Chapter Seventeen: A Den of Vipers
The story of the Second Bank of the United States, the nation’s third central bank; the election of Andrew Jackson on an anti-bank platform; the battle between President Jackson and the head of the bank, Nicholas Biddle; the deliberate creation of a depression to frighten the public into keeping the bank; Jackson’s ultimate victory.
The monetary chaos that existed at the end of the War of 1812, outlined in the previous chapter, was caused by an almost universal fraud within the banking industry. Depositors in good faith placed their gold and silver into banks for safekeeping and for the convenience of using paper money in their everyday transactions. The banks, in turn, promised them they could exchange the paper for their coins whenever they wished. At the same time, however, through the mechanism of fractional-reserve banking, paper money was created far in excess of the value of the coins held in reserve. Since the new money had just as much claim to the coins as the old, the bankers knew that, if a sizable percentage of their customers were to request a withdrawal of their coins, that solemn promise simply could not be kept. This, in fact, is precisely what happened over and over again during that period.
By 1814, Thomas Jefferson had retired to Monticello and had bitterly resigned himself to defeat on the issue of money. In a letter to John Adams he said:
I have ever been the enemy of banks; not of those discounting for cash [that is, charging interest on loans of real money], but of those foisting their own paper into circulation, and thus banishing our cash. My zeal against those institutions was so warm and open at the establishment of the bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains … Shall we build an altar to the old paper money of the revolution, which ruined individuals but saved the republic, and burn on that all the bank charters present and future, and their notes with them? For these are to ruin both republic and individuals. This cannot be done. The Mania is too strong. It has seized by its delusions and corruptions all the members of our governments general, special, and individual.
Jefferson was right. Congress had neither the wisdom nor the courage to let the free market clean up the mess that remained after the demise of the first bank of the U.S. If it had, the fraud soon would have become understood by the public, the dishonest banks would have folded, the losses would have been taken, and the suffering would have been ended, perhaps forever. Instead, Congress moved to protect the banks, to organize the fraud, and to perpetuate the losses. All of this was accomplished in 1816 when a twenty-year charter was given to the Second Bank of the United States.
The Second Bank of the United States
In every respect the new bank was a carbon copy of the old, with one minor exception. Congress unashamedly extracted from the private investors what amounted to nothing less than a bribe in the form of $1.5 million
in consideration of the exclusive privileges and benefits conferred by this Act. The bankers were glad to pay the fee, not only because it was a modest price for such a profitable enterprise, but also because, as before, they received an immediate government deposit of one-fifth the total capitalization which then was used as the base for manufacturing much of the remaining startup capital. The charter required the Bank to raise a minimum of $7 million in specie, but even in its second year of operation, its specie never rose above $2.5 million. Once again, the monetary and political scientists had carved out their profitable niches, and the gullible taxpayer, his head filled with sweet visions of
banking reform, was left to pick up the tab.
Another important continuity between the old and the new Bank was the concentration of foreign investment. In fact, the largest single block of stock in the new Bank, about one-third in all, was held by this group. It is certainly no exaggeration to say that the Second Bank of the United States was rooted as deeply in Britain as it was in America.
The nation’s third central bank ran into deep trouble from the start. It had promised to continue the tradition of moderating the other banks by refusing to accept any of their notes unless they were redeemable in specie on demand. But when the other banks returned the gesture and required that the new Bank also pay out specie on their demand, it frequently lost its resolve. There was also the tiny matter of corruption. As the Bank’s major historian writes:
So many influential people were interested [in the state banks] as stockholders that it was not advisable to give offense by demanding payment in specie, and borrowers were anxious to keep the banks in the humor to lend.
In economics, every policy carries a consequence, and the consequence of the loose monetary policy of the Second Bank of the United States was that America was introduced to her first experience with what now is called the
boom-bust cycle. Galbraith tells us:
In 1816, the postwar boom was full on; there was especially active speculation in western lands. The new Bank joyously participated.
The Bank had the advantage over its competitors of a federal charter plus the government’s agreement to accept its notes in the payment of taxes. But the state banks were by no means left out of the game. It was still within their power to create money through fractional-reserve banking and, thus, to further inflate the amount of the nation’s circulating currency. Anxious to get in on this action, Pennsylvania chartered thirty-seven new banks in 1817. That same year, Kentucky followed suit with forty new charters. The total number of banks grew by 46% in just the first two years after the central bank was created. Any spot along the road that had
a church, a tavern, or a blacksmith shop was deemed a suitable place for setting up a bank. In that same time frame, the money supply was expanded by an additional $27.4 million; another taxpayer fleecing of over forty percent.
The First Boom-Bust Cycle
In the past, the effect of this inflationary process always had been the gradual evaporation of purchasing power and the continuous transfer of property from those who produced it to those who controlled the government and ran the banks. This time, however, the process took on a new twist Gradualism was replaced by catastrophism. The monetary scientists, with their hands firmly on the controls of the money machine, now began to throw the levers, first one way, and then the other. The expansion and then deliberate contraction of the money supply literally threw the nation into economic convulsions. Why wait for the apples to fall when the harvest can be hastened simply by shaking the tree?
In 1818, the Bank suddenly began to tighten its requirements for new loans and to call in as many of the old loans as possible. This contraction of the money supply was justified to the public then exactly as it is justified today. It was necessary, they said, to put the brakes on inflation. The fact that this was the same inflation the Bank had helped to create in the first place, seems to have gone unnoticed.
There is no doubt that many bankers and politicians act in good faith in their attempt to bring under control the inflation they themselves have caused. Not everyone who benefits from the central-bank mechanism fully understands it. Like Frankenstein, they create a monster without realizing they cannot control it. Their crime is one of stupidity, not malice. But stupidity is not a characteristic of the average banker, especially a central banker, and we must conclude that many of the monetary scientists are well aware of the monster’s power for destruction. At best, they just don’t care as long as they are safe. And at worst, they perceive that they are in the apple-harvesting business. They deliberately tease and prod the monster in anticipation of his rampage through the village orchards. In the final analysis, of course, it is of little importance whether the shaking of the trees is out of innocence or malice. The end result is the same. My, how the apples do fall.
The country’s first experience with a deliberately created monetary contraction began in 1818 when the Bank became concerned about its own ability to survive. Professor Rothbard says:
Starting in July 1818, the government and the BUS [Bank of the United States] began to see what dire straits they were in; the enormous inflation of money and credit, aggravated by the massive fraud, had put the BUS in danger of going under and illegally failing to maintain specie payments. Over the next year, the BUS began a series of enormous contractions, forced curtailment of loans, contractions of credit in the south and west … The contraction of money and credit swiftly brought to the United States its first widespread economic and financial depression. The first nationwideboom-bustcycle had arrived in the United States …
The result of this contraction was a rash of defaults, bankruptcies of business and manufacturers, and a liquidation of unsound investments during the boom.
The Cycle Is Worsened by Government Interference
It is widely believed that panics, boom-bust cycles, and depressions are caused by unbridled competition between banks; thus the need for government regulation. The truth is just the opposite. These disruptions in the free market are the result of government prevention of competition by the granting of monopolistic power to a central bank. In the absence of a monopoly, individual banks may operate in a fraudulent manner only to a limited extent and for a short period of time. Inevitably, they will be exposed by their more honest competitors and will be forced out of business. Yes, their depositors will be injured by the bankruptcy, but the damage will be limited to a relatively few and will occur only now and then. Even geographical regions may be hard hit on occasion, but it will not be a national tragedy with everyone brought to their knees. The overall economy will absorb the losses, and commerce at large will continue to prosper. Within an environment of prosperity, even those who have been injured by fraudulent banking would have a good chance for rapid recovery. But, when a central bank is allowed to protect the fraudulent operators and to force all banks to function the same, the forces of competition can no longer dampen the effect The expansion becomes universal and gigantic. And, of course, so does the contraction. Except for the bankers and the politicians, everyone is injured at the same time; depression is everywhere; and recovery is long delayed.
This is exactly what happened in the so-called panic of 1819. In the Documentary History of Banking and Currency, Herman Krooss writes:
The Bank, as the largest creditor [to the state banks], had two alternatives: it could write off its debts which of course would wipe out the stockholders’ equity and result in bankruptcy, or it could force the state banks to meet their obligations which would mean wholesale bankruptcy among state banks. There was no doubt about the choice … The pressure placed upon state banks deflated the economy drastically, and as the money supply wilted, the country sank into severe depression.
As historian William Gouge observed:
The Bank was saved, and the people were ruined.
Competition between the national Bank and the state banks during this period had been moved from the open field of the free market to the closed arena of politics. Free-market competition had been replaced by government favoritism in the form of charters which granted the right of monopoly. A federal charter was clearly better than one issued by a state, but the states fought back fiercely with what weapons they possessed, and one of those was the power to tax. Several states began to levy a tax on the paper notes issued by any bank doing business within their borders which was not also locally chartered. The intent, although pretended to be the raising of state revenue, was really to put the federal Bank out of business.
The Supreme Court Upholds the Bank
When the Bank refused to pay such a tax to the state of Maryland, the issue was taken to the Supreme Court in 1819 as the celebrated case of McCulloch v. Maryland. The Chief Justice at that time was John Marshall, a leading Federalist and advocate of a strong, centralized federal government. As was expected, the Marshall Court carefully tailored its decision to support the federal government’s central bank.
The narrow issue upon which the constitutionality of the Bank was decided was not whether Congress had the power to directly or indirectly emit bills of credit or otherwise convert debt into money. If that had been the issue, the Court would have been hard pressed to uphold the Bank, for that not only is expressly prohibited by the Constitution, it is precisely what the Bank had been doing all along, and everyone knew it. Instead, the Court focused upon the narrow question of whether or not the Bank was a
necessary and proper means for Congress to execute any other constitutional powers it might have. From that perspective, it was unanimously held that the Bank was, indeed, constitutional.
Were the Bank’s paper notes the same as Bills of Credit? No, because they were backed by the credit of the Bank, not the federal government. True, the Bank created money, and most of it was used by the government. Never mind all that. The Treasury did not print it, therefore, it was not government money.
Was not the Bank the same as an agency of government? No, because merely granting it a national monopoly and enforcing that monopoly with the power of the state does not necessarily make it
Furthermore, the states cannot tax the federal government or any of its instruments, including the Bank of the United States, because, as Marshall stated:
The power to tax is the power to destroy.
Here was another end run around the Constitution, executed this time by the very men who were assumed to be its most loyal defenders.
The Supreme Court had spoken, but the Court of Public Opinion had not yet disposed of the case. During the 1820s, popular sentiment shifted back to the laissez-faire and sound-money principles espoused by the Jeffersonian Republicans. But since the Republican Party had by then abandoned those principles, a new coalition was formed, headed by Martin Van Buren and Andrew Jackson, to resurrect them. It was called the Democratic Party, and one of its agenda items was to abolish the Bank of the United States. After Jackson was elected to the Presidency in 1828, he wasted no time in attempting to build Congressional support for that goal.
By this time, the Bank had come under the direction of Nicholas Biddle who was a formidable adversary to Jackson, not only because of the power of his position, but because of his strong will and sense of personal destiny. He was the archetype of the new Eastern Establishment: wealthy, arrogant, ruthless, and brilliant. He had graduated from the University of Pennsylvania at the age of only thirteen, and, as a young man entering business, had fully mastered the secret science of money.
With the ability to control the flow of the nation’s credit, Biddle soon became one of the most powerful men in America. This was brought out dramatically when he was asked by a Senate Committee if his bank ever took advantage of its superior position over the state banks. He replied:
Never. There are very few banks which might not have been destroyed by an exertion of the powers of the Bank. None has ever been injured. As Jackson publicly noted a few months later, this was an admission that most of the state banks existed only at the pleasure of the Bank of the United States, and that, of course, meant at the pleasure of Mr. Biddle.
The year was 1832. The Bank’s charter was good for another four years. But Biddle decided not to wait that long for Jackson to build his forces. He knew that the President was up for reelection, and he reasoned that, as a candidate, he would hesitate to be too controversial. To criticize the Bank is one thing, but to come down squarely for its elimination altogether would surely cost him many votes. So, Biddle requested Congress to grant an early renewal of the charter as a means of softening Jackson’s campaign against it. The bill was backed by the Republicans led by Senator John Clay and was passed into law on July 3, just before the election campaigns began in earnest.
Jackson Overrides Congress
It was brilliant strategy on Biddle’s part but it didn’t work. Jackson decided to place his entire political career on the line for this one issue and, with perhaps the most passionate message ever delivered to Congress by any President, before or since, he vetoed the measure. The President’s biographer, Robert Remini, says:
The veto message hit the nation like a tornado. For it not only cited constitutional arguments against recharter — supposedly the only reason for resorting to a veto — but political, social, economic, and nationalistic reasons as well.
Jackson devoted most of his veto message to three general topics: (1) the injustice that is inherent in granting a government-sponsored monopoly to the Bank; (2) the unconstitutionality of the Bank even if it were not unjust; and (3) the danger to the country in having the Bank heavily dominated by foreign investors.
Regarding the injustice of a government-sponsored monopoly, he pointed out that the stock of the Bank was owned only by the richest citizens of the country and that, since the sale of stock was limited to a chosen few with political influence, the common man, not only is unfairly excluded from an opportunity to participate, but he is forced to pay for his banking services far more than they are worth. Unearned profits are bad enough when they are taken from one class of citizens and given to another, but it is even worse when the people receiving those benefits are not even citizens at all but are, in fact foreigners. Jackson said:
It is not our own citizens only who are to receive the bounty of our Government. More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars … It appears that more than a fourth part of the stock is held by foreigners and the residue is held by a few hundred of our own citizens, chiefly of the richest class. For their benefit does this act exclude the whole American people from competition in the purchase of this monopoly and dispose of it for many millions less than it is worth.
Regarding the issue of constitutionality, he said that he was not bound by the previous decision of the Supreme Court, because the President and Congress had just as much right to decide for themselves whether or not a particular law is constitutional This view, incidentally, was not novel at that time. It is only in relatively recent decades that people have begun to think of the Supreme Court as being specifically authorized to pass on this question. In fact, as Jackson correctly pointed out in his veto message, the founding fathers created a government with power divided between the executive, legislative, and judicial branches, and that the purpose of this division was, not merely to divvy up the chores, but to balance one branch against the other. The goal was not to make government efficient but to deliberately make it inefficient. Each President and each legislator is morally bound, even by oath, to uphold the Constitution. If each of them does not have the power to decide in conscience what is constitutional, then taking an oath to uphold it has little meaning.
The Bank Controlled by Foreign Investors
Regarding the danger to our national security, Jackson returned to the fact that a major portion of the Bank’s stockholders were foreigners. Even though foreign investors technically were not allowed to vote their shares, their financial power was so great that the American investors were clearly beholden to them and would likely follow their instructions. Jackson concluded:
Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? … [Is there not] cause to tremble for the purity of our elections in peace and for the independence of our country in war?… Of the course which would be pursued by a bank almost wholly owned by the subjects of a foreign power, and managed by those whose interests, if not affections, would run in the same direction there can be no doubt … Controlling our currency, receiving our public monies, and holding thousands of our citizens in dependence, it would be more formidable and dangerous than a naval and military power of the enemy.
Jackson saved the greatest passion of his argument for the end. Speaking now, not to Congress, but to the voters at large, he said:
It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth cannot be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favor alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.
The veto did not defeat the Bank. It was merely a declaration of war. The major battles were yet to come.
Biddle’s Control Over Congress
As Commanding General of the pro-bank forces, Biddle had one powerful advantage over his adversary. For all practical purposes, Congress was in his pocket. Or, more accurately, the product of his generosity was in the pockets of Congressmen. Following the Rothschild Formula, Biddle had been careful to reward compliant politicians with success in the business world. Few of them were willing to bite the hand that fed them. Even the great Senator, Daniel Webster, found himself kneeling at Biddle’s throne. Galbraith says:
Biddle was not without resources. In keeping with his belief that banking was the ultimate source of power, he had regularly advanced funds to members of Congress when delay on appropriations bills had held up their pay. Daniel Webster was, at various times, a director of the Bank and on retainer as its counsel.
I believe my retainer has not been renewed or refreshed as usual. If it be wished that my relation to the Bank should be continued, it may be well to send me the usual retainers. Numerous other men of distinction had been accommodated, including members of the press.
Webster is a particularly interesting study in how even so-called
great men can be compromised by an addiction to wealth. He had always been an advocate of sound money in Congress, yet, as a lawyer on Biddle’s payroll, he represented the Bank’s position before the Supreme Court in McCulloch v. Maryland. Much of the twisted logic that allowed the Court to end-run the Constitution and destroy sound money came from his pen.
After Jackson’s veto of the Bank’s charter, Biddle requested Webster to deliver speeches specifically for the purpose of having the Bank reprint them for mass distribution. In one of those speeches, Webster echoed the old refrain that the Bank served as a moderating influence on the nation’s other banks and then piously proclaimed:
Congress can alone coin money;… no State (nor even Congress itself) can make anything a tender but gold and silver, in the payment of debts. In an act of astounding hypocrisy, this speech was distributed widely by the very institution that was designed specifically for creating fractional fiat money, without gold or silver backing, to function as tender in the payment of debts. Then, as now, most people did not discern between words and actions and believed that this speech, delivered by such a
great man, was evidence of the Bank’s worthiness. Biddle even distributed 300,000 copies of Jackson’s veto message, apparently in the belief that many would not read it Obviously, if the Bank thought it was so bad as to distribute it, it must be bad.
The power of the Bank’s money was everywhere. It was as John Randolph, the fiery Old Republican from Virginia, had said:
Every man you meet in this House or out of it, with some rare exceptions, which only serve to prove the rule, is either a stockholder, president, cashier, clerk or doorkeeper, runner, engraver, paper-maker, or mechanic in some other way to a bank.
Jackson Appeals Directly to the Voters
Congress, the banks, speculators, industrialists, and segments of the press; these were the forces commanded by Biddle. But [ackson had a secret weapon which had never been used before in American politics. That weapon was a direct appeal to the electorate. He took his message on the campaign trail and delivered it in words well chosen to make a lasting impression on the voter. He spoke out against a moneyed aristocracy which had invaded the halls of Congress, impaired the morals of the people, threatened their liberty, and subverted the electoral process. The Bank, he said, was a hydra-headed monster eating the flesh of the common man. He swore to do battle with the monster and slay it or be slain by it. He bellowed his position to every crowd he could reach: Bank and no Jackson, or no bank and Jackson.
On the subject of paper money, the President was equally emphatic. His biographer describes the campaign:
On his homeward journey he reportedly paid all his expenses in gold.No more paper money, you see, fellow citizens,he remarked with each gold payment,if I can only put down this Nicholas Biddle and his monster bank.Gold, hardly the popular medium of exchange, was held up to the people as the safe and sound currency which Jackson and his administration hoped to restore to regular use. Unlike paper money, gold represented real value and true worth. It was the corn of honest men. Rag money, on the other hand, was the instrument of banks and swindlers to corrupt and cheat an innocent and virtuous public.
Jackson had awakened the indignation of the American people. When the November ballots were cast, he received a mammoth vote of confidence. He received fifty-five percent of the popular vote (with thirty-seven percent for Clay, eight percent for Wirt) and eighty percent of the vote in the electoral college. But the war still was not over. Jackson won the election, but the Bank had four more years to operate, and it intended to use those years to sway public sentiment back to its support. The biggest battles were yet to come.
Jackson Removes Federal Deposits
Jackson did not wait to act. He knew that time would be used as a weapon against him.
The hydra of corruption is only scotched, not dead he said. Soon after the election, he ordered Secretary of the Treasury, William Duane, to place all new deposits of the federal government into various state banks around the country and to pay current expenses out of the funds still held by the Bank of the United States until that account was drained to zero. Without the use of federal money, surely the monster would perish. To Jackson’s chagrin, however, Duane balked at the order out of a sincere conviction that, to do so, would be disruptive to the economy.
This was not the first time a Cabinet officer and a President had come to disagreement. In the past, however, the impasse had always been resolved by the resignation of the Secretary. This time was different. Duane refused to resign, and that raised an interesting constitutional question. A President could appoint a member of the executive branch only with the consent of the Senate. The Constitution was silent, however, on the matter of dismissal. Did that, too, require Senate approval? The implication was that it did, but the issue had never been tested.
Jackson had no patience for such theoretical questions. The letter arrived promptly on Duane’s desk:
Your further services as Secretary of the Treasury are no longer required. On October 1, 1833, federal deposits began to move out of the Bank.
Jackson felt that he finally had the monster firmly within his grasp.
I have it chained, he said. With gleeful confidence, he added:
I am ready with the screws to draw every tooth and then the stumps. If I am not mistaken, he went on, we will have
Mr. Biddle and his Bank as quiet and harmless as a lamb in six weeks.
Biddle Deliberately Creates Monetary Chaos
The President’s view of the Bank’s meek captivity was premature, to say the least. Biddle responded, not like a lamb, but more like a wounded lion. His plan was to rapidly contract the nation’s money supply and create another panic-depression similar to the one the Bank had created thirteen years earlier. This then could be blamed on Jackson’s withdrawal of federal deposits, and the resulting backlash surely would cause Congress to override the President’s veto. Remini tells us:
Biddle counterattacked. He initiated a general curtailment of loans throughout the entire banking system … It marked the beginning of a bone-crushing struggle between a powerful financier and a determined and equally powerful politician. Biddle understood what he was about. He knew that if he brought enough pressure and agony to the money market, only then could he force the President to restore the deposits. He almost gloated.This worthy President thinks that because he has scalped Indians and imprisoned Judges, he is to have his way with the Bank. He is mistaken.…
The ties of party allegiance can only be broken,he declared,by the actual conviction of existing distress in the community.And such distress, of course, would eventually put everything to rights.Nothing but widespread suffering will produce any effect on Congress … Our only safety is in pursuing a steady course of firm restriction — and I have no doubt that such a course will ultimately lead to restoration of the currency and the recharter of the Bank. … My own course is decided. All other banks and all the merchants may break, but the Bank of the United States shall not break.
Biddle, therefore, decided to use the American people as sacrificial pawns in the giant chess match for the Bank’s survival. The resulting economic chaos is not difficult to imagine. Biddle’s contraction of the money supply was executed at a particularly vulnerable moment. Business had been expanding as a result of the Bank’s prior easy credit and now was dependent on it. Also, the tariff came due at precisely this time, placing still more demand for cash and credit Losses were sustained everywhere, wages and prices sagged, men were put out of work, companies went bankrupt. By the time Congress reconvened in December, in what was called the
Panic Session, the nation was in an uproar. Newspapers editorialized with alarm, and letters of angry protest flooded into Washington.
As the pressure continued to build in Congress, it began to look as though Biddle’s plan would work. In the public eye, it was Jackson who was solely responsible for the nation’s woes. It was his arrogant removal of Secretary Duane; it was his foolish insistence on removing the deposits; it was his obstinate opposition to Congress.
Jackson Is Censured by the Senate
For one-hundred days, a
phalanx of orators daily excoriated the President for his arrogant and harmful conduct. At length, a resolution of censure was introduced into the Senate and, on March 28, 1834, it was passed by a vote of 26 to 20. This was the first time that a President had ever been censured by Congress, and it was a savage blow to Jackson’s pride. Biddle, at last, had the upper hand.
The President rumbled around the White House in a fit of rage.
You are a den of vipers, he said to a delegation of the Bank’s supporters.
I intend to rout you out and by the Eternal God I will rout you out.
The censure was by no means indicative of popular sentiment. Even in the Senate, which was a hotbed of pro-Bank support, a swing of only three votes would have defeated the measure.
During all this time, imperceptibly at first, but quickly growing, the public had been learning the truth. Jackson, of course, was doing everything within his power to hasten the process, but other factors also were at work, not the least of which was Biddle himself. So large was his ego that he could not keep from boasting in public about his plan to deliberately disrupt the economy. People heard these boasts and they believed him. The turning point came when Governor George Wolf of Pennsylvania, the Bank’s home state, came out publicly with a strong denunciation of both the Bank and Biddle. This was like the starting bell at a horse race. With the Bank’s home state turned against it, there was no one left to defend it and, literally within days, the mood of the country and of Congress changed.
The Democrats wasted no time consolidating these unexpected gains. To test their strength on the issue, on April 4, 1834, they called for a vote in the House on a series of resolutions which were aimed at nullifying the censure in the Senate. In essence, the resolutions stated that the House totally approved the President’s bank policy. The first resolution, passed by a vote of 134 to 82, declared that the Bank of the United States
ought not to be rechartered. The second, passed by a vote of 118 to 103, agreed that the deposits
ought not to be restored. And the third, passed by an overwhelming vote of 175 to 42, called for the establishment of a special committee of Congress to investigate whether the Bank had deliberately instigated the current economic crisis. It was an overwhelming victory for Jackson which would be culminated a few years later with the passage of a resolution in the Senate which formally rescinded the previous vote of censure.
Biddle Defies Congress
When the investigating committee arrived at the Bank’s doors in Philadelphia armed with a subpoena to examine the books, Biddle flatly refused. Nor would he allow inspection of correspondence with Congressmen relating to their personal loans and advances. And he steadfastly refused to testify before the committee back in Washington. For lesser mortals, such action would have resulted in citations of contempt of Congress and would have carried stiff fines or imprisonment. But not for Nicholas Biddle. Remini explains:
The committeemen demanded a citation for contempt, but many southern Democrats opposed this extreme action, and refused to cooperate. As Biddle bemusedly observed, it would be ironic if he went to prisonby the votes of members of Congress because I would not give up to their enemies their confidential letters.Although Biddle escaped a contempt citation, his outrageous defiance of the House only condemned him still further in the eyes of the American public.
The Bank was still alive but had been mortally wounded. By this time, Jackson had completely paid off the national debt incurred by the War of 1812 and had even run up a surplus. In fact, he ordered the Treasury to give back to the states more than $35 million, which was used for the construction of a wide variety of public works.
With these accomplishments close on the heels of his victory over the Bank, the President had earned the undying hatred of monetary scientists, both in America and abroad. It is not surprising, therefore, that on January 30, 1835, an assassination attempt was made against him. Miraculously, both pistols of the assailant misfired, and Jackson was spared by a quirk of fate. It was the first such attempt to be made against the life of a President of the United States. The would-be assassin was Richard Lawrence who either was truly insane or who pretended to be insane to escape harsh punishment. At any rate, Lawrence was found not guilty due to insanity. Later, he boasted to friends that he had been in touch with powerful people in Europe who had promised to protect him from punishment should he be caught.
The ending to this saga holds no surprises. The Bank’s charter expired in 1836 and it was restructured as a state bank by the Commonwealth of Pennsylvania. After a spree of speculation in cotton, lavish advances to the Bank’s officers, and the suspension of payment in specie, Biddle was arrested and charged with fraud. Although not convicted, he was still undergoing civil litigation when he died. Within five years, the establishment was forced to close its doors forever, and America’s third experience with central banking came to a close.
Some Bad Mixed in with the Good
It is tempting to let the story stop right there and allow Jackson to forever wear the crown of hero and dragon slayer. But a more balanced view of these events leads to the conclusion that the forces of virtue were not without contamination. Jackson represented the position of those who wanted only gold and silver for the nation’s money. But this group was not large enough to match the power of the Bank. He was joined in that battle by many groups which hated the Bank for other, less admirable reasons. State banks and business interests along the expanding frontier, for example, were not the least interested in Constitutional money. They wanted just the opposite. They viewed the modest restraints of the federal Bank as excessive. With the federal Bank out of the way, they anticipated no restraints at all. As we shall see in the following section, it is ironic that this is the group that got what it wanted, not the hard-money Jacksonians.
One cannot blame Jackson for accepting the support of these groups in his effort to slay the dragon. In politics, it often is necessary to make temporary alliances with one’s opponents to achieve occasional common objectives. But Jackson went further than that. More than any other President before him, and rivalled by only a few since, he changed the character of American politics. He led the nation away from the new concept of diffused powers, carefully worked out by the founding fathers, back toward the Old-World tradition of concentration and monarchy. By strongly challenging the right of the States to secede from the Union, he set into motion a concept that, not only would lead to civil war, but which would put an end forever to the ability of the states to check the expanding power of the federal government. No longer was the Union to be based on the principle of consent of the governed. It was now to be based on force of arms. And through the manipulation of voter passion on the Bank issue, he changed the perception of the role of President from public servant to national leader.
At the height of the battle against the Bank, when Jackson was making a direct appeal to the voters for support, he declared:
The President is the direct representative of the people. To fully comprehend the significance of that statement, it must be remembered that the plan of the Constitution was for the President to be elected indirectly by the state legislatures, not by the voters at large.
After fighting a war to throw off the rule of King George, in, the founding fathers wanted nothing more to do with kings of any land, and they went out of their way to make sure that the president of the United States would never be looked upon as such. They realized that an elected ruler, unless his power is carefully limited and diffused, can become just as despotic as an unelected one. Article 2, Section 1, of the Constitution, therefore, established an electoral college to select the President.
Members of the college are to be appointed by the states. Congressmen, Senators, or other officers of the federal government are specifically and wisely excluded. The college is supposed to select a President strictly on the basis of his integrity and executive ability, not his party label, political connections, good looks, charisma, or stirring orations. The people may elect their Congressmen, but the electoral college chooses the President. Thus, it was intended that the President would have a different constituency from Congress, and this difference was important to insure the balance of power that the framers of the Constitution worked so hard to create. As a means of keeping government under control, it was a truly brilliant piece of political engineering.
All of that was changed in the election of 1832. One of the sad facts of history is that good causes often are the occasion for establishing bad precedents. Jackson’s fight against the Bank of the United States was one of those events.
The government had encouraged widespread banking fraud during the War of 1812 as an expedient for paying its bills, and this had left the nation in monetary chaos. At the end of the war, instead of allowing the fraudulent banks to fall and letting the free market heal the damage, Congress decided to protect the banks, to organize the fraud, and to perpetuate the losses. It did this by creating the nation’s third central bank called the Second Bank of the United States.
The new bank was almost an exact carbon copy of the previous one. It was authorized to create money for the federal government and to regulate state banks. It influenced larger amounts of capital and was better organized across state lines than the old bank. Consequently its policies had a greater impact on the creation and extinguishing of the nation’s money supply. For the first time in our history, the effects began to ricochet across the entire country at once instead of being confined to geographical regions. The age of the boom-bust cycle had at last arrived in America.
In 1820, public opinion began to swing back in favor of the sound-money principles espoused by the Jeffersonian Republicans. But since the Republican Party had by then abandoned those principles, a new coalition was formed, headed by Martin Van Buren and Andrew Jackson, called the Democrat Party. One of its primary platforms was the abolishment of the Bank. After Jackson was elected in 1828, he began in full earnest to bring that about
The head of the Bank was a formidable adversary by the name of Nicholas Biddle. Biddle, not only possessed great personal abilities, but many members of Congress were indebted to him for business favors. Consequently, the Bank had many political friends.
As Jackson’s first term of office neared its end, Biddle asked Congress for an early renewal of the Bank’s charter, hoping that Jackson would not risk controversy in a reelection year. The bill was easily passed, but Jackson accepted the challenge and vetoed the measure. Thus, a battle over the Bank’s future became the primary presidential campaign issue.
Jackson was reelected by a large margin, and one of his first acts was to remove federal deposits from the Bank and place them into private, regional banks. Biddle counterattacked by contracting credit and calling in loans. This was calculated to shrink the money supply and trigger a national panic-depression, which it did. He publicly blamed the downturn on Jackson’s removal of deposits.
The plan almost worked. Biddle’s political allies succeeded in having Jackson officially censured in the Senate. However, when the truth about Biddle’s strategy finally leaked out, it backfired against him. He was called before a special Congressional investigative committee to explain his actions, the censure against Jackson was rescinded, and the nation’s third central bank passed into oblivion.