Second Bank of the United States (1816-1836)

The Second Bank of the U.S. was chartered in 1816 with the same responsibilities and powers as the First Bank. However, the Second Bank would not even enjoy the limited success of the First Bank. Although foreign ownership was not a problem (foreigners owned about 20% of the Bank's stock), the Second Bank was plagued with poor management and outright fraud (Galbraith). The Bank was supposed to maintain a "currency principle" -- to keep its specie/deposit ratio stable at about 20 percent. Instead the ratio bounced around between 12% and 65 percent. It also quickly alienated state banks by returning to the sudden banknote redemption practices of the First Bank. Various elements were so enraged with the Second Bank that there were two attempts to have it struck down as unconstitutional. In McCulloch v. Maryland (1819) the Supreme Court voted 9-0 to uphold the Second Bank as constitutional. Chief Justice Marshall wrote "After the most deliberate consideration, it is the unanimous and decided opinion of this court that the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution, and is part of the supreme law of the land" (Hixson, 117). The Court reaffirmed this opinion in a 1824 case Osborn v. Bank of the United States (Ibid, 14).

Not until Nicholas Biddle became the Bank's president in 1823 did it begin to function as hoped. By the time the Bank had regained some control of the money supply and had restored some financial stability in 1828, Andrew Jackson, an anti-Bank candidate, had been elected President. Although the Second Bank was not a campaign issue (Biddle actually voted for Jackson), by 1832, four years before the Bank's charter was to expire, political divisions over the Bank had already formed (Ibid). Pro-Bank members of Congress produced a renewal bill for the Bank's charter, but Jackson vetoed it. In his veto message Jackson wrote,

A bank of the United States is in many respects convenient for the Government and for the people. Entertaining this opinion, and deeply impressed with the belief that some of the powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people, I felt it my call to the attention of Congress to the practicability of organizing an institution combining its advantages and obviating these objections. I sincerely regret that in the act before me I can perceive none of those modifications of the bank charter which are necessary, in my opinion, to make it compatible with justice, with sound policy, or with the Constitution of our country (Ibid, 14-15).

Jackson was not opposed to central banking, per se, but to the Second Bank in particular. No other bill to renew the Bank's charter was presented to Jackson, and so the Second Bank of the United States expired in 1836. The U.S. would be without an official central bank until 1913 when the Federal Reserve System was formed.

Jackson believed that the nation's money supply should consist only of gold or silver coin minted by the Treasury and any foreign coin the Congress chose to accept. This view was fully impractical. The gold and silver stocks of the U.S. were terribly inadequate to provide a sufficient money supply of Jackson's preference. The U.S. at that time had no substantial mines of its own and regularly had a trade deficit, so there was no dependable method to increase the money supply under what Jackson perceived to be the only Constitutional monetary system.

However, few others shared Jackson's opinions on this matter. Even the so-called "Jacksonian" Supreme Court ruled in 1837 in Briscoe v. Bank of Kentucky that state-chartered banks, state-owned banks, and the banknotes they created were fully Constitutional (Hixson, 119). Combined with the unanimous 1819 McCulloch ruling, the legal environment of the U.S. had clearly established that central banking, state banking, and paper currency issued by both entities were Constitutional. That the U.S. chose to proceed through the balance of the nineteenth century without a central bank would lead to interesting and creative measures to construct a financial system.