1836: The Death Of Our 2nd Central Bank
"In half an hour, I can remove all the constitutional scruples in the District of Columbia." - Nicholas Biddle, President, Second Bank of the United States (1822-1836)
The Second Bank of the United States (one of America's earlier experiences with central banking) was created in 1816, just in time to exacerbate the Panic of 1819, before succumbing to an untimely death in 1836 at the hands of President Andrew Jackson (1829-1837), who doubtless has Ron Paul's admiration for the deed. "The Bank is trying to kill me", Jackson declared, "but I shall kill it!" Rare for his species, the words were not mere campaign rhetoric; he meant what he said.
On September 22, 1832, Jackson ordered the public deposits at the Bank to be removed and dispersed amongst a group of 91 different state banks. When the bill re-chartering the Bank was passed by Congress in 1832, Jackson vetoed the measure, making it known that he intended to terminate the entire institution. The presidential election of 1832 (which pitted Jackson against the arch-mercantilist and Bank supporter Henry Clay) was heavily influenced by the question of the Bank's re-chartering. Jackson crushed Clay, winning 288 of 337 electoral votes.
In the lead up to the presidential elections the Bank, under its president Nicholas Biddle, wasn't lying on its laurels, either, and fought back ferociously. While Biddle was once quoted, "I am far from thinking that the government should have any direct or indirect influence over the Bank", he didn't really mean it nor could he have as a central bank, birthed and sustained from within a legislative chamber, is political by its very nature.
A major presence in the capital's orbit, within Congress the Bank could count on many members who were indebted to it, attorneys for it, or stockholders in it. More blatant bribery was used in an attempt to sway the others. (One of the bribed was the famous Daniel Webster, who received monthly payments from Biddle for his support.) Surprisingly, (or maybe not, if I took a moment to follow the money) the "banking industry" of the time, all the state-chartered banks, was overwhelmingly supportive of the central bank. Jackson took on a formidable opponent.
An energetic bunny, Biddle ranged far and wide beyond the muck of D.C. and, looking to influence the election in favor of Henry Clay, not only provided financial support to his presidential campaign, but also paid journalists to write pro-bank articles and paid their editors to publish them. "He only asked that his role in the campaign be concealed", lest people think he was looking to influence politics - the Bank being independent and all.
Being well aware that in America it's always "the economy, stupid", Biddle in 1832 arranged for rapid contraction of the Bank's loans (particularly in the West, where support for Jackson was strongest) as "a warning to the enemies of the Bank to keep hands off". Jackson charged the Bank was doing so merely to "make itself appear necessary to the community". Biddle's deliberate attempt to provoke economic pain resulted in but a minor recession, as heavy inflows of precious metals from Mexico (and a drop in exports of specie to China) countered his efforts at deflation. In this instance, the use of specie rather than paper as money proved the more inflationary route, and who says God doesn't laugh?
In the end, all of Biddle's efforts came up short. For the second (and last) time in our nation's history, the idea of a central bank had lost popular support in America. Jackson's crushing victory over the pro-Bank Clay and (in December of 1832) the House voting that the Bank should not be given back the deposits removed by Jackson announced that the Bank's time as a politically backed institution were numbered. Crippled, the Bank wheezed on a few more sickly years, but come 1836 her charter expired and she breathed her last as a central bank. Shorn of her federal cape, she was now just a bank.
America's second go at central banking was buried without ceremony, just in time for the Panic of 1837 to come slamming into the American economy. Much like a soldier's nightmare of being caught in a firefight without his rifle, a modern day Keynesian, which is to say a modern day American, would be horrified at the thought of meeting a depression without any centralized ability to manipulate the money supply. Our forebears of 1837 had no such fear. They were far more the hardheaded realists than we, and simply allowed the deflation to adjust prices, and the economy, back to reality. Sometimes, reality bites. They did not believe a central bank could muzzle it. We do.
When debating the merits of having a central bank, it is important to go beyond the mere dollars and cents of this issue and keep in mind the words of Professor H.W. Brands on the second central bank. "The Bank wasn't only a bank. It was the arbiter of the nation's money supply, the bestower or withholder of prosperity." (Emphasis his.) Andrew Jackson also was kind enough to provide a relevant warning about granting political protection to a bank. "It is easy to conceive that great evil to our country and its institutions might flow from such a concentration of power".
This alone - argued Andrew Jackson and his many allies then and argues Ron Paul and his few allies now - is reason enough against having any central bank whatsoever. Taking into consideration human nature, it's hard to argue their point. The demise of America's second central bank (and Biddle's actions in its defense) warns that concentrated power is a dangerous thing and, even worse, incredibly addictive to those who hold it.
Until the birth of our third (and current) central bank in 1913, with the end of Biddle and his Bank no longer would one single bank's decisions have such a preponderant weight in the determination of the health or disease of our nation's money and economy - now foolish notions, greed, and hubris would have to be general among the entire community for economic disaster to strike. As to that, our great nation's history gives a sad verdict - at all times the American mind has been found with more than sufficient foolish notions, greed, and hubris to do the trick: central bank or no, paper money or no. Being flawed creatures, there is no perfect system available to man in any sphere of life. We can merely choose for better or for worse from what's available, and in 1836, and for 77 years to follow, America chose to do without a central bank.
After losing its Federal charter, no longer supported by political means, the Second Bank of the United States would henceforth have to survive solely on its ability, integrity, and prudence. Re-chartered under Pennsylvania law (it being granted after liberal use of bribes to the politicians of that state) the bank survived barely five years before collapsing in a mixture of scandal and heavy debts to Europe. By 1841, it being found far too over-leveraged, the bank expired for good.
But no need to feel badly for Biddle. 180 years after Andrew Jackson's triumph, doubtless it's Biddle, not Jackson, who'd be far more pleased with our current monetary system.