BANK WAR

President Andrew Jackson's (1829–37) struggle against the Second Bank of the United States, known as the "Bank War," was the major national financial issue during his tenure in office. The Second Bank's policies were blamed for starting the economic crisis known as the Panic of 1819, while its dissolution by Jackson was blamed for the Panic of 1837. At odds with the Bank's president, Nicholas Biddle (1786–1844), Jackson decided to remove federal funds from the Second Bank of the United States and put them on deposit with selected state banks. This action led to accusations that Jackson was using his powers arbitrarily and acting contrary to the Constitution. On March 28, 1834, the U.S. Senate formally voted to censure Jackson for his actions.

The Second Bank of the United States was chartered by the U.S. government in 1816, partly to help manage the federal debt left by the War of 1812 (1812–14), and partly to curb inflation brought on by unregulated state banks. In the early nineteenth century there was no standardized national currency. Instead, because most banks were privately owned and operated for commercial purposes, they issued their own paper money. (In reality, this paper money was imprinted with a promise to pay in gold or silver on demand—an action known in financial markets as specie.) These banks were necessary in order to supply the credit needed to buy land, finance businesses, and create economic growth. However, they tended to lend more paper "money" than they had the specie to cover. Thus, if several large creditors demanded payment in cash at the same time, the result was called a "run" and usually led to the bank's failure. If several banks failed at the same time the result was a financial panic, such as the panics of 1819 and 1837. Both of these events led to high rates of inflation and national depressions.

Because of the large cash resources available through federal deposits, the Second Bank of the United States could discipline state banks and force them to limit the credit they supplied to borrowers to the amount of specie they kept in their vaults. The Second Bank also competed with state banks by agreeing to pay in specie any of its drafts, no matter where the draft was originally issued. For that reason it was unpopular with shareholders in the state banks, who felt the national bank limited their ability to profit from their investments. The Bank's competition with state–chartered institutions also led to a celebrated Supreme Court case: McCullough v. Maryland (1819), in which Chief Justice John Marshall (1755-1835) established that Congress had the right to charter a national bank and that states had no power to tax federal institutions.

The Second Bank of the United States faced many of the problems that plagued state institutions. Between 1816 and 1818, for instance, dishonest managers of the Baltimore, Maryland, branch of the Second Bank swindled investors out of more than __BODY__ million before they were caught. The following year this scandal forced the resignation of Bank President William Jones. The reputation of the Second Bank was restored by Jones' successor, a South Carolina lawyer named Langdon Cheves. Cheves brought discipline to the Bank's dealings, sharply reducing the number of loans issued and aggressively pursuing individuals and banks that defaulted on loans. Cheves' policies helped place the Bank on a sound financial footing, however, they also caused a number of bank failures that led directly to the Panic of 1819.

When Jackson was elected president in 1828 the Second Bank, under Nicholas Biddle, was exercising considerable influence over the nation's financial affairs. By 1828 the Bank had built up a surplus of __BODY__.5 million and it was paying its stockholders an annual dividend of seven percent. It also helped stabilize a national currency and provided credit and cash in areas of the West and South where financial resources were scarce. By doing so it made development on the American frontier easier and faster. However, to President Jackson the Bank was a tool of Eastern economic privilege, which enabled speculators, monopolists, and moneyed interests to take advantage of farmers and mechanics. Jackson also believed, despite Chief Justice Marshall's ruling in McCullough v. Maryland, that Congress had no right under the Constitution to charter a bank.

In 1832—a presidential election year—Henry Clay and Daniel Webster, two of Jackson's most vocal opponents in Congress, decided to challenge the president. Even though the Bank's charter was not due to expire for four years, they promoted a bill that renewed the charter of the Second Bank of the United States. Clay and Webster believed that, whether Jackson signed the bill into law, the president would alienate a significant number of voters and risk his chance of a second term. Jackson vetoed the bill on July 10, 1832, in one of the most strongly worded messages ever sent to Congress. Although Clay tried to make the veto an issue in his campaign for the presidency later that year, Jackson easily won reelection, defeating Clay by a margin of 219 electoral votes to 49.

Jackson believed his reelection represented a mandate from the American people to destroy the Second Bank of the United States. In 1833 he instructed his Secretary of the Treasury, Louis McLane, to prepare for the expiration of the Bank's charter by removing the government's deposits to certain state institutions, known as "pet banks." McLane refused and was moved to the position of Secretary of State. His successor, William Duane, also refused and resigned. Jackson did not find a pliable Secretary of the Treasury until former Attorney General Roger B. Taney (1777–1864) took the position.

The removal of the government's deposits brought Jackson into conflict with Nicholas Biddle, who was as strong–willed as the president. Biddle felt that Jackson's actions exceeded his constitutional authority and tried to force the president to renew the Second Bank's charter by sharply reducing the number of loans and also by vigorously collecting outstanding debts. Biddle's actions, however, failed to deter the president. Biddle succeeded only in causing a financial crisis for American business in the summer and autumn of 1834. Worse, he alienated some of his strongest supporters.

Despite Biddle and censure by the Senate, Jackson continued his policy of placing funds in state–chartered banks. When Biddle discovered his policies were ineffective, he reversed himself and launched an even more extensive program of lending. For his part, Jackson made a determined effort to eliminate the extension of credit by forbidding banks with federal deposits from issuing banknotes of less than $5 denominations. In 1836 he issued the presidential order known as the Specie Circular, which required purchasers of public lands to pay in cash. By the time Jackson left office the Second Bank of the United States credit system had been severely crippled.

The Specie Circular was the final salvo in the Bank War, which ended in victory for Jacksonian principles. When the Bank's charter expired in 1836, it sought and received a charter from Pennsylvania, the state in which the main branch of the Bank had always been housed. It then operated under the name of the United States Bank of Pennsylvania. In 1839 the Bank found itself with too little specie to cover its loans. It went into receivership and was dissolved in 1841.

Jackson's victory left a questionable legacy. A boom in public works, such as canal construction, manufacturing, cotton production, and land sales, followed Jackson's decision to remove funds from the Second Bank of the United States. However, soon after his hand–picked successor Martin Van Buren took over in 1837, the country experienced a severe depression, marked by high rates of inflation and large public debt that lasted for nearly a decade. Many historians argue that by eliminating the Second Bank of the United States, Jackson removed an institution that might have eased the Panic of 1837.

BANK WAR

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