US central banking

The story of America's relationship with central banking is a fascinating and recurring political drama. The two times that Americans effectively "killed" or stopped their central bank were the dissolutions of the First Bank of the United Statesin 1811 and the Second Bank of the United States in 1836.

These conflicts were not just about financial policy; they were epic battles over the very soul of the American republic: federal power vs. states' rights, industrial interests vs. agrarian ideals, and the "common man" vs. the wealthy elite.

Here’s a breakdown of both events.

1. The End of the First Bank of the United States (1811)

Background (Why was it created?):

• Proponent: Alexander Hamilton, the first Secretary of the Treasury.
• Purpose: As part of his financial plan to put the new nation on a firm economic footing, Hamilton proposed a national bank in 1791. Its goals were to:
  • Manage the massive debt from the Revolutionary War.
  • Create a stable national currency.
  • Provide a source of credit for the government and businesses.
  • Serve as a depository for federal funds.
• The bank was a private corporation, but the federal government was its largest single stockholder. It was granted a 20-year charter.

The Opposition (Why was it controversial?):

• Opponents: Thomas Jefferson and James Madison.
• The Arguments:
  1. Unconstitutional: They argued that the Constitution did not explicitly grant Congress the power to create a bank. This was a core "strict constructionist" argument.
  2. Elitist and Corrupting: They feared the bank would concentrate financial power in the hands of a wealthy, urban, Northern elite, creating a "moneyed aristocracy" that would corrupt politicians.
  3. Anti-Farmer: They believed the bank's policies would favor manufacturing and commerce over the agrarian interests of the South and West.

How It Was "Killed":

• The bank's 20-year charter was set to expire in 1811. By this time, the Jeffersonian Democratic-Republicans were the dominant political party.
• The re-charter bill came up for a vote in Congress. The old arguments resurfaced with a vengeance. Opponents claimed it was an un-American, monopolistic institution that favored foreign investors (about 70% of the bank's stock was owned by foreigners, mostly British).
• The vote was incredibly close. The bill failed in the House by a single vote (65-64) and failed in the Senate when Vice President George Clinton cast the tie-breaking vote against it.
• Result: The First Bank of the United States ceased to exist in 1811.

The Immediate Aftermath: The timing couldn't have been worse. The War of 1812 broke out a year later, and without a central bank, the U.S. government struggled mightily to finance the war. The country was plagued by inflation and a chaotic banking system, which ironically led many former opponents (including President Madison) to realize a central bank was a "necessary evil."

2. Andrew Jackson's "Bank War" and the Killing of the Second Bank (1836)

Background (Why was it created?):

• The financial chaos of the War of 1812 led Congress to charter the Second Bank of the United States in 1816, again with a 20-year charter. It was larger and more powerful than its predecessor.
• For most of its life, it was run by the capable but arrogant Nicholas Biddle, who stabilized the nation's currency and credit.

The Opposition (Andrew Jackson's Crusade):

• President Andrew Jackson, elected in 1828, harbored a deep-seated distrust of banks in general and the Second Bank in particular. He saw himself as a champion of the "common man" against the powerful and privileged.
• Jackson's Arguments:
  1. A "Monster": He believed the bank was a corrupt, elitist monopoly that held too much power over the economy and politics. He famously called it a "hydra-headed monster."
  2. Unconstitutional: Like Jefferson, he argued it was an unconstitutional extension of federal power.
  3. Foreign Control: He hated that a significant portion of its stock was held by foreigners, which he viewed as a threat to national security.
  4. A Tool of the Rich: He argued it made "the rich richer and the potent more powerful" at the expense of farmers and laborers.

How It Was "Killed" (The Bank War):
This was one of the most dramatic political showdowns in American history.

1. The Early Re-charter (1832): The bank's charter wasn't due to expire until 1836. But Jackson's opponents, led by Senator Henry Clay, decided to make it an election issue in 1832. They pushed a bill to re-charter the bank early, daring Jackson to veto it and risk losing the election.
2. The Veto (1832): Jackson did not back down. He vetoed the re-charter bill with a blistering message that was a masterpiece of political populism. He didn't just argue legal points; he framed the battle as a moral struggle between the American people and a corrupt aristocracy.
3. The Election of 1832: Jackson ran for reelection on his anti-bank platform and won a landslide victory over Clay. He took his victory as a public mandate to destroy the bank completely.
4. Removal of the Deposits (1833): Jackson didn't want to wait until 1836. He ordered his Secretary of the Treasury to remove all federal funds from the Second Bank and place them in various state-chartered banks, which became known as Jackson's "pet banks." This move was so controversial he had to fire two Treasury Secretaries who refused before finding one (Roger B. Taney) who would comply.
5. The Bank's Death: Stripped of federal funds, the Second Bank was crippled. Its federal charter officially expired in 1836. It continued for a few years as a state-chartered bank in Pennsylvania before going bankrupt in 1841.

The Aftermath: Jackson's victory led to a period of "free banking" with no central oversight. The "pet banks," free from federal regulation, engaged in rampant speculation, which helped fuel a massive economic bubble. When that bubble burst, it led to the Panic of 1837, one of the most severe economic depressions in U.S. history. The nation would lack a true central bank for over 70 years, a period marked by frequent financial panics, until the creation of the Federal Reserve System in 1913.