In July 1832, Congress sent a bill to renew the charter of the Second
Bank of the United States to the White House for President Andrew
Jackson’s signature. The measure had passed both the Senate and House by
comfortable margins; many legislators and their constituents believed
that over the past decade the Bank had proven itself a wise and
efficient overseer of the nation’s monetary affairs.
The institution had virtually erased the government’s debt from the War
of 1812. Its paper notes were as good as gold anywhere in the Union.
State banks and businesses had benefited from tens of millions of
dollars in loans by the Bank. Thanks to its interregional payments
system, trade was flourishing from Boston to Chicago, on the expanding
frontier. These successes argued for a new lease on life for the Second
Jackson begged to differ. The war hero known as “Old Hickory” to his
followers considered the Second Bank an unconstitutional “money power”
that favored wealthy stockholders over working people and twisted
democracy to its own ends. As the bank bill sat on his desk, Jackson lay
ill, suffering from a flare-up of an old battle wound and the hot,
sticky weather. Martin Van Buren, who would succeed Jackson as
president, visited the White House one day and found his mentor lying on
a couch, pale and gasping for breath.
“The bank, Mr. Van Buren, is trying to kill me,” he said in a whisper.
Then Jackson grasped his friend’s hand tightly and added, “but I will
kill it.”1 True to his word, Jackson vetoed the bill, and four years
later, upon expiration of its charter, the Second Bank closed its doors.
There would not be another bank like it for 77 years, until the
formation of the Federal Reserve System.
The creation and destruction of the Second Bank were flashpoints in a
long-running debate in the United States over the need for a central
bank and how the economic power of such an entity should be controlled.
Established as a national bank to restore financial order after the war
with Britain, the Second Bank got off to a rocky start. But led by the
brilliant and forceful Nicholas Biddle, the institution thrived and
developed into a de facto central bank with some functions analogous to
those of the modern Federal Reserve. Most scholars agree that by issuing
a uniform currency, ensuring access to credit and facilitating domestic
and international trade, the Bank fostered economic stability and growth
in the 1820s and early 1830s.
But what many regarded as a force for public good came to be seen by
others as a plutocracy that held too much sway over the nation’s
fortunes. “Many people have argued that United States history shows the
suspicion of all concentrated power but a special suspicion of
concentrated financial power,” said Richard Sylla, an economic historian
at New York University, in an interview.
The Bank War in which Jackson and his supporters killed the Second Bank
was a reprise of the bitter fight 20 years earlier over the recharter of
the First Bank of the United States (see the September 2007 Region).
Congressional opponents brought down the First Bank by charging that the
brainchild of Alexander Hamilton was unconstitutionally powerful and an
oppressor of state-chartered banks. Similarly, Jackson aroused populist
passions and the envy of state banks to topple an institution that he
considered unconstitutional and a menace to society because of its
unrivaled economic power exercised outside government control. Biddle’s
desperate efforts to save the Bank, prostrating the economy in hope of
forcing Jackson to relent, showed even its supporters that the Bank was
capable of abusing its power.
The architects of the Federal Reserve System took to heart the fate of
the Second Bank. Instead of a mostly private bank that massed financial
power in one city, the framers of the Federal Reserve Act created a
federal bank composed of 12 independent, regional banks overseen by a
central board in Washington, D.C. The eventual legacy of the Second Bank
was a more democratic banking system that has rendered largely moot the
ideological struggle that doomed its predecessors.
For “the public exigencies”
The idea of a national bank was reborn during the War of 1812. The war
had thrown the country into financial chaos, with federal debt mounting
as the government borrowed heavily to prosecute the war and a British
naval blockade of eastern seaports suppressing foreign and coastal
trade. Economic activity shrank and investor confidence plummeted.
It didn’t help matters that there was no longer a national bank to issue
a uniform currency. The closing of the First Bank in 1811 had greatly
increased the number of state-chartered banks issuing their own notes.
In 1814, when British raids on Washington and Baltimore triggered bank
panics, many state banks stopped redeeming their notes in specie (gold
and silver coin). In a monetary system that relied on a bimetallic
standard to restrain note issue (paper currency could be readily
exchanged for specie held in bank vaults), the refusal of banks to stand
behind their notes caused their notes to depreciate at different rates.
The uncertain value of paper money complicated financial transactions,
The depressed economy hampered the federal government’s efforts to
collect revenue and raise money from bond issues, resulting in defaults
on public debt. Moreover, without a national bank, the U.S. Treasury had
no one bank to go to for a quick loan, and no easy way to move funds to
where they were needed. In 1814, Congressman Alexander Hanson of
Maryland reported that the Treasury had so little money and credit that
it was unable to pay its stationery bill.2
Before the war, the Republican Party founded by Thomas Jefferson had
decried the First Bank as a corporate monopoly that flouted the
Constitution and enriched financiers while bilking yeoman farmers and
other ordinary workers. But after the war, ideological objections gave
way to the pressing need to fix a sputtering economy. The Treasury
needed a national bank to furnish it loans, hold government deposits and
restore the value of currency by pressuring state banks to resume specie
President James Madison, who had vehemently opposed Hamilton’s original
proposal for the First Bank but supported recharter because he believed
the constitutional issue had been settled by precedent, now urged
Congress to provide a bank for “the public exigencies.” Madison
emphasized the nation’s money woes in his December 1815 annual message
(today’s State of the Union address): “The benefits of an uniform
national currency,” he said, “should be restored to the community.”3
Congressman John C. Calhoun of South Carolina then introduced a bill to
establish a national bank, offering in its favor a rebuttal to the old
argument against the First Bank’s constitutionality. The Constitution
gave Congress an exclusive right to regulate the value of currency, he
said; therefore it had an obligation to do so, by creating a national
bank that would impose discipline on state banks.
Calhoun’s argument and those of other bank proponents were persuasive;
Congress passed the bank bill, and the Second Bank opened for business
Jan. 7, 1817, in the same building in Philadelphia that the First Bank
had once occupied.
Under its 20-year charter, the new bank had much in common with the old.
The government owned a fifth of its stock; merchants, landowners and
other private investors held the rest. Three-quarters of its privately
held shares were to be purchased with government securities, enhancing
demand for the country’s war debt. Backed by its stock and government
deposits, the Bank was authorized to issue a sizable currency suitable
for the payment of taxes and to lend to businesses as well as government.
However, the Second Bank was a much bigger institution than its
predecessor, with more than three times the capital and many more
branches (by 1828, there were 25 serving every part of the country,
compared with the First Bank’s eight). Another difference was the
government’s somewhat larger say in the daily operation of the new
institution. Directors chosen exclusively by stockholders ran the First
Bank; in the Second Bank, five of 25 directors were appointed by the
U.S. president with Senate approval.
Avarice and panic
Reincarnated to breathe life back into the economy, America’s national
bank appeared to do more harm than good in its early years. Its first
president was William Jones, a Philadelphia merchant and politician
backed by businessmen in Baltimore eager to tap the Bank’s wealth. The
Second Bank began its career, recalled future Bank president Nicholas
Biddle years later, as “a monied institution governed by those who had
no money … a mere colony of the Baltimore adventurers.”4
The Bank lent aggressively to merchants and land speculators, and gave
sweetheart loans secured by the Bank’s own stock to Jones’ associates.
In the Baltimore branch, lending to directors and other insiders without
collateral resulted in a loss of $1.5 million—$21 million in today’s
Ironically, one of the recipients of these fraudulent loans—Baltimore
Cashier James W. McCulloch—is immortalized in a landmark U.S. Supreme
Court case that seemed to affirm the Second Bank’s constitutionality
once and for all. In 1818, the state of Maryland had imposed a stiff tax
on the Baltimore branch and other banks not chartered by the
Legislature. In McCulloch v. Maryland, the court ruled that the states
had no power to interfere with a bank incorporated by Congress under the
necessary-and-proper clause of the Constitution.5
Profligate lending weakened the Bank, and—coupled with its failure to
persuade all but a handful of state banks to resume specie
payments—caused paper currency to depreciate at varying rates in
different parts of the country, weakening the national economy.
On the brink of collapse, the Bank was forced to retrench, calling in
loans and slashing circulation. Langdon Cheves, who replaced Jones as
president in 1819 after a congressional inquiry into the Bank’s
problems, tightened credit further—just as the country was sinking into
a depression. The Bank’s efforts to save itself worsened the Panic of
1819, which caused widespread bank and business failures.
Many scholars believe that the Bank’s actions (or inaction) during the
Panic sowed the seeds of its later destruction. Jane Knodell, an
economic historian at the University of Vermont, notes that in the west,
where Bank branches had been active in lending for land purchases, the
Bank repossessed people’s livelihoods. “There was lingering resentment,”
Knodell said in an interview. “People saw the Bank acquiring all these
assets that were formerly theirs, and that created some pretty permanent
enemies for the Bank.”
Nicholas Biddle’s bank
After serving as a government director of the Second Bank, Biddle became
its president in 1823. A member of a prominent Philadelphia family who
had turned his talents from literature to finance (see “The Rise and Fall of Nicholas Biddle”), Biddle transformed a national branch banking system with federal
fiscal duties into a functional central bank, a forerunner of the
Federal Reserve. Sylla of NYU points out that by leveraging the Bank’s
currency reserves, Biddle systematically regulated the monetary system
for the good of the overall economy in a period when the Bank of England
was only tentatively flexing its monetary muscle. “I could make an
argument that he was the world’s first self-conscious central banker,”
An effective tool for regulating the money supply was the Bank’s
holdings of notes issued by state banks. As the chief repository of
customs duties and other government revenue, the Bank received millions
of dollars annually in such notes, which could be redeemed for gold and
silver (the majority of state banks had reluctantly resumed specie
payments by this time). Because most banks kept minimal specie reserves,
they were forced to curtail lending when the big bank in Philadelphia or
any of its branches demanded specie.
To tighten credit, the Second Bank promptly presented state banknotes
for redemption, sometimes buying banknotes in the money market to apply
more pressure; to ease credit conditions, the Bank held onto the
banknotes, letting the banks lend more freely. Through this early form
of open market operations, Biddle and his lieutenants aimed “to preserve
a mild and gentle but efficient control over the monied institutions of
the United States,” as Biddle explained in an 1826 letter.6
The Second Bank also regulated the money stock by issuing currency and
lending to state banks. The Bank’s notes, legal tender for the payment
of taxes and accepted everywhere at par, were the closest thing the
country would have to a national currency until after the Civil War.
Biddle kept a tight rein on circulation, making sure that the Bank
provided an adequate money supply while removing the temptation of some
branches to overissue by requiring that notes be payable only at the
bank location that issued them.
Loans to banks—provided by the Federal Reserve today to banks that
cannot otherwise meet their reserve obligations—allowed them to avoid
calling in loans when bank runs or regional trade imbalances drained
their specie reserves. Historians credit timely lending by the Second
Bank for helping to avert bank failures during the global stock market
crash of 1825, which closed scores of banks in Britain.
In addition to fine-tuning the monetary system, the Bank stimulated
interregional and international trade through bills of exchange,
financial instruments that enabled farmers and merchants to obtain
payment for their goods from customers in distant markets. By selling
drafts at a premium, the Bank acted as a clearinghouse for long-distance
transactions—a function roughly similar to check clearing at the Fed.
Unlike the Federal Reserve, the Second Bank operated as a commercial
bank as well as a central bank. The Bank profited from its domestic and
foreign exchange business, which competed with services offered by state
banks and brokerages; and it accepted deposits from and made loans to
businesses and individuals.
By the time Jackson was elected president in 1828, the Bank was, in
historian Robert V. Remini’s words, a “financial colossus, entrenched in
the nation’s economy.”7 Headquartered in a splendid new building on
Chestnut Street and modeled on the Parthenon (the structure still
stands, in the care of the National Park Service), the Bank was by far
the largest corporation in the nation. The head office and its branches
maintained a note circulation of $21 million, held one-third of the
banking system’s total bank deposits and specie, and accounted for 20
percent of the country’s loans.8 At the colossus’ head was Biddle, his
sure hands on the levers and pulleys, personally directing the Bank’s
lucrative commercial business and tightening and relaxing access to
credit at will.
But some Americans disapproved of the Bank’s power, none more resolutely
than Jackson. The president and Biddle would soon be locked in a
Manichean struggle over who should govern the nation’s monetary system.
The Bank War
Jackson held a jaundiced opinion of banks. Like Jefferson, he believed
they perverted democratic ideals, profiting bank stockholders and
mercantile interests at the expense of the working class. As a young
man, he had been stung in a land speculation scheme, an experience that
soured him against paper money and banks in general. Jackson was hostile
to the Second Bank in particular because of what he perceived as its
stranglehold on financial power—the ability of a single private
institution to redistribute wealth among different social classes and
regions of the country.
The president was also convinced that the Bank was wielding its
financial clout against his party, the Democrats (or Jacksonians). He
had heard reports that during the last election, the Bank had bought
votes in Kentucky to assist the reelection of Republican John Quincy
Adams, donated money to the National Republican party and spurned the
loan applications of Democrats. Whether or not they were true, the
rumors deepened Jackson’s animus toward the Bank, convincing him that
its power must be curbed.
In his annual message of 1829, Jackson attacked the Bank, resurrecting
the constitutional issue. A literal interpreter of the Constitution and
an ardent supporter of states’ rights, Jackson asserted what he saw as
his prerogative to disagree with the Supreme Court’s decision in
McCulloch v. Maryland. He also charged—contrary to available
evidence—that the Bank had failed to establish a uniform currency, and
he proposed that the Bank become an arm of the Treasury in order to
bring it under closer government supervision.
Over the next two years, Jackson stepped up his campaign against the
Bank, denouncing it in speeches and letters as a “monster,” a fearsome
hydralike creature that threatened liberty and the Republic. Jacksonian
newspapers such as the Washington Globe picked up on this bestial
imagery, excoriating the Bank in editorials and cartoons.
Old Hickory’s accusations struck a populist chord with farmers, laborers
and artisans who shared his view of the Bank as a tool of the rich that
threatened equal opportunity, the essence of democracy. Many Jackson
supporters in western and southern states still resented the Bank for
calling in loans and foreclosing on their property during the Panic of
1819. Allied with the populists were state banks and businessmen who
chafed under Biddle’s “mild and gentle” monetary restraints in an era
when credit was in high demand to fuel economic expansion and
development on the frontier. Wall Street bankers were jealous of the
Bank’s financial might and coveted its federal deposits.
As what came to be known as the Bank War escalated, Biddle the master
financier found himself out of his depth. “Where Biddle gets into
trouble is his political skills, or lack thereof,” Knodell said. “He
made a lot of bad moves.”
Compromise may have been possible with Jackson, who in December 1831,
looking to enhance his reelection chances, signaled that he was willing
to make peace with the Bank. But Biddle didn’t propose substantive
changes to the Bank charter that might have mollified the president and
ended the Bank War. Instead he used Bank funds to place newspaper
articles praising the Bank’s salutary influence on commerce and to pay
handsome retainers to politicians such as Massachusetts Sen. Daniel
Webster, an eloquent spokesman for regulation of currency and credit.
Then Biddle made a strategic blunder that sealed the fate of the Bank.
Encouraged by Webster and presidential aspirant Henry Clay, who wanted
to make the Bank’s future an issue in the 1832 election, Biddle applied
to Congress to renew the Bank’s charter. The charter still had four
years to run, but Webster, Clay and other Bank supporters believed that
Jackson would be more likely to sign a recharter bill before the
upcoming election than afterward.
Fight to the finish
They were mistaken. The bank bill easily won approval in both the Senate
and the House, receiving strong support from lawmakers in New England
and the Middle Atlantic states. But Jackson was waiting, ailing yet
determined to not just chain the “monster” but kill it outright. In his
famous veto message of July 10, 1832, Jackson blasted the Bank,
insisting that it was unconstitutional—not “necessary and proper” for
the execution of Congress’ powers—and depicting it as a financial
monopoly that granted “titles, gratuities and exclusive privileges to
make the rich richer and the potent more powerful.”9
Dismissing Jackson’s veto message as “a manifesto of anarchy,” Biddle
redoubled his lobbying in an effort to get Congress to override the
veto, courting legislators with large bank loans. And he openly
supported Jackson’s rival Clay in the 1832 election, drawing upon Bank
funds to distribute Clay’s speeches in favor of a national bank and
recharter. Biddle’s aggressive politicking availed him nothing; Congress
lacked the will to overturn the veto, and Jackson scored a landslide
November victory over Clay.
When an emboldened Jackson took steps in the fall of 1833 to remove the
Second Bank’s Treasury deposits and give them to “pet” banks friendly to
the administration—a move that would cripple the Bank as a regulator of
currency—Biddle made a last desperate bid to save his Bank. So far he
had used Bank resources to curry political favor by retaining
high-powered lobbyists and bribing newspaper editors and lawmakers. Now,
in an act that would be unthinkable for a financial institution today,
Biddle deliberately curtailed credit to inflict misery on the money
market and force Jackson to not only return the deposits but agree to
recharter as well.
Decreasing lending was a natural defensive response to the loss of
federal deposits, but Biddle took matters to extremes. Over the next few
months, he cut loans drastically and ordered state banks to immediately
pay off their debts in specie—which forced many banks to curtail their
own lending. By the following spring, the Bank’s assets and demand
liabilities had fallen by a fifth, contributing to a recession
exacerbated by general panic. Banks and mercantile houses collapsed,
wages and real estate values fell, workers lost their jobs. Delegations
of businessmen begged the president to restore the deposits and end
Biddle’s contraction. Jackson sent them packing, and Biddle was now
committed to a fight to the finish. “My own course is decided—all the
other Banks and all the merchants may break, but the Bank of the United
States shall not break,” Biddle wrote in February 1834.10
Finally, Biddle was forced to relax his chokehold on credit when the
public and even the Bank’s supporters turned against him. His scorched
earth policy seemed to confirm what Jackson was saying; the Bank was
indeed an all-powerful, dangerous beast that must be destroyed for the
good of the nation. With its federal deposits drained away, the Bank
lost the ability to restrict the note issue of state banks and ceased
functioning as a central bank. After the Bank’s charter expired in 1836,
Biddle defiantly kept the head office going as a private,
state-chartered institution, but the bank was dogged by mismanagement
and allegations of fraud, and it collapsed in 1841. The building that
the Bank’s enemies had derided as “the Greek temple in Chestnut Street”
became a U.S. Custom House.
The once and future bank
Jackson’s pet banks multiplied and lent exuberantly in the mid 1830s,
providing the funds entrepreneurs craved to start new businesses and
expand operations. Economists have estimated that between 1834 and 1836,
the money supply grew at an average annual rate of 30 percent, sparking
a commercial boom but also rampant speculation in land and commodities.
In a replay of events following the demise of the First Bank, notes
issued by state banks depreciated, forcing Jackson to intervene by
ordering federal officials in July 1836 to accept only specie for the
purchase of public lands.
Within a year, the speculative bubble burst in the Panic of 1837.
There’s considerable debate about the exact causes of the Panic and
subsequent deep depression that lasted until 1843, but recent
scholarship has shown that the death of the Second Bank was a
significant factor. Knodell’s research, for example, indicates that the
closing of Bank branches spurred private investment in western state
banks, which leveraged that equity and their new federal deposits to
make risky long-term loans for land development. When many of those
loans turned bad, the banks were forced to curtail credit, quickening
the country’s slide into depression.11
Banking booms followed by busts would occur roughly every decade for the
rest of the 19th century and into the 20th. Without a bona fide central
bank to exercise control over currency and access to credit, the
monetary system was susceptible to periodic banking disruptions.
Finally, the Panic of 1907—a stock market meltdown and ensuing recession
relieved by the intervention of financial mogul J. P. Morgan—prompted
the creation of the Federal Reserve System in 1913. In designing an
institution that would issue a uniform currency, hold Treasury deposits,
discount commercial paper for banks and perform other central bank
functions, the founders of the Federal Reserve were aware of the
traumatic history of the Second Bank. They understood that the immense
financial power the Bank put in the hands of a select few bred distrust
In 1909, Sen. Nelson Aldrich of Rhode Island, chair of a commission
charged by Congress with reforming the monetary system, invoked the
Second Bank in a speech to a group of Chicago businessmen. Aldrich said
that the Bank had been “destroyed as a matter of party policy” and
assured his audience that any new central bank would be governed and
structured differently from its predecessors to avoid becoming mired in
politics. “[N]o one is thinking of adopting the First or Second Bank of
the United States as a model,” he said. “No institution of similar
construction or methods in management could possibly receive the
approval of the people of the United States at this time.”12 Two years
later, Aldrich chided critics of his central banking plan for conjuring
“the ghost of Andrew Jackson” to stir up political opposition.13
Aldrich’s vision of a central bank that avoided the political pitfalls
of the past was a starting point for a central bank proposal developed
by Rep. Carter Glass of Virginia and economics professor H. Parker
Willis. The new institution created by the Federal Reserve Act struck a
balance between public and private, centralized and local control of the
monetary system. A Federal Reserve Board in Washington would oversee
operations carried out by “not less than eight nor more than twelve”
District Banks spread around the country, under the direction of
representatives from local banks.
Thus the Federal Reserve did not concentrate financial power in the
private sector and in one city, as the Second Bank had done. And unlike
the Second Bank, it was not a commercial bank; it would assist state and
national banks—by lending them reserves and clearing checks—but not take
business away from them. The ghost of Andrew Jackson could rest in peace.
Legislation during the Great Depression restructured the Federal
Reserve, giving more power to an oversight board in Washington and less
autonomy to the 12 District Banks. Today’s Fed is fundamentally a
government entity dedicated to the public interest, not private gain.
This is the legacy of the nation’s first central bank, an institution
that fostered prosperity during most of its 20 years of life. How the
Second Bank died is a cautionary tale about the political dangers of
concentrated financial power that appears to benefit private or
parochial interests rather than the nation as a whole.
1 Martin Van Buren, Autobiography, ed. John C. Fitzpatrick (Washington,
1920), p. 625.
2 Bray Hammond, Banks and Politics in America: From the Revolution to
the Civil War (Princeton, N.J.: Princeton University Press, 1957) p. 230.
3 Ibid., p. 233.
4 Charles Sellers, The Market Revolution: Jacksonian America 1815-1846
(Oxford University Press, 1991) p. 134.
5 17 U.S. 316 (1819).
6 Hammond, p. 307.
7 Robert V. Remini, Andrew Jackson and the Bank War: A Study in the
Growth of Presidential Power (New York: W. W. Norton, 1967) p. 39.
9 Ibid., p. 83.
10 Nicholas Biddle, The Correspondence of Nicholas Biddle, ed. Reginald
C. McGrane (New York: Houghton Mifflin, 1919) pp. 221–22.
11 Jane Knodell, “Rethinking the Jacksonian Economy: The Impact of the
1832 Bank Veto on Commercial Banking,” Journal of Economic History 66(3), pp. 541–74.
12 “Keep banks free, Aldrich advises,” New York Times, Nov. 7, 1909,
13 “Bankers indorse Aldrich money plan,” New York Times, Nov. 22, 1911,
A note concerning the art for “The ‘Monster’ of Chestnut Street”
The Region acknowledges generous assistance from Karin Murphy of the Federal Reserve Bank of Minneapolis; Karie Diethorn, chief curator, and Andrea Ashby, photo librarian, Independence National Historical Park, Philadelphia; Susan Drinan of the Atwater Kent Museum, Philadelphia; and
Erica Kelly, photoduplication services, Library of Congress.