Second Bank of the United States: Definition & Overview

Instructor: Jason McCollom

Jason has a PhD.

The Second Bank of the United States, chartered in 1816, was designed to ensure financial stability in the U.S. It created political tensions and turmoil across two decades in the mid-19th century. Read about the short and exciting career of the bank, and then test your knowledge with a quiz.

The Creation of the Second Bank of the United States

Remember the school lunchroom when you were a kid? You likely traded food with your friends: a bag of chips for a soda, or a candy bar for some ice cream. The barter system was varied and it changed everyday. It was impossible to predict what tomorrow's trades would be.

This is similar to how the financial system operated in the United States during the early 19th century. There were hundreds of local and state banks, each issuing different types of currencies. The system lacked central control, and investors found it difficult to predict financial trends. The Second Bank of the United States (B.U.S.) emerged in 1816 as the country's centralized bank, which meant it systematized smaller banks and issued a uniform currency. In the 1830s the B.U.S. became the focus of political controversy. As politicians became polarized over the bank, it ultimately exhausted its charter and passed into history.

Prior to the B.U.S., hundreds of individual banks across the U.S. issued different types of credit and currency. Speculators and investors often tried to guess which currency would gain value the quickest, and in doing so, fortunes were swiftly made and lost. Loans were offered in a chaotic fashion. In 1816, government leaders finally agreed that the federal government should step in and create a second central bank (the first, commonly known as the First Bank of the United States, existed right after the American Revolution). The goal in creating this banks was to bring stability and uniformity to the nation's unruly financial system.

Located in Philadelphia and granted a 20-year charter, the Second B.U.S. was officially a private entity with which the federal government collaborated. Some of the America's richest people sat on its board of directors, while the federal government owned around 1/5 of the shares in the bank. Once in operation, the B.U.S. loaned money to smaller banks and oversaw their operations to make sure they didn't engage in unreasonably speculative activities. The bank also issued banknotes (paper money) in an attempt to create a strong central currency.

The headquarters of the Second Bank of the United States
2nd bus

The B.U.S. and the Panic of 1819

The B.U.S. issued credit freely and at low interest rates. Many people used this credit to buy up western lands at inflated prices. But in 1819, U.S. cotton prices collapsed due to global competition from Egypt and India. Threatened with a severe economic downturn, the bank called in its loans and people had to pay up. As the economy contracted, businesses closed, unemployment rose, and those Americans unable to pay their debts went to debtors' prisons or declared bankruptcy.

Though the B.U.S. wasn't the sole culprit in the Panic of 1819, many Americans believed it embodied the greed of the rich and created financially unstable situations. This sentiment is colorfully described in an 1820s pamphlet denouncing the paper-money machinations of the central bank. In the pamphlet, a farmer compared the bank's credit system to 'a man pissing in his breeches on a cold day to keep his arse warm--very comfortable at first but I dare say…you know how it feels afterwards.'

Andrew Jackson and the 'Bank War'

Amid this financial turmoil, a Philadelphia businessman named Nicholas Biddle came to lead the B.U.S. In 1832 Biddle appealed to President Andrew Jackson to renew the bank's charter early, before it ended in 1836. Jackson, however, was no friend of banks, especially a centralized federal bank. First, Jackson believed specie--that is, gold and silver--was the most stable currency, not paper banknotes. Second, Jackson had lost a lot of money in the 1790s when he invested in a speculative venture, and from that experience had come to distrust banks. Jackson vowed to obliterate the B.U.S., 'to put his foot upon the head of the monster and crush him to the dust.'

The resulting political confrontation between Jackson and supporters of the B.U.S. is called the Bank War. Congress nevertheless renewed the bank's charter, and Biddle and his political allies dared Jackson to respond. Jackson told his vice president, 'The bank…is trying to kill me, but I will kill it!' And kill it he did, with a presidential veto.

With this veto, Jackson successfully used the issue of the B.U.S. to his political advantage. He gave a strong speech calling the bank a tool of the wealthy and a vehicle for special interests. The president appealed to farmers and workers for support in opposing the bank, because, he argued, loose credit and paper money hurt the poor and only led to economic downturns such as the Panic of 1819.

Andrew Jackson

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