The Second Bank of the United States: Banking Profiles

Executive Summary

• The Second Bank of the United States was created as a private central bank after the American Revolution.

Introduction

This was the second attempt of the private banking interests to take over US money creation. The foreign ownership was virtually identical to The First Bank of the United States. Study shows that politicians were much more knowledgeable about the problems with a private central bank. This knowledge has dissipated in the modern era, with most politicians having no idea how the Fed, the latest private central bank functions, or how it does not serve a public good function.

The Nonrenewal of The Second Bank of the United States

The following describes the opposition to the Second Bank of the United States.

Senator Thomas Hart Benton of Missouri stated in 1831, “I object to the renewal of the charter of the Bank of the United States because I look upon the bank as an institution too great and powerful to be tolerated in a Government of free and equal laws. Its power is that of a purse; a power more potent than the sword.” A strong coalition of small bankers and farmers and their strong ally in the White House led the charge, and in 1836, the second bank’s twenty-year charter was allowed to expire. Jackson’s fears were naïve and misguided. He thought that by killing the central bank, he was diminishing private bank power and elevating “the people.” In fact, without a central bank to provide liquidity and stability, the nation would enter an era of repeated banking crises. Historian Charles Geisst explained: “By curtailing the development of a central bank, the commercial banking institutions of the day were given more de facto power over their own states’ banking systems than otherwise might have been the case.” Investment firms took advantage of the federal government’s absence from the banking sphere to enter unregulated securities and bonds markets, creating unstable and panic-ridden financial markets that otherwise could have been supervised and overseen by a strong central bank that had the nation’s financial health as its first priority. Still, Jackson felt empowered to get rid of the bank, based on his fears. Government policies, no matter how erroneous, trumped bank profitability. It is important to point out the stakes in these early debates. Both advocates and opponents of the early banks recognized that national and centralized banking could solve formidable financial problems and increase credit to both the government and the populace. The debates surrounding these banks did not focus on the profitability or success of the bank itself, but about what a national bank meant for the country. It was a debate about the nature of the democracy.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

This gets to the topic of how banking charters used to be limited.

In particular, early state laws attempted to keep banks small and short-lived, in keeping with widely held fears of concentrated economic power. The state of New York, for example, issued all of its banks charters with an expiration date. Legislatures renewed the charters subject to conditions or more commonly, denied requests for charter extensions to keep banks from amassing too much power or market share. In addition, state law imposed participation requirements to prevent privately controlled banks from being dominated by a few individuals or economic interests. One historian asserts: “In practice state legislatures viewed banking corporations as instrumentalities of the state, established to serve various public purposes as well as the private interests of stockholders and borrowers.” In Schaake v. Dolley, the Kansas Supreme Court explained that banking is not “a matter of private concern only, like the business of the merchant, and for all purposes of legislative regulation and control it may be said to be ‘affected with a public interest.’ ” The court made it clear that banking needs to be distinguished from “ordinary private business” because of its “public nature.” Because banks received “public patronage,” a state bank was “a trustee of the fiscal affairs of the people and of the state.” The most important charter impositions, and the most long-lasting, were prohibitions on bank size and location. Unit banking, wherein a single bank operates in a single region, was the norm in U.S. banking for almost two centuries. Most banks did not open branches outside a state, or even within a state in many cases, for much of U.S. banking history.

Source: How the Other Half Banks

This was designed to control banks, however, bank charters are now no longer designed to expire. This of course places the power with banks, both central banks, and private banks.