The Second Bank of the United States, 1816-1833
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.
With banks freed from redeeming their obligations in specie, the number of incorporated banks increased during 1816, from 212 to 232.
Clearly, the nation could not continue indefinitely with the issue of fiat money in the hands
of discordant sets of individual banks.
It was apparent that there were two ways out of the problem.
One was the hard money path, which was advocated by the old Republicans and, for their own
purposes, the Federalists.
The Federal and State governments would have sternly compelled the Rolican banks to redeem
promptly in specie and, when most of the banks outside of New England could not, to force
them to liquidate.
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.
The inflationary experience would have been over.
Instead, the Democratic-Republican establishment in 1816 turned to the old Federalist path, a new central bank, the Second Bank of the United States.
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.
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.
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.
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.
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.
Bank and the state banks agreed to mutually support each other in any emergency, which
of course meant in practice that the far stronger Bank of the United States was committed to
the propping up of the weaker state banks.
The second Bank of the United States was pushed through Congress by the Madison administration
and particularly by Secretary of the Treasury Alexander J. Dallas, whose appointment was
lobbied for, 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.
Toward the end of its term, Girard was the largest stockholder of the first bank of the
United States, and during the War of 1812, Girard became a very heavy investor in the
war debt of the federal government.
Both as a prospective large stockholder and as a way to unload his public debt, Girard
began to agitate for a new bank of the United States.
Dallas' appointment as Secretary of Treasury in 1814 was successfully engineered by Dallas
and his close friend, wealthy New York merchant and fur trader John Jacob Astor, also a heavy
investor in war debt.
When the second bank of the United States was established, Stephen Girard purchased
$3 million of the $28 million that remained unsubscribed, and he and Dallas managed to
secure for the post of President of the new bank their good friend William Jones, former
Philadelphia merchant.
Much of the opposition to the founding of the Bank of the United States seems keenly prophetic.
Thus, Senator William H. Wells, Federalist from Delaware, in arguing against the bank
bill, said that it was, quote,
Ostensibly for the purpose of correcting the diseased state of our paper currency by restraining
and curtailing the over-issue of bank paper, and yet it came prepared to inflict upon us
the same evil, being itself nothing more than simply a paper-making machine, end quote.
In fact, the result of the deal with the state banks was that their resumption of specie payments
after 1817 was more nominal than real, thereby setting the stage for the widespread suspension
of the 1819 to 1821 depression.
As Bray Hammond writes,
Specie payments were resumed with substantial shortcomings.
Apparently the situation was better than it had been and a pretense was maintained for
its being better than it was.
But redemption was not certain and universal.
There was still a premium on specie and still a discount on banknotes, with considerable
variation in both from place to place.
Three years later, February 1820, Secretary of the Treasury Crawford reported to Congress
that during the greater part of the time that had elapsed since the resumption of specie
payments, the convertibility of banknotes into specie had been nominal rather than real
in the largest portion of the Union.
One problem is that the Bank of the United States lacked the courage to insist on payment
of its notes from the state banks.
As a result, state banks had large balances piled up against them at the Bank of the United
States, totaling over $2.4 million during 1817 and 1818, remaining on the books as virtual
interest-free loans.
As Cotterill points out, quote,
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.
When the Bank of the United States did try to collect on state banknotes in specie, Bank
President Jones reported,
The banks, our debtors, plead inability, require unreasonable indulgence, or treat our reiterated
claims and expostulations with settled indifference.
From its inception, the second bank launched a spectacular inflation of money and credit.
Lacks about insisting on the required payment of its capital in specie, the bank failed
to raise the $7 million legally supposed to have been subscribed in specie.
Instead, during 1817 and 1818, its specie held never rose above $2.5 million.
At the peak of its initial expansion, in July 1818, the Bank of the United States specie
totaled $2.36 million and its aggregate notes and deposits totaled $21.8 million. Thus,
in a scant year and a half of operation, the Second Bank of the United States had added
a net of $19.2 million to the nation's money supply for a pyramid ratio of 9.24 or a reserve
ratio of 0.11. Outright fraud abounded at the Second Bank of the United States, especially
It is no accident that three-fifths of all of the bank's loans were made at these two
branches.
Also, the bank's attempt to provide a uniform currency throughout the nation floundered
on the fact that the Western and Southern branches could inflate credit in banknotes
and that the inflated notes would wend their way to 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
could continue to inflate unchecked.
The expansionary operations of the Second Bank of the United States, coupled with its
laxity toward insisting on specie payment by the state banks, impelled a further inflationary
expansion of state banks on top of the spectacular enlargement of the central bank.
Thus, the number of incorporated state banks rose from 232 in 1816 to 338 in 1818, contending
Kentucky alone charted 40 new banks in the 1817-1818 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% in two years.
Most of this increase was supplied by the Bank of the United States.
The huge expansion of money and credit impelled a full-scale inflationary boom throughout
the country.
Their prices had fallen in 1815 with the renewal of foreign trade after the war, but domestic
prices were another story.
Thus, the index of export staples in Charleston rose from 102 in 1815 to 160 in 1818.
The prices of Louisiana staples at New Orleans rose from 178 to 224 in the same period.
Other parts of the economy boomed.
Prices rose from $81 million in 1815 to a peak of $116 million in 1818.
Prices rose greatly in real estate, land, farm improvement projects and slaves, much
of it fueled by the use of bank credit for speculation in urban and rural real estate.
There was a boom in turnpike construction, furthered by vast federal expenditures on
turnpikes.
Freight rates rose on steamboats and shipbuildings shared in the general prosperity.
Also, general boom conditions expanded stock trading so rapidly that traders, who had been
buying and selling stocks on the curbs on Wall Street for nearly a century, found it
necessary to open the first indoor stock exchange in the country, the New York Stock Exchange,
in March 1817.
Also, investment banking began in the United States during this boom period.
Starting in July 1818, the government and the second bank began to see what dire straits
they were in.
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.
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.
In addition, it purchased millions of dollars of specie from abroad.
These heroic actions, along with the ouster of Bank President William Jones, managed to
save the Bank of the United States, but the massive contraction of money and credit swiftly
brought the United States its first widespread economic and financial depression.
The first nationwide quote boom-bust cycle had arrived in the United States, impelled
Contraction of money and credit by the Bank of the United States was almost unbelievable.
Total notes and deposits fall in from $21.9 million in June 1818 to $11.5 million only
a year later.
The money supply contributed by the Bank of the United States was thereby contracted by
no less than 47.2% in one year.
The number of incorporated banks at first remained the same and then fell rapidly from
1819 to 1822, falling 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% in one year.
If we add in the fact that the U.S. Treasury contracted total Treasury notes from $8.81
million to zero during this period, we get the following estimated total money supply.
In 1818, $103.5 million.
In 1819, $74.2 million.
A contraction in one year, 28.3%.
The result of the contraction was a massive rash of defaults, bankruptcies of businesses
and manufacturers, and liquidation of unsound investments during the boom.
There was a vast drop in real estate values and rents, and in the prices of freight rates
and slaves.
Public land sales dropped greatly as a result of the contraction, declining from $13.6 million
in 1818 to $1.7 million in 1820.
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% during those seven months.
South Carolina export staples dropped from 160 to 96 from 1818 to 1819, and commodity
prices in New Orleans dropped from 200 in 1818 to 119 two years later.
Falling money incomes led to a precipitous drop in imports, which fell from $122 million
in 1818 to $87 million the year later.
Imports from Great Britain fell from $43 million in 1818 to $14 million in 1820.
And cotton and woolen imports from Britain fell from over $14 million each in 1818 to
about $5 million each in 1820.
The Great Fall in prices aggravated the burden of money debts, reinforced by the contraction
Bankruptcies abounded, and one observer estimated that $100 million of mercantile debts to Europe were liquidated by bankruptcy during the crisis.
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.
Exchange, in the dramatic summing up of the hard-money economist and historian William
Gudge by its precipitous and dramatic contraction, quote, the bank was saved and the people were
ruined.