‘A powerful machine,’ part II: Lessons from the death and rebirth of the Bank of the United States
American Enterprise Institute
Key Points
- As discussed in Part I of this series, the First Bank of the United States was both a huge financial success and a political liability.
- The same was true for the Second Bank of the United States. Chartered after the War of 1812, the Second Bank was integral in reordering the national finances, but it facilitated both graft and political corruption.
- The lesson of the bank has important policy implications for today because many contemporary government programs mimic the style of the First and Second Bank and thus are susceptible to the same problems.
Introduction
The previous report in this series examined the First Bank of the United States, noting that it was essential to the successful development of the United States’ early financial sector but that it created negative externalities on republican government. Namely, the stockholders whom Alexander Hamilton favored came to acquire power far beyond ordinary citizens, which they used to pursue their own personal gain during the Panic of 1792.
Interestingly, the career of the Second Bank of the United States largely mirrors that of the first. The government allowed the first charter to lapse in 1811, and its absence was sorely felt during the War of 1812. So, in 1815 it was none other than President James Madison—one of the bank’s original critics—who signed the recharter into law. While this Second Bank performed ably for much of the 1820s, it nevertheless exhibited some of the same corruption that had marked the First Bank in the 1790s. From its chartering in 1815 until the Panic of 1819, greedy and crooked branch managers took advantage of a feckless administration to enrich themselves at the expense of the country. And after the election of 1832, Bank President Nicholas Biddle used the elaborate power of the bank to influence the political process.
The lesson from the First and Second Bank is that while they may have been economically essential, they were also politically dangerous. For modern leaders, the implication is that the bank’s policymaking strategy—whereby private factions are used as mediators for the public interest—can be simultaneously effective for securing government ends and dangerous to the health of republicanism.
