The Second Bank of the United
States, chartered for a twenty year period beginning in February, 1816,
combined aspects of what were increasingly being thought of as two distinct
forms of corporation, public and private. It was initially granted a
capitalisation, meaning the total amount to be held in reserve, of $35 million,
$7 million of which was to be provided by the United States government. This
mirrored the basic framework of First Bank of the United States, of whose $10 million
capitalisation the federal government provided $2 million (amounting to a 5%
share). In both cases the remainder of the needed capital was to be provided by
private individuals, entitling the purchasers to part-ownership of the
institution, the receipt of half-yearly
dividends, and a vote(s) corresponding to their percentage of ownership (for
the 1st BUS, not exceeding thirty votes) in the selection of the
board of directors and president. Shareholders could be United States citizens
or foreigners; either could collect dividends, though only resident citizens
were entitled to a vote. Taken together these various elements paint the 1st
and 2nd BUS as mainly private corporations; though they were both
created and defined by acts of federal legislation the majority of their
respective capital came from private sources, their major officers were elected
exclusively by shareholders, and formal government oversight extended only as
far as permitting the Treasury Secretary to conduct (up to) weekly inspections
of relevant financial records (not including the private accounts of
individuals). This was indeed was Hamilton had intended; guaranteeing the
autonomy of a national bank was a means to attract investors, accumulate
capital, and ensure a degree of prudent management. If the capital that the
institution’s directors were responsible for administering came mainly out of
their own coffers, and if an adequate performance of their duties would ensure
a healthy dividend, so much the better. As he had done before with admirable
skill, Hamilton determined in his framing of a national financial institution
to channel the ambitions, and even avarice, of certain classes of Americans
towards a larger public good.
That
being said, there were public aspects to the First and Second Bank of the
United States as well. With both iterations of the BUS the United States
government contributed five percent to the overall capital. It was thus left to
the President to appoint commissioners to sit on the Banks’ board of directors
and preside over the government’s shares. This allowed the federal government
to maintain direct representation in the institutions’ day to day affairs, gave
them a vote in the election of certain officers, and provided them a degree of
input into the policies that were discussed and/or adopted. In the case of the
1st BUS President Washington appointed three commissioners in 1791: Thomas Willing, a Pennsylvania merchant, David Rittenhouse, an inventor,
mathematician and surveyor from Philadelphia, and Samuel Howell, one of the
Revolution’s leading financiers. Willing was elected the first president of the
bank and served in that role until 1807, while Rittenhouse became the first
Director of the United States Mint. The dividend that accumulated from the
shares over which these men presided was pledged toward a fund set aside for
the payment of the national debt. Thus it was that public funds were to be put
towards a private purpose, with an outcome benefiting the public good.
The 2nd BUS had a twenty-five
member board, of which the President appointed five (subject to Senate
approval). Of the three presidents that the shareholders of the Second Bank of
the United States elected over the course of its twenty year history
(1816-1836), two, William Jones and Nicholas Biddle, where government appointed
directors. As with the 1st BUS, the 2nd was subject to
inspection by the Secretary of the Treasury. The federal government was also
able to exert control over the Second Bank of the United States by charging it
a fee of $1.5 million for the use of interest-free public funds in its private
ventures. Just as a national bank could claim authority over state banks by
controlling a portion of their debts so too could the United States over the 2nd
BUS. The Second Bank, headquartered as the First had been in Philadelphia, was
also permitted to open branch offices wherever it believed was necessary and
operate them free of state taxation. This preferential treatment, the kind of
donation of sovereign authority that incorporation at its root always implies,
can be viewed as both an incentive to the Second Bank to extend its authority
over the widest possible expanse of the United States, and as a signifier of
the importance that the federal government placed on the Bank’s regulatory
function.
Indeed, providing federal
regulation of the American currency market was one of the most important duties
that the Second Bank of the United States performed over the course of its
twenty year lifespan. As mentioned previously, the decentralisation of the
American banking system that followed the failure to re-charter the 1st
BUS in 1811 resulted in a drastic increase in the availability of credit and an
accompanying explosion in the circulation of paper currency. The state banks that
accomplished this feat together helped finance perhaps the most momentous
period of economic growth America had yet witnessed, but the lack of
coordination between them and of the enforcement of basic standards of
operation created their share of problems as well. When, during the war with
Britain, the United States government turned to the state banks for much needed
loans the resulting flurry of paper currency created a fundamental fiscal
imbalance. Banks with more conservative lending policies (located mainly in New
England) began to soak up the credit issued by newer banks in the West, and in
turn accumulated much of the hard currency that had previously acted as the
lending capital of these newer institutions. Because the state banks located in
New England were mostly controlled by Federalists who were opposed to the war
they were accordingly less inclined to offer loans to the federal government on
favourable terms. At the same time, the depleted capital of the
Republican-friendly banks made it harder for them to continue their generous
lending practises and threatened a sudden credit crunch.
In order to avert this
potentially disastrous outcome the Madison Administration agreed to allow the
state banks to cease paying out precious metals in exchange for their bills of
credit. This allowed the banks to continue to print large quantities of paper
currency and offer loans without having to worry about an accompanying
depletion of their specie reserves. While this may have been a useful measure
in the immediate it resulted in mounting inflation and presaged eventual crash
if/when specie payments were resumed. The Second Bank of the United States was
intended to solve this particular issue by regulating the currency distribution
of the various state banks. This was made possible, first by the 2nd
BUS’s acceptance of state-bank printed bills of credit in the form of interest
payments and federal taxes, and second by collecting on said bills in the form
of specie. This created an effective hurdle to extensive lending by rewarding
the state banks’ wide extension of credit with an eventual decrease of their
specie reserves and a resultant restriction of their lending abilities. State
banks that refused to bow to the pressure of this steady capital drain would,
in theory, no longer have their bills accepted by the federal government,
severely decreasing their value and undermining the legitimacy of the banks
themselves. To accompany these regulatory duties the 2nd BUS
proposed to greatly enlarge the scale of its own lending practises – a
proverbial “democratization of credit” – whereby it would offer long-term loans
to farmers, small-scale manufacturers and the various types of entrepreneurs
who had fallen outside of the client base of the 1st BUS. Along with
federal investment in infrastructure and government protection of domestic
manufacturing, the financial stability that the Second Bank was purported to
encourage were intended to foster widespread and sustainable economic growth. This
three-part federal program, supported by the “New Republicans” under Madison
and his successor James Monroe, subsequently became known as the “American
System.”
I apologise if this seems rather
dense, but I feel it’s important to understand how fundamental the operation of
the Second National Bank was to the mainstream Republican platform after the
War of 1812. For a faction that had once taken as its orthodoxy a belief in the
sacred primacy of agriculture and the inherent corruption of commerce this
represented a stunning about face and a major re-articulation of the role that
the Republican elite envisioned certain corporations playing at the highest
levels of American society. There were, or course, opponents to this newly
emerging status quo. The Old Republicans, still led by Virginia’s John
Randolph, maintained their opposition to the chartering of a second national
bank on mainly constitutional grounds and lamented the growing influence that
commerce and manufacturing were apt to enjoy thanks to the policies of the
American System. State banking interests were similarly disenchanted. The
extensive profits they’d been able to collect thanks to their unregulated
lending practises were set to be severely curtailed by the creation of a
central financial authority whose ties to the federal government and
accompanying privileges were nearly impossible to counter. Granted, certain
kinds of financial institutions could and did operate outside the oversight of
the 2nd BUS – non-chartered banks that offered credit on a small
enough scale that their bills never found their way into the hands of federal
tax collectors – but they were hardly poised to offer much resistance to the
Bank’s overall regulatory supremacy. Indeed, when the Second Bank of the United
States did eventually meet with crisis it came from within rather than without.
Under its first president, former
Secretary of the Navy William Jones, the 2nd BUS got off to a rather
inauspicious start. Responding to a proposal put forward by a coalition of
state banking interests, Jones and Treasury Secretary William Crawford agreed
in February, 1817 to delay the resumption of specie payments to the Second Bank
for a further five months until July 1st. Along with an expansion of
the central bank’s credit this allowed the state banks to reverse the flow of
hard currency so that gold and silver moved from the reserves of the 2nd
BUS to their own. This effectively strengthened the state banks’ paper
currencies and expanded their ability to extend credit while it devalued the
bills to be printed by the central bank. This imbalance was exacerbated by the
fact that, in keeping with Republican principles that valued limited federal
oversight, the 2nd BUS branch offices which subsequently opened in
most states operated with little, if any, main office supervision. This became
a problem during the Western land boom that followed, during which said branch
offices printed excessive quantities of paper currency in order to keep up with
the demands of farmers and speculators. At times Western branches of the Second
Bank even used their own notes to transfer specie out of the vaults of their
Northeastern counterparts and into their own reserves in order to bolster their
capital and continue their disproportionate lending practises. The result was a
dangerous overextension of the Second Bank’s credit and a breakdown of its
regulatory competence. By July, 1818 the Bank had lent out $22.4 million while
holding only $2.4 million in specie, double the 5 to 1 ratio of capital to
credit that was considered sustainable. Meanwhile the state banks had come to
hold such large quantities of Second Bank paper currency that it would have
been pointless for the central bank to attempt to collect on the state bills
they had accumulated; specie would have moved in both directions to little
effect.
Across the Atlantic in Europe, several years of poor harvests brought on by a series of volcanic
eruptions in 1815 finally gave way in 1817 to bumper crops. American farmers
had benefited greatly by the sudden increase in demand for the staple produce
they could provide, and many had taken out loans and expanded their holding in
order to boost production. The rapid drop in agricultural prices that followed
delivered a serious blow to the mainly agrarian American economy and set in
motion a sharp contraction of credit (farmers being unable to repay their
long-term loans and banks being unable to lend in the meantime). In October,
1818 the United States Treasury requested that the 2nd BUS transfer
$2 million in specie out of its reserves in order redeem the fifteen-year bonds
that had been sold to pay for the Louisiana Purchase in 1803. Unable to part
with such a large percentage of their capital, the directors of the central
bank attempted to collect the required sum from the state banks whose bills had
been collected in payment of federal taxes. The state banks were similarly
unable to cover the steep request for hard currency and in turn began calling
in the loans they’d granted during the agriculture and land boom and foreclosing
on the properties of those that couldn’t pay. When, in January, 1819, news arrived
that the value of cotton, an American staple crop, had plummeted 25% overnight
due to the emergence of India as a major source of the commodity for Britain’s
textile mills, panic ensued and the United States entered what would become the
first of many full-blown economic recessions.
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