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Along with Jeffersonian and Jacksonian ideology, the jealousy of state banks inspired the campaign against the BUS. As early as July 1791, Hamilton’s fellow Federalist Fisher Ames warned him: “I have had my fears that the state banks will become unfriendly to that of the United States. Causes of hatred and rivalry will abound.”
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Former president John Quincy Adams noted in 1832: “In every state in the Union there is a large capital . . . invested in stocks of multiplied state banks. Most of these are rivals in business with the Bank of the United States, and they have all boards of directors and most of them are colleague with newspapers, all eager for the destruction of the Bank of the United States—an institution doubly obnoxious to the system of Safety Fund Banks in the state of New York.”
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As Adams noted, many in New York’s financial community resented the fact that the federal revenues collected at the Port of New York, which were greater than those of all other ports combined, were deposited in the Wall Street office of the BUS, whose directors were primarily Philadelphians.
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Jackson’s vice president and successor was the New Yorker Martin Van Buren. In 1833, Biddle wrote: “It is a mere contest between Mr. Van Buren’s [projected New York] government bank and the present institution—between Chestnut Street and Wall Street—between a Faro [gambling] bank and a National Bank.”
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Alexander Hamilton’s son James was a leader of the New York financial community. As acting secretary of state for a time, the younger Hamilton assisted Jackson in his crusade against the bank and recorded his surprise when Jackson showed his ignorance by saying that he admired Hamilton’s father: “Colonel, your father was not in favor of the Bank of the United States.”
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Hamilton’s other son, Alexander, was an ally of Biddle who warned the banker of the campaign against him.
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In his first two annual messages to Congress as president, Jackson denounced the bank. In 1832, Biddle sought to obtain the recharter of the bank four years before it was scheduled to expire in 1836. Biddle reasoned that the bank was popular among members of Congress, including some who enjoyed its largesse, like Daniel Webster, a director of the Boston branch. Rechartering the bank early gave Biddle’s ally Henry Clay an issue in his campaign for the presidency against Jackson, who was running for reelection.

“THE BANK IS TRYING TO KILL ME, BUT I WILL KILL IT!”

Led by Clay and Webster, on July 3, 1832, Congress passed a law renewing the charter of the bank. On July 10, President Jackson vetoed it.

Jackson asserted in his veto message that “the constitutionality and the expediency of the law creating this Bank are well questioned by a large portion of our fellow citizens.” In fact, the constitutionality of the bank could not be questioned. Although Jefferson and Madison had opposed its creation, Jefferson accepted and used it and Madison favored the creation of the second bank. The Supreme Court upheld the bank’s constitutionality in two cases.
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The elderly Albert Gallatin, the former secretary of the Treasury under Jefferson, opposed Jackson’s policy and published a defense of the bank in 1830. In 1841, he published a pamphlet arguing for the creation of a third Bank of the United States.
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In addition to making constitutional arguments, Jackson posed as a populist, declaring in his veto message that “when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, 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.” Jackson appealed to public xenophobia, arguing that foreign ownership of some of the bank’s shares was “calculated to convert the Bank of the United States into a foreign bank, to impoverish our people in time of peace, to disseminate a foreign influence through every section of the Republic, and in war to endanger our independence.” Amos Kendall, who wrote the first draft of Jackson’s bank veto message, warned under his own name of a new nobility arising in America: “Its head is the Bank of the United States; its right arm, a protecting Tariff and Manufacturing Monopolies; its left, growing State debts and State incorporations.”
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In his response to Jackson’s veto message, Clay insisted that the bank was constitutional: “The power to establish a bank is deduced from that clause of the Constitution which confers on Congress all powers necessary and proper to carry into effect the enumerated powers.” He dismissed the claim that foreign investors controlled it: “The assignable character of the stock is a quality conferred not for the benefit of foreigners, but for that of our own citizens. . . . The confidence of foreigners in our stocks is a proof of the solidity of our credit. Foreigners have no voice in the administration of this bank; and if they buy its stock, they are obliged to submit to citizens of the United States to manage it. . . . Will it not be a serious evil to be obliged to remit in specie to foreigners the eight millions which they now have in this bank, instead of retaining that capital within the country to stimulate its industry and enterprise?”

Although Jackson’s veto of the bank’s recharter created anger among his opponents in Congress, it was popular with the voters. Jackson easily won reelection, defeating Clay in the electoral college by a margin of 219 to 49. But trouble was only beginning. In September 1833, when Jackson ordered his Treasury secretary, William Duane, to put federal revenues in particular state banks he favored, rather than in the Bank of the United States, rather than carry out the order, Duane and his assistant resigned. Roger Taney was willing to obey the president, but the Senate refused to confirm him. On March 28, 1834, the Senate responded by a narrow vote that censured Jackson. The censure was expunged from the record in 1837.

Meanwhile, Biddle retaliated by contracting credit. Jackson exclaimed, “The bank is trying to kill me, but I will kill it!”

Jackson succeeded. When the House voted against a new charter, Biddle sought a charter for the Bank of the United States from the state of Pennsylvania. Hurt by unwise speculation on cotton futures, the bank closed its doors in 1841, a few years after Biddle retired in 1839. In 1844, he died, having lost much of his money along with his reputation. The center of gravity of American finance passed from the public-private hybrid BUS in Philadelphia first to Boston banking houses and then, by the 1850s, to the banking sector of New York. The United States would not have a national banking system again until the passage of the National Banking Act in 1863. Not until the Federal Reserve System was created in 1913 would the United States once again have a central bank.

In the aftermath of the bank’s destruction, the states adopted a baffling variety of state-chartered bank forms, ranging from private or “free” banks to state bank monopolies, each issuing its own notes. Thomas Hart Benton, a Jacksonian Democratic senator from Missouri, complained in 1837 about the results of the bank’s destruction: “I did not join in putting down the Bank of the United States to put up a wilderness of local banks. I did not join in putting down the paper currency of a national bank to put up a national paper currency of a thousand local banks.”
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In 1836, in one of his last acts as president, Jackson issued the Specie Circular, which required payment in gold or silver, not banknotes, for federal land sales. The Panic of 1837 struck shortly after Jackson’s ally and vice president Martin Van Buren was inaugurated as president. Historians disagree over whether to blame the financial crisis on the Jackson administration or on other factors, such as an increase in British interest rates or a price-lowering glut of cotton. Whatever the cause of the crisis, Van Buren reacted with yet more folly. In 1840, at his urging Congress created the independent treasury system, which ensured that federal money was locked up in subtreasuries where it could not help the banking system or the economy.

Clay’s American System lay in ruins. Not until the 1860s would there be a move to strengthen the federal role in the banking system—and that would take place during a civil war among American sections that had practically become different nations.

That subsequent upheaval was foreshadowed by the strife of the Jacksonian era. The bank war led to more than rhetorical violence. In 1830, Nicholas Biddle’s brother Thomas, a veteran of the War of 1812, was serving as a paymaster for the US Army in Saint Louis. After a local congressman, Spencer Pettis, denounced his brother Nicholas and the Bank of the United States, Thomas Biddle exchanged insulting letters with Pettis in a newspaper. Biddle then went to the hotel room in Saint Louis where Pettis was staying and proceeded to flog him with cowhide, a weapon chosen to show Biddle’s disdain according to the code duello. Pettis challenged Biddle to a duel that took place on August 26, 1831, on Bloody Island in the Mississippi River. Each shot the other and within a few days both men died.

AN ERA OF STATE POWER

The defeat of the ambitious federal internal-improvements schemes envisioned by Jefferson and Gallatin as well as by Hamilton and Clay meant that financing roads, canals, and railroads was overwhelmingly the responsibility of the states before the Civil War. From 1790 to 1860, the federal government spent $54 million on transportation infrastructure; of this, $9 million was spent on roads. State and local governments spent roughly nine times as much—more than $450 million. State governments also provided as much as 40 percent of the funds for American railroads.
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Surveying Jacksonian America, Jackson’s rival John Quincy Adams complained that the nation was “palsied” in “an Era of State Power.”
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The ambition of some of the state infrastructure projects can be inferred from the name of the Mammoth Bill of 1836 in Indiana. In promoting infrastructure without aid from the federal government, the state governments went deeply into debt. In 1841, of total government debt, the federal government accounted for only $5 million while the state debts totaled $193 million and local debt made up $25 million.
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As a result of the Panic of 1837, many states defaulted on their debts. British financiers called on the federal government to assume the debts of the states, as it had done under Hamilton. But the federal government refused, and when it issued securities later in the year, the
Times
of London in 1842 declared that “the people of the United States may be fully persuaded that there is a certain class of securities to which no abundance of money, no matter how great, can give value; and that in this class their own securities stand pre-eminent.”
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In Illinois, state-led internal improvements were opposed by many Jacksonian Democrats and supported chiefly by Whigs. One of the latter was a young Whig state legislator named Abraham Lincoln. In his bid for reelection in 1836, he declared: “Whether elected or not, I go for distributing the proceeds of the sales of the public lands to the several states, to enable our state, in common with others, to dig canals and construct railroads, without borrowing money and paying interest on it.”
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During the Illinois legislative session of 1836–1837, Lincoln belonged to a group of Whigs called the “Long Nine” because all were at least six feet in height. The Long Nine gained enough allies among the Democrats to pass a bill authorizing construction of the Illinois-Michigan Canal and a state bond funding railroads and river improvements. Construction halted, however, during the Panic of 1837. Lincoln’s law partner William Herndon later recalled that “every river and stream . . . was to be widened, deepened, and made navigable. A canal to connect the Illinois River and Lake Michigan was to be dug, . . . cities were to spring up everywhere, . . . people were to come swarming in by colonies, until . . . Illinois was to outstrip all others, and herself become the Empire State of the Union.” However, “the internal improvement system, [in] the adoption of which Lincoln had played such a prominent part, had collapsed, with the result that Illinois was left with an enormous debt and an empty treasury.”
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Eventually Chicago grew into a major trade entrepôt and metropolis, thanks in part to the canal that linked the Illinois River with Lake Michigan.

Mixed-enterprise capitalism in the United States was a casualty of the canal and railroad bubbles of the 1830s. Following the Panic of 1837, corporations in which the federal or state governments owned shares along with private investors were denounced by Jacksonian populists. Like many other states, Illinois amended its constitution in 1848 to ban state subsidies to private corporations.

The public backlash against mixed enterprise inspired support for free or general incorporation—allowing corporations to form by registering with a state government, rather than depending on a special charter from a state legislature. This solved one problem—minimizing the incentive of businessmen to obtain corporate charters by bribing politicians—only to create another. The regulation of corporations that were chartered by legislatures or, as with the two Banks of the United States, by the federal government, posed no problems, because specific rules governing particular corporations could be spelled out in their individual charters. But when incorporation became easy in the second half of the nineteenth century, regulation had to be based on statutes, not on charters. The question of the authority of the state and federal governments to regulate corporations by statute created difficult issues that had not existed under the older system of mixed enterprise.

THE MODERNIZATION OF THE NORTHEAST

The collapse of the national development project in the 1830s meant that modernization by default became the project of state governments rather than the federal government. One consequence was the increasing divergence of different parts of the country. In the generation before the Civil War, the United States became three regional societies, each with its own distinctive economy.