Nov. 25, Banking, Jackson, Panic of 1837, and Nullification

1. How Banks Work (Basic Idea)

  • Banks do not store your money untouched.

  • Deposits go into a pool.

  • Banks make money by giving loans and charging interest.

  • Regular commercial banks cannot invest your deposits (post–Great Depression rule).

  • If too many people demand their money at once, banks fail → bank runs.

Bank Runs

  • Early U.S. banking had no regulation.

  • If loans were out and people rushed to withdraw money, banks ran out and failed.

  • In the Great Depression, 11,000 banks failed.

2. Why the Bank of the United States Was Safe

  • BUS held huge amounts of government money.

  • With federal backing, it was unlikely to collapse the way small banks did.

  • Jackson hated the BUS for political and personal reasons.

3. Jackson’s Bank Veto

  • BUS had already been declared constitutional (McCulloch v. Maryland, 1819).

  • Earlier presidents vetoed only laws they thought were unconstitutional.

  • Jackson changed this: vetoed based on personal policy objections, not constitutionality.

  • Massive increase in presidential power — leads to modern veto use.

4. Jackson Destroys the Bank

  • After vetoing renewal, Jackson withdraws all federal money from BUS.

  • BUS had loans out → little cash on hand → collapses.

  • Not many individuals lose money (big corporations mainly affected).

  • Jackson sends federal money to state banks (“pet banks”) that supported him politically.

Effect

  • Economy destabilizes:

    • Dollar value fluctuates

    • Investment drops

    • Companies close

  • Leads directly to the Panic of 1837.

5. Martin Van Buren

  • Jackson’s VP in his second term (after Calhoun resigned).

  • Wins 1836 election; takes office 1837.

  • Immediately crushed by the Panic of 1837.

  • Becomes a one-term president.

  • Teacher’s point: following a popular two-term president usually ends badly.

6. Nullification Crisis (Key Issue #1 of Jackson’s Presidency)

Root cause begins with:

Alien & Sedition Acts (1798)

  • Federalist laws → targeted Democratic-Republicans.

  • Jefferson and Madison thought they were unconstitutional.

  • No judicial review yet → Marbury v. Madison (1803) hadn’t happened.

Kentucky & Virginia Resolutions

  • Jefferson & Madison argued:

    • States gave the Constitution its power.

    • Therefore states could nullify federal laws they believed unconstitutional.

  • If true → Congress would be powerless.

  • John Marshall later rejected this idea:

    • Power comes from the people, not the states (“We the People”).

7. Tariff of Abominations (1828)

  • Congress passes very high tariffs:

    • 38% on imported finished goods.

    • ~40% on imported raw materials.

  • Other countries retaliate with tariffs on American goods.

  • Farmers suffer → they lose almost half their profits.

South Carolina Reaction

  • Led by John C. Calhoun (Jackson’s former VP, extreme states’ rights figure).

  • South Carolina nullifies the tariff.

  • Declares they will not enforce or collect it.

8. Jackson’s Role

  • As president, Jackson must enforce federal law.

  • Nullification directly challenges federal supremacy.

  • Sets up a confrontation between Jackson (Union) and South Carolina (states’ rights).