The Bank Wars: Hamilton vs. Jefferson

The constitutional framework established in 1789 was barely in place before the new nation's leaders clashed over its monetary architecture. Alexander Hamilton, the first Secretary of the Treasury, proposed a Bank of the United States modeled on the Bank of England: a federally chartered institution with the authority to issue bank notes, hold government deposits, and extend credit. Thomas Jefferson and James Madison opposed it on constitutional grounds -- no such power was explicitly granted to Congress -- and on political ones: a central bank would concentrate financial power in the commercial Northeast and benefit wealthy creditors at the expense of agrarian debtors.

Hamilton prevailed in 1791, and the First Bank of the United States operated until 1811, when its charter was not renewed, again over constitutional objections. The War of 1812, conducted without a central bank to coordinate financing, made the case for a successor institution, and the Second Bank of the United States was chartered in 1816. It performed an important monetary stabilization function -- requiring state-chartered banks to maintain specie reserves and restraining overissuance of bank notes -- but generated enormous hostility from state banks whose lending it constrained and from Western and Southern interests who saw it as an instrument of Eastern financial power.

Andrew Jackson's veto of the Second Bank's recharter in 1832 was one of the most consequential political-economic decisions in American history. Jackson framed the veto in populist terms -- the Bank as a monster of privilege enriching the few at the expense of the many -- and was reelected by a wide margin. The Bank's demise removed the principal institutional restraint on state bank money creation, inaugurating what historians call the "free banking era": a period of extraordinary monetary chaos in which hundreds of state banks issued notes of wildly varying quality and reliability.

The bank is trying to kill me, but I will kill it.Andrew Jackson, to Martin Van Buren, 1832

The free banking era produced genuine financial instability -- the Panic of 1837, triggered partly by Jackson's Specie Circular requiring federal land payments in gold, caused a severe depression lasting several years. But the era also demonstrated that monetary systems can function, imperfectly, without central coordination -- and that the principal casualties of monetary chaos are typically those with the least ability to protect themselves: wage workers and small savers who cannot diversify their monetary holdings or access alternative instruments.

The Civil War imposed a de facto central monetary authority: the National Banking Acts of 1863 and 1864 created a system of federally chartered national banks and established a uniform national currency. Greenbacks -- paper currency not backed by gold -- financed the Union war effort. The postwar deflation required to return to the gold standard produced the populist movement of the 1890s, as falling agricultural prices squeezed farmers whose debts had been contracted in cheaper dollars. William Jennings Bryan's "Cross of Gold" speech (1896) articulated the class dimension of monetary policy as clearly as any American political speech before or since.