high inflation and struggled to raise debt to fund the War of 1812 . Realizing that a central bank was essential , Congress approved a 20-year charter for the establishment of the Second Bank of the United States in 1816 . President Nicholas Biddle took over as the Bank ’ s president after the Panic of 1819 , and the Second Bank once again stabilized the nation ’ s currency .
2 . The Wildcat Banking Era
“ The bank , Mr . Van Buren , is trying to kill me , but I will kill it .”
— President Andrew Jackson , July 1832
In the run-up to the 1832 election , President Andrew Jackson expressed hostility toward the Second Bank . His animosity stemmed from his populist leanings , as well as his personal financial history . In the early 1800s , Jackson was nearly bankrupted after he accepted a promissory note for the sale of his property , and the buyer defaulted . This made him skeptical of any currency other than gold and silver coin . Sensing that President Jackson posed a threat to the Second Bank , Biddle submitted an early request to Congress to renew the Second Bank charter in January 1832 . Biddle believed that this would force Jackson to either back down from his threats or openly voice his opposition and lose the election as a result . But Biddle miscalculated . Despite gaining approval in both Houses of Congress , President Jackson vetoed the bill .
Contrary to Biddle ’ s expectations , the veto strengthened Jackson ’ s populist appeal , and he easily won a second presidential term . After taking office , Jackson terminated the Second Bank ’ s contract as the government ’ s fiscal agent and removed the government ’ s deposits . He then distributed the funds to state banks across the country . The Second Bank ’ s charter officially expired in 1836 , but without the government ’ s deposits its power was dramatically reduced by the end of 1833 .
The distribution of the government ’ s deposits initially stimulated the US economy , as it increased the reserves of state banks , which could then lend more liberally . This , in turn , drove higher asset prices , especially in real estate in the Midwestern and Western states . It was only a matter of time , however , before prices rose to
unsustainable levels . Jackson then made matters worse by issuing the Specie Circular in July 1836 , which forbade the use of bank notes for the purchase of public lands . This triggered a sharp rise in withdrawals of gold and silver from banks , forcing many to suspend conversion of bank notes .
Financial conditions worsened after Jackson left office , triggering a financial crisis known as the Panic of 1837 . In that year alone , several hundred banks failed , and the failure rate worsened in the 1840s . Americans referred to the early 1840s as the “ Hard Times ,” and the US economy contracted to depths previously unseen . Similar to the Great Depression that occurred nearly 100 years later , bread lines , soup kitchens and violent uprisings were common in major American cities throughout the early 1840s .
3 . The National Banking Era
“ We only ask you to examine the history of the times , during the existence of the two Banks [ First and Second Banks of the United States ], and compare those times with the miserable present .”
— President Abraham Lincoln , 1843
The US economy slowly recovered in the mid-1840s but only reached escape velocity after the discovery of gold at Sutter ’ s Mill in 1848 . The gold strengthened the balance sheets of the federal government and banking system by adding $ 50 million in reserves from 1848-1849 , and a total of $ 555 million in reserves over the course of the next decade . The expansion was interrupted , however , with the outbreak of the Civil War in 1861 . Soon thereafter , currency instability was problematic again . Union troops needed to purchase equipment and services across state lines , and stabilizing the currency was essential to ensure operational efficiency .
The United States did not reintroduce a central bank , but it did pass three laws that resurrected several of its functions . The Legal Tender Act of 1862 , the National Currency Act of 1863 and the National Banking Act of 1864 formed what is now referred to as the National Banking System . Nationally chartered banks were authorized to issue bank notes backed by Treasury securities , which stabilized the value of the currency .
The laws also established national banking regulations for the first time , which were enforced by the Office of the Comptroller of the Currency ( OCC ). Finally , the United States issued “ greenbacks ,” which were the nation ’ s first fiat currency , as they were not initially convertible to a fixed amount of gold or silver . The National Banking Acts proved absolutely critical during the Civil War and for several decades thereafter . However , the expansion of the US economy at the turn of the 20th century soon rendered them inadequate .
4 . The Federal Reserve Era
“ This is the place to stop the trouble , then .”
— J . Pierpont Morgan , October 22 , 1907
On April 18 , 1906 , residents of San Francisco were jolted awake by a massive earthquake . Within days , a large percentage of the city was either leveled by the quake or destroyed by fire . The earthquake also triggered a financial chain reaction that slowly made its way to New York City . By October 1907 , the combination of bank withdrawals to fund reconstruction in San Francisco and the typical pressure of the agricultural financing cycle rendered New York City banks and trusts highly vulnerable to panic .
In mid-October , the panic arrived when an amateur stock operator , Otto Heinze , attempted to corner the stock of United Copper . After his scheme failed , Heinze defaulted on his loans , forcing several brokerage firms into bankruptcy . With liquidity tight , the failure of the brokerage firms triggered an all-out run on the banking system . If not for the heroic effort of J . Pierpont Morgan to rally support from the largest national banks and trust companies , the entire financial system would have collapsed .
The Panic of 1907 inspired several key reforms , but it took six years before Congress and President Woodrow Wilson concluded that re-establishing a central bank was essential . Frustrated by the delays , Senator Nelson W . Aldrich lamented , “ Something has got to be done . We may not always have Pierpont Morgan with us to meet a banking crisis .”
The opposition eventually relented , and Wilson signed the Federal Reserve
16 FINANCIAL HISTORY | Winter 2023 | www . MoAF . org