The bank war
“THE monster is trying to kill me, but I will kill it!” that’s what General Andrew Jackson reportedly liked to say as he readied himself for a second term as President of the United States in 1832. In his second term, a lot would happen that entrenched the culture of bold entrepreneurship hailed today as a defining trait of America’s economic ascendancy and global dominance. Arguably, his resolve to kill the monster contributed a lot to that entrepreneurial culture.
The monster was the Second Bank of the United States, a successor of Alexander Hamilton’s Bank of United States chartered in 1791. Hamilton’s Bank as critics called, it was chartered for 20 years.
When the charter was due for renewal in 1811, it was rejected, but when Treasury struggled to raise funds for the 1812 war with England, the charter was reinstated up to the end of the war in 1815.
Madison, the charter’s opponent in 1791, renewed it in 1816 for another 20 years. In the 1812-15 war, the US, at least in their own eyes, emerged victorious and General Jackson became the larger-than-life war hero. He was popular and perhaps none had been so popular since General George Washington at the founding of the republic.
General Jackson ran for the presidency in 1824, won the popular vote, but was controversially beaten by John Quincy Adams. In 1829, he won and again in 1832 at which time, he declared his resolve to crush the Monster.
Drama that unfolded in fighting the Monster is known as the bank war: The president on one side and the bank’s chief Nicholas Biddle on the other, each with a sizable and passionate following which eventually became the two main political parties we know today.
On July 10, 1832 just four months after inauguration, he vetoed a move to re-charter the bank on the 1812 charter. The bank, however, still had the 1816 charter which would expire in 1836. He couldn’t even wait for it to die of natural causes.
Why was he and the Jacksonians against the bank? Who would want to shut down a central bank?
Many would, even today. As a matter of fact, some cryptocurrency enthusiasts envision that reality questioning the financial system as we have known to work for centuries. But in the times of Andrew Jackson the argument was different . . . wanted real things: gold, silver, livestock, slaves etc., not paper money.
While the general rule then was that all paper money was backed by gold, it was normal for even the most conservative bank to issue three-times gold reserve in paper money loans.
To Jacksonians this was outright fraud. Some even in our times are uncomfortable with banks creating money like that. Lest we forget, it was as recent as 2018 that the Swiss held a referendum on whether the National Bank of Switzerland should have the sole mandate to do that or let the banks “create” money by lending more than what they held as is practice. The Jacksonians would have liked that referendum.
Like many today, the Jacksonians also regarded traders on Wall Street as good-fornothings sucking away money from the real economy to gambling. All that gambling, they reasoned, had to be stopped.
There was, however, another reason for the President’s crusade against the bank charter: corruption. The process of getting charters was ridden with corruption. Senators pocketed kickbacks not to mention that charters themselves granted monopolies that permanently excluded fellow citizens from ever venturing into sectors with chartered firms. If anyone wanted to venture, they had to pay arbitrary fees to whoever held the charter. This was indeed unfair.
The bank war was thus a war for levelling the playing field and crushing a culture of privilege and corruption.
Things moved fast between 1832 and 1834. Essentially, the president compelled government to withdraw its funds from the bank. This left the bank in a financial squeeze. The bank chief raised interest rates because money was now in short supply. The market panicked.
The bank chief also called back loans and in so doing, borrowers across the financial market suffered. The market panicked further. As interest rates increased, some banks and many businesses went under.
For a little while, the president was unpopular as carnage hit commerce, but things changed quickly in his favour. Businesses started blaming the bank’s chief Nicholas Biddle.
It was he who was raising interest rates. It was he who was calling back loans. It was he who was at the centre of the problem and after all, as the bank, what was he doing to fix the problem?
On the other side of the camp the Jacksonians felt vindicated that this artificial thing, “the bank”, was indeed a monster given the carnage it was single-handedly wrecking. It had to go. Nicholas Biddle was defeated.
In 1836, the bank lapsed. Although in killing the monster President Jackson did not completely eradicate corruption and the exclusionary effect of charters, he roused the masses around a good cause and thus entrenched the daring entrepreneurial spirit so celebrated today in that country. The president had demonstrated that the culture of exclusion and corruption was not invincible; people could challenge it and win as they just had. It was now up to the people to get on with whatever enterprises they wanted - the good from the bank war.
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