History 103: US History I

In this lesson, we will discuss President Andrew Jackson's economic policies, including his determination to close the Bank of the United States and the financial panic of 1837.

Growing Power of the Bank

Although the Supreme Court case of McCulloch v. Madison had established the legality of the Bank of the United States, the bank itself came under close scrutiny in the early years of Andrew Jackson's first administration.

For its part, the bank felt it provided a service to the American people and the young nation as a whole. Led by Nicholas Biddle, the bank served as a rudimentary central bank of the United States. Privately owned to be sure, but due to its size and wealth, it could effectively regulate the availability of credit throughout the nation by controlling the lending policies of state and other small banks. At the same time, banks issued paper notes, and their only concern was if the owner of these notes wished to cash them in, so to speak, and retrieve hard currency. For you see in those days, money was directly convertible into gold or silver, so the bank had to have enough of both on hand to handle customer demands. Since most of the paper notes eventually made their way to the Bank of the United States, the bank could effectively pressure smaller banks to keep their lending policies in check.

Biddle's bank oversight served to reign in excessive borrowing and lending policies - policies that were all too common in Jacksonian America when the economy was booming and speculation was the rule of the day. People were looking for quick investments, quick cash and quick returns, and for much of Jackson's years in office, they were succeeding. But the Bank of the United States had enemies on many fronts. There were those who distrusted paper currency on the whole, no matter which bank was issuing it, feeling anything other than gold and silver (known as hard currency) was a disaster waiting to happen. And some local bankers felt Biddle was too restrictive on their own lending policies, hurting their business. New York bankers also did not like or trust a Philadelphia-based bank and felt it unfair that New York City did not have the nation's central bank in its own city limits. They would ask themselves, 'Why turn over such immense profits to Biddle?' Finally, there were those who simply distrusted the monopoly the bank had. One institution having so much power, invested in the hands of one individual, just seemed like too much.

Testing Jackson's Resolve

The situation would come to a head during the election of 1832. Jackson, still very popular among the constituencies that had elected him in 1828, faced his old foe Henry Clay in the general election. Clay rallied anti-Jackson forces and won the favor of Biddle and the Bank of the United States. Both realized they needed each other in order to defeat Jackson. Jackson also realized that the bank and its new allies were seeking to cast him out of office. A showdown was inevitable. Clay and his allies believed that the bank was too important to the United States and that voters would realize this too. What is more, Congress would seek to force Jackson to sign the bank's bill of re-charter in the months prior to the election - a move that was unnecessary since the first charter did not expire until 1836. Unnecessary, but it was politically expedient. Should Jackson fail to sign the bill, Clay and his allies believed it would clearly show how out of touch Jackson was to the interests of the country and to the realities of finance.

Congress passed the re-charter bill in July of 1832, and the country waited breathlessly to see what Jackson would do. Would he sign the bill and then argue against the bank's future, or would he veto it and risk it becoming a campaign issue to be used against him? Not one to shy away from a fight, Jackson promptly vetoed it. His reasons for vetoing the bank's charter were simple: it was dangerous. It was a private monopoly. And in his view, that made a few rich and powerful people more rich and more powerful. Furthermore, many of the stockholders were foreigners (gasp!), and any bank of the U.S. should be a 100% purely American bank. It turned out that Jackson's veto was a popular move, and Jackson coasted to reelection. After his election, it became his singular purpose to do away with the bank before its charter expired in 1836. He promptly ordered the withdrawing of all U.S. deposits from the bank. Attempts by Biddle to fight back by restricting lending and pressuring Jackson to ease up failed, and in the end, he gave in. By 1841, the Bank of the United States was liquidated and no more.

Panic of 1837

The war over the bank did have consequences, including the financial panic of 1837. The panic had many causes, and like most financial crises, was the result of a complicated series of events. First and foremost, 'killing' the Bank of the United States meant that there was a vacuum to be filled by state banks and other private banks. New banks rapidly sprang up, offering money to finance American expansion on every front. Banks wildly speculated on American growth, hoping for quick and large returns on projects.

With so much money floating around, inflation skyrocketed. The government noticed and ordered that all government lands had to be bought with gold or silver, but the hard currency never came. Banks called in their loans; many couldn't pay. Property went into foreclosure, prices collapsed, businesses shuttered, individuals went bankrupt and panic set in. By 1837, thousands were financially ruined, with an estimated 343 out of 850 banks forced to cease operations. From the shopkeeper to the farmer to the banker, many were left with nothing. In a time when there was no social welfare safety net, it was disastrous. It would take years before the American economy would recover.

Lesson Summary

The battle over the Bank of the United States was just one of many chapters in the colorful and vibrant political struggles of the administration of Andrew Jackson and would leave a lasting legacy on America's financial future.