The Second Bank of the United States

"Central" banker in an era of nation-building, 1816–1836

Jane Ellen Knodell

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138786622
• eBook ISBN: 9781317662761
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The year 2016 marks the 200th anniversary of the founding of the Second Bank of the United States (1816-1836). This book is an economic history of an early central bank, the Second Bank of the United States (1816-36). After US President Andrew Jackson vetoed the re-chartering of the Bank in 1832, the US would go without a central bank for the rest of the nineteenth century, unlike Europe and England. This book takes a fresh look at the role and legacy of the Second Bank.

The Second Bank of the United States shows how the Bank developed a business model that allowed it to make a competitive profit while providing integrating fiscal services to the national government for free. The model revolved around the strategic use of its unique ability to establish a nationwide system of branches. This book shows how the Bank used its branch network to establish dominance in select money markets: frontier money markets and markets for bills of exchange and specie. These lines of business created synergies with the Bank's fiscal duties, and profits that helped cover their costs. The Bank's branch in New Orleans, Louisiana, became its geographic centre of gravity, in contrast with the state-chartered banking system, which was already, by the 1820s, centred around New York.

This book is of great interest to those who study banking and American history, as well as economic students who have a great interest in economic history.

1
Introduction

Central banks are widely credited with effectively managing the global financial crisis of 2007–2008 by developing new lender of last resort programs. The expansion of the social safety net to encompass almost every type of financial intermediary has brought renewed scrutiny to the role of central banks and, in some corners, worry about their solvency. After many decades of quiet consensus, central banking is once again a political issue, as it was 200 years ago, when the federal government chartered the Second Bank of the United States.¹

The Second Bank was the subject of one of the biggest political fights in US history, one which ended badly for the Bank with President Jackson’s veto of the bill to renew its charter. The Bank and the “Bank War” are two of the most heavily researched topics in economic history, much of it centering on the economic consequences of Jackson’s veto. The Bank was heavily outnumbered by the 260 state-chartered banks in operation by 1820. But it had powerful competitive advantages conferred by its charter: it was the only federally chartered bank, and the sole fiscal agent for the federal government; it was by far the largest bank in the country in terms of both assets and capitalization; and it was the only bank in the country that was able to establish a nationwide system of branches. The Bank struggled in its early years, but became sound and profitable under its third and final president, Nicholas Biddle, who took office in 1823.

It has been over fifty years since the last significant book about the Bank, but economic historians are still writing about the Bank, trying to figure out whether it was a central bank in the modern sense. In much of this literature, the Second Bank is seen through the lens of the modern Federal Reserve, an institution with which US economic historians are very familiar and which, with its district banks, is seemingly so similar to the Second Bank. A central issue in the economic history literature on the Bank is whether the Bank met the “lender of last resort” benchmark, particularly with regards to its behavior during the monetary crisis of 1825–1826. This book enters the central-banker debate in the literature and also seeks to move beyond it.

Catterall published his comprehensive history of the Bank in 1902, five years before the Panic of 1907, the last in a series of banking crises leading up to the creation of the Federal Reserve in 1913. Catterall gave the Bank high marks for providing a sound national currency and stabilizing the economy during banking crises. During 1825–1826, the Bank was “appropriately conservative” at first, and then “at the moment aid was needed the BUS [Bank of the United States] was able to render it.” Catterall charged that

Jackson and his supporters committed an offense against the nation when they destroyed the bank. . . . It was the overthrow of a machine capable of incalculable service to this country—a service which can be rendered by no bank not similarly organized. Would it not be better for the nation if it could command that service today?²

Little was published about the Bank during the decades of the 1920s, Great Depression, or Second World War. In the postwar decades of the 1950s and 1960s, a flurry of books, articles, and theses were written about the Second Bank. By this time, the Federal Reserve had won its independence from the US Treasury and was becoming proficient at stabilizing cyclical fluctuations. Three authors from this period, Redlich (1951), Smith (1953), and Hammond (1957), were more or less convinced that the Second Bank was a central bank. Hammond, the least ambiguous of the three, concluded that the Bank performed a “rounded and complete central banking function” after 1823 (when Biddle was installed as President), acting as a “balance wheel” of the banking system, governing the exchanges, restraining the growth of bank credit, and protecting the money market from disturbances. Hammond thought that the Second Bank’s central-banking performance in the 1820s was better than that of the Federal Reserve in the 1930s (which was not very good at all).³

Redlich was similarly bullish on the Bank, but more nuanced in his analysis. Redlich called Biddle “perhaps the world’s very first conscious central banker,” assessed against contemporary thinking about what central banks should do. Redlich saw the Second Bank as a “controlling bank within a system of banks” and, in the end, concluded that Biddle controlled the state-chartered banks more than he assisted them. Yet, Redlich said, Biddle did feel responsible for the health of the national economy and sacrificed Bank profits for national economic stability: “for some critical weeks in 1825 Biddle acted as the lender of last resort, thereby fulfilling a true central banking function.”⁴ Smith was also somewhat mixed in his assessment of the Bank, concluding that Biddle had the right ideas, but “the activities of the Bank, viewed in their entirety, did not live up to Biddle’s version of this conceived policy” in 1825–1826. Smith criticized Biddle for later taking credit for easing the money market by increasing the Bank’s discounts, since the Bank was selling securities at the same time, offsetting the expansionary effect of the increase in discounts. Both Redlich and Smith claimed that the Bank lent to state banks in times of crisis, but provided no documented examples.⁵

Three other authors from the golden years of the postwar period were not convinced that the Bank was a central bank. Meerman (1961) concluded that Biddle developed “a theory and practice of central banking well adapted to the US during the first half of the nineteenth century.” Ultimately, though, it was the specie standard that regulated money; the Bank just provided time for the banking system to adjust to balance of payments deficits. In 1825–1826, Meerman said, the Bank was relatively skillful in managing credit conditions in New York, but not as a lender of last resort.⁶ Timberlake (1961, 1978) agreed with Meerman that the Second Bank was more of a “shock absorber” than a “balance wheel,” and that at times it did the opposite of what a central bank would do. Timberlake, like many contemporaries of the Second Bank, had constitutional problems with its chartering. It was not created to be a central bank, just a public bank (that is, the central government’s bank) and a commercial bank. But “one would have to be either obtuse or modest in the assumption of power not to recognize and cultivate the central-banking potential of such an institution, even if such power was ultimately subordinate to the discipline of a specie standard.”⁷ Biddle was not one to be modest in the assumption of power.

Peter Temin (1969) continued the themes of Meerman and Timberlake in his book on the Jacksonian economy. Temin disagreed sharply with the central-bank thesis, arguing that the Second Bank did not assist the state banks in 1825, but that it did what it had to do to keep the Bank in a position of strength and safety. Van Fenstermaker (1965) agreed: the Bank put its own liquidity first in 1825 and was a “controlling” bank, but not a “central” bank. Highfield et al. (1991, pp. 317–18) analyzed the Bank’s behavior in short-run monetary fluctuations using time-series econometric analysis, and concluded that the Bank provided “stability to the financial system through its consistently conservative policies,” but that it did not exhibit:

the central bank behavior claimed by its supporters. . . . the animosity directed at the Bank arose not so much because of what the Bank did but because of what its behavior precluded its competitors from doing. By acting as a check on the expansiveness of the financial system, the Second Bank provided perhaps the most important central banking function.

Jumping forward to the twenty-first century, the literature has come full circle. Recent contributions have returned to the view that the Bank was a central bank. According to Bordo (2012, p. 598), under Biddle, the Bank “had developed into a first rate central bank. . . . stabilizing exchange rates, . . . smoothing seasonal and cyclical shocks and acting as a lender of last resort to the banking system.” Bordo cited as evidence Redlich’s report that Biddle had read Thornton’s essay on central banking, so he knew what to do and how to do it.⁸ Officer (2002) drew the closest analogy of all between the Second Bank and the Federal Reserve, going so far as to include the notes and deposits issued by the Second Bank in the monetary base in one version of his model of long-run monetary growth.⁹

This book presents a variety of evidence showing that the Bank fell short of the (modern) central-banker test. The Bank was not chartered to fill the need for a lender of last resort, did not behave like a lender of last resort during monetary crises or in selecting branch locations, and its management was philosophically opposed to the idea of a lender of last resort. Neither did the Bank see its function as providing other kinds of services for the state-chartered banking system. If not a central bank in the modern sense, was the Second Bank, as Dewey (1910a, p. 148) concluded, “nothing more or less than a large commercial bank with practically the same functions as other banks established under state charters, and differed from them little save size and enjoyment of a few special privileges”? The answer offered here is no, the Second Bank was not just another commercial bank, only bigger. The monetary services that its charter required it to provide to the federal government made it qualitatively different from other commercial banks.

This book seeks to understand the Second Bank’s role in the national economy and its business model in the context of early nineteenth-century US political economy. Balogh (2009) and other contributors to the “new institutionalist” US history literature provide insight into the challenges facing the federal government when it chartered the Bank in 1816. In the aftermath of the War of 1812, national

Republican leaders like Jefferson and Madison [were alerted] to the need for organization and infrastructure that could only be provided by a more assertive General Government. . . . they advocated a far-reaching program of military preparedness that included annual funding for coastal and frontier defense, a peacetime army, an expanded navy, and greater control over state militias.¹⁰

The United States was a young nation with a greatly enlarged territory, but the loyalties of the western populace still in question and its finances and accounts in disarray. The country needed an institution to integrate the west into national commodity markets and to knit together the central government’s geographically expanding fiscal affairs. As this book will show, the Second Bank fit the bill. It helped “conquer space,” in the words of US Senator, War Secretary, and Second Bank advocate John Calhoun, for two major clients with operations that spanned long distances: the US government and merchants involved in interregional and international trade.

This historically grounded perspective on the Bank calls for spatial analysis. Space mattered in the early nineteenth-century United States: given the state of the country’s transportation infrastructure, it was costly, and took time, to move people, commodities, and money around the country, especially between interior regions and the eastern seaboard. In such an environment, the Bank’s national branch network gave it a distinct advantage. The Bank’s branch network has received relatively little attention in the literature. In this book, the branch network takes center stage: where the Bank located branches, and why; how the head office at Philadelphia managed the branch network; how financial assets circulated between branches; which branches were strategically vital to the Bank’s success, and why.

The literature tends to rely, perhaps more than it should, on Nicholas Biddle’s public statements for evidence on the Bank’s operations. During the Bank War, Biddle was campaigning for the Bank’s recharter in his public testimony, seeking to create a positive image for the Bank. This book considers Biddle’s correspondence in the Biddle Papers with the cashiers and presidents of the branches as a more reliable guide to the operations of the Bank than Biddle’s testimony before Congressional committees. The book uses the Biddle Papers, as others have done, and also brings new archival evidence to its project, including two collections relating to the Baltimore branch of the Second Bank. Other collections supplement the Biddle Papers with other correspondence between Philadelphia, the head office, and the branches, both outgoing (as with the Biddle Papers) and incoming.

The book’s major findings fall into five broad areas: why the Bank was chartered; the factors driving the design of the Bank’s branch network; the Bank’s role as the central manager of the domestic and foreign exchanges; the Bank’s role in monetary stabilization; and the Bank’s operations as a dealer in specie markets. In all of these areas, the model of a twentieth-century central bank is shown to be a poor fit for the Second Bank. Rather, the Second Bank was organized, and organized itself, to earn a competitive profit while meeting the public needs of the 1820s: to put the fiscal affairs of the US government on strong monetary footing and to economically integrate the New West into the national economy. Monetary stability, the key mission of modern central banks, was simply a by-product of the Bank’s pursuit of duty and profit.

Notes

1Contemporaries referred to this bank as the Bank of the United States, but it has come to be known as the Second Bank of the United States to differentiate it from its predecessor, also named the Bank of the United States (1791–1811) and now known as the First Bank of the United States. In this book, the terms “the Second Bank” and “the Bank” are used to refer to the Second Bank of the United States.

2Catterall (1902, pp. 106–7, 476).

3Hammond (1957, pp. 323, 324, 285).

4Redlich (1968, pp. 96, 97, 128, 136).

5Smith (1953, p. 140). Smith believed that Biddle did not tell the whole story in such statements as the following about the Fall of 1825: “I was perfectly satisfied that there was a tremendous squall coming, that there was a scarcity and a dread which unl...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of maps
• List of tables
• Acknowledgments
• Note on primary sources
• 1 Introduction
• 2 Origin and purposes of the Second Bank
• 3 The Second Bank’s branch network and the state banking system
• 4 The Second Bank and the “exchanges”: conquering space
• 5 The “production” of monetary stability
• 6 The Second Bank’s specie market operations
• 7 Conclusion
• Appendices
• References
• Index