Sunday, March 31, 2019

Jackson and His Bank War

Andrew Jackson (1767-1845), 7th President of the United States, was an implacable foe of the 2nd Bank of the United States, chartered in 1816. He would veto the re-charter of the Bank in 1832. Federal deposits would be removed by 1833. Jackson won the War on the Bank, and is charged with precipitating a sharp economic downturn in the Panic of 1837. There are conflicting narratives gauging the positive and negative effects of the destruction of the bank; the standard one reports an upsurge in unregulated banking, then a sharp downturn in 1837.

Despite any previous attempts to make Jackson into a pre-New Deal Democrat, the truth is far closer to a Libertarian or a pre-Laissez-faire ally who opposed government intervention and the debt that accompanies it. He advocated no subsidies (bounties) to native business or protective tariffs as did Hamilton, the first Treasury Secretary, nor a central bank regulating currency and banking. Incidentally, part of Jackson’s program was to pay off all Federal Debt, which accomplished as well on January 1, 1835.

He did masterfully summon popular sentiment into electoral success by demonizing the 2nd Bank of the U.S. The bank was seen as a repository of privilege for the wealthy, exercising undue influence on Congress and granting sweetheart loans to its cronies. And that characterization was largely true; the President of the Bank, Nicholas Dibble, attempted to exercise political influence (something that is done massively today but then again has been carried out through history of legislatures: it’s called buying votes). It must be noted that the 2nd U.S. Bank had about 25 branches all east of the Mississippi, so it was felt is had extensive influence across the nation.

Jackson’s Populist charge against the wealthy privilege of the Bank resonates most with modern day Liberals. Otherwise Jackson is devoid of any resemblance to New Deal advocacy of large scale governmental guidance of the economy and measures to address perceived income inequalities.

Beyond this negative characterization of the Bank, New York financial interests were opposed to the Philadelphia sited bank. Its demise would further New York as the financial center of the bank. Jackson’s Kitchen Cabinet of informal advisers had more than one banker and industrialist, especially Amos Kendall, the future investor in the revolutionary technology of instant communication, telegraph. Credit expansion was highly appealing to them. The U.S. Bank countered private banks by calling them to redeem their bank notes. That policy reduced the amount of specie that Southern and Western banks could expand credit on. Absent the U.S. Bank, fractional reserve banking could proceed with fewer restraints.

Once Federal deposits were removed from the bank, the Jackson circle had their “Pet” banks that the Federal deposits were transferred to. Private state banks had less supervision in creating bank notes and an untoward expansion of the money supply took place. (See below for a counter narrative to this synopsis.) This inevitably leads to a Crash as the state private banks overextended themselves. Out of 850 banks in the country 343 closed and 62 partially failed. This is the risk of fractional reserve banking. Once confidence is lost then there are runs on all the banks, even healthy ones. It becomes a musical chair of money. Somebody will find themselves without a deposit to withdraw. In addition bank will call in loans for repayment, trying to obtain funds to pay the depositors. A real “It’s a Wonderful Life” scenario.

Permit an aside. Deposit insurance was to have solved that the problem of runs on the banks, but didn’t help in the Panic of 2008. The government was terrified of the consequences of the failure of Wall Street banksters and their counterparties with their highly leveraged financial schemes involving derivatives. The Wall Street genius’ had outwitted themselves. Even AIG that was to have backed up the risk was hopeless underfunded. Time for the U.S. taxpayer to pay up for Wall Street’s recklessness. And the Federal Reserve stepped in to rescue them by buying $ trillions of these esoteric derivatives. Those remain on the books of the Federal Reserve to the tune of some $ trillions, yet.

The Bush administration didn’t want to be left holding the bag of a massive collapse that wiped out Wall Street, resulting in a repetition of 1929. The political repercussions for the Republican Party for that economic disaster lasted decades.

When Dibble’s 2nd U.S. Bank suffered the withdrawal of the Federal receipts, sound banking would demand that loans would be called in as well. This was seen as a deliberate ploy by his opponents to wreck the economy. Jackson, always a hard money man, released the Specie Circular of 1836 mandating Western land purchases be paid with gold. This could be seen as having had a chilling effect on the economy as well. The price of cotton plummeted, due to overexpansion led on by easy money now that the U.S. bank no longer was an effective central banking instrument. And land purchases, much of it for cotton production, plunged in 1837. The destruction of the Bank presaged the sharp downturn of 1837. And the public determined the “War on the Bank” precipitated the Panic. The voters turned out the Democrats and elected a Whig for President in 1840.


A huge problem attaining straightforward economic analysis is its varying narratives. The Jackson’s Bank War is not immune. Stephen Temin in his The Jacksonian Economy has posited a counter narrative. The inflation 1832-36 and the Panic 1837 transpired for reasons other than absence of U.S. Bank supervision. Reserve ratios held steady; that is the amount of funds retained versus deposit didn’t drop dramatically after Jackson removed deposits from the Bank. In fact the public was content to hold less specie and more paper at this time and that in itself could escalate prices.
British business investment in America and its demand for cotton in the period 1831-1836 accounted for the spurt of inflation in the economy. Another international factor contributed to inflation for the period, which was Chinese silver purchasing British marketed opium.

The downturn began when the Bank of England acted in 1836 to stem the American investment, fearing loss of specie, by raising their interest rates. There was a short respite in the downturn in 1838 America; then a bad wheat harvest in 1838 in England increased imports and higher Bank of England interest rates again in 1839. The higher interest rates will attract funds and are meant to retain them in England. This is to counteract the increased grain imports, due to bad harvests in Britain. This had a negative effect in 1840 in America, due to the loss of British investment.

The crux, Jackson’s Bank War had little to do with neither the inflation nor the Panic of 1837. It was mentioned that the inflation was caused in part by the public’s holding MORE paper then specie as a percentage for the 1832-1836 period. Excessive cotton harvests and the accompanying collapse in its price and Bank of England’s contractive policies in 1836 instigated the Panic of 1837 NOT the Bank War. As noted the private banks were no more expansionary in their lending practices than the U.S. Bank either. 

The take away here is that President Jackson, Libertarian who envisioned little governmental role in the economy, saw a monetary system regulated by a Central Bank as an undo accretion of power; contrary to Constitutional ideals. He retained an agrarian sensibility that was skeptical of fractional reserve banking (the “It’s a Wonderful Life” bank) that had become common place. His Specie Circular of 1836 enforced this idea that real money, real store of value, was gold or silver not artificial contrivances like bank notes and paper, thus specie could only be accepted for Federal land purchases. Surprisingly, his Kitchen Cabinet was largely composed of ambitious business types not agrarian idealists. State banking versus The U.S. Bank was very attractive to them. And so they were much in favor of the destruction of the U.S. Bank.