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Second Bank of the United States (aka S.B.U.S.)

A central bank is an institution that has a unique government charter, aids government finance, supervises non-government commercial banks, for example keeping their note issues at safe levels, and serves as a lender of last resort during financial panics because of a commanding capital position.

Jackson's Bank Veto and the political conflagration known as the “Bank War” that it touched off seem rather arcane and nearly incomprehensible. While misdeeds among the rich and powerful still garner headlines and incite congressional inquiries, the core instruments of the economic system - the network of banks capped by the Federal Reserve; the corporate form of business enterprise; the dollars in wallets, issued and guaranteed by the federal government — are taken for granted. That these could have been the subject of controversy, that anyone could seriously contemplate organizing American capitalism differently, seems nearly unthinkable.

The history of the Bank ran from its "Bad Start" (1816-1818) through its recovery (1819-1822) and "Golden Age" (1823-1829) to its losing fight against Andrew Jackson (1830-1836), its metamorphosis into a state-chartered banlc, and its spectacular failure (1836-1841).

A long line of important studies claimed that Jackson's policies, especially the destruction of the S.B.U.S. and the "Specie Circular," caused the Panic of 1837. Bourne (1885), Schlesinger (1945), Hofstader (1948), Meyers (1960), and Hammond (1957), among others, contended that the S.B.U.S. kept state banks from issuing too many notes. The destruction of the S.B.U.S. led to rampant abuses, an expansion of credit, and a speculative bubble that Jackson burst asunder with the "Specie Circular," which drained specie out of eastern banks to the west by mandating the payment of specie for federal land, most of which was west of the Appalachians.

The Second Bank of the United States operated from 1816 to 1836, when its charter was allowed to expire. The War of 1812 reopened debate over the need for a central bank, however, and in 1816 Congress again chartered a Bank of the United States, popularly called the Second Bank of the United States. The Second Bank also incurred the wrath of those opposed to the growth of the federal government and when Congress renewed the bank’s charter in 1832, President Andrew Jackson vetoed the bill. The bank ceased to function as the nation’s central bank shortly thereafter.

Chartered by Congress in 1816, the Second Bank played a pivotal role in the "bank wars," which pitted President Andrew Jackson against powerful bank president Nicholas Biddle. President Jackson contended that the Second Bank was unconstitutional and dangerous to republican ideals. In 1832, Jackson's political opponents decided to make the Bank an election issue by forcing an early renewal of the Bank's 20 year charter, but the plan backfired when President Jackson vetoed the bill. By 1836, all of the Second Bank's funds had been transferred to state banks.

Jackson believed that the nation's money supply should consist only of gold or silver coin minted by the Treasury and any foreign coin the Congress chose to accept. This view was fully impractical. The gold and silver stocks of the U.S. were terribly inadequate to provide a sufficient money supply of Jackson's preference. The U.S. at that time had no substantial mines of its own and regularly had a trade deficit, so there was no dependable method to increase the money supply under what Jackson perceived to be the only Constitutional monetary system.

The financial difficulties arising out of the War of 1812 demanded that something be done to restore order to the chaotic state of American finance. The charter of the First Bank of the United States had expired leaving no central financial institution for the United States. As a result the United States found it difficult to repay loans secured to finance the war. Foreign credit was in poor standing, there was no uniform national currency and bank notes could not be exchanged for gold. As a result of this situation, many Americans who had opposed the First Bank of the United States changed their minds and supported establishment of the Second Bank of the United States in 1816.

Authorized to establish branches throughout the states, the Bank was the country's only financial institution of truly national reach. While competing with state-chartered banks for private business (and controlling their lending by collecting their notes for redemption), it would also be the federal government's banker, charged with brokering its loans and with receiving, storing, transporting, and disbursing federal funds. The Bank's notes were legal tender.

After a shaky start, the Second Bank settled down to become, in the decade after the Panic of 1819, a conservative, prosperous, and reasonably responsible business enter prise. Opening for business in the midst of a postwar boom, the Second Bank promptly discredited itself by speculation, stockjobbing, and, at some branches, outright fraud. But under the discreet management of its second president, Langdon Cheves, and his successor, Nicholas Biddle, it soon repaired its condition and reputation. By the end of the 1820s it had proved not only useful but, to many eyes, indispensable.

Nicholas Biddle, the second president of the Second Bank, created an institution that soon became an effective regulator of the national economy. The bank marketed government bonds and served as a reliable depository of government funds; it was an important source of credit for the business community; its bank notes provided the country with a sound paper currency; it forced the state banks to back their notes with adequate specie reserves and thus helped to create confidence in the entire banking system of the United States. The source of its power was its control of one-fifth of the bank notes and one-third of the bank deposits and specie of the country.

In November 1829, Biddle approached Jackson with a proposition. The Bank would assume the last of the dwindling national debt to enable its full discharge before the end of Jackson's term, an object that Biddle knew was dear to the president's heart. The quid for this quo was an early recharter for the Bank, which would send its stock soaring and provide a windfall for shareholders.

Intended to placate Jackson by showing the Bank's friendship and usefulness, Biddle's offer had the opposite effect. To Jackson it was a backstairs deal smelling of privilege and corruption, something close to a bribe. Already suspicious of the Bank, from that moment he turned irrevocably against it.

Although the constitutionality of the bank seemed to have long since been settled, President Andrew Jackson criticized it repeatedly during his first term in office, made it a major target in his campaign for a second term, and gave it so much attention during his second term that he appeared almost obsessed with the desire to destroy it. In his attack on the bank, Jackson reopened the question of its constitutionality.

In 1832, Congress acted, but not as Jackson recommended. Biddle had decided to press for recharter at the urging of Senator Henry Clay, Jackson's opponent in the presidential election only months away. A bill to extend the charter, slightly modified, of the existing Bank passed both houses by healthy majorities, though less than the two-thirds required to override a veto.

Acknowledging the Supreme Court's affirmation of the bank in McCulloch v. Maryland (1819), Jackson discounted the significance of this decision by arguing that the political branches were not bound by the judiciary's reading of the Constitution, but rather were obliged to interpret the fundamental law themselves. Jackson denied the Bank's constitutionality and affirmed his right to judge that question independent of Congress or the courts.

Jackson pointed out that in the McCulloch case the Court said the degree of necessity of a legislative act, under the necessary—and—proper clause, was a matter of political discretion. Permitted thus to examine the bill on its own merits, Jackson described the bank as a potentially "self-elected directory" possessing monopolistic power that was capable of influencing elections and controlling the affairs of the nation. Especially insofar as it was connected with foreign capital, Jackson reasoned, the bank was a "danger to our liberty and independence. "

At the heart of Jackson's opposition to the bill was support of the principle of dual-federalism. Dual-federalism stated the existence of mutually exclusive and reciprocally limiting spheres of state and federal power, neither of which was superior to the other in a categorical sense. Dual-federalist theory attached as much importance to the Tenth Amendment, reserving to the states or the people powers not delegated to the general government, as John Marshall did to the supremacy clause of the Constitution.

Jackson argued that by exempting the private business of the bank from state taxation, the recharter bill, "as a means of executing the powers delegated to the General Government," attacked "the substantive and most essential powers reserved to the States." The framers of the Constitution, Jackson declared, never imagined "that any portion of the taxing power of the States not prohibited to them nor delegated to Congress was to be swept away and annihilated as a means of executing certain powers delegated to Congress." The contrast with John Marshall' s doctrine of national-supremacy federalism was profound: whereas Marshall held that federal power properly exercised could stop the state taxing power, Jackson's dual-federalism permitted the states to exclude the exercise of a constitutional federal power.

Perceiving himself to be the champion of the people, Jackson defied both the Congress and the Supreme Court when he thought necessary. His veto of the bank bill set forth two clear and distinct messages — that the Supreme Court was not the final arbiter of all constitutional questions, and that the President could exercise a judgment independent of Congress, upon matters of policy, persumably even where constitutional issues were not involved. Jackson objected to the Second Bank of the United States not only on the basis of its constitutionality but also for reasons of policy. Previous presidents had vetoed bills on constitutional grounds only. Jackson's bank veto and his veto of numerous internal improvement bills changed this pattern.

Ingeniously, and perversely, he targeted foreign stockholders for special censure. Much of the Bank's stock was, in fact, held abroad, especially in Britain. The charter screened management from foreign interference by barring noncitizens from serving as directors or voting their shares. They could invest, but not control. By an economist's rationale, a more benign vehicle for inviting capital into America's developing economy could hardly be contrived. Yet Jackson's arguments turned investment into subversion. Bank dividends, he complained, siphoned off American money overseas, and the immunity of foreign stockholders from domestic taxation would lure ever more stock abroad, concentrating the Bank's control within a narrowing sphere of domestic holders and inviting their subservience to foreign dictation. “If we must have a bank,” Jackson warned, “it should be purely American.”

The real heart of the Veto was its attack on exclusivity and favoritism. Sounding the loaded words “monopoly” and “privilege” over and over like a tocsin, Jackson laid out his core theme: The Bank's charter gave its stockholders a promise of wealth and power not accessible to other citizens. It made them “a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the Government.”

In addition to the dual-federalist objections, Jackson opposed the bank as an unwise and inexpedient interference with republican liberty.

".... when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society-the farmers, mechanics, and laborers-who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing."

Jackson's veto of the bank bill anticipated later presidential vetoes and the growth of the system of checks and balances inherent today in the relationship between the executive, legislative and judicial branches of government.

Jackson trounced Clay in the election. Afterwards, to defang the Bank, whose present charter was still in effect and whose political resourcefulness was by no means exhausted, Jackson withdrew the federal government's deposits and lodged them with various state-chartered banks. Biddle retaliated by curtailing loans, causing business distress. Intended to force a recharter, his action instead discredited the Bank by reinforcing Jackson's warnings of its irresponsible power. Jackson's removal of the deposits prompted his foes to coalesce under the name of Whigs, a term denoting opponents of royal prerogative.

In 1834, a Whig Senate formally censured Jackson — an action which Jacksonians, now calling themselves Democrats, expunged from the Senate record as soon as they gained a majority. The defeated Bank accepted a charter from the Pennsylvania legislature and continued after 1836 as a state institution.

The destruction of the S.B.U.S. led to rampant abuses, an expansion of credit, and a speculative bubble that Jackson burst asunder with the "Specie Circular," which drained specie out of eastern banks to the west by mandating the payment of specie for federal land, most of which was west of the Appalachians.