geekyIt was the nation's first Treasury Secretary, Alexander Hamilton, who chartered the first national bank in the United States. Hamilton saw the importance of a strong bank as an important element of a strong central government. But after Hamilton left office, the first national bank would not last long. In 1795, the new Secretary of the Treasury Oliver Wolcott, Jr. informed Congress that, due to the state of government finances, more money was needed. This could be achieved either by selling the government's shares of stock in the bank, or by raising taxes. Wolcott preferred the former choice and a (Jeffersonian) Republican Congress agreed, above Hamilton's objections. Hamilton tried to organize opposition to the measure, but was unsuccessful. Sixteen years later, in 1811, the Senate tied on a vote to renew the bank's charter. James Madison's Vice President George Clinton broke the tie and voted against renewal. The bank's charter thus expired in 1811.
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.
Jackson's victory in the 1832 election allowed him to veto an extension of the national bank's charter before that charter expired in 1832. Though a congressional override of his veto was unlikely, Jackson still wanted to be sure that the national bank would be abolished. His administration was unable to legally withdraw federal deposits from the national bank unless the Secretary of the Treasury issued an official finding that the national bank was a fiscally unsound institution. This was a problem because the national bank was clearly solvent.
In January 1833, at the height of the Nullification Crisis, Tennessee Congressman James K. Polk introduced a bill that would provide for the removal the federal government's deposits from the national bank. Polk's bill was quickly defeated. After the Nullification Crisis ended in March 1833, Jackson renewed his offensive against the national bank. He was met with some opposition from within his own cabinet. Still, Jackson made preparations to remove federal deposits from the national bank. He sent Amos Kendall to meet with the leaders of various banks to see whether they would accept federal deposits.
Jackson ordered Secretary of the Treasury William Duane to remove existing federal deposits from the national bank. Duane refused to issue the requisite finding that the federal government's deposits in the national bank were unsafe. Jackson fired Duane and replaced him with future Supreme Court Chief Justice Roger Taney (infamous for writing the majority opinion in the Dredd Scott case). Rather than removing existing deposits from the national bank, Taney and Jackson instituted a new policy in which the government would deposit future revenue elsewhere, while paying all expenses from its deposits with the national bank. This policy ensured that the federal government would eventually no longer have deposits in the national bank. The Jackson administration deposited government money in a variety of state banks which were friendly to the administration. Jackson's critics called these banks "pet banks."
Nicholas Biddle responded to the withdrawals by stockpiling the national bank's reserves and offering less credit. This causing interest rates to rise. Biddle wanted to force Jackson into a compromise, but the move backfired and only served to increasing public opposition to the national bank. The transfer of large amounts of bank deposits, combined with rising interest rates, contributed to the onset of a financial panic in late 1833.
When Congress reconvened in December 1833, the National Bank was the main issue for everyone. Controversy ensued over the withdrawals from the national bank and the consequent financial panic. Neither party had complete control of either house of Congress, but the Democrats were stronger in the House of Representatives while the anti-Jacksonians were stronger in the Senate.
Senator Henry Clay introduced a measures to censure the Jackson for unconstitutionally removing federal deposits from the national bank. In March 1834, the Senate voted to censure Jackson in a 26–20 vote. The Senate also rejected Taney's nomination as Treasury Secretary, forcing Jackson to find a different treasury secretary. He eventually nominated Levi Woodbury, who was confirmed by the Senate.
In response, Democrats in the house, led by Ways and Means Committee chairman James K. Polk, passed a resolution on April 4, 1834 which declared that the national bank "out not to be rechartered" and that the depositions "ought not to be restored." The House voted to continue to allow pet banks to be places of deposit and also voted to investigate whether the national bank had deliberately instigated the panic.
By mid-1834, the relatively mild financial panic had ended, and Jackson's opponents had failed to recharter the national bank or reverse Jackson's removals. The national bank's federal charter expired in 1836. Nicholas Biddle's institution continued to operate under a Pennsylvania charter, but it never regained the influence it had had at the beginning of Jackson's administration.
In January 1837, following the election of 1836, Jackson's supporters had a majority in the Senate, and the Senate voted to expunge the censure of their president.