US Economic History 3 — National Banks’ Rise and Fall
Does a national bank make the US economy more stable or more chaotic? Video created with the Bill of Rights Institute to help students ace their exams.
This is the third video in a series of nine with Professor Brian Domitrovic, which aim to be a resource for students studying for US History exams and to provide a survey of different (and sometimes opposing) viewpoints on key episodes in U.S. economic history. How do you think we did?
- Hamilton Tells the Story of a Great Historical Figure, but Misses Some of the History (blog post): Interested in learning more about Alexander Hamilton after seeing Hamilton and this video? Peter McNamara explains how historically accurate the musical Hamilton is.
- Cash is not the enemy; central banks are (blog post): Douglas French makes a case against central banks.
- Andrew Jackson: The First Imperial President (video): Professor Amy Sturgis argues why Andrew Jackson shouldn’t be considered one of America’s greatest presidents.
One of the most notable political battles in the early United States once the Constitution was ratified in 1789, was over the question of whether there should be a national bank. The bank of the United States was chartered by Congress and signed by the president in 1791 at the urging of Alexander Hamilton, the first Secretary of the Treasury. Hamilton held that the bank was constitutional on the grounds of the necessary and proper clause in article 1 section 8 of the founding document.
However, prominent figures such as Thomas Jefferson disagreed holding the bank was neither necessary nor proper, and therefore it was an unconstitutional expansion of federal power. Now when the bank was passed by Congress and signed by president Washington in 1791, it had a charter for 20 years, there was to be a branch in every state.
One of the purposes of the bank was to provide a place for the United States to deposit its own receipts and for the Americans to make tax payments. The bank would lend money for American industrial, commercial and agricultural growth, moreover, the bank would be essential in funding the military in times of war. The bank was especially useful for helping to pay down large amounts of government debt.
As the debt leftover from the revolutionary war shrunk in the early 1800s, president James Madison thought it became clear that the bank was losing its usefulness. As such, the bank was retired when its charter expired in 1811. But then the United States again piled up a large debt in the war of 1812 that came just the next year, and the financing of the war is hampered by there not being a national bank.
In 1816 when the war was over, Congress and president Madison chartered a second bank of the United States again for 20 years. Madison reversed his earlier opposition by signing the bank bill. When states attempted to tax branches of the bank as they taxed other business entities within their borders, it led to a famous and important Supreme Court case.
In McCulloch versus Maryland of 1819, the Supreme Court ruled that taxation and any other form of state sovereignty over a federal institution within a state's borders was unconstitutional because of the federal supremacy clause in article 6 of the Constitution. More importantly, the Supreme Court ruled that the national bank was constitutional. However, despite adoption by two congresses and presidents, and the ruling in McCulloch versus Maryland, the bank continued to be very controversial.
In particular, many southerners and westerners adopted the Jeffersonian view toward the second bank of the United States and believed it was an unconstitutional expansion of federal power. The bank provided a stability to the national banking system, in that the bank's various branches in each state which accepted public deposits had a very little chance of failure given that the bank had a claim on federal tax revenue.
However, critics said that the bank introduced an instability into the banking system by incentivizing private banks to take greater risks and that the bank played favorites in Washington. When Andrew Jackson became president in 1829, 10 years after McCulloch versus Maryland, the controversy over the bank was still ongoing. When Congress passed a bill to renew the bank's charter in 1832, and thereby establish a third United States bank, president Jackson vetoed the bill. He said, "The bank is trying to kill me, but I will kill it."
Jackson argued against the bank on the grounds that he believed the bank concentrated economic power in the hands of wealthy monopolists and well-connected speculators. Jackson thought that foreign invested had undue influence upon the bank, and Jackson believe as Jefferson had argued years before, that the bank was unconstitutional despite what the Supreme Court had said.
But Jackson's treasury secretaries refused the president's instructions that federal deposits be taken out of the bank of the United States and place it in the state [inaudible 00:04:26] banks which were private banks that the federal government could choose to do business with. Jackson fired several secretaries of the treasury until he appointed an obliging Roger Taney who agreed to make the move. Jackson got his way and the bank's charter expired in 1836. After that there was no federal organization of the national banking system for 77 years until the creation of the federal reserve system in 1913.
Economic historians disagree about whether this was a good thing. Some argued that this period demonstrates that the national economy was better off without a national bank, while most others argue that we had a clear need for it. Like debates over today's federal reserve, the argument is not settled.