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 bank notes into specie. At that time each bank issued its own paper money and held specie (gold and silver coins) 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 bank notes 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 5 of the 25 directors. Shares of stock were sold at a price to attract broadly based ownership. Foreign-owned 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 bank notes. 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 bank notes. These banks tended to expand the supply of bank notes 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 advisers 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.

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.