Second Bank of the United States

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The (Second) Bank of the United States was a central bank constituted in 1816 under the same name as the (First) Bank of the United States that had lost is charter in 1811. The bank continued to stir controversy and partisanship, with Henry Clay and the Whigs ardently supporting it and Andrew Jackson and the Democrats fervently opposing it. The bank ceased operation in 1841.[1]



The charter of the First Bank of the United States was repealed in 1811. The very next year, the United States launched an unsuccessful war against Great Britain. Most of the industry and most of the capital was in New England, a pro-British region highly unsympathetic to the War of 1812. New England capital and the conservative New England banks were unwilling to invest heavily in debt to finance the war. Therefore, the U.S. government encouraged an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt. These new and recklessly inflationary banks in the Middle Atlantic, Southern, and Western states, printed enormous quantities of new notes to purchase government bonds. The federal government then used these notes to purchase arms and manufactured goods in New England.

Thus, from 1811 to 1815, the number of banks in the country increased from 117 to 246. The estimated total of specie in all banks fell from $14.9 million in 1811 to $13.5 million in 1815, whereas the aggregate of bank notes and deposits rose from $42.2 million in 1811 to $79 million four years later, an increase of 87.2 percent, pyramiding on top of a 9.4 percent decline in specie.

In the War of 1812, as the federal government spent the new inflated notes in New England, the conservative New England banks called on the banks of the other regions for redemption in specie. By August 1814, it became clear that the banks of the nation apart from New England could not pay, that they were insolvent. Rather than allow the banks of the nation to fail, the governments, state and federal, decided in August 1814 to allow the banks to continue in business while refusing to redeem their obligations in specie. This was a massive special privilege to the banking system and it provided carte blanche, an open sesame, for bank credit inflation. The banks were allowed to continue to "suspend specie payments" while remaining in business for 2½ years, even though the war was over by early 1815.

The United States emerged from the War of 1812 in a chaotic monetary state. Clearly, the nation could not continue indefinitely with discordant sets of individual banks issuing fiat money. There were only two ways out of this pressing problem. One was the hard money path. The federal and state governments would then have compelled the recklessly inflating banks to redeem promptly in specie and, when most of the banks outside of New England failed to do so, force them to liquidate.

Instead, the Democrat-Republicans in 1816 turned to the second way: a new inflationary central bank, the Second Bank of the United States.

The BUS was driven through Congress by the Madison administration and particularly by Secretary of the Treasury Alexander J. Dallas, whose appointment had been pushed for that purpose. Dallas, a wealthy Philadelphia lawyer, was a close friend, counsel, and financial associate of Philadelphia merchant and banker, Stephen Girard, reputedly one of the two wealthiest men in the country. Girard had been the largest single stockholder of the First BUS, and during the War of 1812, he became a very heavy investor in the war debt of the federal government. As a prospective large stockholder of the BUS and as a way of creating a buyer for his public debt, Girard began to urge a new Central Bank. Dallas’s appointment as Secretary of Treasury in 1814 was successfully engineered by Girard and his close friend, wealthy New York merchant and fur trader, John Jacob Astor, also a heavy investor in the war debt.[2]


Modeled closely after the First Bank, the Second Bank, a private corporation with 1/5 of its stock owned by the federal government, was to create a uniform national paper currency, purchase a large part of the public debt, and receive deposits of Treasury funds. The BUS notes and deposits were to be redeemable in specie, and they were given quasi-legal tender status by the federal government’s receiving them in payment of taxes.

That the purpose of establishing the BUS was to support rather than restrain the state banks in their inflationary course is shown by the deal that the BUS made with the state banks as soon as it opened its doors in January 1817. While it was enacting the BUS charter in April 1816, Congress passed a resolution of Daniel Webster, at that time a Federalist champion of hard money, requiring that after February 20, 1817, the U.S. would accept in payments for taxes only specie, Treasury notes, BUS notes, or state bank notes redeemable in specie on demand. In short, no irredeemable state bank notes would be accepted after that date. The BUS, meeting with representatives from the leading urban banks outside Boston, agreed to issue $6 million worth of credit in New York, Philadelphia, Baltimore, and Virginia before insisting on specie payments on debts due from the state banks. In return for that massive inflation, the state banks graciously consented to resume specie payments.

Moreover, the BUS and the state banks agreed to mutually support each other in any emergency, which, of course, meant in practice that the far stronger BUS was committed to the propping up of the weaker state banks.

As a result of the deal between the BUS and the state banks, the resumption of specie payments by the latter after 1817 was more nominal than real, thereby setting the stage for continued inflation, and for renewed widespread suspensions of specie payment during the 1819–21 panic and depression. A mark of this failure of redemption was that varying discounts on bank notes against specie continued from 1817 on.

The problem was aggravated by the fact that the BUS lacked the courage to insist on payment of notes from the state banks. As a result, the BUS piled up large balances against the state banks, reaching over $2.4 million during 1817 and 1818. As the major historian of the BUS writes: “So many influential people were interested in the [state banks] as stockholders that it was not advisable to give offense by demanding payment in specie, and borrowers were anxious to keep the banks in the humor to lend.”

From its inception, the Second BUS launched a massive inflation of money and credit. Lax about insisting on the required payments of its capital in specie, the Bank failed to raise the $7 million legally required to be subscribed in specie. During 1817 and 1818, its specie never rose above $2.5 million and at the peak of its initial expansion, BUS specie was $21.8 million. Thus, in a scant year and a half of operation, the BUS added a net of $19.2 million to the money supply.

Outright fraud abounded at the BUS, especially at the Philadelphia and Baltimore branches, which made 3/5 of all BUS loans. Furthermore, the BUS attempt to provide a uniform national currency foundered on the fact that the western and southern branches could inflate credit and bank notes, and that the inflated notes would then come into the more conservative branches in New York and Boston, which would be obligated to redeem the inflated notes at par. In this way, the conservative branches were stripped of specie while the western branches continued to inflate unchecked.

The expansionary operations of the BUS impelled an inflationary expansion of state banks on top of the enlargement of the central bank. The number of incorporated state banks rose from 232 in 1816 to 338 in 1818, with Kentucky alone chartering 40 new banks in the 1817–18 legislative session. The estimated total money supply in the nation rose from $67.3 million in 1816 to $94.7 million in 1818, a rise of 40.7 percent in two years. Most of this increase was supplied by the BUS. This enormous expansion of money and credit impelled a full-scale inflationary boom throughout the country.[2]

Panic of 1819

Main article: Panic of 1819

Starting in July 1818, the government and the BUS began to see what dire straits they were in; the enormous inflation of money and credit, aggravated by the massive fraud, had put the BUS in danger of going under and illegally failing to maintain specie payments. Over the next year, the BUS began a series of enormous contractions, forced curtailment of loans, contractions of credit in the south and west, refusal to provide uniform national currency by redeeming its shaky branch notes at par, and at last, seriously enforcing the requirement that its debtor banks redeem in specie. These heroic actions, along with the ouster of President William Jones, managed to save the BUS, but the contraction of money and credit swiftly brought to the United States its first widespread economic and financial depression. The first nationwide "boom-bust" cycle had arrived in the United States, ignited by rapid and massive inflation and quickly succeeded by contraction of money and credit. Banks failed, and private banks curtailed their credits and liabilities and suspended specie payments in most parts of the country.

The notes and deposits of the BUS fell from $21.8 million in June 1818 to $11.5 only a year later. The money supply contributed by the BUS was thereby contracted by no less than 47.2 percent in one year. The number of incorporated banks at first remained the same, and then fell rapidly from 1819 to 1822, dropping from 341 in mid-1819 to 267 three years later. Total notes and deposits of state banks fell from an estimated $72 million in mid-1818 to $62.7 million a year later, a drop of 14 percent in one year. Adding the fact that the U.S. Treasury contracted total treasury notes from $8.81 million to zero during this period, the total money supply was $103.5 million in 1818, and $74.2 million in 1819, producing a contraction in one year of 28.3 percent.

The result of the contraction was a rash of defaults, bankruptcies of business and manufacturers, and a liquidation of unsound investments during the boom. Prices in general plummeted: the index of export staples fell from 158 in November 1818 to 77 in June 1819, an annualized drop of 87.9 percent in seven months. In the famous charge of the Jacksonian hard money economist and historian William M. Gouge, by its precipitate and dramatic contraction "the Bank was saved, and the people were ruined."

The Bank of the United States was supposed to bring the blessings of a uniform paper currency to the United States. Yet from the time of the chaotic 1814–17 experience, the notes of the state banks had circulated at varying rates of depreciation, depending on how long the public believed they could keep redeeming their obligations in specie.[2]

Loss of the charter

Out of the debacle of the Panic of 1819 emerged the beginnings of the Jacksonian movement dedicated to laissez-faire, hard money, and the separation of money and banking from the State. During the 1820s, the new Democratic Party was established by Martin Van Buren and Andrew Jackson to take back America for the Old Republican program. The first step on the agenda was to abolish the Bank of the United States, which was up for renewal in 1836.

The imperious Nicholas Biddle, head of the BUS, decided to force the issue early, filing for renewal in 1831. Jackson, in a dramatic message, vetoed renewal of the Bank charter, and Congress failed to pass it over his veto.

Triumphantly reelected on the Bank issue in 1832, President Jackson disestablished the BUS as a central bank by removing Treasury deposits from the BUS in 1833, placing them in a number of state banks (soon called “pet banks”) throughout the country. At first, the total number of pet banks was seven, but the Jacksonians, eager to avoid a tight-knit oligarchy of privileged banks, increased the number to 91 by the end of 1836. In that year, as its federal charter ran out, Biddle managed to get a Pennsylvania charter for the Bank, and the new United States Bank of Pennsylvania managed to function as a regular state bank for a few years thereafter.

Panic of 1837 and the end of the Bank

Historians long maintained that Andrew Jackson, by his reckless act of eliminating the BUS and shifting government funds to pet banks, freed the state banks from the restraints imposed upon them by a central bank. In that way, the banks allegedly were allowed to pyramid money on top of specie, precipitating an unruly inflation later succeeded by two bank panics and a disastrous inflation.

Recent historians, however, have demonstrated that the correct picture was precisely the reverse. First, under the regime of Nicholas Biddle, BUS notes and deposits had risen, from January 1823 to January 1832, from $12 million to $42.1 million, an annual increase of 27.9 percent. This sharp inflation of the base of the banking pyramid led to a large increase in the total money supply, from $81 million to $155 million, or an annual increase of 10.2 percent. Clearly, the driving force of this monetary expansion of the 1820s was the BUS, which acted as an inflationary spur rather than as a restraint on the state banks.

Furthermore, the inflationary boom of the 1830s began, not with Jackson’s removal of the deposits in 1833, but three years earlier, as an expansion fueled by the central bank. Thus, the total money supply rose from $109 million in 1830 to $155 million at the end of 1831, a spectacular expansion of 35 percent in one year. This monetary inflation was sparked by the central bank, which increased its notes and deposits from January 1830 to January 1832 by 45.2 percent.

In response to this contractionist pressure—demands for specie—the banks throughout the United States (including the BUS) promptly suspended specie payments in May 1837. The governments allowed them to do so, and continued to receive the notes in taxes. The notes began to depreciate at varying rates, and interregional trade within the United States was crippled. The banks, however, could not hope to be allowed to continue on a fiat basis indefinitely, so they reluctantly began contracting their credit in order to go back eventually on specie. Finally, the New York banks were compelled by law to resume paying in specie, and other banks followed in 1838. During the year 1837, the money supply fell from $276 million to $232 million, a large drop of 15.6 percent in one year. Specie continued to flow into the country, but increased public distrust in the banks and demands to redeem in specie put enough pressure on the banks to force the contraction. In response, wholesale prices fell precipitately, by over 30 percent in seven months, declining from 131 in February 1837 to 98 in September of that year.

This healthy deflation brought about speedy recovery by 1838. Unfortunately, public confidence in the banks returned as they resumed specie payment, so that the money supply rose slightly and prices rose by 25 percent. State governments ignited the new boom of 1838 by recklessly spending large Treasury surpluses which President Jackson had distributed pro rata to the states two years earlier. Even more money was borrowed to spend on public works and other forms of boondoggle. The states counted on Britain and other countries purchasing these new bonds, because of the cotton boom of 1838. But the boom collapsed the following year, and the states had to abandon the unsound projects of the boom. Cotton prices fell and severe deflationist pressure was put upon the banks and upon trade. Moreover, the BUS had invested heavily in cotton speculation, and was forced once again to suspend specie payments in the fall of 1839. This touched off a new wave of general bank suspensions in the South and West, although this time the banks of New York and New England continued to redeem in specie. Finally, the BUS, having played its role of precipitating boom and bust for the last time, was forced to close its doors forever in 1841.[2]


  1. Encyclopædia Britannica. "Bank of the United States", referenced 2013-07-07.
  2. 2.0 2.1 2.2 2.3 Murray Rothbard. The Mystery of Banking (pdf), Second edition, p. 198-211. Referenced 2013-07-07.