Cronyism

CHAPTER 14

DISMANTLING THE AMERICAN SYSTEM: DECENTRALIZING MONEY

Reforming the Executive

Admirably, the virtually uninterrupted Democratic reign of Andrew Jackson, Martin Van Buren, John Tyler, and James K. Polk severely weakened cronyism, though moderations occurred. The Jacksonians succeeded where the Jeffersonians failed because of greater tenacity, refusing to work with the opposition, the increased influence of free market thought, and tacit cooperation with free market British politicians. Crucially, they triumphed with the executive branch, morphing the office from a corrupt shield into an anti-crony sword. First, Jacksonians transformed the presidential veto and exercised greater use of rotation. Then, they achieved a quasi-free market in money by vetoing the Second Bank of the United States’ recharter, instituting the Independent Treasury, and adopting quasi-free banking on the state level. But in doing so, Democrats helped turn the executive into a leader with enormous authority and control.

Originally, the Federalists envisioned Congress spearheading special-interest legislation. The president played the defense: similar to colonial governors, he could use the veto to protect cronyism if Congress succumbed to the people. Altogether, the six presidents from Washington to John Quincy Adams exercised the veto only ten times over forty years, mostly for minor legislative matters or to encourage a strengthening of proposed special privileges. By contrast, Democrats envisioned the veto as an offensive reform and an expression of the people’s will: true reform required a democratically elected executive, because corruption proliferated in Congress. Only the executive, not the legislature, could lead the charge against cronyism. Amos Kendall and Francis Preston Blair, editors of the new administration newspaper the Washington Globe, emphatically championed this perspective. Over the next twenty years, the Jacksonians utilized the veto twenty-six times, largely on important bills.

Jackson’s veto found a firm advocate in Philip Barbour, who proclaimed the executive had a constitutional duty to actively dissent from legislation. He was one of the many strict constructionists who saw the veto strategy as a savior from Congress’ inexorable subsidies and regulations. Barbour moved beyond Jefferson, who famously told a hesitant Washington to defer to Congress on Hamilton’s Bank. While Barbour recognized the problem of executive usurpation, he believed that Jackson represented the people and was “placed at the helm” to bring the “vessel of State” back “into the right course.” William Belko is surely correct that many Old Republicans, previously viewing “executive presence [as] the bane of liberty and the manifestation of corruption,” now “turned to [it] to rescue the republic.”

In stark contrast, Adams, Clay, and Webster vehemently attacked Jacksonian vetoes, soon naming their new party in reference to the English Whigs that fought monarchical tyranny in the eighteenth century. They even advocated a constitutional amendment to weaken the veto. In reality, the Whig Party was only against a commander vetoing monetary intervention, protective tariffs, and subsidies. These reactionaries eagerly looked forward to a strong president when they controlled the White House.

The Jacksonians undoubtedly played with fire. Although Democrats increased the veto power to whittle down cronyism, they increased the power of the federal president, corrupting the office. One man now wielded two-thirds the legislative influence of Congress, providing a heady wine to its wielder. The president’s augmented veto power made him very important, almost an emperor, opening the door for enormous influence in legislative matters. This no doubt fit in with one of Jackson’s greatest flaws, his penchant for militarism.

Jackson and his successors also revolutionized the executive through widespread rotation of bureaucrats. Many historians argue that this “spoils system” bred corruption more than the previous quasi-civil service. This perspective results from the unrealistic assumption that bureaucrats promote the public interest. In reality, rotation is only visibly more corrupt; but it actually decreases cronyism. It admittedly empowers the president and incentivizes him to replace officials according to political preferences, but does not inherently lead to a more bloated and unaccountable bureaucracy.

While Jefferson removed some Federalists early on, little rotation occurred in subsequent administrations. By the Era of Corruption, Washington had turned into a swamp, and many officials viewed their sinecures as property rights they could bequeath to their sons. In fact, due to seemingly impenetrable tenure, politicians could only reward campaign supporters by creating new jobs. This encouraged a steady increase in the number of government officials and bureaucrats. The National Republicans’ civil service profited from their offices by embezzling funds and supported the American System to increase demand for their posts. No wonder Murray Rothbard describes civil service as leading to a “permanent and self-conscious . . . caste, set aside from, and in fundamental opposition to, the mass of the citizenry.”

This protected bureaucracy deeply worried Jackson, who declared “rotation in office . . . will perpetuate our liberty.” In his first address to Congress, the president attacked the corrupt bureaucracy for enjoying “office and power” to the detriment of the public, making government “an engine for the support of the few at the expense of the many,” something at variance with strict constructionism and the Spirit of 1798. To destroy “office as property,” Jackson endorsed the dead-letter 1820 Tenure of the Office Act, which instituted terms for upper-level bureaucrats. He also gave special instructions to his new fourth auditor of the treasury, Kendall, to trim the bloated payroll.

Against furious Whigs who defended the entrenched bureaucracy, Jackson practiced considerable rotation. While the presidents from Washington to John Quincy Adams removed 213 presidential class officials, Jackson fired 252 appointees. Jackson’s dismissals led to a removal rate of 41 percent, a noticeable improvement over Jefferson’s 25 percent. Although Jackson’s removal rate for all federal employees totaled less than 20 percent, it significantly surpassed that of previous administrations.

Jackson experienced less success with his replacements. Although Whigs charged Jackson with employing mere commoners, his appointees were just as qualified as their predecessors, but that did not make them less corrupt. Friendship and political support clouded the president’s judgment, most notably with Samuel Swartwout, Jackson’s customs collector for New York ports. Swartwout, whom Van Buren strenuously opposed, embezzled $1.2 million over the years, a major embarrassment that mortified Jackson. The president also appointed men to his executive cabinet based on personal loyalty rather than ideology. Similarly to Jefferson’s cabinet, most were moderates. However, in complete contrast to Jefferson, Jackson generally eschewed their advice, instead relying on an informal “Kitchen” cabinet composed of Van Buren, Kendall, Blair, Benton, Polk, and others. This was a notable improvement, for it allowed Jackson’s libertarian advisors to influence policy.

To attack the American System and its special privileges, Jacksonians transformed the executive branch. However, by empowering the president they risked a major corruption of the office. There is no greater example of the Jacksonians’ use of the executive than their most important struggle: eliminating the SBUS and creating the Independent Treasury.

The War against Central Banking

The Democrats launched total war against monetary interventionism. The Invisible Hand Jacksonians wanted to institute hard money and cripple fractional reserve banking, arguing that government privileges supported the institutions and that credit expansion caused the Panic of 1819. The Jacksonians increased executive power to first fight the Second Bank of the United States, climaxing with Jackson’s veto against recharter. Unfortunately, they then postponed their Independent Treasury, moderating instead with a system of politically connected state banks.

Many historians argue that Jackson’s war resulted from a clash between assertive personalities, insisting that Jackson only wanted to change Nicholas Biddle’s SBUS or replace it with his own bank. In reality, the president fought all fractional reserve banking. Constitutionally, Jackson disagreed with McCulloch v. Maryland, insisted paper-issuing banks violated the Constitution, and interpreted the coinage clause to sanction a purely specie currency. Economically, the president listened to American hard money economists and the like-minded British Currency School, a group that wanted to limit credit expansion. Since these theorists explained that corporate bank charters bred inefficiency and caused business cycles, the president attacked the SBUS’ restrictionist charter, monopoly on federal deposits, and immunity from state taxes. Furthermore, Jackson vented at the monster’s corruption of politicians, businesses, and newspapers. He sincerely wanted to weaken the government-bank partnership, a fundamental alliance in the powerful empire.

Historians’ confusion results from two factors. First, while scheming behind the scenes with his Kitchen Cabinet, the president used his actual cabinet to communicate with Biddle. Jackson, experienced in war, sent confusing signals to “keep his political opponents off-balance,” a tactic they belatedly recognized.Second, and more importantly, the president struggled with the SBUS’ replacement, not understanding how to achieve monetary laissez-faire. The Independent Treasury was an evolving concept that at times bordered on a central bank, and Jacksonian economists did not grasp free-banking theories until the mid-to-late 1830s. This problem also affected the British Currency School, and to a greater extent.

In early 1829, economists William Gouge and Condy Raguet fired the opening shot in the bank war, castigating the banking system as the “foundation of artificial inequality of wealth, and thereby, of artificial inequality of power.” After Van Buren’s anti-SBUS meeting, Kendall exhorted the president to strongly denounce the Bank in his December message. Consequently, Jackson declared that the institution was “well questioned by a large portion of our fellow citizens.” This disturbed Biddle, who thought that he previously obtained assurances about the charter’s renewal. Indeed, the swipe bushwhacked other American System proponents, particularly Clay, Webster, and Niles.

Biddle countered with propaganda and bribes. First, he communicated with Senator Samuel Smith and Congressman George McDuffie, pro-SBUS chairs of influential committees, and sent them pro-central banking information. Second, Biddle enlisted the help of American Quarterly Review, an academic journal owned by Robert Walsh, a recipient of SBUS loans. Third, the central banker corrupted newspapers. Most prominently, Biddle flipped the Jacksonian James Webb, editor of the Courier and Enquirer, for a $15,000 loan. By July 1832, the SBUS had spent between $50,000 and $100,000 for pro-Bank material, lent $100,000 to newspapers, and loaned congressmen from $100,000 to $200,000. Biddle would not give up easily.

However, Jackson continued the assault. In 1830, he proposed a rudimentary Independent Treasury, “a bank . . . without power to make loans or purchase property . . . [and] though issuing no paper, would check the issues of the State banks by taking their notes in deposit and for exchange only so long as they continue to be redeemed with specie.” He continued to feed misleading information through his official cabinet, causing Biddle to realize “the kitchen would predominate over the Parlor.” In the Senate, Thomas Benton blasted the institution as a privileged monopoly unbecoming of a “confederacy of States.” Webster, a longtime beneficiary of Biddle’s slush fund, called a vote to end discussion. Disastrously for the Whigs, the measure only passed by a narrow margin.

At the same time, Jackson’s new Treasurer, Louis McLane, whose family owned SBUS stock, desperately tried to sway the president. Van Buren had previously warned Jackson about McLane. Despite this, Jackson’s 1831 address eschewed Kendall’s attacks, and the secretary’s separate report caused a violent response from John Randolph and the Van Burenite Churchill Cambreleng. But Jackson quickly reassured his Kitchen Cabinet, professing that the independent McLane did not speak for him.

As 1832 dawned, Biddle’s supporters advised pushing for early recharter, a prospect that delighted the presidential candidate Clay. The Kentuckian adamantly supported Biddle; his running mate was John Sergeant, a former SBUS shareholder, director, and lawyer. Clay’s rationale was simple: if Jackson vetoed an early recharter, he would lose reelection, and if he meekly signed the bill, he would still lose reelection. Biddle attacked, pressing for an early recharter and instructing state banks to support the decision. In a legislature where many politicians previously worked for the SBUS, no one doubted the outcome. Most notably, the new Whig Congressman John Quincy Adams defended the Bank. The recharter passed in July by comfortable bipartisan majorities, but not the two-thirds necessary to override a veto. It all came down to Jackson. Biddle expected approval, triumphantly appearing before Congress.

However, the president secretly tasked Kendall with the veto message for the “corrupting monster.” Arthur Schlesinger is surely correct when he describes Jackson’s response as a “thunderclap over the nation,” and Blair did not exaggerate by comparing it to the Declaration of Independence. Without a doubt, Jackson’s veto was the greatest presidential stand against cronyism. Constitutionally, the veto questioned McCulloch v. Maryland and blasted broad constructionist arguments regarding the coinage clause. Economically, it attacked the SBUS’ monopoly, special privileges, and corrupting influence. In particular, Jackson emphasized that when the “rich and the powerful” scheme to devise “artificial distinctions, to grant titles, gratuities, and exclusive privileges,” the public has “a right to complain of the injustice.” As Donald Cole explains, “the veto is an attack on government privilege, not, as some have suggested, on capitalism.” Nor did it criticize class warfare between the rich and poor; the veto attacked caste warfare between the subsidized political elites and the public at large. Heroically, Jackson would not, like Washington and Jefferson, defer. The veto was Jackson’s crowning victory and embodied the anti-American System thrust of his movement.

Unsurprisingly, the stunned Biddle described Jackson’s decision as “anarchy.” Since Jackson declared that the veto expressed the people’s will, the upcoming election served as a referendum. Although Biddle invested mightily in Clay’s campaign, Kendall and Blair delivered Jackson and his vice presidential nominee, Van Buren, a smashing victory. It was official: Jackson had finished central banking. After the election, Van Buren wrote to Jackson and stated, “The idea of the establishment of any bank in any of the States, is, I take it, entirely done away with by the veto.” When the Globe reaffirmed the party’s hostility, pro-central bank Democrats joined the Whig Party.

Despite the triumph, the veto only prevented the SBUS’ recharter in 1836. Or, as Jackson wrote to Congressman Polk, “the hydra of corruption is only scotched, not dead.” Democrats needed to go for the jugular. Unfortunately, political gridlock forced them to moderate and pass measures that just chipped away at the SBUS. Even worse, to accomplish these reforms they corruptly partnered with partisan banks and enacted new monetary interventions.

In 1833, Gouge published A Short History of Paper Money and Banking. This free market treatise contained ideological ammunition for the next offensive, earning the praise of Democrats and Currency School reformers. Gouge argued that fractional reserve banking was fraudulent and caused credit-induced business cycles. Government privileges that encourage inflation included monopolistic corporate charters with limited liability, sanctioning specie suspensions, and accepting bank notes for tax payments. According to Joseph Dorfman, Gouge believed “banking, like all other businesses, should be free,” achievable by gradually restricting bank notes (building on an Adam Smith proposal), ending bank charters, eliminating limited liability, and establishing 100 percent reserves. Most importantly, building on Jefferson and Randolph, Gouge devised the Independent Treasury: prohibit the government from subsidizing banks by depositing federal monies in them or accepting their notes in payment. Implementation of this specie program would disconnect the federal government from banks, crippling the American System and the empire it strengthened. Gouge’s proposals achieved the Jacksonians’ hard money sanctioned by a strict construction of the coinage clause.

Unfortunately, Jackson did not adopt Gougian policies. In particular, only states could enact most of his bank reforms and the Independent Treasury faced an uphill battle in Congress. Furthermore, Biddle committed to causing short-term economic havoc. To stymie Biddle and avoid a legislative quagmire, in his December 1832 address Jackson advocated a Kendall proposal: sever the SBUS partnership by selling government shares and order the Treasurer to shift the $10 million of federal deposits into various state banks. Jackson’s makeshift solution undeniably weakened what Kendall called the SBUS’ “concentrated power,” but it also subsidized certain banks by giving them federal deposits and Treasury protection. The new partnership had a similar, albeit much more limited, corrupting influence on federal officials: it still incentivized politicians and bureaucrats to patronize banks for political and financial support. Even Kendall’s report on the selection of banks preferred those “politically friendly.”

Jackson’s program caused immense controversy, and in early 1833 the House voted against Polk’s resolution to sell the government’s shares. Furthermore, Treasurer McLane fought deposit removal. But this did not deter Jackson. In May, while Congress recessed until December, he rotated his cabinet and appointed William J. Duane as Treasurer. But when Duane refused the orders, Jackson rotated him out with Maryland’s Roger Taney, the current attorney general who also served in the Kitchen Cabinet. Taney shifted deposits into seven “pet” banks, five of which maintained friendly relations with the administration, and soon increased the number to twenty-two. When Congress convened, it furiously criticized Jackson’s maneuvers, calling them executive aggrandizement. Famously, Senator John Tyler of Virginia caustically broke with the administration.

Thus, Jacksonian reform tripped upon the pet bank moderation, and soon the president himself criticized it as an inefficient solution. Democratic bureaucrats and politicians eagerly abused the program, illegally borrowing from pet banks and shifting federal deposits to their favored institutions. Even Kendall succumbed: he borrowed $10,000 from the pet Girard Bank of Philadelphia for land speculation. Some individuals floated independent treasury proposals in 1834, including one by Raguet, but they went nowhere in Congress. When Gouge started working for the Treasury Department, the new Secretary Levi Woodbury asked him to outline his independent treasury. Unfortunately, Woodbury, corrupted by the pet banks that coveted their deposit subsidies, put Gouge’s measure aside. After encouragement from Kendall, Gouge drafted another independent treasury plan, but it failed to gain traction.

In the meantime, Jacksonian reformers tried to restrict what the administration’s Globe called the “frauds of paper money.” Congress devalued the dollar in terms of gold, legalized foreign specie, and established new mints. Significantly, it passed the 1836 Deposit Act, increasing the pet banks to ninety-one and requiring them to honor redemption, restrict note issuance, and accept fewer notes in payments. However, the act also included the distribution of the budget surplus stored at the pet banks to the state legislatures. Although Jackson had previously supported distribution, by 1836 he recognized that the subsidy increased centralization and dependency on Congress. Reluctantly signing the bill, the president countered with the Specie Circular, an executive order requiring the Treasury to accept only specie for public land payments. Jackson reasoned that increased use of specie would drain the deposit subsidy and surplus from the pet banks.

These reforms showed some growing Jacksonian pitfalls. First, Democrats accomplished their goals through presidential edicts, rotation, and discretionary Treasury action, worrying libertarians. Second, Jacksonians increased regulatory control over the pet banks. This “exercise of governmental power,” John McFaul explains, “was incompatible with the Jacksonian ideology of laissez faire.” The Democrats did destroy the SBUS, forcing it to secure a Pennsylvania charter in 1836, but the executive now partnered with select state banks. To make matters worse, the states continued their banking partnerships. In Whig fashion, Democrats in the state legislatures doled out special privileges through new corporate charters and other cushy regulations.

Most notably, when Van Buren briefly served as New York’s governor in 1829, he insisted on reforming the corrupt banking system. Unfortunately, Van Buren settled on an insurance program, forcing banks to pay into a government-backed fund that would reimburse noteholders of failed banks. In addition to maintaining charters, the Safety Fund Act increased risk taking. Soon enough, Democratic Governor William Marcy and others defended New York’s regional monopolies. This moderation earned the criticism of the Gougians William Cullen Bryant and William Leggett at the Evening Post. Notably, the two classical liberals supported genuine free banking, recognizing that the adverse clearing mechanism limited credit expansion while intervention encouraged it. This significantly advanced laissez-faire economic thought.

In Virginia, anti-bank Democrats, led by Thomas Ritchie, blocked proposals to increase charters while fighting for reserve requirements and note restrictions. They correctly viewed banks as sources of corruption, but incorrectly pushed for restricting their number, which caused the monopoly problems they wanted to avoid. In the West, fluid party lines led to outright bank cronyism. Michigan Democrats chartered their own banks and subsidized them with state deposits, particularly the Michigan State Bank. In Mississippi, they actually invested massive government funds into newly chartered banks, especially the Planters’ Bank and the Union Bank, by issuing bonds that creditors could redeem if the banks failed.

Clearly, the determined Jacksonians used the executive branch to apply their free market theories, but they did not come close to finishing monetary intervention on the federal and state level. Democrats required a new shock to reenergize their reform movement.

The Separation of Bank and State

Once Jackson left office, the Panic of 1837 ended the preceding economic boom and totally revitalized monetary reform, symbolized by Van Buren’s Independent Treasury. Although the Whigs repealed it in 1841, President Tyler vetoed new central bank bills, and President Polk reinstituted the Independent Treasury in 1846. In the state realm, Democrats pushed for genuine free banking laws, restrictions on chartered banks, and even eliminating banks altogether, meeting varying degrees of success.

Historians frequently argue that Jackson’s quasi-deregulation through deposit removal caused hasty credit expansion, while the Deposit Act and Specie Circular encouraged credit contraction and the Panic of 1837. Actually, Jackson’s policies played ancillary roles at best. Undoubtedly, inflation and price increases occurred after the veto. However, from 1829 to 1832, the money supply drastically augmented from $105 million to $150 million (43 percent, or 13 percent per year). The reason was simple: the SBUS, far from restraining banks, increased its own credit expansion by 52 percent and made loans to banks. After the veto, inflation accelerated to 84 percent (16 percent per year), pushing up prices by 20 percent (5 percent per year) from 1832 to 1836. But this was caused by a massive 135 percent increase in specie reserves from politically unstable China and Mexico. Likewise, the proximate reason for the 1837 panic was the Bank of England raising interest rates to protect specie holdings. The Deposit Act and Specie Circular undoubtedly put pressure on state banks, but historians exaggerate their effects relative to the Bank of England’s actions.

When New York City banks suspended specie payments in May 1837, other banks followed suit, ushering in a panic. A year later, banks resumed specie payments and recklessly inflated to reignite the boom. But the fundamentals remained the same, and to arrest a specie out-flow, the Bank of England contracted credit again in 1839, resulting in another US bank crisis and suspension of specie payments. Overall, between 1836 and 1842, the money supply collapsed from $276 million to $158 million, or by 43 percent (9 percent per year). The number of banks similarly dropped, and intense deflation caused a 28 percent plummet in prices.

Although contemporaries perceived the period as a time of economic depression, they once again mistook nominal changes for declines in real output. From 1832 to 1836, industrial production and real GDP increased by 28 and 14 percent (6.3 percent and 3.3 percent per year). But from 1836 to 1837, industrial production only declined by 1 percent and real GDP actually rose by 1 percent. Far more importantly, from 1837 to 1842, they still grew by 20.1 percent and 13 percent, respectively (3.7 percent and 2.5 percent per year). Positive growth rates only declining from their abnormally high levels hardly constitutes a severe economic crisis. Population did continue to grow at relatively the same rate, so real GDP per capita declined by a minor 0.3 percent per year, but it had risen during the boom by only 0.3 percent each year. Clearly, despite the 1838 inflation, the federal government’s laissez-faire policy allowed for a healthy reallocation of resources.

Van Buren triumphed in 1836, but the panic came as a rude shock. The hard-money Jacksonians fumed at the pet banks suspending specie payments. In July 1837, Jackson indignantly advocated “separat[ing] the government from all banks” and “receiv[ing] and disburs[ing] the revenue in nothing but gold and silver coin.” After additional counsel, Van Buren decided that he would establish the long-awaited Independent Treasury. The panic had a similar jolting effect on the British Currency School, and Parliament created committees to investigate monetary reform.

In a special congressional session in September, Van Buren preached a hands-off approach, articulating the Gougian business cycle and shrewdly recognizing that Great Britain experienced a similar downturn despite the Bank of England. Most importantly, the president introduced the Independent Treasury, which would ideally end all banking privileges. The concept thrilled hard money Democrats, particularly Kendall, Bryant, Leggett, and Benton. However, moderate Democrats sided with the Whigs, who adamantly fought the measure. Despite such moderation, the hard money contingent refused to buckle. For example, Preston King of New York “damn[ed] the idea of compromise. . . . Van Buren’s message is a banner in the sky—Stand to its doctrines.” Similarly, the president’s young advisor and disciple of Adam Smith, Samuel J. Tilden, sprang into action. He wrote a highly libertarian and economically sophisticated tract on the Independent Treasury, attacking Whig statism and pinpointing credit expansion as the cause of business cycles. Gouge and Raguet praised Tilden’s writing, and Jacksonians shipped it to the Currency School reformers.

The hard-money strategy paid off when banks suspended specie payments in 1839. As a result of yet another banking embarrassment, the moderate Democrats acquiesced. Van Buren signed the Independent Treasury bill on July 4, 1840, symbolizing its connection to Jefferson’s Declaration of Independence. The legislation was a major victory for liberty against power and for decentralization against empire, because no longer could the Treasury subsidize any bank with deposits and accept their notes in tax payments. Instead, the federal government separated itself from the banks—a relinquishment of its own economic control—and decided to only accept payments in specie, storing these funds in its own vaults.

Tragically, Van Buren lost reelection, thanks to the New Yorker Thurlow Weed. He cunningly realized that Whigs could only win with a flashy campaign full of slogans, symbols, razzle dazzle, and songs. Weed convinced the Whigs to nominate William Henry Harrison of Ohio, a former general and land speculator. He then created a massive campaign movement that fabricated Harrison’s background, appealed to the common man, and exaggerated the downturn’s severity. Although Van Buren racked up an impressive four hundred thousand more votes than in 1836, Harrison and his southern vote magnet, John Tyler, crushed the incumbent.

Harrison portended crucial repairs to the American System. The Boston Associates lobbied for his nomination, and Abbott Lawrence even gave the president a $5,000 “loan” after his inauguration. Clay partisans filled the cabinet, and Webster served as secretary of state. The president, a previous appointee to the SBUS’ Cincinnati board, even contemplated making Biddle his Treasurer, but then settled on Thomas Ewing, a lawyer close to Lawrence. With the agreeable executive branch, Senator Clay planned to charter another central bank. But, in an odd fluke, Harrison died, elevating Tyler to the presidency. Whigs feared a catastrophe because the states’ rights Tyler only left the Democratic Party in opposition to Jackson strengthening the executive.

Harrison’s death did not deter Clay. The legislature repealed the Independent Treasury and created a new central bank; the bill landed on Tyler’s lap in August 1841. Unfortunately for reform, the president signed the bill repealing Van Buren’s system, associating it with executive power, but partially redeemed himself by vetoing the bank bill on constitutional grounds. When Congress passed another bank bill in September, Tyler responded in the same manner. This caused the Whig cabinet, save Webster, to resign in protest. With Tyler’s unfortunate repeal of the Independent Treasury, Congress returned to the pet bank system. New pet banks acquired government deposits, most notably Corcoran & Riggs in Washington DC, headed by W. W. Corcoran. Thanks to Democratic Senator Robert J. Walker of Mississippi, affiliated with Corcoran, the bank secured depository status and turned into a leading holder of government funds. Corcoran and his institution would exercise an unusually large political influence in the future.

In 1844, Polk secured the Democratic nomination and defeated Clay. A die-hard Jacksonian, Polk wanted to restore the Independent Treasury. Notably, the president emphasized that the greater demand for specie in government transactions would cause banks to hold higher reserve ratios, thereby restricting credit expansion. However, against Jackson’s wishes, Polk chose Walker as his Treasurer. It looked as if the pet system would continue after Walker made Corcoran & Riggs the only depository in Washington, DC, and Corcoran started to advise the president on investment matters. Fortunately, Polk and Walker disappointed the banker. In 1846, the two pressured wavering Democratic senators to vote for reestablishing the “constitutional currency.” Thanks to this executive influence, Congress reestablished the Independent Treasury by a party vote.

After a long struggle, thanks to free market economics and six-teen years of executive intervention through vetoes, appointments, orders, and influence in Congress, Democrats finally severed the connection between the federal government and the banks. The Independent Treasury mirrored a similar (though less effective) law that the Currency School secured for Britain in 1844: Peel’s Act. Prime Minister Robert Peel, whom Van Buren long admired, sponsored the law with the assistance of Manchester classical liberals such as the ardent free trader Richard Cobden.

The Jacksonians were not content to rest: Democratic governors implemented hard money policies in the states, because “the increased use of specie was seen as a laissez-faire reform device that would add a kind of automatic balance to the banking system.” Two different strands of laissez faire motivated them. The first echoed older economists who advocated prohibiting notes or note-issuing banks altogether. The second used modern free-banking theories to argue that open competition curbed inflation. The second strand was clearly superior, building on recent economic thought and eliminating intervention. Ultimately, free market Democrats achieved mixed success. First, moderate Democrats and Whigs blocked hard money proposals in favor of a “free banking” that tied note issuance to government debt. Second, with the exception of New York, the older version of laissez-faire influenced most reformers. New York, Virginia, Michigan, and Mississippi provide canonical examples.

In New York, after the moderate Democratic legislature legalized specie suspension in May 1837, radical Democrats denounced suspension and criticized “all special legislation whereby privileges are granted to the few and withheld from the many.”Exacerbating the party rift, Governor Marcy criticized the proposed Independent Treasury. In the face of this party split, the Whigs won the fall 1837 elections and seized the legislature. Congressman Cambreleng wrote to Van Buren professing that the party was now ripe for purification.

A fantastic cure emerged from Samuel Young, a student of the Currency School. The Democrat advocated for a free banking law in New York that abolished charters and required owners to only pledge some property and capital. He argued that note competition, not a bond-backing provision requiring banks to insure their notes’ value with government bonds, promoted sound money. Unfortunately, the Whig legislature in 1838 passed a general incorporation law that included a bond-backing requirement. Moreover, the state would continue to accept bank notes in payments. A $100,000 capitalization requirement restricted banking to wealthy investors while the bond-backing feature tied note issuance to government debt, incentivizing banks to purchase state securities. Unsurprisingly, free bankers Bryant and Leggett attacked the law and only reluctantly supported it as a first step toward monetary laissez-faire. Major Wilson astutely remarks that the legislation “was a Whig coup” because they opportunistically exploited the Democrats’ anti-monopoly spirit.

Leggett suffered an untimely death in 1839, but libertarian Democrats continued the struggle. By this time, Bryant and Leggett’s disciples were known as “Barnburners,” willing to burn down their political offices (the “barn”). Moderates, such as Marcy, were “Hunkers,” because after winning the election they “hunkered” in office and refused to enact reforms that could jeopardize their positions. In 1844, Barnburner Silas Wright defeated the Whig Millard Fillmore for the governorship. The following year, Wright supported Barnburner efforts for a New York constitutional convention in 1846 and criticized the free banking law because it incentivized banks to favor a large public debt. At the convention, Barnburners did not eliminate the bond-backing regulation, instead weakening the state’s ability to borrow. In addition, they forbade the legislature from sanctioning suspensions of specie payments or “granting any special charter for banking purposes.” It is clear from these proposals that New York Democrats supported free banking and tried to restrict bank cronyism by keeping entry open. No wonder Arthur Ekirch wrote that the new constitution “embodied the laissez-faire position better than any document in the state’s history.”

In Virginia, during the panic, banks suspended specie payments and the Whigs seized the legislature. Hugh Garland decided that it was time for Democrats “to divorce [banks] entirely from all connection with the Government, State and Federal—to tear asunder that unnatural connection which has been injurious and corrupting.” Edmund Ruffin, who founded the Association for Promoting Currency and Banking Reform, sounded the charge of John Taylor by declaring that “the paper banking system is essentially and necessarily fraudulent.” Hard money forces focused on higher reserve ratios and specie payment, but soft money Democrats and Whigs blocked their efforts. When the Whig legislature let banks suspend convertibility again in 1839, Thomas Ritchie’s Enquirer demanded “the specie standard—a radical reform, or total extermination of our present paper system.” Unfortunately, banks controlled the Virginia legislature: fifty members owed a combined $111,000. Only after fierce Democrat insistence did the legislature make banks resume specie payment by November 1842. The struggle continued at the 1850 constitutional convention, where Democrats unsuccessfully pushed for a New York–style ban on suspensions of specie payments. Afterwards, against Democrat resistance, Whigs passed their version of bond-backed free banking.

By 1836, many Michigan Democrats had grown uneasy at the party’s connection with state-sponsored banks, particularly the Michigan State Bank. Consequently, the Free Press followed New York’s debates and reprinted free-banking articles. On the other hand, the Whig Daily Advertiser remained silent and supported a continuation of the existing system. In 1837, before the panic, Democrats passed a free banking law. Unfortunately, shortly thereafter the legislature sanctioned a suspension of convertibility, encouraging new banks to issue irredeemable notes. Failing to recognize that suspending specie payments, not free banking, caused the problem, the state repealed the law in early 1839. Matters drastically changed in the fall, when banks once again suspended specie payments and the Whigs seized control of the government. This time, the Democrats’ Michigan State Bank failed, and the end of its corruption “allowed [Democrats] to be consistently antibank.” When the Whigs passed a Currency Bill sanctioning the previous suspension of specie payments in exchange for internal improvement loans to the state, hard money Democrats violently protested.

In 1841, Democrat John Barry captured the governorship on an anti-bank and government retrenchment platform. He made the legislature pass laws requiring redemption as a test of solvency, abolishing banks’ corporate rights, repealing the charters of institutions that suspended specie payments, and prohibiting municipalities from issuing currency. Soon enough, the editor of the Free Press declared, “Our government is based upon equal rights—banks upon fraud and corruption. . . . and in justice to equal rights let us have no banks.” At the 1850 constitutional convention, Democrats successfully prohibited special bank charters and a year later the legislature blocked a Whig free banking law. Barry, back in the governor’s saddle, distrusted free banking because bond-backing requirements perpetuated the public debt, or what he called “the evidence of public misfortunes.” Michigan only enacted a free banking law in 1857.

Democrat hostility to banking was extremely harsh in Mississippi, whose chartered banks, particularly the state-owned Union Bank and Planters’ Bank, suspended convertibility during the panic. The new hard money governor, Democrat Alexander G. McNutt, wanted the legislature to rescind the charters of suspending banks, recognizing that the public valued a bank note based on “its convertibility into specie.” By 1840, after failing to accomplish this goal, McNutt advocated closing insolvent banks and repudiating government debt invested in the Union Bank. McNutt would not countenance raising taxes to benefit the stockholders and directors who borrowed heavily and mismanaged the institutions. Furthermore, he recognized the difference between a private debt and a government bond that required coercive taxes. Whigs and soft money Democrats fought repudiation, because they wanted the state’s credit to finance public works. After Democrats won the 1841 elections, they repudiated the Union Bank bonds, helping to sever Mississippi’s government-bank alliance.

Unfortunately, after McNutt left the governorship, the Union Bank’s debtors—particularly the large planters and land speculators who mismanaged the institution—seized control of the anti-bank movement, led by associates of Senator Walker: John F. H. Claiborne and William Gwin (the latter owed $311,000 to the Union Bank). In 1842, Parmenas Briscoe introduced a bill, allowing bank debtors to escape their obligations (Briscoe owed the banks $30,000). This split the Mississippi Democrats because many recognized that repudiating voluntary contracts violates property rights, which the Whigs opposed. Despite the opposition, large debtors controlling the movement secured the Briscoe Bill in 1846. Banking controversies died thereafter, because banking disappeared, and Mississippi never hosted a constitutional convention.

Thanks to their executive reforms, the Jacksonians succeeded in crippling the American System’s monetary cronyism. They destroyed the SBUS, separated the federal government from banking, and made serious in-roads toward removing banking privileges on the state level. The party expected to reap similar rewards when they attacked internal improvements and protective tariffs, two other planks of the American System.

______________

Stephen Campbell, The Bank War and the Partisan Press (Lawrence: University Press of Kansas, 2019), p. 39; Historical Statistics of the United States, Historical Statistics of the United States, vol. 5, ed. Richard Sutch and Susan Carter (New York: Cambridge University Press, 2006), p. 197; Gerard Magliocca, “Veto!,” Nebraska Law Review (1999): 213–26; Leonard White, The Jacksonians (New York: Macmillan, 1954), pp. 28–29.

William Belko, Philip Pendleton Barbour in Jacksonian America (Tuscaloosa: University of Alabama Press, 2016), p. 157.

Ibid., pp. 160–61.

Robert Kelley, The Transatlantic Persuasion (New York: Alfred A. Knopf, 1969), p. 251; Magliocca, “Veto,” p. 255; Robert Remini, Andrew Jackson, vol. 3 (New York: History Book Club, 1998), pp. 136–37; White, Jacksonians, pp. 27–30, 46–47.

Jay Cost, A Republic No More (New York: Encounter Books, 2015), pp. 62–82.

Murray N. Rothbard, “Bureaucracy and the Civil Service in the United States,” Journal of Libertarian Studies (Summer 1995): 23.

Robert Remini, Andrew Jackson, 2 (New York: History Book Club, 1998), p. 190.

Rothbard, “Bureaucracy,” p. 35.

Robert Remini, The Legacy of Andrew Jackson (Baton Rouge: Louisiana State University Press, 1988), p. 31.

Donald Cole, A Jackson Man (Baton Rouge: Louisiana State University Press, 2004), pp. 123–31, 139; Remini, Andrew Jackson, 2, pp. 183–91; David Rosenbloom, Federal Service and the Constitution (Washington, DC: Georgetown University Press, 2014), pp. 43–49.

Arthur M. Schlesinger Jr., The Age of Jackson (Boston, MA: Little, Brown and Company, 1945), p. 67.

Donald Cole, Martin Van Buren and the American Political System (Princeton, NJ: Princeton University Press, 1984), pp. 192–93; Bray Hammond, Banks and Politics in America (Princeton, NJ: Princeton University Press, 1957), pp. 329–40; Remini, Andrew Jackson, 2, pp. 186, 194–99; Remini, Legacy of Andrew Jackson, pp. 31–32; Schlesinger, Age of Jackson, pp. 59–73.

Larry Schweikart, “Jacksonian Ideology, Currency Control and Central Banking,” The Historian (November 1988): 78–102.

Paul Kahan, The Bank War (Yardley, PA: Westholme Publishing, 2016), p. 70.

Campbell, Bank War, pp. 64–65, 95; Cole, Jackson Man, pp. 157, 166, 168; Jeffrey Rogers Hummel, “The Jacksonians, Banking, and Economic Theory,” Journal of Libertarian Studies (Summer 1978): 151–65; Kahan, Bank War, pp. 67–70, 88–90; Murray N. Rothbard, An Austrian Perspective of Economic Thought, vol. 2, Classical Economics (Auburn, AL: Mises Institute, 2006), pp. 211–16, 234–35, 246; Schlesinger, Age of Jackson, pp. 77, 227.

Schlesinger, Age of Jackson, p. 79.

Campbell, Bank War, p. 50.

Ibid., pp. 11, 50–52, 68, 82–83; Cole, Jackson Man, p. 138; Joseph Dorfman, The Economic Mind in American Civilization, vol. 2 (New York: Viking Press, 1946), p. 604; Hammond, Banks and Politics, p. 371; Kahan, Bank War, pp. 37–38, 93; Scott Nelson, A Nation of Deadbeats (New York: Alfred A. Knopf, 2012), pp. 109–10; Schlesinger, Age of Jackson, pp. 81, 92.

Kahan, Bank War, pp. 81–82.

Cole, Jackson Man, p. 158.

Remini, Andrew Jackson, 2 , p. 303.

Philip Burch, Elites in American History, vol. 1 (New York: Holmes & Meier Publishers, 1981), p. 139; Remini, Andrew Jackson, 2, pp. 303–04, 335, 337–40.

Campbell, Bank War, p. 77.

Schlesinger, Age of Jackson, p. 90.

Kahan, Bank War, p. 105.

Cole, Jackson Man, p. 169.

Steven Calabresi and Larissa Leibowitz, “Monopolies and the Constitution,” Harvard Journal of Law & Public Policy (Summer 2013): 1026–28; Campbell, Bank War, pp. 77–80; Cole, Jackson Man, pp. 165–71; John McFaul, The Politics of Jacksonian Finance (New York: Cornell University Press, 1972), pp. 17–28; Schlesinger, Age of Jackson, pp. 86–90; David Schwartz, “Coin, Currency, and Constitution,” Michigan Law Review (2020): 1019.

Remini, Andrew Jackson, 2, p. 369.

McFaul, Politics of Jacksonian Finance, p. 51.

Campbell, Bank War, pp. 87–91, 106–07; Kahan, Bank War, pp. 108–11; McFaul, Politics of Jacksonian Finance, pp. 51–55.

Campbell, Bank War, p. 94.

Joseph Dorfman, “William M. Gouge and the Formation of Orthodox American Monetary Policy,” in William Gouge, A Short History of Paper Money and Banking (Auburn, AL: Mises Institute, 2007), p. 17.

Paul Conkin, Prophets of Prosperity (Bloomington: Indiana University Press, 1980), pp. 207–15; Dorfman, “William M. Gouge,” pp. 5, 9–10, 13–21; Susan Hoffman, Politics and Banking (Baltimore, MD: The John Hopkins University Press, 2001), pp. 61–65; Schlesinger, Age of Jackson, pp. 117–19, 123, 127–28, 227–28, 314–17; Larry Schweikart, Banking in the American South from the Age of Jackson to Reconstruction (Baton Rouge: Louisiana State University Press, 1987), p. 17.

Cole, Jackson Man, p. 188.

Ibid., 184.

Burch, Elites in American History, 1, pp. 284–85; Cole, Jackson Man, pp. 173, 177–80, 187–90; Kahan, Bank War, pp. 119–20; Remini, Andrew Jackson, 3, pp. 105–07; Norman Risjord, The Old Republicans (New York: Columbia University Press, 1965), p. 277; Richard Timberlake, Monetary Policy in the United States (Chicago: The University of Chicago Press, 1993), pp. 43–46, 67.

Campbell, Bank War, pp. 122–27; Cole, Jackson Man, p. 196; Dorfman, Economic Mind, 2, pp. 611–12; Dorfman, “William M. Gouge,” pp. 21–22; Kahan, Bank War, pp. 120–27; McFaul, Jacksonian Finance, pp. 126–27.

McFaul, Politics of Jacksonian Finance, p. 74.

Ibid., pp. 80–81.

Remini, Andrew Jackson, 3, pp. 321–29; Murray N. Rothbard, “The History of Money and Banking Before the Twentieth Century,” in A History of Money and Banking in the United States, ed. Joseph T. Salerno (Auburn, AL: Mises Institute, 2002), pp. 93, 104–07.

Howard Bodenhorn, State Banking in Early America (New York: Oxford University Press, 2003), pp. 157–82; Howard Bodenhorn, “Bank Chartering and Political Corruption in Antebellum New York,” in Corruption and Reform, ed. Edward Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006), pp. 236–43; McFaul, Politics of Jacksonian Finance, pp. 89, 102–06; Fritiz Redlich, The Molding of American Banking (New York: Johnson Reprint Corporation, 1968), p. 189; Edward Spann, Ideals and Politics (Albany: State University of New York Press, 1972), pp. 56–63, 70–72, 97, 100–01; Lawrence White, “William Leggett,” History of Political Economy (June 1986): 313–17.

Ronald Formisano, The Birth of Mass Political Parties (Princeton, NJ: Princeton University Press, 1971), pp. 41–42; McFaul, Politics of Jacksonian Finance, pp. 93–101; Schweikart, “Jacksonian Ideology,” pp. 93–94; William Shade, Banks or No Banks (Detroit, MI: Wayne State University Press, 1972), pp. 20–39; James Sharp, The Jacksonians versus the Banks (New York: Columbia University Press, 1970), pp. 56, 63.

Hammond, Banks and Politics, pp. 451–67.

Historical Statistics, 3, p. 181; Peter Temin, The Jacksonian Economy (New York: W.W. Norton & Co., 1969), pp. 71, 120–47; Timberlake, Monetary Policy, pp. 30, 51–64; Rothbard, “History of Money,” pp. 95–100; Robert Whaples, “Were Andrew Jackson’s Policies ‘Good for the Economy’?” The Independent Review (Spring 2014): 550–51.

Joseph Davis, “An Annual Index of U.S. Industrial Production,” Quarterly Journal of Economics (November 2004): 1189; Historical Statistics, 3, pp. 181–82; Jeffrey Rogers Hummel, “Martin Van Buren,” in Reassessing the Presidency, ed. John V. Denson (Auburn, AL: Mises Institute, 2001), pp. 189–93; Louis Johnston and Samuel Williamson, “What Was the U.S. GDP Then?” Measuringworth.com; Rothbard, “History of Money,” pp. 99–104; Temin, Jacksonian Economy, pp. 71, 113, 152, 159.

Hammond, Banks and Politics, p. 491.

Schlesinger, Age of Jackson, p. 258.

Cole, Jackson Man, p. 228; Hummel, “Martin Van Buren,” pp. 178–86; Kelley, Transatlantic Persuasion, pp. 246–49, 256–59; Rothbard, Austrian Perspective on the History of Economic Thought, 2, pp. 238–48; Schlesinger, Age of Jackson, pp. 234–36, 265.

Burch, Elites in American History, 1, pp. 179–82, 218; Thomas Govan, Nicholas Biddle (Chicago: The University of Chicago Press, 1959), p. 388; Hummel, “Martin Van Buren,” p. 199; Henry Watson, Liberty and Power (New York: The Noonday Press, 1990), pp. 213–26.

Henry Cohen, Business and Politics in America from the Age of Jackson to the Civil War (Westport, CT: Greenwood Publishing, 1971), pp. 18–29; Dan Monroe, The Republican Vision of John Tyler (College Station: Texas A&M University Press, 2003), pp. 83–110, 117–19; Robert Remini, Henry Clay (New York: W.W. Norton & Company, 1991), pp. 586–97; Timberlake, Monetary Policy, pp. 69–72.

Charles Sellers, James K. Polk, Continentalist (Princeton, NJ: Princeton University Press, 1966), p. 345.

Cohen, Business and Politics, pp. 28–36; Sellers, James K. Polk, Continentalist, pp. 344–45, 469–70; James Shenton, Robert John Walker (New York: Columbia University Press, 1961), pp. 87–89.

Avner Cohen, “Cobden’s Stance on the Currency and the Political Forces behind the Approval of the Bank Charter Act of 1844,” European Journal of the History of Economic Thought (Summer 1998): 253–54, 261–62; Kelley, Transatlantic Persuasion, pp. 189, 247–49; Rothbard, Austrian Perspective on the History of Economic Thought, 2, pp. 248–59.

Sharp, Jacksonians versus the Banks, p. 323.

Ibid., p. 301.

Major Wilson, The Presidency of Martin Van Buren (Lawrence: University Press of Kansas, 1984), p. 120. See also Lee Benson, The Concept of Jacksonian Democracy (Princeton, NJ: Princeton University Press, 1961), pp. 68–69, 97–104; Redlich, Molding of American Banking, pp. 189–90, 196–204; Rothbard, Austrian Perspective on the History of Economic Thought, 2, pp. 198, 235–36, 242; Rothbard, “History of Money,” pp. 112–14; Sharp, Jacksonians versus the Banks, pp. 300–04; Spann, Ideals and Politics, pp. 102–05; Wilson, Presidency of Van Buren, pp. 118–20.

L. Gunn, The Decline of Authority (Ithaca, NY: Cornell University Press, 1988), p. 186.

Arthur Ekirch, “Democracy and Laissez Faire,” Journal of Libertarian Studies (Fall 1977): 322. See also p. 322; John Garraty, Silas Wright (New York: Columbia University Press, 1949), pp. 309–32, 353–55; Gunn, Decline of Authority, pp. 186–87; Spann, Ideals and Politics, pp. 122, 124, 128.

Sharp, Jacksonians versus the Banks, p. 226.

Ibid., p. 261.

Ibid., p. 242.

William Shade, Democratizing the Old Dominion (Charlottesville: University Press of Virginia, 1996), pp. 95–96, 170, 275–76, 281–82; Sharp, Jacksonians versus the Banks, pp. 227–46, 261; Schweikart, Banking in the American South, pp. 34–37, 120–27; John Wallis, “Constitutions, Corporations, and Corruption,” The Journal of Economic History (March 2005): 219.

Shade, Banks or No Banks, p. 89.

Ibid., p. 124.

Ibid., p. 146.

Formisano, Birth of Mass Political Parties, pp. 38–42; Shade, Banks or No Banks, pp. 36–39, 50–57, 62–70, 88–100, 110–20, 146–48, 150, 173, 190–94; Sharp, Jacksonians versus the Banks, pp. 198–99, 203–04, 207.

Sharp, Jacksonians versus the Banks, p. 64.

Ibid., pp. 61–88; Schweikart, Banking in the American South, pp. 24–27, 175–82; John Wallis, Richard Sylla, and Arthur Grinath, “Sovereign Debt and Repudiation, NBER Working Paper Series (September 2004): 12–15.