The Bank Fight
Although the nullification crisis possessed the seeds of
civil war, it was not as critical a political issue as a bitter
struggle over the continued existence of the nation's central
bank, the second Bank of the United States. The first
bank, established in 1791 under Alexander Hamilton's guidance,
had been chartered for a 20-year period. Though the government
held some of its stock, the bank, like the Bank of England and
other central banks of the time, was a private corporation with
profits passing to its stockholders. Its public functions were
to act as a depository for government receipts, to make
short-term loans to the government, and above all to establish a
sound currency by refusing to accept at face value notes (paper
money) issued by state-chartered banks in excess of their
ability to redeem.
To the Northeastern financial and commercial establishment,
the central bank was a needed enforcer of prudent monetary
policy, but from the beginning it was resented by Southerners
and Westerners who believed their prosperity and regional
development depended upon ample money and credit. The Republican
Party of Jefferson and Madison doubted its constitutionality.
When its charter expired in 1811, it was not renewed.
For the next few years, the banking business was in the hands
of state-chartered banks, which issued currency in excessive
amounts, creating great confusion and fueling inflation. It
became increasingly clear that state banks could not provide the
country with a reliable currency. In 1816 a second Bank of the
United States, similar to the first, was again chartered for 20
years. From its inception, the second bank was unpopular
in the newer states and territories, especially with state and
local bankers who resented its virtual monopoly over the
country's credit and currency, but also with less prosperous
people everywhere, who believed that it represented the
interests of the wealthy few.
On the whole, the bank was well managed and rendered a
valuable service; but Jackson long had shared the Republican
distrust of the financial establishment. Elected as a
tribune of the people, he sensed that the bank's aristocratic
manager, Nicholas Biddle, was an easy target. When the
bank's supporters in Congress pushed through an early renewal of
its charter, Jackson responded with a stinging veto that
denounced monopoly and special privilege. The effort to override
the veto failed.
In the presidential campaign that followed, the bank question
revealed a fundamental division. Established merchant,
manufacturing, and financial interests favored sound money.
Regional bankers and entrepreneurs on the make wanted an
increased money supply and lower interest rates. Other
debtor classes, especially farmers, shared those sentiments.
Jackson and his supporters called the central bank a "monster"
and coasted to an easy election victory over Henry Clay.
The president interpreted his triumph as a popular mandate to
crush the central bank irrevocably. In September 1833 he ordered
an end to deposits of government money in the bank, and gradual
withdrawals of the money already in its custody. The
government deposited its funds in selected state banks,
characterized as "pet banks" by the opposition.
For the next generation the United States would get by on a
relatively unregulated state banking system, which helped fuel
westward expansion through cheap credit but kept the nation
vulnerable to periodic panics. During the Civil War, the United
States initiated a system of national charters for local and
regional banks, but the nation returned to a central bank only
with the establishment of the Federal Reserve system in 1913.
Answer Key: (1) Alexander Hamilton; (2) Issuing currency in excessive amounts; (3) 1816; (4) A -True; (5) Cheap credit from the unregulated state banking system; (6) Federal Reserve System. Click here to print.
Text courtesy of the U.S. State Department, Bureau of International Information Programs, 2005