Economic Perspective on the Political History of the Second Bank of the United States

By Green, Edward J. | Economic Perspectives, Spring 2003 | Go to article overview

Economic Perspective on the Political History of the Second Bank of the United States


Green, Edward J., Economic Perspectives


Introduction and summary

The Second Bank of the United States (1817-36) was chartered by the federal government for a 20-year period and it resembled a modem central bank in its close relationship with the U.S. Treasury and paramount position in the nation's banking system. (1) It was conceived in response to a fiscal crisis during and following the War of 1812. The bank's charter had a tortuous legislative history, and there was intense political and judicial controversy throughout the bank's existence, culminating in the "War on the Bank" by President Andrew Jackson and the ultimate refusal of Congress to renew its charter. (2) The "Panic of 1819" was a banking crisis and economic contraction that was blamed (rightly or wrongly) on tight credit policy that the bank had imposed in order to recover its solvency after mismanagement in its early days of operation. The subsequent period, 1819-32, was characterized by prosperity and stability on the whole, but there were some minor financial crises that did not have apparent causes. Fina lly, some contemporary observers and historians have argued that actions taken by the national bank during the Jacksonian "war" may have partly caused the "Panic of 1837," another banking crisis and economic contraction, which occurred shortly after the Second Bank of the United States lost its federal charter.

The consensus among historians is that the Second Bank of the United States (which I call the U.S. Bank for short) was politically controversial because it involved an expansion of federal powers that many Americans in that day resisted on general principle; and because the monetary discipline that it was designed to impose on state-chartered banks was costly to those banks and thus engendered a powerful industry lobby in opposition to it. A predominant view (emphasized particularly by Hammond, 1957) is that, while various classes of indebted persons often expressed hostility to the bank and were sometimes mobilized to support politicians who opposed it, those debtor constituencies were not the mainspring of opposition. On the whole, other historians do not dispute Hammond's view. It is generally thought that, in fact, the U.S. Bank did not act in a predatory way toward the state banks. (3) Regarding the economic management of the bank, there is wide agreement that there was disastrous mismanagement during t he first two years of operation but, after a change of leadership, very capable management subsequently.

The thesis of this article is that conflict between debtors and creditors regarding economic policy may have played a large role, both politically and economically, throughout the history of the U.S. Bank. This conclusion is only tentative. It rests on some theoretical premises that are plausible but not yet rigorously proven. If they are valid, historical research suggested by their implications may overturn them nevertheless. However, if correct, this explanation can account for four aspects of the history of the U.S. Bank that other explanations have not addressed convincingly: 1) Why a large number of legislators changed positions, in both directions, during the debate on the charter; 2) Why a demonstrably incompetent president and some venal senior managers were initially selected; 3) Why states whose legislators had eventually supported issuance of the U.S. Bank charter shifted to oppose the bank after capable and honest management was installed; and 4) Why several, relatively minor, financial crises o ccurred during the period while the bank was capably managed and before the conflict about renewing its charter reached its apex.

The interpretation of the U.S. Bank offered here rests on theoretical premises about two related matters. One is the relationship between the structure of the banking industry in an economy and the macroeconomic performance of that economy, particularly in times of high inflation and banking crises. The other is the nature of voters' preferences over those macroeconomic outcomes, and the way in which political institutions translate those preferences into legislation or regulation that affects the structure of the banking industry. …

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