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But five years later, after near defeat in the War of 1812, Madison came to better appreciate the need for a strong central bank and in 1816, the bank was succeeded by the Second Bank of the United States. The Second Bank of the United States was located in Philadelphia. Although it was technically a private corporation, the bank handled all fiscal transactions for the U.S. Government, and was accountable to Congress and the U.S. Treasury. Twenty percent of its capital was owned by the federal government, the bank's largest stockholder. Four thousand private investors held the remaining 80% of the bank's capital. The majority of the stocks were held by a few hundred wealthy Americans.
The biggest job of the bank was to regulate the public credit issued by private banking institutions. The bank did this by setting the interest rate at which it would lend money to the smaller state banks. The Second Bank was chartered by President James Madison in 1816. Thought its main branch was in Philadelphia, it had twenty-five branch offices nationwide by 1832.
The bank's charter was coming up for renewal, and this became a major issue during the general election campaign of 1832. The bank's president Nicholas Biddle and pro-bank National Republicans led by Henry Clay clashed with the administration of Andrew Jackson, who preferred to have banking power in the hands of state banks.
Under Biddle's leadership, the bank had become a powerful banking institution that produced a strong and sound system of national credit and currency. From 1823 to 1833, Biddle expanded credit steadily, but with wise restraint. By the time of Jackson's inauguration in 1829, the national bank appeared to be on solid footing. The U.S. Supreme Court had affirmed the constitutionality of the bank in 1819 the precedent-setting case of McCulloch v. Maryland. The bank had also helped American currency to remain healthy and stable and public perceptions of the central bank were generally positive.
But the bank came under attack by the Jackson administration in December 1829, on the grounds that it had failed to produce a stable national currency, and that it lacked constitutional legitimacy. Both houses of Congress launched committee investigations and their reports were supportive of the bank. Jackson rejected these findings, and called the bank as a corrupt institution, dangerous to American liberties.
Biddle tried to reach a compromise with Jackson and his cabinet to secure the bank's rechartering. Its term was due to expire in 1836. But Jackson persisted in his opposition to the bank. Biddle in turn reached out to pro-bank National Republicans led by Henry Clay. The led to what became known as the Bank War and led to a showdown in the 1832 election.
On July 10, 1832 Jackson used his veto to reject a bill calling for the recharter of the bank. Congress was unable to overturn the veto. Jackson won reelection in November of 1832 on his anti-bank platform, convincing the public of the evils of the bank. He removed all federal deposits from the bank and in 1833, federal revenue was diverted into selected private banks by executive order, ending the regulatory role of the Second Bank of the United States.
A brief financial crisis followed, with each side villifying the other. Some blamed on Jackson's executive action. while others Blamed Biddle for causing the panic. In February 1836, the bank became a private corporation under Pennsylvania law. An even greater financial crisis followed, due to the shortage of hard currency that Jackson had counted on, causing the Panic of 1837. This lasted for approximately seven years. The Bank suspended payment in 1839 and was liquidated in 1841. However this also spelled disaster for the Democratic Party in 1840, when William Henry Harrison was elected as the first Whig President, defeating incumbent (and Jackson's hand-picked successor) Martin Van Buren, who was pejoratively called "Martin Van Ruin" because of the Panic.