the problems facing the new Bank. The charter required that payment for Bank stock be made one-fourth in specie and the remainder in government securities or specie. Because of the premium on both specie and Treasury issues that existed at the time, this stipulation was often bypassed with the Bank accepting promissory notes secured by its own stock in payment. This meant that the Bank received neither the specie nor government securities it should have and began its operations in a weakened position.
Further, in an economy rife with speculation, it opened the way for an intense round of Bank stock speculation. This was particularly evident in Philadelphia and Baltimore, where a small group of individuals controlled much of the Bank’ s stock and used their position to manipulate the stock’ s price. Among the policies utilized was allowing stockholders to borrow on their stock holdings at a 25 % premium. Because of this advantage, at times the Bank’ s stock traded in the market at a premium of 50 % or more.
Baltimore branch President James A. Buchanan, Cashier James W. McCulloch and Director George Williams were primary participants in the stock speculation and engaged in outright fraud. They accomplished this by giving“ themselves the sole right to discount loans on pledges of stock, by lying to the local board of directors, by false entries in the books of the branch, by false reports to the bank at Philadelphia …” In early 1819 the scheme came crashing down at a cost of over $ 1.4 million to the Bank.
By the end of 1818, this mismanagement and fraud put the Bank in dire straights. Accommodations had fallen over 15 % since July, and circulation had fallen some 22 %. With specie holdings low relative to demand liabilities, when a call came in October from the Treasury for $ 2 million in specie to pay Louisiana Purchase obligations, the Bank could not comply. The Treasury had to settle for drafts on London instead.
That same month the House of Representatives instructed a committee to investigate the Bank, and its report in January 1819 spelled the end for President Jones. The report— combined with the losses suffered by the Bank from malfeasance— pushed it to the brink of failure. Popular opposition led to state efforts to tax the Bank’ s branches and only Supreme
Correspondence letter from Langdon Cheves to the head of the Bank of the United States in New Orleans directing him to cash drafts on Stephen Girard, dated February 28, 1822.
Court decisions in the cases of McCulloch vs. Maryland and Osborn vs. Bank of the United States saved the Bank from being taxed out of existence.
In late January 1819, Jones, encouraged by President Monroe, resigned his office. Backed by a group of Charleston, South Carolina, stockholders who had formed committees of correspondence with stockholders in other states, Langdon Cheves was elected to succeed Jones as president of the Second Bank in March 1819.
Cheves brought a distinguished record to his new position. He had begun public service as a member of Charleston City Council in 1802 and was elected to the South Carolina House of Representatives later that same year. He was appointed Attorney General of the state from 1808- 1810 before being elected to the US House of Representatives in 1810. There he strongly supported the War of 1812, chairing the Select Committee on Naval Affairs. He then chaired the Ways and Means Committee before being elected Speaker of the House in January 1814 and serving until he decided not to seek re-election in 1815.
With the country in the midst of a deepening depression and the Bank blamed for much of the resulting misery, Cheves began putting together a plan to restore the Second Bank’ s solvency and to place its operations on sound footing. In addition, he immediately reduced salaries and cut operating expenses, dealt with the revelations of mismanagement and fraud with“ investigations, dismissals and prosecutions” and orchestrated the appointment of new officers and directors.
Collection of the Museum of American Finance
38 FINANCIAL HISTORY | Winter 2018 | www. MoAF. org