Andrew Jackson and the Bank War: Exhaustive Study Notes

Banking Policy and Currency in the Nineteenth Century

• Categorization of Money: During the Jacksonian Era, money was bifurcated into two distinct types:

  • Hard Money (Specie): Consisted of physical gold and silver. This was the only currency the federal government was authorized to coin.

  • Paper Currency (Notes): These were essentially credit instruments or promises to pay. They were issued primarily by commercial state banks rather than the federal government.

• Mechanics of Paper Currency:

  • Paper notes were used heavily for land purchases, business transactions, and credit.

  • In theory, a paper note (e.g., a $10$ note) represented a promise by the issuing bank to pay the bearer the equivalent value in hard gold or silver.

  • The actual value of these notes fluctuated frequently due to the limited supply of hard specie available to back them.

• Problems with State Banking:

  • State banks often engaged in "lax money policy," printing an excessive amount of paper notes to facilitate cheap land sales.

  • Over-printing led to the significant devaluation of paper currency, creating a volatile financial environment described as a "recipe for disaster."

The Second Bank of the United States (BUS)

• Purpose and Function: Based on Alexander Hamilton’s original financial vision, the Bank of the United States was established as a centralized institution to rein in the practices of state banks and ensure national economic stability.

• Controversial Nature of the Bank:

  • Regulatory Friction: State banks resented the federal bank’s oversight, particularly its power to demand that state banks back their paper notes with physical gold and silver—reserves many state banks did not actually possess.

  • Perceptions of Corruption: The bank held all federal revenues, giving the federal government and bank directors immense power to decide who received credit and loans. It was widely associated with "privilege" and elitism.

  • Power Dynamics: Critics, including Jackson, calculated that the bank held more power over the economy and currency than the people’s elected representatives.

• Recharter History: The original bank charter expired and was rechartered in $1816$ for another $20$-year term.

Andrew Jackson’s Opposition to the Bank

• Personal Philosophy: Andrew Jackson harbored a deep-seated hatred for the Bank of the United States, paper money, and banks in general. Historians often describe his economic views as "neanderthal" or rooted in a simplified agrarian past.

• Political Objections:

  • He viewed the bank as a symbol of concentrated power and systemic corruption.

  • He believed the bank had the ability to withhold money and manipulate the national currency for the benefit of a wealthy few.

  • He adopted a "Jeffersonian viewpoint," arguing that the bank was unauthorized by Congress, subversive to state rights, and dangerous to human liberty.

The Bank War and the Election of $1832$

• The Recharter Strategy: Proponents of the bank, specifically Daniel Webster and Henry Clay, attempted to use the bank as a political wedge issue. Though the bank was not set to expire until $1836$, they brought the recharter bill to Congress in $1832$ to force Jackson to take a definitive stand before the election.

  • The Trap: They believed that if Jackson signed the bill, he would alienate his anti-bank base; if he vetoed it, he would lose the support of pro-bank voters.

• The Veto Message: Jackson successfully vetoed the bank bill. In his message, he framed the veto as an act of protection for the common people against the forces of privilege and wealth. He explicitly categorized the bank as an institution that did more harm than good to the citizenry.

• Election Results of $1832$:

  • Jackson won a resounding victory, which he interpreted as a clear mandate from the American public to dismantle the bank entirely.

  • Alabama Case Study: In the state of Alabama, approximately $14,500$ total votes were cast. Jackson received nearly every vote; only $5$ individuals in the entire state voted for Henry Clay. Jackson viewed such overwhelming numbers as a directive for his "war."

Dismantling the Bank: Pet Banks and the Specie Circular

• Removal of Deposits ($1833$): To effectively "starve" the bank to death, Jackson ordered the removal of all federal deposits from the Bank of the United States. These funds were redistributed into "selected state banks" (often referred to as "Pet Banks").

  • This move was supported by individuals who desired easier credit and by state bankers who benefited from the influx of federal revenue.

• Shift to Hard Money: Jackson sought to eliminate paper notes from the national circulation entirely, favoring a return to gold and silver.

• The Specie Circular ($1836$): Near the end of his second term, Jackson issued this executive order, which mandated that all purchases of public land be made exclusively in gold or silver (hard specie). This was intended to curb land speculation and inflation.

The Response of Nicholas Biddle

• Nicholas Biddle’s Retaliation: The President of the Bank of the United States, Nicholas Biddle, famously reacted to Jackson’s attacks by stating, "Jackson thinks he’s going to kill the bank. I will kill it. I will kill him."

• Economic Manipulation: Biddle attempted to demonstrate the bank’s necessity by deliberately tightening the money supply, reducing loans, and calling in debts. He hoped to trigger an economic downturn that would damage Jackson’s popularity.

  • To Jackson, Biddle’s actions served only to prove his point: that the bank was a dangerous entity with too much power over the lives of everyday citizens.

• Congressional Censure: Jackson’s critics in Congress, appalled by his aggressive banking policies and the removal of deposits, officially censored him for his actions.

Economic Consequences: The Panic of $1837$

• Initial Boom: Immediately following the Bank War, there was a temporary surge in canal construction, land sales, and cotton production.

• The Great Depression of $1837$: By $1837$, the economy collapsed into a deep depression that lasted until the mid-$1840$s.

  • Inflationary Peak: Prices climbed $28\%$ over a three-year span. By $1840$, the cost of living was significantly higher than it had been in $1837$.

  • State Debt: State-level debts rose considerably during this period.

• Debate Over Causality:

  • Internal School of Thought: Argues Jackson was directly responsible. By removing the Second Bank of the United States, he removed the only check on state banks. These banks over-circulated notes, causing inflation. When the Specie Circular forced people to trade notes for gold, banks lacked the reserves and were forced to close.

  • External School of Thought: Argues the panic was caused by factors outside Jackson’s control, such as a global surplus of cotton causing prices to drop (bankrupting Southern and Western farmers) and Great Britain raising interest rates in $1836$, which halted foreign investment and caused states to default on loans.

• The Van Buren Response: Jackson’s successor, Martin Van Buren, adhered to the Jeffersonian principle of limited government. He provided little federal aid to businesses, viewing the depression as a natural market cycle that would eventually correct itself.