The Jacksonian Movement and the Bank War
Out of the bitter experiences of the Panic of 1819 emerged the beginnings of the Jacksonian Movement, dedicated to hard money, the eradication of fractional reserve banking in general, and of the Bank of the United States in particular.
Andrew Jackson himself, Senator Thomas Hart, quote, Old Bullion Benton of Missouri, future
President James K. Polk of Tennessee, and Jacksonian economists Amos Kendall of Kentucky
and Condi Rigo of Philadelphia, were all converted to hard money and 100% reserve banking by
the experience of the Panic of 1819.
The Jacksonians adopted, or in some cases pioneered in, the currency school analysis,
which pin the blame for boom-bust cycles on inflationary expansions followed by contractions
of bank credit.
Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians
were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School.
Indeed, no movement in American politics has been as flagrantly misunderstood by historians
as the Jacksonians.
They were emphatically not, as historians until recently have depicted, either quote
The Jacksonians were libertarians, plain and simple.
Their program and ideology were libertarian.
They strongly favored free enterprise and free markets, but they just as strongly opposed
Special Subsidies and Monopoly Privileges Conveyed by Government to Business or to Any Other
Group
They favored absolutely minimal government, certainly at the federal level, but also at
the state level.
They believed that government should be confined to upholding the rights of private property.
In the monetary sphere, this meant the separation of government from the banking system and
a shift from inflationary paper money and fractional reserve banking to pure specie
and banks confined to 100% reserves.
In order to put this program into effect, however, the Jacksonians faced the grueling
task of creating a new party out of what had become a one-party system after the War of
1812, in which the Democrat Republicans had ended up adopting the Federalist program,
including the reestablishment of the Bank of the United States.
The new party, the Democratic Party, was largely forged in the mid-1820s by New York political
leader Martin Van Buren, newly converted by the aging Thomas Jefferson to the laissez-faire
cause.
Van Buren cemented an alliance with Thomas Hart Benton of Missouri and the old Republicans of Virginia, but he needed a charismatic leader to take the presidency away from Adams and what was becoming known as the National Republican Party.
He found that leader in Andrew Jackson, who was elected president under the new Democratic banner in 1828.
The Jacksonians eventually managed to put into effect various parts of their free market and minimal government economic program, including a drastic lowering of tariffs
And for the first and probably the last time in American history, paying off the federal debt.
But their major concentration was on the issue of money and banking.
Here they had a coherent program, which they proceeded to install in rapidly succeeding stages.
The first important step was to abolish central banking, in the Jacksonian view, the major inflationary culprit.
The object was not to eliminate the Bank of the United States in order to free the state banks for inflationary expansion,
The Bank of the United States Charter was up for renewal in 1836, but Jackson denounced
the bank in his first annual message in 1829.
The imperious Nicholas Biddle, head of the second bank, decided to precipitate a showdown
with Jackson before his reelection effort, so Biddle filed for renewal early in 1831.
The host of national Republicans and non-Jacksonian Democrats proceeded to pass the Recharta bill,
but Jackson, in a dramatic message, vetoed the bill and Congress failed to pass it over
as veto.
Triumphantly re-elected on the bank issue in 1832, President Jackson lost no time in
disestablishing the Bank of the United States as a central bank.
The critical action came in 1833 when Jackson removed the public treasury deposits from
the Bank of the United States and placed them in a number of state banks, soon labeled as
The original number of pet banks was seven, but the Jacksonians were not interested in
creating a privileged bank oligarchy to replace the previous monopoly, so the number of pet
banks had increased to 91 by the end of 1836.
In that year, Biddle managed to secure a Pennsylvania charter for his bank, and the New United States
Bank of Pennsylvania functioned as a much-reduced but still influential state bank for a few
years thereafter.
Orthodox historians have long maintained that by his reckless act of destroying the Bank
of the United States and shifting government funds to the numerous pet banks, Andrew Jackson
freed the state banks from the restraints imposed on them by a central bank.
Thus, the banks were supposedly allowed to pyramid notes and deposits rashly on top of
existing species and precipitate a wild inflation that was later succeeded by two bank panics
and a disastrous deflation.
Recent historians, however, have totally reversed this conventional picture.
In the first place, the record of bank inflation under the regime of the Bank of the United
States was scarcely ideal.
From the depths of the post-1819 depression in January 1820 to January 1823, under the
regime of the conservative Langdon Chivas, the Bank of the United States increased its
notes and deposits at an annual rate of 5.9%.
The nation's total money supply remained about the same in that period.
Under the far more inflationist regime of Nicholas Biddle, however, the Bank of the
The United States notes and deposits rose after January 1823 from $12 million to $42.1 million,
an annual increase of 27.9%.
As a consequence of this base of the banking pyramid inflating so sharply, the total money
supply during this period vaulted from $81 million to $155 million, an annual increase
of 10.2%.
It is clear that the driving force for monetary expansion was the Bank of the United States,
which acted as an inflationary rather than a restraining force upon the state banks.
Looking at the figures another way, the 1823 data represented a pyramid ratio of money
liabilities to specie of 3.86 to 1 on the part of the Bank of the United States and
4 to 1 of the banking system as a whole, or respective reserve ratios of 0.26 and 0.25.
By 1832, in contrast, the Bank of the United States reserve ratio had fallen to 0.17 and
and the country as a whole to 0.15.
Both sets of institutions had inflated almost precisely proportionately on top of specie.
The fact that wholesale prices remained about the same over this period is no indication
that the monetary inflation was not improper and dangerous.
As Austrian business cycle theory has pointed out, any bank credit inflation sets up conditions
for boom and bust.
There is no need for prices actually to rise.
The reason that prices did not rise was that the increased production of goods and services
suffice to offset the monetary expansion during this period.
But similar conditions of the 1920s precipitated the great crash of 1929, an event that shocked
most economists who had adopted the proto-monetarist position of Irving Fisher and other economists
of the day that a stable wholesale price level cannot, by definition, be inflationary.
In reality, the unhampered free market economy will usually increase the supply of goods
and services and thereby bring about a gently falling price level, as happened in most of
the 19th century, except during wartime.
What then of the consequences of Jackson's removal of the deposits?
What of the fact that wholesale prices rose from 84 in April 1834 to 131 in February 1837,
a remarkable increase of 52% in a little less than three years?
Wasn't that boom due to the abolition of central banking?
An excellent reversal of the orthodox explanation of the boom of the 1830s, and indeed of the
ensuing panic, has been provided by Professor Temin.
First, he points out that the price inflation really began earlier, when wholesale prices
reached a trough of 82 in July 1830 and then rose by 20.7% in three years to reach 99 in
the fall of 1833.
The reason for the price rise is simple.
The total money supply had risen from $109 million in 1830 to $159 million in 1833, an
increase of 45.9% or an annual rise of 15.3%.
Breaking the figures down further, the total money supply had risen from $109 million in
1830 to $155 million a year and a half later, a spectacular expansion of 35%.
Unquestionably, this monetary expansion was spurred by the still-flourishing Bank of the
United States, which increased its notes and deposits from January 1830 to January 1832
from a total of $29 million to $42.1 million, a rise of 45.2%.
Thus, the price and money inflation in the first few years of the 1830s were again sparked
by the expansion of the still-dominant central bank.
But what of the notable inflation after 1833?
There is no doubt that the cause of the price inflation was the remarkable monetary inflation
during the same period, for the total money supply rose from $150 million at the beginning
of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84% or 21% per
annum.
But as Temin points out, this monetary inflation was not caused by the liberated state banks
expanding to a fairly well.
If it were true that the state banks used their freedom and their new federal government deposits
to pyramid wildly on top of specie, then their pyramid ratio would have risen a great deal,
or conversely, their reserve ratio of specie to notes and deposits would have fallen sharply.
Yet the bank's reserve ratio was 0.16 at the beginning of 1837.
During the intervening years, the reserve ratio was never below this figure.
But this means that the state banks did no more pyramiding after the demise of the Bank
Bank of the United States as a central bank than they had done before.
Conventional historians, believing that the Bank of the United States must have restrained
the expansion of state banks, naturally assumed that they were hostile to the central bank.
But now, Gene Wilburn has discovered that the state banks overwhelmingly supported the Bank
of the United States, quote, We have found that Nicholas Biddle was correct when he said
state banks in the main are friendly, specifically only in Georgia, Connecticut and New York
Bank was their positive evidence of hostility. A majority of state banks in some states of
the South, such as North Carolina and Alabama, gave strong support to the bank, as did both
the Southwest states of Louisiana and Mississippi. Since Virginia gave some support, we can claim
that state banks in the South and Southwest for the most part supported the bank. New
England, contrary to expectations, showed the banks of Vermont and New Hampshire behind
the bank, but support of Massachusetts was both qualitatively and quantitatively weak.
The banks of the middle states all supported the second bank except for those of New York."
What then was the cause of the enormous monetary expansion of the 1830s?
It was a tremendous and unusual expansion of the stockpile of specie in the nation's
banks.
The supply of specie in the country had remained virtually constant at about $32 million from
the beginning of 1823 until the beginning of 1833.
But the proportion of specie to banknotes held by the public as money dropped during
in this period from 23% to 5% so that more species flowed from the public into the banks
to fuel the relatively moderate monetary expansion of the 1820s.
But starting at the beginning of 1833, the total species in the country rose swiftly
from $31 million to $73 million at the beginning of 1837 for a rise of 141.9% or 35.5% per
annum.
Hence, even though increasing distrust of banks led the public to withdraw some specie
from them, so that the public now held 13% of its money in specie instead of 5%, the
banks were able to increase their notes and deposits at precisely the same rate as the
expansion of specie flowing into their coffers.
Thus, the Jackson administration is absolved from blame for the 1833 to 1837 inflation.
In a sense, the state banks are as well, certainly, they scarcely acted as if being, quote, freed
by the Demise of the Bank of the United States. Instead, they simply increase their money
issues proportionately with a huge increase of specie. Of course, the basic fractional
reserve banking system is scarcely absolved from responsibility, since otherwise the monetary
expansion in absolute terms would not have been as great.
The enormous increase in specie was the result of two factors. First and foremost, a large
influx of silver coin from Mexico, and second, the sharp cut in the usual export of silver
The latter was due to the substantial increases in China's purchase of opium instead of
silver from abroad.
The influx of silver was the result of paper money inflation by the Mexican government,
which drove Mexican silver coins into the United States, where they circulated as legal
tender.
The influx of Mexican coin has been attributed to a possible increase in the productivity
of the Mexican mines, but this makes little sense since the inflow stopped permanently
as soon as 1837.
The actual cause was an inflation of the Mexican currency by the Santa Ana regime, which financed
its deficits during this period by minting highly debased copper coins.
Since the debased copper grossly overvalued copper and undervalued gold and silver, both
the latter metals proceeded to flow rapidly out of Mexico until they virtually disappeared.
Silver, of course, and not gold was flowing into the United States during this period.
Indeed, the Mexican government was forced to rescind its actions in 1837 by shifting
A bank credit inflation, the magnitude of that of the 1830s, is bound to run into shoals
that cause the bank to stop the expansion and begin to contract.
As the banks expand and prices rise, specie is bound to flow out of the country and into
the hands of the domestic public, and the pressure on the banks to redeem in specie
will intensify, forcing cessation of the boom and even monetary contraction.
In a sense, the immediate precipitating cause is of minor importance.
Even so, the Jackson administration has been unfairly blamed for precipitating the Panic
of 1837 by issuing the Species Circular in 1836.
In 1836, the Jackson administration decided to stop the enormous speculation in western
public lands that had been fueled during the past two years by the inflation of bank credit.
Hence, Jackson decreed that public land payments would have to be made in Specie.
This had the healthy effect of stopping public land speculation, but recent studies have
shown that the specie circular had very little impact in putting pressure on the banks to
pay specie.
From the point of view of the Jackson program, however, it was as important as moving toward
putting the U.S. government finances on a purely specie basis.
Another measure advancing the Jacksonian program was also taken in 1836.
Jackson, embarrassed at the government having amassed a huge budget surplus during his eight
Years in Office, ordered the Treasury to distribute the surplus proportionally to the states.
The distribution was made in notes, presumably payable in specie.
But again, Temin has shown that the distribution had little impact on movements of specie between
banks and therefore in exerting contractionist pressure upon them.
What then was the precipitating factor in triggering the panic of 1837?
Temin plausibly argues that the Bank of England, worried about inflation in Britain and the
and the consequent outflow of gold tighten the money supply and raise interest rates
in the latter half of 1836.
As a result, credit contraction severely restricted the American cotton export trade in London.
Exports declined, cotton prices fell, capital flowed into England and contractionist pressure
was put upon American trade and the American banks.
Banks throughout the United States, including the Bank of the United States, promptly suspended
Specie Payments in May 1837, their notes depreciated at varying rates and interregional
trade within the country was crippled.
While banks were able to evade specie payments and continue operations, they were still obliged
to contract credit in order to go back on specie eventually, since they could not hope
to be creating fiat money indefinitely and be allowed to remain in business.
Finally, the New York banks were compelled by law to resume paying their contractual
Obligations, and the other banks followed in the fall of 1838.
During the year 1837, the money supply fell from $276 million to $232 million, a large
drop of 15.6% in one year.
Total species in the country continued to increase in 1837, up to $88 million, but growing
public distrust of the banks, reflected in an increase in the proportion of money held
The Bank's reserve ratio rose from 0.16 to 0.2.
In response to the monetary contraction, wholesale prices fell precipitately by over 30 percent
in seven months, declining from 131 in February 1837 to 98 in September of that year.
In 1838, the economy revived.
Britain resumed easy credit that year.
When prices rose and a short-lived boomlet began, public confidence in the banks unwisely
returned as they resumed specie payment, and as a result, the money supply rose slightly
during the year and prices rose by 25%, increasing from 98 in September 1837 to 125 in February
1839.
Leading the boom of 1838 were state governments, who, finding themselves with the unexpected
windfall of a distributed surplus from the federal government, proceeded to spend the
the money wildly and borrow even more extravagantly on public works and other uneconomic reforms
of quote, investment.
But the state governments engaged in rashly optimistic plans that their public works would
be financed heavily from Britain and other countries and the cotton boom on which these
hopes depended collapsed again in 1839.
The states had to abandon their projects en masse, cotton prices declined and severe contractionist
pressure was put on trade.
Furthermore, the Philadelphia-based Bank of the United States had invested heavily in
cotton speculation, and the falling price of cotton forced the Bank of the United States,
once again, to suspend payments in October 1839.
This touched off a wave of general bank suspensions in the South and West, but this time the banks
of New York and New England continued to redeem their obligations in specie.
Finally, the Bank of the United States, having for the last time played a leading role in
and generating a recession and monetary crisis was forced to close its doors two years later.
With the crisis of 1839, there ensued four years of massive monetary and price deflation.
Unsound banks were finally eliminated.
Unsound investments generated in the boom were liquidated.
The number of banks during these four years fell by 23%.
The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843.
A seemingly cataclysmic drop of 34% or 8.5% per annum. Prices fell even further, from $125 in February 1839 to $67 in March 1843, a tremendous drop of 42% or 10.5% per year.
During the boom, as we have indicated, state governments went heavily into debt, issuing bonds to pay for wasteful public works.
In 1820, the total indebtedness of American states was a modest $12.8 million.
By 1830, it rose to $26.5 million.
But then it started to escalate, reaching $66.5 million in 1835 and skyrocketing to
$170 million in 1839.
The collapse of money, credit banking and prices after 1839 brought these state debts
into jeopardy.
At this point, the Whigs, taking a leaf from their forebears, the Federalists, agitated
for the federal government to bail out the states and assume their debts.
After the crisis of 1839 arrived, some of the southern and western states were clearly
in danger of default, their plight made worse by the fact that the bulk of the debt was
held by British and Dutch capitalists and that specie would have to be sent abroad to
meet the heavy interest payments.
The Whigs pressed further for federal assumption of the debt, with the federal government to
The American people, however, spurned federal aid, including even the citizens of the states
in difficulty, and the advent of the Polk administration ended any prospects for federal
assumption.
The British noted in wonder that the average American was far more concerned about his
Demonstrating an astute perception of the reckless course the states had taken, the
typical American response to the problem, quote, suppose foreign capitalists did not
lend any more to the states, end quote, was the sharp retort, quote, well, who cares if
they don't?
Now as a community heals overhead in debt and can scarcely pay the interest."
The implication was that the disappearance of foreign credit to the states would have
the healthy effect of cutting off their wasteful spending as well as avoiding the imposition
of a crippling tax burden to pay for the interest in principle.
There was in this response an awareness by the public that they and their government
were separate and sometimes even hostile entities rather than one in the same organism.
By 1847, four western and southern states, Mississippi, Arkansas, Michigan and Florida,
had repudiated all or part of their debts.
Six other states, Maryland, Illinois, Indiana, Louisiana, Arkansas and Pennsylvania, had
defaulted from three to six years before resuming payment.
It is evident then that the 1839 to 1843 contraction was helpful for the economy in liquidating
and unsound investments, debts and banks, including the pernicious bank of the United
States.
But didn't the massive deflation have catastrophic effects on production, trade, and employment
as we have been led to believe?
In a fascinating analysis and comparison with the deflation of 1929 to 1933 a century later,
Professor Temin shows that the percentage of deflation over the comparable four years
In 1929 to 1933, real gross investment fell catastrophically by 91%, real consumption
by 19% and real GNP by 30%.
In 1839 to 1843, investment fell by 23% but real consumption increased by 21% and real
GNP by 16%.
The interesting problem is to account for the enormous fall in production and consumption
in the 1930s as contrasted to the rise in production and consumption in the 1840s.
It seems that only the initial months of the contraction worked a hardship on the American
in Public, and that most of the earlier deflation was a period of economic growth.
Salmon properly suggests that the reason can be found in the downward flexibility of prices
in the 19th century, so that the massive monetary contraction would lower prices but not particularly
cripple the world of real production or standards of living.
In contrast, in the 1930s, government placed massive roadblocks on the downward fall of
prices and wage rates and hence brought about severe and continuing depression of production
and Living Standards.
The Jacksonians had no intention of leaving a permanent system of pet banks and so after
the retirement of Jackson, his successor, Martin Van Buren, fought to establish the
independent treasury system in which the federal government conferred no special privilege
or inflationary prop on any bank.
Instead of a central bank or pet banks, the government was to keep its funds purely in
specie in its own treasury vaults or its quote, sub-treasury branches and simply take in
Banking and Spend Funds from there.
Van Buren finally managed to establish the independent treasury system, which would last
until the Civil War.
At long last, the Jacksonians had achieved their dream of severing the federal government
totally from the banking system and placing its finances on a purely hard money, specie
basis.