The Second Bank of the United States met the need for a central bank in the United States between 1816 and 1836. During the War of 1812, state banks suspended the conversion of banknotes into specie (gold and silver coins). At that time, each bank issued its own paper money and held specie to redeem its paper money. Today, banks issue checking accounts and hold paper money to redeem the checking accounts. When the banks suspended specie payments in 1814, six months before the war ended, the federal government had no way to pressure them to return to convertibility. The Second Bank of the United States bore a strong resemblance to the First Bank of the United States, which had lost its charter in 1811 because of constitutional questions and foreign ownership. At the time, many questioned if Congress had the authority to grant a charter of incorporation, much less sanction a monopoly. The First Bank of the United States provided monetary discipline by demanding that all banknotes deposited with it be redeemed in specie by the bank that issued them. As the government began to miss the monetary discipline enforced by the First Bank of the United States, critics—mainly followers of Jefferson and Madison—began to soften their constitutional objections and came to support the creation of the Second Bank of the United States. Now the Jeffersonian Republicans were supporting such a bank instead of the New England Federalists.
Congress approved the charter for the Second Bank of the United States early in 1816, and President Madison signed the bill on April 10 of that year. The Second Bank was capitalized at $35 million. The government owned one-fifth of the stock and appointed five of the 25 directors. Shares of stock were sold at a price to attract broadly based ownership. Foreignowned stock had no voting rights, and large shareholders were limited to 30 votes. Subscribers could pay as little as one-fourth in specie and the remainder in government securities. 
The Second Bank got off to a wobbly start. In 1818, a House committee investigated the bank. It then had $2.4 million in specie to support $22 million in demand liabilities. The bank was on the verge of suspending specie payments itself. The investigating committee discovered that the Second Bank had extended loans to its own stockholders who used stock in the bank as collateral. This practice enabled speculators to buy stock in the Second Bank by using the bank’s own money. The officers of the bank had speculated in its stock, and the Second Bank had also been slow in demanding specie payments on notes issued by state banks.
The Second Bank’s poor management had consequences for the economic contraction in 1818. The bank’s effort to bring its own house in order hastened the economic downturn. The Baltimore branch failed. It had made bad loans, and its officers had speculated in its stock. The president of the Second Bank resigned, and Langdon Cheves assumed the leadership of the bank (1819). His conservative administration put the bank on firm financial footing. Nicholas Biddle succeeded Cheves in 1823. Biddle’s understanding of the role of a central bank put him ahead of his time. He placed the public responsibilities of the bank above the private interests of its stockholders. In 1834, a French traveler termed the Second Bank the “banque centrale.”
The Second Bank forced the state banks to maintain specie payments for their banknotes. To reduce money in circulation, the Second Bank accumulated specie. The bank increased the money in circulation by making more loans. The bank’s practices made enemies of state banks in the West and South, which resented its regulation of state banknotes. These banks tended to expand the supply of banknotes in circulation beyond what their reserves of specie could be counted on to redeem. 

The state banks had a powerful ally in President Andrew Jackson. Biddle and his advisors saw the hostility to the bank gathering momentum. Rather than wait for the Second Bank’s charter to expire in 1836, they asked Congress for a renewal of the charter in 1832. The bill for rechartering the bank passed the House and the Senate. President Jackson vetoed the bill.
Critics charged that the bank put too much power in the hands of officials who were neither elected directly by the people nor responsible to elected officials. In addition, paper money had not yet established itself in the confidence of the voters. President Jackson himself was a “hard money” person. The public saw paper money as the culprit in depressions. In his veto message, President Jackson stated:
Equality of talents, of education, or of wealth cannot be produced by human institutions . . . but when the laws undertake to add to these natural and just advantages artificial distinctions . . . to make the rich richer, and the potent more powerful, the humble members of society—the farmers, mechanics, and laborers—who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. (Schlesinger, 1945, 90)
Jackson’s rhetoric may bear the stamp of the demagoguery of the frontier politician rather than the best thinking of the time. Perhaps the best-educated and most cosmopolitan of all the presidents, Thomas Jefferson, described his opinion of banks in this way:
I have ever been the enemy of banks; not of those discounting cash; but of those foisting their own paper into circulation, and thus banishing our cash. My zeal against those institutions was so warm and open at the establishment of the [First] bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains. (Cappon, 1959, 424)
With the establishment of the Federal Reserve System in 1913, the United States finally came to terms with the idea of a central bank. By then, the role of central banks in maintaining economic stability was better understood, and banks were better accepted than they were in Jefferson’s day.
Brown, Marion A. 1998. The Second Bank of the United States and Ohio, 1803–1860: A Collision of Interests.
Cappon, Lester, ed. 1959. The Adams-Jefferson Letters.
Meyers, Margaret G. 1970. A Financial History of the United States.
Schlesinger, Arthur M., Jr. 1945. The Age of Jackson.
Timberlake, Richard H. 1978. The Origins of Central Banking in the United States.