Wall Street History
Andrew Jackson: Part Three - Panic
Well, guess what? Another detour in our story of Andrew
Jackson and the Bank of the United States (to be totally correct,
the “Second” Bank). You realize why I’m doing this, don’t you?
It’s to delay the inevitable, that being how to make the
confrontation between Jackson and the Bank entertaining. I
haven’t figured out if I can pull that off yet, so, instead, we go
gallivanting about in different directions, until the inevitable day
Actually, we have thus far covered two important events from
the Jackson presidency (1829-37), that being the Peggy Eaton
affair and the battle over the Union itself. Now I figure that I
can’t cover the Bank of the United States without going back to
the Panic of 1819 and McCulloch vs. Maryland, because these
two moments in America’s history are not only important, but
they helped shape Andrew Jackson’s opinions on both
government and the influence of a central bank.
In his first inaugural address in 1829, President Jackson voiced
his doubts about the power of the Bank and the constitutionality
behind it. He was equally suspicious of any alliance between
government and a bank, believing that such a relationship
benefited the few at the expense of the many.
Back on April 10, 1816, Congress created the Second Bank of
the U.S., the first having been established by Alexander
Hamilton, but the charter of which expired in 1811. Congress
chartered the Second Bank for a period of 20 years and
capitalized it with $35 million, of which $28 million was to be
sold to private stockholders, with the other $7 million subscribed
to by the federal government.
The creation was in response to the War of 1812, which virtually
bankrupted the government. By 1816, the public debt stood at
$127 million, exceeding $100 million for the first time, so the
Bank was seen as a way of restoring fiscal stability.
Headquartered in Philadelphia, it was permitted to establish
branches and issue bank notes.
Postwar, the U.S. was expanding like crazy. Consider, for
example, that between 1816 and 1821, six new states would be
created; something that, as historian Paul Johnson notes, was
akin to adding six European nations.
The boom was first fueled by the soaring price of cotton. British
and French consumers were sopping it up, as were Americans,
and one boom begot another, this time in land. This led to the
establishment of all kinds of banks, for, as Johnson put it, all you
needed to set one up was “plates, presses, and paper.”
There were all kinds of crosscurrents in the American economy
at this time. Since 1815, the speculative land bubble had been in
full swing, fueled by easy access to credit. Out West, land
speculators would buy up huge tracts, putting down just 25%.
They then turned around and sold it to settlers, who agreed to pay
the remaining installments. Well this works as long as prices
keep going up. [I’m hoping right about now you are thinking of
our own recent bubble in equities, and the potential real estate
one that some say is close to popping as well.]
Land speculation was a major part of the initial debate in
chartering the Bank in 1816. Missouri Senator Thomas Hart
Benton at one point said of the western towns, soon to be at the
mercy of a centralized eastern bank:
“They may be devoured by it at any moment! They are in the
jaws of the monster! A lump of butter in the mouth of a dog!
One gulp, one swallow, and all is gone!” [Tindall & Shi]
By 1818 the price of cotton was about 32 cents a pound. Then
the bubble burst and soon it collapsed to 14 cents in New
Orleans. [Philadelphia cotton mills, which employed 2,300 in
1816, were soon down to 150 workers.] This touched off a
decline in other goods. [It’s a classic example of why ‘deflation’
is not a good thing, particularly in an environment of massive
indebtedness.] The huge speculative bubble, fueled by easy
access to credit for businessmen, farmers and land speculators,
burst. Land prices fell 50-75%. No one could pay off their loans
and banks went under in 1819, a true “panic.”
While all this was going on, the Bank of the United States was
also caught up in the speculation. William Jones, a former
congressman, had been appointed the first president in 1816, but
he knew little about the industry. The Bank was reckless in its
own activities, and then you had the case of the two managers of
the Baltimore branch, James Buchanan and James McCulloch.
Now this gets a little complicated, but two things were going on
in Baltimore. The state of Maryland, under pressure from the
state-chartered banks, sought to raise revenue by taxing the
federal bank’s branch, so it brought suit against McCulloch, the
cashier (for lack of a more senior term), when he refused to pay
One of the reasons why McCulloch may not have wanted to pay
the tax is the fact that both he and Buchanan had been taking out
unsecured loans from their own bank, to the tune of $675,000
between them, in order to play the land speculation game.
[Heck, Worldcom CEO, Bernie Ebbers, was loaned $341 million
by his firm, some of it to invest in real estate, so what’s the big
deal?] Of course, both lost everything and then some in the
Panic that ensued.
Anyway, back to McCulloch vs. Maryland, the state initially won
its claim, but the Federal Government, facing suits in other states
as well, took it to the Supreme Court.
Two issues were central to the case:
1) Does Congress have the power to incorporate a bank?
2) May the state of Maryland tax a branch of the Bank of the
United States located there?
Of course this turns out to be one of the most important cases in
the history of our nation.
Regarding the first question, Chief Justice John Marshall (who
held this position from 1801-1835) said, yes, Congress had the
power to establish a central bank. If Congress has been
empowered by the Constitution to collect taxes, to borrow
money, to regulate commerce and conduct war, it also certainly
holds that it can incorporate a bank.
Marshall opined that Congress had the power to “make all laws
which shall be necessary and proper for carrying into execution”
the expressed powers in the Constitution, including creating a
bank, adding, on the issue of constitutionality:
“Let the end be legitimate, let it be within the scope of the
constitution, and all means which are appropriate ”
As to the second issue, could Maryland tax a federal bank, the
answer was a big, no. The national government is “supreme.” If
a state could regulate the laws of the federal government as it
saw fit, then the Federal Government, and the Constitution itself,
would be rendered “incompetent to the objects for which it was
instituted, and place all powers under the control of the state
legislatures." The tax was therefore unconstitutional because the
“power to tax involves the power to destroy,” which is what
Marshall et al saw as the mission of the various state legislatures
seeking to do just this with the Bank of the United States.
But with the decisions in McCulloch vs. Maryland, we’re not
finished with the Panic of 1819. Due to William Jones’s
incompetence, another former congressman, Langdon Cheves,
was brought in to clean up the mess at the Bank. Cheves
pressured the state banks, which put pressure on the debtors, and
the resultant credit squeeze really caused problems. Even
Jefferson and Madison almost went under with their personal
holdings, as the nation’s distress lasted until about 1823.
In the end the Bank wasn’t exactly loved by the people;
particularly those living in the South and West. As historian
Michael Beschloss writes, “The ‘villainous’ bank, which did not
have to stand for public office, became the object of public fury,
and calls for an end to its federal charter were renewed.”
This is how we come full circle to Andrew Jackson. The Panic
was a defining moment for him in shaping his views. The Bank
wasn’t to be trusted. So maybe next week we’ll finally get
around to the big conflict he had with a chap, Nicholas Biddle.
Then again, maybe we won’t!
“America: A Narrative History,” Tindall and Shi
“A History of the American People,” Paul Johnson
“American Heritage: The Presidents,” Michael Beschloss
“A History of the Supreme Court,” Bernard Schwartz
Note: I would have answered this next week, but in case you’re
wondering now, the current Federal Reserve Bank, which I’m
assuming you were thinking of from time to time as you read the
above, was established in 1913.