Lecture 11.

Jackson’s Bank War: A Monetary Union Perspective

1. Political-economic significance of Jackson’s “bank war.”

a. Economic: from Hamilton’s “dual” banking-monetary system to an era of “free” or
“states’ rights” banking.
b. Political: consolidation of the 2nd party (Democrats-Whigs) system in the 1832
presidential election. Transregional parties.

2. Alternative formulation: weak vs. strong monetary union.

a. Weak union: common national unit of account; local control over the money
supply. “Multiple” moneys, domestic exchange rates.
b. Tight union: a defacto common national currency whose supply is effectively
regulated by a central monetary authority?
1) Source of BUS’s monetary powers or authority? How did it wield this power?

3. Monetary impacts of Biddle’s policies: Some preliminaries.

a. M1 = transactions money = Currency in circulation (C) + Deposits (D); currency
includes official (legal) and private bank money = Cl + Cp.
b. High-powered money or monetary base = H = monetary specie = bank reserves +
legal tender currency = R + Cl.
c. M1 = H @ money multiplier; multiplier varies inversely with key ratios Cl/M1, R/D
(c, r in text).

4. The Biddle regime: relatively conservative real bills monetary policy.

a. BUS policy accommodated current economic activity; constrained bank lending
and monetary issues to financing (e.g.) inventories, trade credit.
1) Relatively stable per capita money supply.
2) Decline in H offset by increase in money multiplier.
b. Why? E.g., Bank’s policies instilled greater public trust in banking system and
enabled banks to economize on use of currency to effect transactions.
c. But these benefits came at a real cost: slow, steady, deflationary growth.

5. After Biddle: a new monetary regime with more rapid money supply and economic
growth.
a. Surge in M1 during 1830s boom, after 1843. “Wildcat” banking? Evidence?
Decline in money multiplier (increase in reserve ratio), offset by an increase in H.
b. Money supply growth fueled rapid economic growth. Price inflation but only in
the 1830s, for more inelastically supplied agricultural products.
c. “Free banking” concentrated in and fueled rapid settlement-development of the
“west,” south (Jackson-land).
d. The BUS as a developmental institution.
 http://upload.wikimedia.org/wikipedia/en/8/8c/2ndBankofUSSouthFacade.JPG

Second Bank of the United States Building (in Philadelphia)

1 of 1 2/1/2007 10:11 AM
 Figure 1
Minnesota Money before the Civil War
 Discount Rates on Chicago Bank Notes in New York City
1852 to 1860
30

25 Bank of America
Chicago Bank

20.0 City Bank of Chicago

20 Commercial Bank
% Discount from Par

15

10.0
10
8.0
7.0

5 5.0
2.5 3.0 3.0
1.5 2.0 1.8 1.5 2.0

0
Thompson’s Bank Note Reporter
 The Price of “Money” across the BUS
Network: An Administered Market

Drawn on
Philadelphia Boston New York

Purchased at 1830 1831 1830 1831 1830 1831

Philadelphia 0.125 0.125 0.062 0.062

Boston 0.000 0.000 0.000 0.000
New York 0.000 0.000 0.125 0.000
Charleston 0.125 0.500 0.125 0.500 0.125 0.500
Cincinnati 0.250 0.500 1.000 1.000 1.000 0.750
St. Louis 0.250 0.500 0.255 0.250
New Orleans 0.250 0.500 0.250 0.500 0.250 0.500
 Second Bank of the United States “Money:”
Bank Notes and Drafts

 
 
Figure x.1
MAP OF SECOND BANK AND ITS BRANCHES
55
6
9
8
23
20
26
19
11
Philadelphia, Pennsylvania (1817)
1 Augusta, Georgia (1817)*
2 Baltimore, Maryland (1817)
3 Boston, Massachusetts (1817)
4 Charleston, South Carolina (1817)
5 Chillicothe, Ohio (1817)
6 Cincinnati, Ohio (1817)
7 Fayetteville, North Carolina (1817)
8 Lexington, Kentucky (1817)
9 Louisville, Kentucky (1817)
10 Middletown, Connecticut (1817)
11 New Orleans, Louisiana (1817)
12 New York City, New York (1817)
* Closed that same year
Source: Federal Reserve Bank of Philadelphia (2010), p. 8.
8 The Second Bank of the United States
Subscriptions went on sale in of the Second Bank greatly aided the country’s
July 1816, and the sale period was set westward expansion and its economic growth
at three weeks. To make it easier for in several ways. The branches took in revenues
investors to buy subscriptions, sales from the sale of federal land. They also provided
were held in 20 cities. However, when, credit to businesses and farmers, and these loans
21
14 after three weeks, $3 million of scrips helped to finance the production of goods and
24
33 remained unsold, Stephen Girard agricultural output and the shipment of these
25
15
10 bought them.19 goods to domestic and foreign destinations.
22
12
12 Because the Second Bank Customs duties collected as a result of
also functioned as a commercial foreign trade were deposited in the branches.
22
18 bank and made loans to individuals Moreover, the network helped move the
16 and companies, its banknotes (paper money deposited in the branches to other
13 currency) most commonly entered parts of the nation, facilitating both the
77 circulation as part of the loan process government’s ability to make payments and
rather than through the purchase of the branches’ ability to supply credit.
11 U.S. government securities. Many state Unlike modern central banks,
44
17
banks envied the Second Bank because the second Bank of the United States did
it received all of the government’s not officially set monetary policy. Nor
deposits and therefore could make did it regulate other banks. Nonetheless,
more loans. Although state banks its prominence as one of the largest
issued their own banknotes when corporations in America and its branches’
making loans, these banks did not broad geographic position in the
have the size or geographic scope of expanding American economy allowed
13 Norfolk, Virginia (1817)
the Second Bank. it to conduct a rudimentary monetary
14 Portsmouth, New Hampshire (1817)
15 Providence, Rhode Island (1817) Indeed, the Second Bank’s policy. The bank’s notes, backed by substantial gold Cover of a report submitted to the Senate
16 Richmond, Virginia (1817) of Pennsylvania, arguing in favor of having
reach was far greater than that of its reserves, gave the country a more stable national
17 Savannah, Georgia (1817) the government’s deposits returned to the
18 Washington, D.C. (1817) predecessor. Shortly after the bank currency. By managing its lending policies and the Second Bank.
19 Mobile, Alabama (1826) opened, it had 18 branches and later flow of funds through its accounts, the bank could Courtesy, Independence National Historical Park
20 Nashville, Tennessee (1827)
added eight more. But one closed, so — and did — alter the supply of money and credit
21 Portland, Maine (1828)
22 Buffalo, New York (1829) the bank ultimately ended up with in the economy and hence the level of interest rates
23 St. Louis, Missouri (1829)
25 branch offices around the country charged to borrowers. banks. In the course of business, the Second Bank
24 Burlington, Vermont (1830)
25 Utica, New York (1830) (see the map).20 The First Bank, in These actions, which had effects similar to (again, similar to the First Bank) would accumulate
26 Natchez, Mississippi (1830)
comparison, had only eight branches. today’s monetary policy actions, can be seen most the notes of the state banks and hold them in
The extensive branch network clearly in the Second Bank’s interactions with state its vault. When it wanted to slow the growth of
The Second Bank of the United States 9
Figure x.5: The "In-Degree" Network of the
New Orleans Branch (NOLA)

Boston

NOLA
Figure x.6: The "In-Degree" Network of the New York Branch
 Bills Discounted (in millions of current and 1821 dollars)

$0.0
$2.5
$5.0
$7.5
$10.0
$12.5
$15.0
$17.5
$20.0
$22.5
$25.0
$27.5
$30.0
$32.5

1819.10
1820.04
1820.10
1821.04
1821.10
1822.04
1822.10
1823.04
1823.10
1824.04
1824.10
1825.04
1825.10
1826.04
Real

1826.10
Nominal

1827.04
1827.10
1828.04
1828.10
1829.04
1829.10
1830.04
1830.10
1831.04
1831.10
1832.04
1832.10
1833.04
Figure x.2: Domestic Bills of Exchange Discounted by the BUS (nominal and real)

1833.10
1834.04
1834.10
 Table x.1 Shares (in %) of Bills of Exchange Discounted by SBUS Branches
(by Region and Main Branch in Each Region)

1821 1825 1830 1832 1833 1832/33

New England 14.4 17.5 8.1 10.0 19.7 14.6
Boston 7.2 9.0 4.3 5.4 12.9 8.9
Mid-Atlantic 13.6 28.5 20.1 17.7 16.5 17.1
New York 10.7 8.1 7.3 4.3 4.0 4.2
Philadelphia 2.3 18.2 10.1 8.3 8.4 8.3
South Atlantic 39.5 26.2 15.6 14.3 13.6 14.0
Charleston 10.7 11.5 3.4 3.2 3.9 3.6
North Central 9.4 5.6 4.2 3.5 3.3 3.4
Cincinnati 8.5 5.1 3.6 3.0 2.8 2.9
South Central 23.1 22.2 51.9 54.5 46.9 50.9
Louisville 3.3 3.1 7.2 8.1 5.7 7.0
Nashville 11.9 8.8 5.0 7.0
New Orleans 17.5 17.1 21.8 21.1 21.1 21.1

Source: S.doc.147, 22nd Cong, 1st sess.,March 2, 1832, pp. 4-52; S.doc.17, 23rd Cong.,
2d sess., December 18,1834, pp. 150-175.
 Money and Monetary Specie Per Capita
$25.0 6.0

Money 5.0
$20.0
Specie

M lti li
Multiplier
4.0

ultiplier
Per capita stocks

$15.0

Money mu
3.0

$10.0

2.0

$5.0
1.0

$0.0 0.0
 Determinants of Money Multiplier: Reserve Ratio
and Specie Share
0.45

0.40 Reserve ratio

Specie share
0.35

0.30

0.25
Ratios

0.20

0.15

0.10

0.05

0.00
1820

1822

1824

1826

1828

1830

1832

1834

1836

1838

1840

1842

1844

1846

1848

1850

1852

1854

1856

1858
 Index of Money Per Capita and Industrial Production
160.0

140.0
Money

120.0 IP Index

100.0
1849-50 = 100

80.0

60.0

40.0

20.0

0.0
1820

1822

1824

1826

1828

1830

1832

1834

1836

1838

1840

1842

1844

1846

1848

1850

1852

1854

1856

1858
 Farm and All Prices (1910-14 = 100)

0
100
120
140

20
40
60
80
1820
1821
1822
1823
1824
1825
1826
1827
1828
1829
1830
1831
All

1832
Farm

Textiles

1833
1834
1835
1836
1837
1838
1839
Money and Prices, 1820-1850

1840
1841
1842
1843
1844
1845
1846
1847
1848
1849
1850
75
100
125
150
175
200
225
250

Textile prices (1910-14 = 100)

 Bank Growth after Jackson's Veto, 1834-60
1800 1200

1600
1000
Banks
1400
Bank Assets

1200 800
Banks (number of offices)

Assets ($millions)
1000
600
800

600 400

400
200
200

0 0
 FIGURE 1
Distribution of Free and Charter Banks
Panel A: 1836 Panel B: 1859

Note: The figure maps the location of each charter and free bank in 1836 and 1859. The blue dots represent
charter banks and red triangles represent free banks. The size of the shape denotes the number of banks in the
county. Due to the few banks west of the Mississippi River, we censored the map at that point. County
boundaries obtained from NHGIS (2004), and bank numbers were obtained from Weber (2005).

26
 Real GDP and Index of Industrial Production
1810-1845
$40,000 70

$35,000 60

GDP
$30,000
Real GDP (millions of $1996 dollars)

Industrial Production (1849-50 = 100)

50
IP
$25,000
40

$20,000

30
$15,000

20
$10,000

10
$5,000

$0 0
 Business Incorporations in New York by Sector

160

Total
140
Manuf.
Transport
120 Finance

100
Number

80

60

40

20

0
 Business Incorporations in Ohio by Sector

100

90 Total
Manuf.
80 Transport
Finance
70

60
Number

50

40

30

20

10