WEBVTT NOTE 10. The Second Bank of the United States, 1816-1833 1 00:00:00.000 --> 00:00:06.000 The Second Bank of the United States, 1816-1833 2 00:00:06.000 --> 00:00:18.000 The United States emerged from the War of 1812 in a chaotic monetary state, with banks multiplying and inflating ad lib, checked only by the varying rates of depreciation of their notes. 3 00:00:18.000 --> 00:00:28.000 With banks freed from redeeming their obligations in specie, the number of incorporated banks increased during 1816, from 212 to 232. 4 00:00:28.000 --> 00:00:33.240 Clearly, the nation could not continue indefinitely with the issue of fiat money in the hands 5 00:00:33.240 --> 00:00:36.360 of discordant sets of individual banks. 6 00:00:36.360 --> 00:00:39.780 It was apparent that there were two ways out of the problem. 7 00:00:39.780 --> 00:00:44.320 One was the hard money path, which was advocated by the old Republicans and, for their own 8 00:00:44.320 --> 00:00:46.460 purposes, the Federalists. 9 00:00:46.460 --> 00:00:50.600 The Federal and State governments would have sternly compelled the Rolican banks to redeem 10 00:00:50.600 --> 00:00:55.840 promptly in specie and, when most of the banks outside of New England could not, to force 11 00:00:55.840 --> 00:00:56.840 them to liquidate. 12 00:00:56.840 --> 00:01:08.840 In that way, the mass of depreciated and inflated notes and deposits would have been swiftly liquidated, and specie would have poured back out of hoards and into the country to supply a circulating medium. 13 00:01:08.840 --> 00:01:11.840 The inflationary experience would have been over. 14 00:01:11.840 --> 00:01:21.840 Instead, the Democratic-Republican establishment in 1816 turned to the old Federalist path, a new central bank, the Second Bank of the United States. 15 00:01:21.840 --> 00:01:36.840 Modeled closely after the first bank, the second bank, a private corporation with one-fifth of the shares owned by the federal government, was to create a national paper currency, purchase a large chunk of the public debt, and receive deposits of treasury funds. 16 00:01:36.840 --> 00:01:47.840 The second bank of the United States notes and deposits were to be redeemable and specie, and they were given quasi-legal tender status by the federal governments receiving them in payment of taxes. 17 00:01:47.840 --> 00:02:03.840 That the purpose of establishing the second bank of the United States was to support the state banks in their inflationary course, rather than crack down on them, is seen by the shameful deal that the second bank made with the state banks as soon as it opened its doors in January 1817. 18 00:02:03.840 --> 00:02:33.840 At the same time that it was establishing a new bank in April 1816, Congress passed the resolution of Daniel Webster, at that time a Federalist champion of hard money, requiring that after February 20, 1817, the United States should accept as payments for debts or taxes only specie, treasury notes, bank of the United States notes, or state bank notes redeemable and specie on demand. In short, no irredeemable state bank notes would be accepted after that date. 19 00:02:33.840 --> 00:03:03.840 Instead of using the opportunity to compel the banks to redeem, however, the Second Bank of the United States, in a meeting with representatives from the leading urban banks, excluding Boston, agreed to issue $6 million worth of credit in New York, Philadelphia, Baltimore and Virginia, before insisting on specie payments from debts due to it from the state banks. In return for that agreed upon massive inflation, the state banks graciously consented to resume specie payments. 20 00:03:03.840 --> 00:03:08.280 Bank and the state banks agreed to mutually support each other in any emergency, which 21 00:03:08.280 --> 00:03:12.800 of course meant in practice that the far stronger Bank of the United States was committed to 22 00:03:12.800 --> 00:03:16.080 the propping up of the weaker state banks. 23 00:03:16.080 --> 00:03:20.280 The second Bank of the United States was pushed through Congress by the Madison administration 24 00:03:20.280 --> 00:03:25.480 and particularly by Secretary of the Treasury Alexander J. Dallas, whose appointment was 25 00:03:25.480 --> 00:03:27.640 lobbied for, for that purpose. 26 00:03:27.640 --> 00:03:33.400 Dallas, a wealthy Philadelphia lawyer, was a close friend, counsel and financial associate 27 00:03:33.400 --> 00:03:38.300 of Philadelphia Merchant and Banker, Stephen Girard, reputedly one of the two wealthiest 28 00:03:38.300 --> 00:03:40.240 men in the country. 29 00:03:40.240 --> 00:03:43.960 Toward the end of its term, Girard was the largest stockholder of the first bank of the 30 00:03:43.960 --> 00:03:49.000 United States, and during the War of 1812, Girard became a very heavy investor in the 31 00:03:49.000 --> 00:03:51.720 war debt of the federal government. 32 00:03:51.720 --> 00:03:56.480 Both as a prospective large stockholder and as a way to unload his public debt, Girard 33 00:03:56.480 --> 00:03:59.560 began to agitate for a new bank of the United States. 34 00:03:59.560 --> 00:04:05.000 Dallas' appointment as Secretary of Treasury in 1814 was successfully engineered by Dallas 35 00:04:05.000 --> 00:04:10.760 and his close friend, wealthy New York merchant and fur trader John Jacob Astor, also a heavy 36 00:04:10.760 --> 00:04:12.920 investor in war debt. 37 00:04:12.920 --> 00:04:16.480 When the second bank of the United States was established, Stephen Girard purchased 38 00:04:16.480 --> 00:04:21.920 $3 million of the $28 million that remained unsubscribed, and he and Dallas managed to 39 00:04:21.920 --> 00:04:26.400 secure for the post of President of the new bank their good friend William Jones, former 40 00:04:26.400 --> 00:04:28.600 Philadelphia merchant. 41 00:04:28.600 --> 00:04:33.160 Much of the opposition to the founding of the Bank of the United States seems keenly prophetic. 42 00:04:33.160 --> 00:04:38.640 Thus, Senator William H. Wells, Federalist from Delaware, in arguing against the bank 43 00:04:38.640 --> 00:04:40.680 bill, said that it was, quote, 44 00:04:40.680 --> 00:04:45.720 Ostensibly for the purpose of correcting the diseased state of our paper currency by restraining 45 00:04:45.720 --> 00:04:50.640 and curtailing the over-issue of bank paper, and yet it came prepared to inflict upon us 46 00:04:50.640 --> 00:04:57.120 the same evil, being itself nothing more than simply a paper-making machine, end quote. 47 00:04:57.120 --> 00:05:01.640 In fact, the result of the deal with the state banks was that their resumption of specie payments 48 00:05:01.640 --> 00:05:07.600 after 1817 was more nominal than real, thereby setting the stage for the widespread suspension 49 00:05:07.600 --> 00:05:11.240 of the 1819 to 1821 depression. 50 00:05:11.240 --> 00:05:13.800 As Bray Hammond writes, 51 00:05:13.800 --> 00:05:17.640 Specie payments were resumed with substantial shortcomings. 52 00:05:17.640 --> 00:05:21.800 Apparently the situation was better than it had been and a pretense was maintained for 53 00:05:21.800 --> 00:05:23.840 its being better than it was. 54 00:05:23.840 --> 00:05:26.400 But redemption was not certain and universal. 55 00:05:26.400 --> 00:05:30.880 There was still a premium on specie and still a discount on banknotes, with considerable 56 00:05:30.880 --> 00:05:34.020 variation in both from place to place. 57 00:05:34.020 --> 00:05:39.260 Three years later, February 1820, Secretary of the Treasury Crawford reported to Congress 58 00:05:39.260 --> 00:05:42.840 that during the greater part of the time that had elapsed since the resumption of specie 59 00:05:42.840 --> 00:05:48.400 payments, the convertibility of banknotes into specie had been nominal rather than real 60 00:05:48.400 --> 00:05:52.320 in the largest portion of the Union. 61 00:05:52.320 --> 00:05:56.360 One problem is that the Bank of the United States lacked the courage to insist on payment 62 00:05:56.360 --> 00:05:58.440 of its notes from the state banks. 63 00:05:58.440 --> 00:06:02.520 As a result, state banks had large balances piled up against them at the Bank of the United 64 00:06:02.520 --> 00:06:09.680 States, totaling over $2.4 million during 1817 and 1818, remaining on the books as virtual 65 00:06:09.680 --> 00:06:11.560 interest-free loans. 66 00:06:11.560 --> 00:06:13.720 As Cotterill points out, quote, 67 00:06:13.720 --> 00:06:17.600 So many influential people were interested in the state banks as stockholders that it 68 00:06:17.600 --> 00:06:22.680 was not advisable to give offense by demanding payment in specie, and borrowers were anxious 69 00:06:22.680 --> 00:06:26.560 to keep the banks in the humor to lend. 70 00:06:26.560 --> 00:06:31.120 When the Bank of the United States did try to collect on state banknotes in specie, Bank 71 00:06:31.120 --> 00:06:33.920 President Jones reported, 72 00:06:33.920 --> 00:06:40.240 The banks, our debtors, plead inability, require unreasonable indulgence, or treat our reiterated 73 00:06:40.240 --> 00:06:45.600 claims and expostulations with settled indifference. 74 00:06:45.600 --> 00:06:50.740 From its inception, the second bank launched a spectacular inflation of money and credit. 75 00:06:50.740 --> 00:06:55.160 Lacks about insisting on the required payment of its capital in specie, the bank failed 76 00:06:55.160 --> 00:06:59.640 to raise the $7 million legally supposed to have been subscribed in specie. 77 00:06:59.640 --> 00:07:06.740 Instead, during 1817 and 1818, its specie held never rose above $2.5 million. 78 00:07:06.740 --> 00:07:11.700 At the peak of its initial expansion, in July 1818, the Bank of the United States specie 79 00:07:11.700 --> 00:07:20.100 totaled $2.36 million and its aggregate notes and deposits totaled $21.8 million. Thus, 80 00:07:20.100 --> 00:07:24.520 in a scant year and a half of operation, the Second Bank of the United States had added 81 00:07:24.520 --> 00:07:32.060 a net of $19.2 million to the nation's money supply for a pyramid ratio of 9.24 or a reserve 82 00:07:32.060 --> 00:07:38.580 ratio of 0.11. Outright fraud abounded at the Second Bank of the United States, especially 83 00:07:38.580 --> 00:07:47.460 It is no accident that three-fifths of all of the bank's loans were made at these two 84 00:07:47.460 --> 00:07:48.460 branches. 85 00:07:48.460 --> 00:07:53.220 Also, the bank's attempt to provide a uniform currency throughout the nation floundered 86 00:07:53.220 --> 00:07:57.580 on the fact that the Western and Southern branches could inflate credit in banknotes 87 00:07:57.580 --> 00:08:01.540 and that the inflated notes would wend their way to the more conservative branches in New 88 00:08:01.540 --> 00:08:06.740 York and Boston, which would be obligated to redeem the inflated notes at par. 89 00:08:06.740 --> 00:08:11.020 In this way, the conservative branches were stripped of specie, while the western branches 90 00:08:11.020 --> 00:08:14.180 could continue to inflate unchecked. 91 00:08:14.180 --> 00:08:18.060 The expansionary operations of the Second Bank of the United States, coupled with its 92 00:08:18.060 --> 00:08:23.140 laxity toward insisting on specie payment by the state banks, impelled a further inflationary 93 00:08:23.140 --> 00:08:28.060 expansion of state banks on top of the spectacular enlargement of the central bank. 94 00:08:28.060 --> 00:08:35.060 Thus, the number of incorporated state banks rose from 232 in 1816 to 338 in 1818, contending 95 00:08:36.740 --> 00:08:42.620 Kentucky alone charted 40 new banks in the 1817-1818 legislative session. 96 00:08:42.620 --> 00:08:50.300 The estimated total money supply in the nation rose from $67.3 million in 1816 to $94.7 million 97 00:08:50.300 --> 00:08:55.700 in 1818, a rise of 40.7% in two years. 98 00:08:55.700 --> 00:08:59.860 Most of this increase was supplied by the Bank of the United States. 99 00:08:59.860 --> 00:09:04.140 The huge expansion of money and credit impelled a full-scale inflationary boom throughout 100 00:09:04.140 --> 00:09:06.020 the country. 101 00:09:06.020 --> 00:09:11.320 Their prices had fallen in 1815 with the renewal of foreign trade after the war, but domestic 102 00:09:11.320 --> 00:09:13.220 prices were another story. 103 00:09:13.220 --> 00:09:21.820 Thus, the index of export staples in Charleston rose from 102 in 1815 to 160 in 1818. 104 00:09:21.820 --> 00:09:28.540 The prices of Louisiana staples at New Orleans rose from 178 to 224 in the same period. 105 00:09:28.540 --> 00:09:30.840 Other parts of the economy boomed. 106 00:09:30.840 --> 00:09:37.840 Prices rose from $81 million in 1815 to a peak of $116 million in 1818. 107 00:09:37.840 --> 00:09:43.040 Prices rose greatly in real estate, land, farm improvement projects and slaves, much 108 00:09:43.040 --> 00:09:48.040 of it fueled by the use of bank credit for speculation in urban and rural real estate. 109 00:09:48.040 --> 00:09:51.920 There was a boom in turnpike construction, furthered by vast federal expenditures on 110 00:09:51.920 --> 00:09:53.320 turnpikes. 111 00:09:53.320 --> 00:09:57.840 Freight rates rose on steamboats and shipbuildings shared in the general prosperity. 112 00:09:57.840 --> 00:10:03.240 Also, general boom conditions expanded stock trading so rapidly that traders, who had been 113 00:10:03.240 --> 00:10:07.360 buying and selling stocks on the curbs on Wall Street for nearly a century, found it 114 00:10:07.360 --> 00:10:12.920 necessary to open the first indoor stock exchange in the country, the New York Stock Exchange, 115 00:10:12.920 --> 00:10:14.720 in March 1817. 116 00:10:14.720 --> 00:10:20.280 Also, investment banking began in the United States during this boom period. 117 00:10:20.280 --> 00:10:24.860 Starting in July 1818, the government and the second bank began to see what dire straits 118 00:10:24.860 --> 00:10:25.860 they were in. 119 00:10:25.860 --> 00:10:36.860 The enormous inflation of money and credit, aggravated by the massive fraud, had put the Bank of the United States in real danger of going under and illegally failing to sustain specie payments. 120 00:10:36.860 --> 00:10:54.860 Over the next year, the bank began a series of heroic 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 seriously enforcing the requirement that its debtor banks redeem in specie. 121 00:10:54.860 --> 00:10:59.500 In addition, it purchased millions of dollars of specie from abroad. 122 00:10:59.500 --> 00:11:03.960 These heroic actions, along with the ouster of Bank President William Jones, managed to 123 00:11:03.960 --> 00:11:08.580 save the Bank of the United States, but the massive contraction of money and credit swiftly 124 00:11:08.580 --> 00:11:14.180 brought the United States its first widespread economic and financial depression. 125 00:11:14.180 --> 00:11:19.720 The first nationwide quote boom-bust cycle had arrived in the United States, impelled 126 00:11:19.720 --> 00:11:37.480 Contraction of money and credit by the Bank of the United States was almost unbelievable. 127 00:11:37.480 --> 00:11:44.800 Total notes and deposits fall in from $21.9 million in June 1818 to $11.5 million only 128 00:11:44.800 --> 00:11:46.320 a year later. 129 00:11:46.320 --> 00:11:50.080 The money supply contributed by the Bank of the United States was thereby contracted by 130 00:11:50.080 --> 00:11:54.200 no less than 47.2% in one year. 131 00:11:54.200 --> 00:11:58.320 The number of incorporated banks at first remained the same and then fell rapidly from 132 00:11:58.320 --> 00:12:07.240 1819 to 1822, falling from 341 in mid-1819 to 267 three years later. 133 00:12:07.240 --> 00:12:13.240 Total notes and deposits of state banks fell from an estimated $72 million in mid-1818 134 00:12:13.240 --> 00:12:19.920 To $62.7 million a year later, a drop of 14% in one year. 135 00:12:19.920 --> 00:12:24.960 If we add in the fact that the U.S. Treasury contracted total Treasury notes from $8.81 136 00:12:24.960 --> 00:12:31.120 million to zero during this period, we get the following estimated total money supply. 137 00:12:31.120 --> 00:12:35.040 In 1818, $103.5 million. 138 00:12:35.040 --> 00:12:38.840 In 1819, $74.2 million. 139 00:12:38.840 --> 00:12:43.220 A contraction in one year, 28.3%. 140 00:12:43.220 --> 00:12:47.940 The result of the contraction was a massive rash of defaults, bankruptcies of businesses 141 00:12:47.940 --> 00:12:52.780 and manufacturers, and liquidation of unsound investments during the boom. 142 00:12:52.780 --> 00:12:56.980 There was a vast drop in real estate values and rents, and in the prices of freight rates 143 00:12:56.980 --> 00:12:58.220 and slaves. 144 00:12:58.220 --> 00:13:03.820 Public land sales dropped greatly as a result of the contraction, declining from $13.6 million 145 00:13:03.820 --> 00:13:08.860 in 1818 to $1.7 million in 1820. 146 00:13:08.860 --> 00:13:10.380 Prices in general plummeted. 147 00:13:10.380 --> 00:13:18.060 The index of export staples fell from 158 in November 1818 to 77 in June 1819, an annualized 148 00:13:18.060 --> 00:13:22.060 drop of 87.9% during those seven months. 149 00:13:22.060 --> 00:13:29.380 South Carolina export staples dropped from 160 to 96 from 1818 to 1819, and commodity 150 00:13:29.380 --> 00:13:35.820 prices in New Orleans dropped from 200 in 1818 to 119 two years later. 151 00:13:35.820 --> 00:13:41.180 Falling money incomes led to a precipitous drop in imports, which fell from $122 million 152 00:13:41.180 --> 00:13:45.340 in 1818 to $87 million the year later. 153 00:13:45.340 --> 00:13:51.500 Imports from Great Britain fell from $43 million in 1818 to $14 million in 1820. 154 00:13:51.500 --> 00:13:57.100 And cotton and woolen imports from Britain fell from over $14 million each in 1818 to 155 00:13:57.100 --> 00:14:00.740 about $5 million each in 1820. 156 00:14:00.740 --> 00:14:05.340 The Great Fall in prices aggravated the burden of money debts, reinforced by the contraction 157 00:14:05.340 --> 00:14:14.340 Bankruptcies abounded, and one observer estimated that $100 million of mercantile debts to Europe were liquidated by bankruptcy during the crisis. 158 00:14:14.340 --> 00:14:24.340 Western areas, shorn of money by the collapse of the previously swollen paper and debt, often returned to barter conditions, and grain and whiskey were used as media of exchange. 159 00:14:24.340 --> 00:14:29.380 Exchange, in the dramatic summing up of the hard-money economist and historian William 160 00:14:29.380 --> 00:14:35.780 Gudge by its precipitous and dramatic contraction, quote, the bank was saved and the people were 161 00:14:35.780 --> 00:14:36.280 ruined.