The financial stability of the United States and its currency was compromised by the expiration of the charter of the First Bank of the United States in 1811 and by the expenses incurred by the War of 1812. The Second Bank of the United States was chartered to promote a common U.S. currency, repay loans, and reestablish the nation’s international credit.

In 1811, Congress failed to recharter the First Bank of the United States, because the majority Democratic-Republican Party believed that its existence was unconstitutional. This decision left the nation without a unified currency. Local and state banks used paper currency that lost value during the financial strains of the War of 1812, because it was not backed by specie (gold or silver). American bankers and businessmen, as well as foreign shippers, refused to accept local currencies. Congress thus had little choice but to establish a new national bank to create a new national currency.Bank of the United States, Second

The bill authorizing the Second Bank of the United States was introduced by Senator John C. Calhoun of South Carolina and was approved with little opposition. The Second Bank was similar to Alexander Hamilton’s First Bank: It was chartered for twenty years and authorized to serve as a source of deposit, act as the fiscal agent of the government, loan money to the government, and establish a credible national currency. Congress agreed to provide $7 million of the $35 million required as operating capital, and five of the twenty-five members of the bank’s board would be appointed by the federal government. The bank’s first president was William Jones, WilliamJones, who was more a Democratic-Republican political loyalist than an economic talent. The new bank helped facilitate Henry Clay’s expansionist scheme to develop the interior of the United States with a transportation network connecting the Great Lakes and the Ohio and Mississippi Rivers and a tariff system to encourage domestic manufacturing.

Jones established a policy of easy credit and allowed branches to open without sufficiently scrutinizing their banking practices. As a result, the bank extended too many loans to farmers to purchase equipment, seed, and other materials. The European continent was plagued at the time by wars and revolution, so American agricultural products were in demand. A return to political stability in Europe decreased the demand for American farm goods, however.

With reduced markets for their products, American farmers could no longer pay their debts. The Second Bank was authorized to regulate currency values and credit rates and to regulate state banks by accepting state currency only if it was sufficiently backed by specie. As a result, state and local bank loans could be recalled at the discretion of the Second Bank. Further credit to loan money was curtailed. Farms were repossessed, and factories closed. The Second Bank’s regulatory actions contributed to the Panic of 1819Panic of 1819, making the bank nationally unpopular.

Jones resigned the bank’s presidency in 1819 and was quickly replaced by Langdon Cheves, LangdomCheves. Cheves’s leadership resolved the bank’s liquidity problems and restored financial confidence within a year. The new president reduced the number of loan notes in circulation, regulated interest rates, and stabilized the nation’s currency. However, reducing the dividend rate being paid to stockholders won Cheves opponents, who joined forces with state banks opposed to the Second Bank’s requirement that loans be repaid in specie.

The states of Maryland, Tennessee, Georgia, North Carolina, Kentucky, and Ohio passed legislation taxing branches of the Second Bank. Indiana and Illinois refused to permit branches to operate in their states. The conflict between state banks and the Second Bank of the United States culminated in the case of McCulloch v. Maryland (1819)[MacCulloch v. Maryland]McCulloch v. Maryland (1819), which was appealed to the U.S. Supreme Court. At issue was whether Congress had the right to charter a bank and whether a state could tax a federal institution.

The Court, led by Chief Justice John Marshall, ruled in favor of the bank, arguing that the state’s powers were outweighed by the sovereignty of the people of the United States acting through Congress to carry out the federal government’s responsibilities. The Maryland law permitting the taxing of a federal institution was declared unconstitutional. In 1823, when Cheves stepped down as president, the Second Bank emerged as a strong financial institution, saving the national government over $1 million by transferring funds directly from the Treasury to the bank, securing funds for the federal government to borrow, maintaining specie payments at both the state and federal levels, and permitting easier credit and currency for the West and South.

The appointment of Nicholas Biddle, NicholasBiddle as bank president in 1823 continued to strengthen the nation’s fiscal confidence. However, a controversy developed over the amount of specie backing the nation’s paper currency. The controversy generated criticism of the bank from those who did not understand the institution’s function; they were joined by state bankers who felt increasingly constrained by the bank’s regulatory practices.

President Andrew Jackson, AndrewJackson made the bank an issue during his first term as president. For Jackson, the bank violated his interpretation of the proper spheres of action of the states and the federal government. He urged that the private business of the bank be taxed by the states. Jackson challenged the Supreme Court’s verdict in McCulloch v. Maryland, believing the Second Bank to be unconstitutional. He sought to expand the scope of the Tenth Amendment, which reserves to the states or the people all powers not delegated to the central government. He believed it was wrong for a private banking institution to act as a central bank for the federal government and as a potential rival in financial policy to the president and the Congress.

President Jackson, in championing himself as the voice of the people, placed himself against the perceived moneyed interests of the East, represented by Biddle. Jackson warned Biddle not to renew the bank’s charter early. Biddle listened instead to Jackson’s political rival, Henry Clay, who persuaded Biddle to renew the charter in 1832 instead of 1836. The charter renewal passed both houses of Congress by the summer of 1832, but Jackson vetoed it on July 10, 1832. Jackson’s stubbornness and Biddle’s arrogance led them to butt heads during the 1832 election campaign, making the constitutionality of the bank part of the national election debate.

Jackson won the election, bringing about the demise of the bank. Federal funds were not immediately withdrawn, but no new funds were deposited. Biddle raised interest rates excessively in 1834, undermining any chances of Congress revisiting the bank’s charter. When the Second Bank’s charter expired in 1836, the federal government’s funds were withdrawn. The state of Pennsylvania granted the bank a charter, however, and it continued to do business until 1839, when it was forced to close because it had extended too many loans. The remaining resources of the Second Bank of the United States were liquidated in 1841. The government’s failure to renew the charter of the Second Bank of the United States contributed to the Panic of 1837 and a six-year economic downturn in the U.S. economy.

• 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 U.S. Civil War, with attention to the Bank of the United States.
• 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 conflicts between the Second Bank of the United States and the state of Ohio.
• Ellis, Richard E. Andrew Jackson. Washington, D.C.: CQ Press, 2003. Excellent biography of President Jackson that explores his life, career, policies, and legacy.
• Govan, Thomas P. Nicholas Biddle: Nationalist and Public Banker, 1786-1844. Chicago: University of Chicago Press, 1959. Well-written biography that provides rich background information on the development of the Second Bank of the United States.
• Kaplan, Edward S. The Bank of the United States and the American Economy. Westport, Conn.: Greenwood Press, 1999. Wide-ranging economic study of the role of the Bank of the United States in American economic history.
• Sharp, James R. The Jacksonians Versus the Banks: Politics in the States After the Panic of 1837. New York: Columbia University Press, 1970. Examines the ruinous aftereffects of the demise of the national bank and the rise of untrustworthy state banks.
• Timberlake, Richard H. Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993. Broad history of American monetary policy. The third chapter, focusing on the Second Bank of the United States, regards the institution as a comparatively primitive central bank that was constrained by its commitment to the gold standard.
• Watson, Harry L. Liberty and Power: The Politics of Jacksonian America. New York: Noonday Press, 1990. Analyzes the political forces that elevated the bank battle to become the primary issue in the 1832 presidential campaign.

Articles of Confederation

First Bank of the United States

Banking

U.S. Constitution

Currency

Federal Reserve

Federal monetary policy

Panic of 1819

Panic of 1837

U.S. Presidency

Supreme Court and banking law