackson historians such as Arthur Schlesinger, Jr., and Robert Remini to create a myth about Jackson fighting for the common man, but it was only that, a myth.
Jackson favored a large central government as much as his predecessor, John Quincy Adams, but wanted the levers of government in the hands of the Democrats, not the Whigs or Federalists. He greatly expanded executive power at the federal level, and his forces in Congress sought to enact sweeping new laws against currency issue by any bank.
In the end, Jackson did not hate banks, but only banks that were not under the control of his party. Nevertheless, the image of a swordwielding Jackson, slashing away at an octopus representing “big business” and “big money,” remains a popular one to this day.