“The Bank War”
and the Crash of 1837
Second Bank of the United States
• Given a charter by Congress in 1816.
• John Calhoun guided the bill though the House. He
turned the earlier constitutional objection around. He
argued that the Constitution required Congress to
establish an agency for the regulation of currency
because “No one could doubt that the power to coin
money and regulate the value thereof included now
paper money as well as coin.”
• Vote for the Bank was 80-71 in the House and 22-12 in
Senate
• Geographical distribution of votes was reverse of 1791
with most of opposition coming from the Northeast where
state banking was the strongest---competition.
• Daniel Webster argued that a national bank was
unnecessary.
420 Chestnut Street Philadelphia
• Chartered for 20 years in 1816.
• Capital $35 million. 1/5 by
government and 4/5 by private
subscribers. 25 directors—20
elected by shareholders and 5
appointed by President.
• Head Office in Philadelphia
plus branches
• Large commercial business
and biggest dealer in foreign
exchange.
• Third president of Bank was
Nicholas Biddle---wealthy and
brilliant intellect.
Second
Bank of the
United
States
• Quickly
establishes
18 branches
by 1817.
• Banks charter included limit of loans to
government of $500,000.
• Bank forbidden to suspend repayment of gold or
silver of its obligations; penalty to pay 12%
interest to customers.
• Poorly managed first few years.
• Stabilized by Biddle.
Second bank as “proto-central” bank
• No power to create high powered money—no open
market operations, like Bank of England or Bank of
France in this period.
• But, powerful because of largest reserve of specie and
conservative lending policy.
• Fiscal agent of government—large reserves
• Balance of payments outflow of gold in 1831. Provides
credit to other banks and helps to head off a panic.
• As a proto-central bank it:
– Serves as a “Lender of Last Resort” to state banks---borrow
specie from it in times of crisis.
– Regularly presents of notes of state banks---limits their
expansion.
• But, at same times also a competitor with state banks
• Opposition from the state banks,
especially in the North........laissez faire
• Key figure: Jackson’s Attorney General
and 4th Secretary of the Treasury
Roger Taney. Later Chief Justice of the
Supreme Court.
• Baltimore attorney and shareholder in
banks, enemy of the privilege.
• Taney: “the stockholders in the state
banks, who are generally men in
moderate circumstances are subject to
the weight of unlimited war taxation
whenever the public exigency may
require it—why should the stock in the
Bank of the United States which is
generally held by the most opulent
monied men, many of them wealthy
foreigners be entirely free from the
additional taxation which war or any
other calamity may bring upon the rest
of the community.”
Why is 2nd
Bank not rechartered?
Forces Hostile
to the Bank are
gathering!!
Forces Hostile to the
Bank are gathering!!
• Some enemies of the Bank were
anti-bank agrarians. Ban all banks
only hard money, others were
inflationists
• Senator Thomas Hart Benton of
Missouri in 1831 on the 2BUS
actions lending to other banks.
“This is enough! Proof enough! For
all who are unwilling to see a
moneyed oligarchy established in
this land and the entire Union
subjected to its sovereign will. The
power to destroy all others banks
is admitted and declared.”
• Vice President Martin Van Buren
was the former governor and
sought New York City’s dominance
over Philadelphia. He opposed
Hamilton’s consolidation of federal
power and defended states’ rights.
• Wall Street banks felt that BUS
restrained the r freedom to lend
and make money.
• 1828 Andrew Jackson elected
President. Hated banks—early in his
life he received large quantity of
worthless banknotes and felt banks
had overcharged him. In his first
address to Congress 1829---he aims
to end the bank---announced nearly 7
years in advance.
• Biddle tries to win him over but Henry
Clay persuades Biddle to let him make
the question of re-charter a campaign
issue in 1832.
• Early re-charter bill in 1832 is vetoed
by Jackson: unconstitutional, too much
foreign ownership, domestic
ownership concentrated in East---and
it is an instrument of the rich to
oppress the poor.
• Opposition in West and South where
conservative policies deny easy credit
• Opposition from Wall Street which
wants to supplant Philadelphia.
Andrew
Jackson
http://www.yale.edu/lawweb/avalon/
presiden/veto/ajveto01.htm
Rockoff
• Is Jackson a villain and Biddle a hero?
• Is Jackson responsible for the
macroeconomic problems of the 1830s--inflation and financial crises?
Chronology---recession, boom and crash
•
•
•
•
•
•
•
•
•
•
•
•
1828: Deflation/Jackson elected
1829: Deflation
1830: Deflation
1831: Mild Inflation
1832: Mild Inflation/Re-charter Vetoed/
Jackson Re-Elected
1833: Mild Inflation/Jackson withdraws govt deposits
1834: Inflation/Biddle reduces 2BUS operations
1835: Inflation
1836: Inflation/Specie Circular/Distribution of Surplus Act
1837: Inflation, Bank of England raises discount rate,
(May) Financial Crisis/Banks Suspend
1838: Deflation/Bank Resume payments
1839-1841: New financial crisis: bank failures, falling
stock prices and Depression
BACKGROUND
Note: Specie Standard Guarantees Long But Not Short-Term Price Stability
1820-1845
135
130
125
120
1820 = 100
115
110
105
100
95
90
85
80
1820
1822
1824
1826
1828
1830
1832
Real GDP pc
1. Deflation 1820-1830
2. Mild Inflation 1830-1833
1834
1836
1838
1840
1842
1844
Price Level
3. Rapid Inflation 1834-1837
4. Crisis and Deflation 1837-1843
What Causes Economic Instability?
1. Exogenous Shocks
2. Government Policy
What exogenous shocks and government
policies does Rockoff identify?
What were they in Rockoff (1972)?
A. Exogenous Shocks
1. Increased Silver Imports from Mexico
2. Decreased Silver Exports to China
3. Bank of England raises its discount rate in 1837
B. Government Policy
1. Jackson’s Veto of Recharter
2. Biddle’s contraction of the Second Bank
3. Jackson’s withdrawal of deposits from the
Second Bank and distribution to “Pet” banks
4. Distribution Act
5. Specie Circular
We need a Detailed Chronology of
the 1830s----a tumultuous decade--details are important
Jackson’s 1832 Landslide!!!
• 1833, Jackson orders government to stop
making deposits in the bank and begins to
withdraw funds. Moves funds to “pet”
banks---Biddle responds by contracting
loans—tight money and financial
“stringency” in 1834.
• Bank loses its federal charter in 1836 and
becomes a Pennsylvania state bank.
The Boom (Bubble?) Economy of
the 1830s
• Commodity prices rose at 13% a year in 1835
and 1836
• Urban and agricultural land prices and sales
boom
• Prices of slaves soars.
• Large-scale foreign investment
• Canal boom of the 1830s.
• Securities prices boom
• Distribution Act. In June 1836, Congress
authorizes distribution of federal reserve surplus
to the states to begin January 1837.
Huge investments in transportation
The Boom Economy
Jackson’s response to the boom
• Inflation begins---traditionally blamed on transfer of
government deposits to over-expansive state banks
• August 1836 Jackson issues the “Specie Circular” tries
to check speculative purchases of public land sales and
orders Public Land Office to accept only specie in
payment.
• May 1837 financial panic. Banks suspend convertibility
of notes into gold.
• 1838 Banks resume specie payments. Recovery.
• 1839 new financial crisis. Bank failures including 2BUS.
• Severe Depression 1839-1843: 194 of 729 banks close
their doors, 45% reduction of bank assets, railroad
stocks fall by 63%, banking stocks by 32%, investment
negative.
Rockoff: Was Jackson to Blame for Boom and Bust?
Money Supply in the Specie Standard
•
•
•
•
•
•
M = [(1 + c)/(c + r + e)]H
c = coins/deposits + banknotes
r = bank reserves in coin/deposits + banknotes
e = excess reserves/deposits + banknotes
Specie---gold and silver coin
David Hume’s price-specie-flow mechanism.
Payments surplus/deficit determines changes
in H.
• Rockoff’s version:
M = S/[(C/M) + (R/D) – (C/M)(R/D)]
M($m) S($m)
R/D(%) C/M(%)
1832
1833
150
168
31
41
16
18
5
8
1834
1835
172
246
51
65
27
18
4
10
1836
1837
276
232
73
88
16
20
13
23
1838
1839
1840
240
215
186
87
83
80
23
20
25
18
23
24
Was Jackson to blame for the boom?
• Bank veto and removal of federal funds from the
2BUS does not start monetary expansion
leading to inflation.
• There is no decline in the bank reserve to
liability ratios. AND there was no decline in the
public’s coin to deposit ratio.
• Big increase occurs because of increase in high
powered money.
• Sources: Surplus with Mexico which covers with
silver exports. Surplus of U.S. and U.K. with
China, silver for opium. Heavy British
investment in American securities, especially
canal stocks.
Was Jackson to blame for the boom?
Regional reserve ratios (%)
N.E.
M.A.
S.E.
S.W.
N.W.
1834
.06
.22
.24
.13
.46
1835
.07
.16
.21
.15
.28
1836
.07
.14
.18
.14
.30
1837
.09
.19
.24
.13
.32
Was Jackson to blame for
the Crash and Depression?
• Specie Circular helps to prick bubble. The official and
supplemental inter-bank transfers to distribute federal
surplus placed huge stress on financial system in 1836.
• Heightened demand for specie in the West beginning in
August 1836. But it did not dampen the boom in
Western land sales
• Together these force a reduction in specie reserves of
NYC banks from $7.2 million 9/1836 to $1.5 million
5/1837. Huge effect when total specie is $70 million and
42% in individuals’ hands.
• President Martin van Buren refuses to repeal the specie
circular causing a rise in precautionary holding of specie.
• End result is a financial collapse and deep recession
from several large monetary shocks.
Was Jackson to blame for
the Crash and Depression?
• Peter Temin (The Jacksonian Economy, 1969)
blames Panic of 1837 on Bank of England raises
its discount rate in 1836 to stem outflow of
specie.
• Bank of England instructs its Liverpool office to
reject American bills to “recover” specie. Fall in
market value of cotton-backed bills leads to
default of cotton factors, defaults on bank loans
and panic.
• Interest rise in U.S. and U.K. and cotton prices
and other goods and securities begin to fall.
• Key: U.S. a small open economy, subject to
international shocks.
The Aftermath
• Between 1830-1839 debts of U.S. states increase 13
times.
• British and Dutch investors hold large shares. ($20 of
$35 million of Pennsylvania’s debt).
• Between 1841-1843, 8 states and one territory defaulted
on their debts.
• Primary investments are transportation and banking.
Many projects not complete by the time of the
depression. No revenue and must pay interest.
• These are sovereign debts because U.S. Constitution
forbids suits against states to enforce payment of debts.
• Economic sanctions by another country (e.g. UK or
Netherlands) against states are virtually impossible--part of one large union, not trade or war against one.
• Only “sanction” is the loss of reputation.
Western and Southern debts
• PA and MD
borrow for
canals, rich,
populous,
defaults in
depression
outrage
European
investors, don’t
repudiate. Raise
taxes pay debt
and arrears.
OH, IN, IL MI, LA
borrow for
canals, similar
but don’t make all
payments on
bonds.
FL, MISS
disasters—
repudiation of
state bank bonds.
So why did some states pay?
• Key—those that repay
can borrow, even if
default, those that
repudiate debt can’t.
Mississippi and Florida
issue no new bonds
before Civil War.
• Temporary defaults
recover low yields.
Indiana and Illinois
receive new loans to
allow completion.
• Clearly reputation
matters.
The U.S. post-1837/1843?
• Bimetallic System
• No central bank. No monetary policy, no lender
of last resort, no fiscal agent. The U.S.
government uses system of “sub-treasuries” to
collect and disburse funds.
• Federal debt declining. No big wars and no
large projects. Damaged reputation on
international capital markets slowly recover.
• No federal regulation of banking---regulation of
banks left completely to the states and a new
period of experimentation begins---the “Free
Banking Era”
• A truncated “Hamiltonian” system.