Second Bank of the United States Is Chartered Summary

  • Last updated on November 10, 2022

The federal government’s wish to restore the monetary system to the gold standard led to the second attempt to created a national bank, but the bank was ultimately the victim of political opposition.

Summary of Event

In April, 1816, President James Madison signed a bill authorizing the establishment of the Second Bank of the United States. In January, 1817, the bank commenced operations in Philadelphia in the same building that had housed the First Bank of the United States. The First Bank had been chartered in 1791 as part of the comprehensive financial program of Treasury Secretary Alexander Hamilton. Hamilton, Alexander [p]Hamilton, Alexander;and Bank of the United States[Bank of the United States] One purpose in chartering the bank was to improve the market for the newly issued securities constituting the funded national debt, for these securities could be turned in to purchase stock in the new bank. In addition, the bank was expected to enlarge credit availability substantially, as only three commercial banks existed in 1790. The Bank of the United States was also to serve as a fiscal agent for the federal government, managing its checking account, helping to issue and redeem government securities, and paying the interest on them. However, the First Bank’s charter was not renewed in 1812, despite the bank’s productive and efficient existence of twenty years. Bank of the United States;Second Banking law, U.S.;Second Bank of the United States [kw]Second Bank of the United States Is Chartered (Apr., 1816) [kw]Bank of the United States Is Chartered, Second (Apr., 1816) [kw]United States Is Chartered, Second Bank of the (Apr., 1816) [kw]Chartered, Second Bank of the United States Is (Apr., 1816) Bank of the United States;Second Banking law, U.S.;Second Bank of the United States [g]United States;Apr., 1816: Second Bank of the United States Is Chartered[0860] [c]Banking and finance;Apr., 1816: Second Bank of the United States Is Chartered[0860] [c]Trade and commerce;Apr., 1816: Second Bank of the United States Is Chartered[0860] [c]Organizations and institutions;Apr., 1816: Second Bank of the United States Is Chartered[0860] Astor, John Jacob [p]Astor, John Jacob;and Bank of the United States[Bank of the United States] Biddle, Nicholas Cheves, Langdon Girard, Stephen Madison, James [p]Madison, James;and Bank of the United States[Bank of the United States]

In 1812, the United States entered the War of 1812 War of 1812 (1812-1814);financing of with Great Britain. As usual, government expenditures greatly increased, and most of that increase was financed by borrowing. The federal government borrowed extensively by selling securities to state-chartered banks, which numbered about eighty-eight in 1812. To pay for these securities, the banks expanded their notes and deposits, while their specie reserves declined. In 1814, when British warships sailed up Chesapeake Bay and burned Washington, D.C., most banks outside New England suspended specie redemption of their liabilities. Suspension freed the banks to expand their credit with little restraint. As a result, many bank notes depreciated severely and commodity prices increased by about 50 percent between 1811 and 1814.

After the war ended in December, 1814, a movement to form a new Bank of the United States gained momentum. As in 1790, the federal government was burdened with a large public debt, much of it selling below face value. It was believed that if the securities could be used to pay for the stock of a new bank, their market value would rise. Furthermore, Treasury officials needed competent help in managing their funds, after having had bad experiences with state bank depositories. One of the government’s most important motivations was to restore monetary order to the United States and halt the inflation process. Many businessmen, such as Stephen Girard Girard, Stephen and John Jacob Astor Astor, John Jacob [p]Astor, John Jacob;and Bank of the United States[Bank of the United States] , believed that the banks needed to return to redeeming their notes and deposits in gold and silver Silver;and Bank of the United States[Bank of the United States] on demand, as they had done before 1814. Girard and Astor also were large investors in government securities.

The new bank charter passed Congress in April of 1816. It specified the structure and operations of the bank but did not identify any public purpose that the bank was to serve. The Second Bank of the United States resembled its predecessor in many respects, although its capitalization, at thirty-five million dollars, was larger. As before, the government took one-fifth of the stock. A new feature was that one-fifth of the directors were appointed by the government. The bank provided a depository for federal funds in every state where a branch opened.

Between 1817 and 1828, twenty-eight branches were established in the major commercial cities of the nation. It was through these branches that the Second Bank was enabled to exercise control over the rapidly increasing number of state banks. The bank transferred federal funds from place to place and paid public creditors without charge to the government. The bank was authorized to issue notes that were receivable at par in all payments to the government. It was also authorized to lend money and to buy and sell bills of exchange. It became the manager of the U.S. Treasury’s bank account and handled transactions involving issue, redemption, and interest payments on government securities.

The new bank was expected to lead the nation’s banks back to specie redemption, aided by the Webster Resolution of 1816, which forbade the Treasury to accept notes of non-specie-paying banks. The banks nominally resumed specie payments in February, 1817, but their specie reserves were very small relative to their liabilities. The Second Bank tried to make their position easier by expanding its own credit rapidly. However, the bank was badly managed under its first president, William Jones Jones, William , and made many bad loans.

In 1818, the United States experienced a large international outflow of gold. The government called on banks to redeem notes and deposits in specie. As their reserves declined, they were obliged to reduce loans, and the resulting contraction of credit led to severe deflation and economic depression. The Second Bank reduced its loans from forty-three million dollars in early 1818 to thirty-one million dollars in September, 1819, during which time its note circulation fell from ten million to four million dollars. Under fire for internal mismanagement and for the country’s deflationary distress, Jones Jones, William resigned as president in 1822. His successor, Langdon Cheves Cheves, Langdon , concentrated on cleaning up the Second Bank’s internal affairs without much concern for the nation’s economy.

The Second Bank’s role in the Panic of 1819 Panic of 1819;and Bank of the United States[Bank of the United States] made it politically unpopular. In 1817, Maryland placed a tax upon the branch office in Baltimore. In 1819, after several other states had followed this example, Ohio Ohio;and Bank of the United States[Bank of the United States] and Kentucky Kentucky;and Bank of the United States[Bank of the United States] imposed taxes of sixty thousand dollars and fifty thousand dollars on the U.S. Bank branches in those states. However, the landmark Supreme Court decision in McCulloch v. Maryland McCulloch v. Maryland (1819)[MacCulloch v. Maryland (1819)] (1819) held that chartering the bank was within the constitutional authority of the Congress and that state taxes could not be imposed to block federal programs.

Significance

In 1823, Nicholas Biddle Biddle, Nicholas became president of the Second Bank. He developed many programs to expand its operation. In particular, the bank became an extensive dealer in domestic exchange. The bank made loans secured by goods (such as cotton) produced in the interior and sent to eastern cities for sale or export. These loans were repaid in the eastern cities, but the bank’s interior branches could sell drafts on those funds to local people needing to make payments to the East. The process yielded revenue for the bank and helped improve the country’s interregional payments system. However, Biddle and the Second Bank had many political enemies. The number of state-chartered and private banks was increasing, and they and their customers resented the competition from the Second Bank and the restraints it imposed on them. Antagonism from President Andrew Jackson ultimately led him to block recharter of the Second Bank, and its federal charter expired in 1836.

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. New York: Cambridge University Press, 2000. Examination of American banking policies in the years leading up to the Civil War, with attention to the Bank of the United States.
  • citation-type="booksimple"

    xlink:type="simple">Brown, Marion A. The Second Bank of the United States and Ohio, 1803-1860: A Collision of Interests. Lewiston, N.Y.: Edwin Mellen Press, 1998. Study of the conflicts between the Second Bank of the United States and the state of Ohio.
  • citation-type="booksimple"

    xlink:type="simple">Govan, Thomas P. Nicholas Biddle: Nationalist and Public Banker, 1786-1844. Chicago: University of Chicago Press, 1959. This highly readable biography gives ample background on the evolution of the Second Bank and its political adventures.
  • citation-type="booksimple"

    xlink:type="simple">Hammond, Bray. Banks and Politics in America. Princeton, N.J.: Princeton University Press, 1957. This breezy, entertaining book blends political and economic analysis. Criticizes the Jacksonian point of view.
  • citation-type="booksimple"

    xlink:type="simple">Kaplan, Edward S. The Bank of the United States and the American Economy. Westport, Conn.: Greenwood Press, 1999. Broad, economic study of the role of the Bank of the United States in American economic history.
  • citation-type="booksimple"

    xlink:type="simple">Redlich, Fritz. The Molding of American Banking: Men and Ideas. 1951. Reprint. New York: Johnson Reprint, 1968. Emphasizes the role of businessmen in the initial chartering of the Second Bank, and assesses Biddle’s innovations in both commercial and central banking.
  • citation-type="booksimple"

    xlink:type="simple">Smith, Walter B. Economic Aspects of the Second Bank of the United States. Cambridge, Mass.: Harvard University Press, 1953. Presents considerable statistical data and objective analysis of the Second Bank’s operations.
  • citation-type="booksimple"

    xlink:type="simple">Timberlake, Richard H. Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993. Chapter 3 depicts the Second Bank as a rather primitive central bank, constrained by its commitment to the gold standard.

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Panic of 1837 Begins

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