In the years leading up to the War of 1812, the US economy had been on the upswing. The war with Britain, however, disrupted foreign trade. As one of the United States’ largest trading partners, Britain used its navy to blockade US trade with other nations. The war prevented US farmers and manufacturers from exporting merchandise, blocked US merchants and fisherman from sailing the high seas, and curtailed federal government revenues, which were derived mainly from tariffs on trade. By 1815, the United States found itself heavily in debt, much like it had been at the end of the Revolutionary War thirty years earlier.
In January 1815, the United States had been without a national bank for almost four years. Many people thought that a successor would again provide relief for the country’s ailing economy and help in paying its war debt. Six men figured prominently in establishing this new entity, commonly referred to as the second Bank of the United States: the financiers John Jacob Astor, David Parish, Stephen Girard, and Jacob Barker; Alexander Dallas, who would become secretary of the Treasury in 1814; and Rep. John C. Calhoun of South Carolina. These men thought that reestablishing a national bank would solve some of the country’s economic woes. In particular, Astor, Parish, Girard, and Barker – as lenders and financiers -- felt that a national bank would restore a stable currency, thereby avoiding bouts of inflation and insuring their business interests.
Establishing a Second National Bank
Despite broad support for reestablishing a national bank, the road to re-creation was not smooth. In January 1814, Congress received a petition signed by 150 businessmen from New York City, urging the legislative body to create a second national bank. In February, and again in November, Calhoun put forth plans to create a bank that would be headquartered in the District of Columbia, but his bills did not pass.
In April 1814, President James Madison, who had opposed the creation of the first Bank of the United States in 1791, reluctantly admitted to the need for another national bank. He believed a bank was necessary to finance the war with Britain. But later that year, progress in peace negotiations led Madison to withdraw his support for the proposed national bank.
After peace with Britain came in 1815, Congress rejected new efforts to create the bank. In the months that followed, however, the federal government’s financial position deteriorated amid a broader economic downturn. Many state-chartered banks had stopped redeeming their notes, which convinced Madison and his advisers that the time had come to move the country toward a more uniform, stable paper currency. In his annual report, Dallas again called for the establishment of a national bank. After much debate and a couple of additional attempts, Madison finally signed in April 1816 an act establishing the second Bank of the United States.
Bank Structure and Operations
The Bank opened for business in Philadelphia in January 1817. It had much in common with its forerunner, including its functions and structure. It would act as fiscal agent for the federal government — holding its deposits, making its payments, and helping it issue debt to the public — and it would issue and redeem banknotes and keep state banks’ issuance of notes in check. Also like its predecessor, the Bank had a twenty-year charter and operated as a commercial bank that accepted deposits and made loans to the public, both businesses and individuals. Its board consisted of twenty-five directors, with five appointed by the president and confirmed by the Senate.
The capitalization for the second Bank was $35 million, considerably higher than the $10 million underwriting of the first Bank. Subscriptions went on sale in July 1816, and the sale period was set at three weeks. To make it easier for investors to buy subscriptions, sales were held in twenty cities. After three weeks, $3 million of scrips remained unsold, so Philadelphia banker Stephen Girard bought them.
The Bank’s reach was far greater than that of its predecessor. Its branches eventually totaled twenty-five in number, compared to only eight for the first Bank. The extensive branch network aided the country’s westward expansion and its economic growth in several ways. The branches provided credit to businesses and farmers, and these loans helped finance the production of goods and agricultural output as well as the shipment of these goods to domestic and foreign destinations. Moreover, the network helped move the money deposited in the branches to other parts of the nation, facilitating both the government’s ability to make payments and the branches’ ability to supply credit.
Unlike modern central banks, the Bank did not set monetary policy as we know it today. It also did not regulate, hold the reserves of, or act as a lender of last resort for other financial institutions. Nonetheless, its prominence as one of the largest US corporations and its branches’ broad geographic position in the expanding economy allowed it to conduct a rudimentary monetary policy. The Bank’s notes, backed by substantial gold reserves, gave the country a more stable national currency. By managing its lending policies and the flow of funds through its accounts, the Bank could — and did — alter the supply of money and credit in the economy and hence the level of interest rates charged to borrowers.