THE JACKSONIANS, BANKING, AND ECONOMIC THEORY: A REINTERPRETATION

JEFFREY ROGERS HUMMEL

Department of History, University of Texas

Andrew Jackson's war upon the Second Bank In his two books, A History of Banking in the of the United States and the economic conse- United States['] and Andrew quences stemming from it badly need a new Sumner presented an analysis that foreshadowed historical interpretation. The traditional inter- subsequent accounts and set the pattern for pretation asserts that Jackson's veto of the Bank what developed into the traditional interpre- re-charter and withdrawal of government tation. That such should be the case is extremely deposits caused an inflation; Jackson's Specie ironic, for Sumner, himself a staunch advocate Circular and the distribution of the surplus of laissez-faire,perceived that laissez-fore was caused a panic and depression. Recent research the central ideological tendency of the Jackson- has included much evidence that indicates that ians. "The democratic party was for a gener- this traditional interpretation requires economic, ation, by tradition, a party of hard money, free and also political, revision. More importantly, trade, the non-interference theory of govern- however, the traditional interpretation suffers ment, and no special legislation", he wrote.''] from a faulty economic theory. However, he differed in that the Jacksonians In no other field is the relationship between were radicals, using democratic means to throw theory and history more explicit than in off the power of the state, while Sumner was a economic history. The obvious effect different conservative, defending laissez-faire from the understandings of economic theory will have twin evils of plutocracy and mob rule. Sumner's upon the interpretation and explanation of animosity toward Jackson was a consequence specific historical-economic events makes the of focusing on the democratic and egalitarian importance of theory undeniable. It is also aspects of Jacksonianism. Sumner, and clear that, in most cases, the validity of the other members of what Charles Grier Sellers, theory is decided a priori to history, on some Jr., calls the "Whig" school of historiography,['] other basis, and then is applied to the data. objected to the increased political role of the Rarely is history used to generate new economic masses and the spoils system. Both of these theories. were procedural changes in the form of govern- I believe that the economic theory that has ment rather than substantive changes in its size guided the traditional interpretation of Jackson's and power, but Sumner saw them as creating a Bank war is wrong. In this paper, I will show the social environment hostile to the preservation evolution of the traditional interpretation and of a limited government. then survey the recent research that makes it On the Bank war, despite his frequent moral historically untenable. I will conclude with a judgments, Sumner was ambiguous, almost reinterpretation based on an economic theory contradictory. He called the Bank war "one of that is both theoretically sound and historically the greatest struggles between democracy and consistent. the money power", a "premonition of the conflict between democracy and plutocracy",1s1 and he applauded the bullionists of the Jack- The first economist to write about the Jackson- sonian party who "put a metallic currency high ians and banking was Wiam Graham Sumner. up on its banner".1*' Yet, he also felt that in 152 JEFFREY ROGERS HUMMEL waging war on the Bank "Jackson's-adminis- class converted Turner's sectional conflict into tration unjustly, passionately, ignorantly, and Schlesinger's class conflict and helped obscure without regard to truth, assailed a great and Sumner's insight into the anti-statist thrust of valuable financial instit~tion".l'~ Sumner's Jacl$onianism.'"' The Jacksonian opposition praise for the Bank was not without reservation, to state privilege was translated into an oppos- and he accused , president of ition to capitalism, and the Bank war was the Bank, of insincerity, but on the whole he interpreted from that angle. considered the Bank a successful restraint on Arthur M. Schlesinger, Jr., in The Age of the inflationary proclivities of the state banks. Jackson,"" correctly evaluated Jackson's Sumner it should be noted, did not blame the destruction of the Bank as part of a calculated economic instability of the years from 1829 to hard-money campaign which included a change 1840 entirely on Jackson's policies. He of the mint ratio between gold and silver to mentioned international factors - British bring gold back into circulation, an effort to capital flows, the discount rate of the Bank of suppress bank notes of small denominations, England, and changing cotton prices - as the establishment of an , contributing to the inflation of 1835-1836 and and an attack on state banks. However, he saw the . this campaign as motivated by an underlying Ralph C. H. Catterall, in The Second Bank labor class consciousness. After the publication of the United States,"' filled in the details of Schlesinger's book, Joseph Dorfman wrote around Sumner's basic account, eliminating the "The Jackson Wage-Earner Thesi~",~"~an ambiguity and balance. Catterall, who wrote article demonstrating that the Jacksonians prior to the System, believed were not anti-capitalist, but really anti- that the Second Bank had provided the United government. It is indicative of the strength and States with the soundest currency it had ever pervasiveness of Marxist class analysis among had and that the reasons given by Jackson for American historians that , vetoing its charter were "in the main beneath in The American Political Tradition, managed c~ntempt".~~]"Jackson and his supporters to convert Dorfman's refutation of SchIesinger's committed an offense against the nation when class thesis into a new class interpretation - they destroyed the bank. . . . few greater one with the Jacksonians as aspiring and rising enormities are chargeable to politicians than the entrepreneurs."51 destruction of the Bank of the United States."l'ol While the political nature of Jacksoniansm Catterall did not carry his story through the was the subject of considerable disagreement, later history of the Bank after it lost its national the economic account remained largely unaltered. charter and became a state bank, but his praise Schlesinger admitted that "In destroying the of Biddle was also qualified. Catterall's book Bank, Jackson had removed a valuable brake on the Bank was followed twenty years later by on credit expansion."'"' Hofstadter complained Reginald Charles McGrane's book on The that Jackson "had left the nation committed to Panic of 1837.'"' McGrane, like Catterall, a currency and credit system even more inade- blamed Jackson's ignorant policies for the Panic. quate than the one he had inhe~ited".~"'Dur- With the Progressive shift in American histor- ing the next decade, four additional books deal- iography at the turn of the century, the attitude ing directly with the Bank war expanded and of historians towards Jackson became friendlier. fortified the traditional interpretation. Walter Interestingly enough, despite the change in Buckingham Smith, in Economic Aspects of outlook, the historical debate was still conduc- the Second Bank of the United state^,^"' ted within the terms originally laid down by portrayed the Bank as an effective , Sumner and his "Whig" contemporaries. although like Sumner, he also stressed inter- Sumner had condemned the Jacksonians for national factors. Thomas Payne Govan, in the unleashing majority rule; Turner, Beard, and biography, Nicholas Biddle: Nationalist and Schlesinger praised them for the same thing. Public Banker, 1786-1844,"s1 praised Biddle Later, the acceptance of the Marxist notion of as an astute central banker well ahead of his THE IACKSONIANS, BANKING, AND ECONOMIC THEORY: A REINTERPRETATION 153 time, as did Fritz Redlich, in his two volume nascent central bank, it was a useful institution. The Moulding of American Banking: Men and The state banks were inherently inflationary and Ide~s,'~' a work which particularly emphasized tended toward , and the the im ct of the European banking tradition Second Bank restrained them. Because it was on enca. The traditional interpretation national and because it was the government received its most effective and popular present- depository, the Bank held a dominant position ation in Bray Hammond's highly overrated in the U.S. economy. In the process of its Banks and Politics in America: From the operations, it tended to receive the notes of Revolution to the Civil War. I"] Hammond, state banks. Its mechanism of control was who had developed his ideas in a previous series forcing the state banks to redeem their notes in of articles, grafted the traditional economic specie. interpretation to the Hofstadter entrepreneurial Jackson, by vetoing the charter of the Bank thesis."" in 1832 and later removing from it the govern- The economic theory to which Hammond, ment deposits, destroyed the Bank's effective- Redlich, Govan, Smith et a/. adhere and which ness as a central bank. He consequently is at the heart of the traditional interpretation unleashed the state banks, which overissued may be called the sound banking doctrine. their notes and generated an inflationary boom. Banks have always issued more notes or deposit The government deposits were placed in pet liabilities than they have monetary reserves to banks, and this further encouraged credit cover. This process is called fractional reserve expansion. Traditional accounts differ as to the banking, and through it, banks create money. precise cause of the Panic of 1837 and on Thus, an ante-bellum bank which issued $1000 whether or not it was made inevitable by the in notes with only $100 in specie (gold or silver previous boom, but they all agree that certain bullion and coin) as reserves in its vault, had of Jackson's policies contributed to bringing it created $900 and had a reserve ratio of 10%. about. First, the distribution of the surplus The sound banking doctrine holds that fraction- shifted bank reserves and made certain banks al reserve banking is necessary and beneficial contract their note issue. Secondly, the Specie for a prosperous economy. There are insuffici- Circular increased the demand for specie and ent quantities of gold and silver in existence to put a drain on the reserves of banks. The banks satisfy monetary needs. Money creation by were compelled to contract and finally to banks is a needed service. However, monetary suspend specie payment. creation can go too far. Banks will overissue Politically the Jacksonian attack on the Bank their notes and deposits and reduce their represented an alliance between two divergent reserve ratios to dangerous levels if governed groups, according to the traditional interpreta- solely by the banker's desire for profit. That leads tion. One of these was the hard-money agrarians, to inflation, economic instability, and wildcat who ended up defeating their own purpose. The banking. People will drown in a deluge of other more important group included the unbacked paper money. Therefore, external aspiring capitalists who wanted state bank checks are necessary to insure that fractional inflation and the state banks themselves, which reserve banking stays within certain limits and wanted to be free from the Second Bank. Other that reserve ratios stay at certain levels, and motives at work include the political desire to government must provide the checks. It can be bring the Bank within the Democratic fold and seen that this doctrine occupies the middle the desire of New York City bankers to escape ground between the extremes of hard money on the financial hegemony of Philadelphia, where the one hand, and inflationary banking or fiat the Bank was located. The importance of Jack- money on the other."" son himself is disputed. Some picture him as a Central banking is one of the means, accord- tool of his advisors, while others consider him ing to the sound banking doctrine, by which to be the primary actor initiating the Bank war. government can restrain private banks. Since The destruction of the repre- the Second Bank of the United States was a sented the triumph of the aspiring capitalists - .~~-- ~ ~~ 1

JEFFREY ROGERS HUMMEL within the Jacksonian movement at the national does not relate specifically to the banking issue. level; "free banking" represented their triumph Of that which does relate, much of it reinforces at the state level. "Free banking was ab applica- the traditional interpretation. Benson, Eke tion of laissez faire to the monetary function", Hammond, feels that Jackson's atla on the writes Hammond, and its adoption insured "a ~ankwas instigated from New Ya* bbartin permanent policy of monetary inflation."["' Van Buren, but not for the same xeason. It was an inferior system, primarily because it Rather than an effort to gain financial ascen- was unregulated. dancy for Wall Street, Benson construes tlJe These various propositions constitute the Bank War as a divers~onto relieve anti-monopoly major tenets in the traditional interpretation, pressure directed against the Regency banking and they add up to a severe indictment of the system. "Seen in historical context, the Jack- Jacksonians. The response of proJackson sonian 'Bank War' becomes a brilliant counter- historians to the difficult problem of reconciling attack - not a bold offensive on behalf of these charges has been varied and ingenious. free enterprise."t3" Benson's major revisionist Robert V. Remini,tZ5lfollowing in a direction contribution is his assessment of who was pointed by Leonard D. White,"'' has emphasized responsible for New York's "free banking" the role of the Bank war in the growth of Pres- act.["] "Free banking", it turns out, was not a idential power, considering that a positive good scheme promoted by the Locofoco radical regardless of how it was used. George Rogers Democrats, with their anti-monopoly, hard- Taylor'"' admits that under Biddle the Bank money views; it was a scheme promoted by the performed splendidly, but argues that it had Whigs. It was not consistent with Democratic shown in the past that it had an immense ideas about limited government; it was consist- potential for abuse lying dormant. The Bank ent with Whig ideas about positive state action. was too independent from the national govern- It restricted entry on the basis of capital, ment, and that justified not renewing its charter. limited the liabilities of stockholders, provided Schlesinger, in a review of Smith's book,["' stringent regulations, and established a board of goes so far as to take up the cause of the state bank commissioners. Most significantly, by banks, when he asserts that "the men in making note issue dependent on holdingof state Jackson's day who were most nearly right from bonds, it forged a close alliance between the the viewpoint of economic growth were neither bank and state. "Free banking" was neither the Bank advocates nor the hard-money Jacksonian nor la~ssezIfarre.[~" theorists but the soft money men of the Van Buren's prominence in the Bank war, West"."@' None of these approaches questions along with charges of a New York-Virginia the essential validity of the traditional interpre- conspiracy, were finally called into question tation. when Frank Otto Gatell published his article, "Sober Second Thoughts on Van Buren, the Albany Regency, and the Wall Street Conspir- acy".["' Gatell points out that although the The recent scholarly work challenging the trad- Regency had intimate connections with Albany itional interpretation falls into two broad cate- banks, it was not that close to New York City gories: political revisionism and economic banks. There was no reason for the Regency to revisionism. The political revisionism has been champion the interests of Wall Street. In dominated, although not exclusively, by answer to Benson's version of the New York historians using statistical tools, and the conspiracy, Gatell argues that politically the pioneer in statistical methodology applied to Regency did not need the Bank war; indeed, it the Jacksonian era is Lee Benson. Most of was a fairly risky venture for Regency politicians. Benson's book, The Concept of Jacksonian Gatell concludes that Jackson "still remains Democracy: New York as a Test Case,[3o'is an central to the Bank War"."" effort to develop an alternative to Marxist class The political tenet of the traditional interpre- notions in describing political behavior and tation, however, hinges not on New York but THE JACKSONIANS, BANKING. AND ECONOMIC THEORY: A REINTERPRETATION I55 on the supposition of general state bank oppo- Panic of 1837 the Jacksonian campaign for sition to the national Bank. That supposition is hard money shifted into the state arena: addressed in the most important work of \ The Democratic Party did not engage in the battle over political revisionism, Jean Alexander Wilburn's banks and currency as the patty of the entrepreneur in Biddle's Bank: The Crucial Years.["] By the age of enterprise. . . . After the Panic of 1837, , ' carefully analyzing the vote over the Bank's although the rhaoric of the two parties often obscured their real position, it is clear that the Whigs were recharter in Congress in 1832, a vote on a champions of the banks against the "radicalism" of the resolution to Congress on that issue by the New Jacksonians. Despite internal feuding, the main body York State legislature, petitions and memorials of the Democratic party supported radical reform of the banks and, in some cases, their destruction. sent to Congress, and Biddle's correspondence party reflected, in both ethos and program, the hard- with allies in which he organized support for money position."" the Bank, Wilburn attempts to determine exactly who supported the Bank. She finds that Sharp found that the hard-money program prior to Jackson's veto, support was over- varied among states. In the more agrarian states, whelming, even among state banks: it was more radical, calling for the abolition of statechartered corporate banks, while in more We have found that N~cholasBlddlc was corrcct when commercial states, the hard-money advocates he sad. "state banks in the mun are friendly" Specif- wmpromised for less hard-line reforms. Wiam ~cally,only m Georaa. Co~cct~cut,and Nm York was there positive evidence of hostility. A majority of state Gerald Shade, in Banks or No Banks: The banks in some states of the South. such as North Caro- Money Isnre in Wgfem Politics, 1832-1865,[401 haand Alabama, gave strong support to the Bank as ddboth the Southwest States of Lourma and Mss~ui- wnfums Sharp's major fmdings. Shade focuses ppi. Since Virginia gave some support, we can claim on the five states of the Old Northwest, with that state banks in the South and Southwest for the special statistical attention on Illinois (where he most part supported the Bank. New England, contrary to expctations, showed the banks of Vermont and Nm interestingly finds confirmation for Benson's Hampshire behind the Bank, but support of Massa- ethno-religious voting behavior thesis). Both chuwtts was both qualitatively and quantitatively weak. books agree that nowhere was "free banking" The banks of the Middle states all supported the Ssond Bank except for those of New York. There, the Mech- a Democratic proposal. When it passed, it was anics' and Farmers' Bank together with the other banks with the support of the Whigs and occasional Olcott controlled "arrayed a powerful force against defecting Democrats. ) theBank"."" The most recent contribution to the political Wilburn's much-needed refutation of the myth revision of the traditional interpretation is of state bank opposition to the national Bank is David A. Martin's article, "Metallism, Small only slightly marred by her resurrection of the Notes, and Jackson's War with the B.U.S.""". New York-Virginia conspiracy. In her version, Martin is an economist, and some of his fmdings the prime figure is Thomas Olcott, who is able can be considered economic revisionism. to wield undue influence because of Biddle's However, his main effort consists of putting failure to establish a branch of the Bank in the Bank war within the context of a broader, Albany. encompassing hard-money (or metallist) program Since the publication of Wilburn's book, two at the national level. In doing so, he amplifies 1books have been written which examine the Schlesinger's original presentation. According struggle over banking at the state level. Both to Martin, the specific planks of the program in used statistical analysis of voter returns. The addition to the Bank war involved: (1) a change first was James Roger Sharp's The Jacksonians in the mint ratio,["1 (2) the establishment of versus the Banks: Politics in the States After the branch mints to increase coinage, (3) the Panic of 1837.13" Sharp presents an overview reinstitution of legal tender for foreign coins, of all the states, but selects for special concen- (4) the prohibition of small notes, and (5) the tration Mississippi, Ohio, and Virginia. In each establishment of a government bank without of those states he does the kind of voter corre- note-issuing authority. The second and third lation introduced by Benson. His conclusion is planks have previously escaped historians; the that with the defeat of the Second Bank and the fourth, of course, failed; and the last evolved 156 JEFFREY ROGERS HUMMEL into the independent treasury. Martin is even specie imports or exports, which in turn forced sympathetic with the Jacksonian program to the expansion or contraction of the US. money extent that, while he agrees with the traditional supply and consequent changes in the price interpretation that the Bank provided a uniform level. To reach his conclusion, Macesich con- currency for large, interregional transactions, structed a series of figures for the stock of he claims that the overissue of small notes drove money in the U.S. from 1834-1845 along the specie out of circulation and made smaller and same lines as the series constructed by Miton local transactions more chaotic than generally Friedman and Anna Jacobson Schwartzf'" for supposed. a later period. He used the Friedman-Schwartz proximate determinants for analysis. Jeffrey G. Williamson, in an article entitled "International Trade and United States The economic revision of the traditional inter- Economic Development, 1827-1843",['*' critl- pretation has been accomplished by cliometric- cizes Macesich for using a static specie-flow ians, practitioners of the new economic history. balance of payments model;and ignoring the The cliometricians, most notably Peter Temin, dynamic impact of the growth of the U.S. have completely demolished almost all of the economy. It was real economic growth in the major propositions of the traditional interpre- U.S. that induced both the capital inflows and tation. The first work of economic revisionism the gold inflows (and an unfavorable balance to appear was Richard H. Timberlake, Jr.'s, of trade). Williamson attributes economic "The and the Distribution of disturbances during the period not to exogenous the S~rplus".~'~~Compared to Temin and the external events but to an internal natural cycle, others that followed, Timberlake's article is or long swing, in economic gr0wth.1~~~While only mildly revisionist, but it broke the ground. Williamson and Macesich disagree over the By examining the volume of public land sales source of economic disturbance, they both and their importance within the economy, agree that the U.S. banking system responded Timberlake reached the conclusion that the passively in its monetary expansion and contrac- "Specie Circular was dramatic but innoc- tion to factors beyond its influence. In other uous",14" in its impact upon the economy. He words, neither granted the Bank war much also discovered that distribution of the surplus significance. resulted in very small interstate species flows and In a rejoinder, Macesich argues that capital that the cooperation of state bahks and state flows induced growth, rather than vice versa,["1 treasuries prevented any intrastate drain. Tim- but the next important contribution to the berlake is left with only a small ,interstate debate is Thomas D. Willett's "International demand for specie (mostly against New York) Factors in Specie Flows and American as a cause. for the Panic of 1837. Harry N. Stability: 1834-1860".~5'l Willett raises theo- Scheiber in an article on questioned retical objections to Williamson's model, but Timberlake's conclusion on the Specie does not totally agree with Macesich. Instead, Circular,['s1 so Timberlake in a brief second his hypothesis not only stresses international article buttressed it with more e~idence.["~ specie flows but includes the reaction of the U.S. The next contribution to economic revisionism, banking system as an active agent. The George Macesich's "Sources of Monetary Macesich-Williamson-Willett debate involves Disturbance in the United States, 1834-1844",1"1 more issues than those raised by Jackson's is broader i; its scope. Building upon the Bank war, and by the time Willett's contribution suggestions found in Sumner and Smith, appeared, Temin's preliminary article had also Macesich argues that international factors were been published. Nevertheless, the controversy actually to blame for the monetary disturbances in many ways anticipated Temin's findings. of the Jacksonian era. U.S. prices were not Another work of economic revisionism, one autonomous, but linked to an international which Temin almost entirely incorporates, is market. British capital flows were followed by Jacob Meerman's article, "The Climax of the THE JACKSONIANS, BANKING, AND ECONOMIC THEORY: A REINTERPRETATION IS7 Bank War: Biddle's Contraction, 1833-1834".["' include the fact that reserve ratios were not Meerman studied the data on the contraction lowest in the south and west; they were lowest Biddle is credited with bringing on and found in New England. In addition, the currency ratio that it was a highly exaggerated event. Biddle's (the percentage of money held by the public in action resulted in a very small decrease in the the form of specie) rose dramatically after the rate of growth of the money supply and a very destruction of the Bank, indicating a decrease minor recession. in the public use of bank money. The most sweeping economic revision of the Since the publication of Temin's book, traditional interpretation is contained in Tergin's Edward J. Stevens, in his article "Composition book, The Jacksonian E~onorny,~~"and a of the Money Stock Prior to the Civil War","" prior article, "The Economic Consequences of has done a Friedman-Schwartz money stock the Bank War".["] Temin's work is based on analysis for 1842 to 1859. His figures are not an improved series for the stock of money in the strictly identical with Temin's, but they U.S. from 1820 to 1858. Temin, like Macesich, similarly show a rising currency ratio. Stevens uses the Freidman-Schwartz proximate deter- points out that gold from California must have minants, one of which is the reserve ratio (the stayed in the hands of the public rather than percentage of bank circulating money - notes passing into bank vaults. Stanley L. Engerman, plus deposits - covered by specie reserves in in "A Note on the Economic Consequences of bank vaults). According to the traditional inter- the Second Bank of the United state^"^"^ starts pretation, one of the advantages of the Second with the assumption that paper money is less Bank as a central bank was that it kept state expensive than specie and attempts to calculate bank reserve ratios higher than they otherwise the cost resulting from the increased currency would have been; Jackson's war supposedly ratio following the destruction of the Bank. He precipitated a decline in the reserve ratio. Temin comes up with 0.15% of GNP annually. found that, on the contrary, from the period Hugh Rockoff has published various art- 1831 to 1837, when the reserve ratio should icles on the nature of "free banking".16'l In have been declining, that it actually remained "Money, Prices, and Banks in the Jacksonian fairly constant. There was an increase in the Era",[5e1 in addition to summarizing Temin's money stock, but it wasn't due to Jackson's conclusions, he offers a profit maximization war or the state banks. It resulted from an equation to explain the note issue behavior of inflow of specie which increased bank reserves. banks. "American Free Banking Before the However, Macesich's guess that the specie came Civil War: A Re-E~amination"['~~argues that from England is wrong. The inflow resulted "free banking" only led to wildcat banking if from increased specie imports from Mexico the statutory Limit on the amount of notes that coupled with decreased specie exports to the Or- could be issued against state bonds significantly ient. The importance of British capital was not exceeded the market price of the bonds. Wildcat that it was followed by specie but that it prevented banking was a visible, but minor, problem. In the US. unfavorable balance of trade from driv- "The Management of Reserves by Ante- ing the new specie overseas. bellum Banks in Eastern Ficial center^'',[^'^ Just as Jackson's Bank war had nothing to do which Rockoff co-authored with Roger H. with the inflation, his Specie Circular and the Hinderliter, they attempt to subject the reserve distribution of the surplus had nothing to do with behavior of eastern banks to econometric the Panic of 1837. The major cause was a analysis. In his most recent article, "Varieties contraction started by the with of Banking and Regional Economic Develop- its high discount policy. It drew capital and ment in the United States, 1840-1860",[1a specie out of the U.S. and abruptly ended the Rockoff tries to determine if "free banking" inflation. Furthermore, during the period of laws, which he considers "the antithesis of deflation and contraction following the brief lai.*wz-faire banking laws",["1 had any negative recovery in 1838, conditions were not as bad as impact on regional economic growth: often pictured. Other of Temin's findings In summary, free banking was a mixed blessing. At 158 JEFFREY Rot3ERS HUMMEL times it produced wildcat banking. But this was due the cost of uniform currency. But the costs he orimarilv to defects in the land securitv svstem for considers result from fixed exchange rates ;trculatl& notn. Whcn thnc dcfms wcr; abwnt. frm banking. judged on the basis of ev~dcnccprcrentcd pegged to specie, and his ultimate preference is above, performed at least on par with otha systqns."'' a system of state or regional fiat currencies, A fmal article that should be mentioned is totally independent of each other and specie. Arthur Eraas' "The Second Bank of the United The trend away from the sound banking to the States: An Instrument for an Interregional fmt money doctrine is clearly exhibited in a recent Monetary Union".res1 Eraas makes an astute article by Richard E. Sylla entitled "American analogy between the wndition of state banks Banking and Growth in the Nineteenth Century: prior to the establishment of the Second Bank A Partial View of the Terrain".["J Sylla and an international situation in which there are celebrates the demise of Redlich and his floating exchange rates. He asserts that the "quest for soundness" school. No longer will benefit from imposing a uniform national banking history be viewed as a "quest for currency with the Bank must be weighed against soundness". Instead, it will be viewed in terms the cost of fixing exchange rates and of the services banks perform towards encoua- eliminating price autonomy between regions. ging economic growth, and the most important He feels the latter hurt economic growth in the of these is credit creation. Sylla favorably quotes Western states. Schumpeter to the effect that "sound money men of all times. . .throw and still 'throw away the baby with the bath water' by condemning popular banking practices".["] Unsound money With the principal tenets of the traditional promotes growth. What in effect the new interpretation refuted, the crucial question approach is coming around to is Schlesinger's becomes: how will all the data and recent advocacy of the soft-money men of the west, findings be synthesized and integrated into a new only the real soft-money men turn out to have general overview of the Bank war? Unfortun- been in the east and with the Bank. Only Temin, ately, the articles by Engerman, Rockoff, and when he points to the rapid growth during the Eraas all indicate that if any economic theory deflation following the Panic of 1837, and succeeds the sound banking doctrine, it will be Williamson, with his long swing that leaves the fiat money doctrine. Rockoff explains, for banks passive and irrelevant, have presented instance, that lower reserve ratios like those ideas that might be developed in a different that existed in New England should not be direction. construed as harmful. Just the opposite, they One of the problems with the traditional were good because they indicate that banks interpretation and the sound banking doctrine were using specie reserves more efficiently. that the new fiat money doctrine has not "The reduction in the ratio of specie to money solved is providing an integrated causal explan- would be a benefit to the nation because it took ation for the business cycle. J. R. T. Hughes real resources to produce specie reserves."lm1 and Nathan Rosenberg, in an article written That assumption underlies Engerman's calcula- fifteen years ago, complained: tion on the wst of the destruction of the Bank. By This~ ~~~~ aawr.~. is orornoted . . bv the d~ssatisfact~onof the lowering the currency ratio, the Bank permitted authors with the state of the economlc htrtory of busi- more efficient use of specie. If one follows ness flunuations in the US. up to 1860. Thc existing litcraturc dcaling u~hthe hstorical origins of busincrs that reasoning through, the most efficient fluctuations is, we feel, dominated by sweeping gener- currency becomes one that uses no specie at dilations which, as they stand, are open to serious all - a completely fiat money supply. That is question.'"' the standard by which some of the new economic Since Hughes and Rosenberg wrote that state- historians are judging the banking of the ment, there has not really been much Jacksonian economy. improvement. Except for Williamson's, most At first glance, Eraas appears to contradict explanations are monetarist, but none show the prevailing trend. He raises the question of how monetary fluctuations affected business THE JACKSONIANS, BANKING, AND ECONOMIC THEORY: A REINTERPRETATION 159 conditions. Those explanations, like Macesich's, ratios.lr'l The same result could be attained if that import the cycles from abroad, have just banking were totally free in the market sense, pushed the question into another country. meaning that anyone could create unbacked There is a monetary theory, however, that is money. No one would accept such money unless an alternative to both the fiat money and reasonably certain of redemption. Thus, banks sound banking doctrines, that does deal with the would be limited in their ability to inflate["' business cycle and can be used with great success by the size of their clientele. Bank money would to reintegrate the history of the Bank war. It is tend to depreciate to a level offsetting the risk of the monetary and trade cycle theory of the non-redemption. Another limit would be com- Austrian school of economists, most notably petition between banks in the redemption of Ludwig von Mises, Friedrich A. von Hayek, each other's notes. If Bank A operates at a and Murray N. Rothbard. In policy prescrip- lower reserve ratio and inflates more than its tions, the Austrian school is unabashedly laissez- competitor, Bank B, then more of Bank A's faire and hard-money, and it has been largely notes will flow through the normal transaction ignored, although not refuted, by professional of business into the hands of Bank B than those economists in this country since the Keynesian of Bank B will flow into the hands of Bank A. revolution. However, its insights are essential if The resulting specie drain will force Bank A to one is truly to understand the economy of the deflate and bring up its reserve ratio. The oper- Jacksonian era. ation of such a system of free banking would Austrian theory views money as a creation of drive reserve ratios toward 100%. Proponents the free market and not a creation of the state. of the Austrian school differ on whether they When government intervenes in the sphere of prefer the prohibition of fractional reserves as money, it is usually for its own enrichment and fraud or the free banking approach to achieving always to the detriment of the market. A com- 100% reserves.'"' pletely laissez-faire approach to money would The question at this point may be raised, if imply private coinage and no legal tender laws. competition tends to drive up reserve ratios Government monopolies of the mint eventually and prevent inflation, why didn't it do so during result in coin debasement. Legal tender laws the Jacksonian era? The first part of the answer usually have the effect of fixing an artifical is that it did -to a certain extent. Sound bank- price between two types of money (e.g. gold ing theorists have always deplored the notorious and silver or specie and paper) and bringing into tendency of bank notes to depreciate and banks operation Gresham's Law (which is merely an to start runs on each other during this period. application of a general principle about govern- More important, however, was the fact that ment price fixing). Everyone should be free to competition was restricted by all sorts of use or to refuse whatever form of money they interventions that were part of the traditional un- wish, and the market should set exchange rates holy alliance between bank and state. Banks and between coexisting monies.vo1 governments throughout history have entered Sometimes governments intervene in the into a profitable symbiosis where the banks market by creating money which they force create money for the governments in return for people to use. Banking, to the extent that it special privilege^.["^ Hammond has correctly involves providing either a money warehouse pointed out that banks owe much of their growth or a loan service (bringing together prospective "to government and the need it too had for creditors and debtors) is a legitimate free market credit. For governments always have been activity. Banking, to the extent that it involves borrowers, and repeatedly their dependence the creation of money through fractional upon banks has been critical, especially in war- reserves, is fraud and an intervention into the time"."" War and also the desire of states to market no different from money creation by finance internal improvements were the two government. However, it is not necessary for a major projects for which governments needed laissez-faire society to outlaw fractional bank money during the Jacksonian era. Again I reserve banking and require 100% reserve quote Hammond: "The wild- lent no money 160 JEFFREY RO(3ERS HUMMEL to farmers and served no farmer interest. They banks so that all private banks may inflate to- arose to meet the credit demands not of farmers gether. At the same time, the govcment usually (who were too economically astute to accept grants legal tender status to the central bank's wildcat money) but of states engaged in public notes and uses them exclusively in its own improvements."["I transactions, inducing public acceptance. Among the special privileges received by One of the many difficulties with orthodox banks from governments was the legitimacy and schools of economics is that they treat internat- acceptability their notes gained by being put ional and interregional trade asymmetrically.["' into circulation by the government. Chartered According to Austrian theory, the principles of banks and state monopoly banks obviously had interregional or interlocal trade also apply to their competition limited, and we have already international exchange. The problem of the pointed out that the "free banking" system of balance of payments is not a problem between the Whigs did not permit totally free entry and nations; it is an example of the competitive was far from free banking in a IaLrsa-faire relationship operating between competing sense. A most important protection from com- central banks or banking systems. A drain of petition occurred in every when specie occurs in one country because that the states granted the banks the privilege of country's central bank is inflating faster than suspending specie payments. Continually freed the central bank of the country to which the from the need to redeem their notes, it is no specie is flowing. Wigoff the gold standard or wonder that banks did not feel obliged to keep devaluing is the international equivalent of their reserve ratios high. Another factor was the suspending specie payments. This analogy general prohibition of interstate branch banking between international and interregional trade and the frequent prohibition of intrastate branch has even been noticed in a backward fashion by banking.["' Finally, usury laws, to the degree a few of the Jacksonian economic revisionists. that they were enforced and effective, would Rockoff writes that, "In other words, one can decrease competition from banks with higher treat each state as a small country in a gold reserve ratios.'"] standard world of fixed exchange rates and The most effective way for banks to protect free trade".w21 Willett in his article compares themselves would be to cartellize and agree not the U.S. banking system of the nineteenth cen- to compete. For instance, Bank A could agree tury to the international monetary situation at not to redeem the notes of Bank B hut hold the time he was writing,[831and I have already them as reserves upon which to expand its own pointed out that the same understanding notes, and this practice would also permit Bank informs Fraas' article.^"] B to expand. This arrangement can be called a Bank inflation has many unfortunate con- collusive relationship, as opposed to the sequences, but the worst is the business cycle. competitive relationship in which there is mutual When banks create new money, they do so in the redemption. The banks could also agree to form of credit. By increasing the supply of inflate at the same rate, so that mutual redemp- loanable funds, banks artificially lower the tion could continue with neither having to interest rate, inducing businessmen and entre- contract. Since voluntary cartels[7P1are notor- preneurs to make investments they otherwise iously unsuccessful, cartellizers frequently turn would not make. The creates a boom. However, to government to make their cartels biding and according to Austrian theory, since the interest effective. Central banking is a state cartelli- rate was artificially distorted, the boom consists tion of the banking system and as such is the of malinvestments which are not economically ultimate stage in the alliance between bank and justified. Eventually the malinvestments must state. It involves a collusive relationship between be liquidated in a cluster of business failures the private banks and the central bank, in which called a depression. That, in brief, is the Austrian the private banks hold the central bank's notes business cycle theory.w51 as re~erves,~'~'with central bank control (direct The traditional interpretation claims that the or indirect) over the reserve ratios of the private Second Bank was a central bank, but describes THE JACKSONIANS, BANKING, AND ECOlVOMlC THEORY: A REINTERPRETATION 161 its functioning as if it were in a competitive fixed ratio at all. However, Jacksonian under- relationship with the state banks. That is the standing of banking was far superior to that meaning of Hammond's statement: shown by politicians today. The war against the Its [the Bank's] regulatory powcrs uerr dependent on national Bank was only the first step in a thc pnvate banks lalllng currently Into dcbt to 11. The struggle to eliminate fractional reserve banking regulatory pouer no* in cffm undcr the Fedcral Rcrcnc AcI depends upon the opposite relation -that is, upon entirely. After breaking the alliance between the private banks' maintaining balances with the bank and state at the national level, the Jackson- Federal Reserve Banks. The private banks were then ians made a valiant effort to break that alliance debtors to the central bank; they are now creditors."" at the statelevel as well. In actuality, the Second Bank was only a primi- The Jacksonians unfortunately failed, not tive central hank and its relationships with state only because the Whigs with their neo- banks could be both competitive and collusive. mercantilist ideology pushed through "free The fact that the reserve ratio did not increase banking" as a means of rearranging and under the Bank indicates, however, that the extending the bank-state alliance,1s01but also "regulatory" competitive element described by because the business cycle was an international Hammond was not very strong. Although the phenomenon. America was subject to the reserve ratio did not fall either, the fall in the monetary expansions and contractions occurring currency ratio demonstrates very clearly the in other countries. When specie flowed into the operation of the collusive That US. from Mexico, it was baause of an inflation explains the Bank's popularity with the state there fostered by Santa ha,'"' and the specie banks. Its popularity was not unanimous. There stayed in the U.S. because of credit expansion are always individual firms within an industry, by the Bank of England. When the Bank of usually the most efficient, that feel they have England contracted to shore up its reserve more to gain outside a government imposed position, a depression was precipitated in the cartel. On the wbole, however, the following U.S.le" statement by Rothbard is extremely accurate: The Jacksonian attack on the Bank of the It is also a widespread myth that central banks are inaugurated in order to check inflation by commercial U.S. inspired a similar attack on the Bank of banks. The second hank of the United States, on the England by William Cobbett. He did not contrary, was inaugurated in I817 as an inflationist succeed, but his intellectual allies, the Currency sop to the statechartered banks, which had been permitted to run riot without paying specie since 1814. School, did manage in 1844 to pass Peel's Act, It was a weak substitute for compelling a genuine which imposed a 100% reserve requirement on raurn to specie payments.'"' all further note issues. The Currency School was With a clear understanding of the nature of opposed by the Banking School, contemporary the Second Bank, the Jacksonian hard-money advocates of the sound banking doctrine. attack no longer comes across as confused and Ironically, Peel's Act also failed, because its self-contradictory. No longer can the JacksonianS restriction applied only to bank notes and not to he dismissed as either ignorant, anti-capitalist money created in the form of deposits.[sai The agrarians or as greedy entrepreneurs hoping to failure of the hard-money stalwarts in both unleash the state banks. The attack on the Bank England and the U.S. left the developing was a fully rational and highly enlightened step Anglo-American free market economy hurden- towards the achievement of a laksez-fare ed with the destabilizing effects of the business metallic monetary system["' The Jacksonians cycle. That was a tragedy the consequences of may not have been totally consistent. The exten- which we still suffer. sion of legal tender to foreign coins was a step in the right direction, but legal tender should NOTES have been expanded to private coinage as well, or 1. William Graham Sumner, A History of Banking in even better, abolished altogether. Instead of rhe United States (New York: The Journal of Commerce expanding the government mint, they should and Commercial Bulletin, 18%). 2. William Graham Sumner, Andrew Jockson (rev. ed., have sold it. Instead of changing the fixed ratio Boston: Houghton, Mifflin &Ca., 18%). between gold and silver, they should have had no 3. Ibid., p. 438. 162 JEFFREY ROCiERS HUMMEL

4. Charles Grier Sellers. Jr.. Jacksonian &mmcv view that the democratic. movement was itself (Washington. D.C.: he& Historical Asm.. 1958;; strongly capitalist in spirit and objected only to any and idem.. " versus the Historians". limitation. on free entry into the game or capitalist. . Mississippi Valley Historical Review 44 (March. 1958). exploitation". pp. 615-634. 15. Hofstadter, American Political Tradition. 5. Sumner, Andrew Jackson, p. 265. 16. Schlesinger, Ageof Jackson, p. 218. 6... -.Ihid.. -.a. .1RR. 17. Hofstadter, American Political Tradition, p. 63. 7. Ibid., p. 397. 18. Walter Buckingham Smith. Economic Aspfs. of ?he 8. Ralph C. H. Catterall, TheSeEondBank of the United SeEond Bank of the United States (Cambridge, Mass.: Statm (Chicago: University of Chicago Press, 1903). Harvard University Press, 1953). 9. Ibid., p. 239. 19. Thomas Payne Govan, Nicholm Biddle: Nationalist and 10. Ibid., p. 476. Public Banker, 17861844 (Chicago: University of I I. Reginald Charles McGrane, The Panic of 1837: Some Chicago Press, 1959). Also see Govan, "The Funda- Financial Problems of the Jocksonian Era (Chicago: mental Issues of the Bank War", Pennrylvania University of Chicago Press, 1924). Magazine of History and Biography, 82 (July, 1958), 12. By Marxist notion of class, I mean a concept of class pp. 305-315. which defines dasss on an economic basis, on the basis 20. Fritz Redlich, The Moulding of American Banking: of people's relationships to the means of production. I Men ond Idem (2 vols., New York: Hafner Pub. Co., don't mean to imply that all persons accepting such a -~1951).- - ,- notion of class are conscious or consistent Marxists. I 21. Bray Hammond, Banks and Politics in America: should point out here that the Marxist economic type From theRevolution to the Civil War (Princeton, N.J.: of cLars is an inversion of the original Librrtarian concept Princeton University Press; 1957). For those who wish of class, formulated by two French liberals, Charles to avoid plowing through Hammond's book, all his Comte (not to be confused with Auguste Comte) and important points can be gleaned from his articles: "The Charles Dunoyer. The libertarian concept sees conflict Banks, the States, and the Federal Government", arising out of the employment of a coercive state American Economic Review, 23 (December, 19331, apparatus for plunder and oppression and thus defines pp. 622-636; "Long and Short Term Credit in Early classeson the basis of people's relationship to the state. American Banking", Quarterly Journal of Economics, Saint-Simon twisted the Comte-Dunoyer formulation 49.. (November, 1934). pp. 79-87; "Free Banks and and passed it on to Mm. See Leonard P. Liggio, Corporations: the New York Free Banking Act of "Charles Dunoyer and French Classical Liberalism", 1838", Journalof PoliticalEconomy, 44(April, 1936), The Journal of Libertarian Studies. Vol. 1. No. 3 pp. 1W209; "Jackson. Biddle, and the Bank of the (Summer, 1977), pp. 153-178. United States", Journal of Economic Hislory, 7 (May, Much of the confusion about Jacksonian rhetoric l947), pp. 1-23; "The Chestnut Street Raid on Wall would be eliminated if historians could escape the Street, 1839". Quarlerly Journal of Economics, 61 blinders of the Marxist class concept and realize that (August, 1947). pp. W5-618; and "Banking in the the Jacksonians are speaking in Libertarian terms. For Early West: Monopoly, Prohibition, and Laissez instance, a great deal of energy has been wasted on the Faire", Journal of Economic History, 8 (May, 1948), argument whether the Jacksonians were pro-labor or pp. 1-25. Also see Hammond's review of Schlesinger: anti-labor. They were neither; they were anti-state. To Bray Hammond, "Public Policy and National Banks", the extent that they viewed labor as a victim of state Journal.. of Economic History, 6 (May, I%), pp. 79- oppression, they will appear pro-labor. To the extent ((4. that they viewed labor as employing the state to oppress 22. 1 have called it the Hofstadter entrepreneurial thesis others, they will apwanti-labor. Similarly with the because it is associated with his name. Actually, question of whether the Jacksonians were anti- Hammond developed his synthesis in an article which capitalist or capitalists themselves. Yet, whenever appeared prior to Hofstadter's book. See Hammond, historians encounter the libertarian concept of class in "Jackson, Biddle, and the Bank of the UnitedStatesn, thinkers of the Jacksonian period, they automatically passim. superimpose Marxist categories. Witness Schlesinger's 23. Variants of the sound banking doctrine include the treatment of John Taylor in Arthur M. Schlesinger, Jr., real-bills doctrine and the Banking School which arose The Age of Jockson (Boston: Little, Brown & Co., in nineteenth century Britain. 1945). or Hofstadter's treatment of John C. Calhoun, in 24. Hammond, BanksandPolitie, p. 573. Richard Hofstadter, The American Political Tradition 25. Robert V. Remini. Andrew Jackson (New York: (New York: Vintage Books, 1948). See also my Harper & Row, 1966); and Remini, Andrew Jackson comment in note 14, below. and the Bank War: A Study in the Growlh of PrPsidential Power (New York: W. W. Norton & Co., 13. Schlesineer.- .. OD. cil. ~. 14. Joseph Dorfman, "The Jackson Wage-Earner Thesis", 1967). American HLnorical Review, 54 (January, 1949). pp. 26. Leonard D. White, The Jacksonians: A Study h 296-306. dsosee ~o~fman,me ~~~~~~i~ ~indin Administrative History, 1829-1861 (New York: American Civiliration, 1646-1865, vol. I1 (New York: Macmillan Co.* 1954). Viking Press, 1946). Dorfman has bcen frequently 27. George Rogers Taylor, The Tranrportalion Revolulion, misinterpreted as saying the same thing as Hofstadter. 1815-1860 (New York: Holt, Rinehart & Winston, For exinple. Sellers, "Andrew Jackson and the 1951). Historians", p. 628, lumps them together as the 28. Arthur M. Schlesinger, Jr., "Review of Walter B. "Columbia historians", about whom he says: " . . . the Smith, Economic Aspects of the Second Bank of the Columbia historians defend the diametrically opposite United Stater", American Hislorical Review, 59 THE JACKSONIANS, BANKING. AND ECONOMIC THEORY: A REINTERPRETATION 163

(October. 1953). pp. 140-141. Jackson's War With the B.U.S.", Erploralions in 29. Ibid., pp. 140-141. Economic History, 11 (Spring, 1974), pp. 227-247. 30. Lee Beuson, The Concept of Jacksonian DemoCmcY: 42. The hard-money significance of changing the mint New York as a Test Case (Princeton, N.J.: Princeton ratio was not pointed out first by either Martin or University Press. 1961). Schlesinger, but by Paul M. O'Leary. in "The Coinage 31. Ibid., p. 54. Legislation of 1834". Journal of Political Economy, 32. New York in 1838 became the second state to adopt 45 (February, 1937). pp. 80-94. Martin has written 'Lfreebanking" and themodel for the rest of the states. two articles on bimetallism: David A. Martin, "Bimet- 33. Of course, Benson did not discover the provisions of allism in the United States before 1850". Journal of the act. Hammond was familiar with them and also PolilicalEconomy, 76(May/June, 1960, pp. 428442; knew that in New York it was the Whigs who pad and idem., "1853: The End of Bimetallism in the "free banking". Nevertheless, he still places "free United States", Journal of Economic History, 33 banking" within the context of the Jacksonian (December, 1973), pp. 825-644, in which he claims entrepreneurial drive toward laissez-faire. that between 1834 and 1853 the mint ratio was so close 34. Frank Otto Gatell, "Sober Second Thoughts on Van to the market ratio that bimetallism actually worked Buren, the Albany Regency, and the Wall Street without driving gold or silver out of circulation. Conspiracy". Journal of American History, 53 (June, 43. Richard H. Timberlake, Jr., "The Specie Circular and I%@, pp. 19-40. Gatell also treats the issue of pet Distribution of the Sumlus". Journal of- Political banks in: Gatell, "Spoils of the Bank War: Political Economy, 68 (April, lWj, pp. 109-117. Bias in the Selection of the Pet Banks", American 44. Timberlake, "SpecieCircular", p. 117. Historical Review, 70 (October, 1%4), pp. 35-58; 45. Scheiber, "The Pet Banks",pwim. "Secretary Taney and the Baltimore Pets: A Study in 46. Richard H. Timberlake, Jr., "The Specie Circular and Banking and Politics", Business History Review, 39 the Sale of Public Lands: A Comment", Journal of (Summer. 1965). pp. 205-227; and John Michael EconomicHislory, 25 (Septemba. 1%5). pp. 414416. McFaul and Frank Otto Gatell, "The Outcast Insider: Timberlake's other two articles dealing with the Jack- Reuben M. Whitney and the Bank War", Pennsylvania sonian era are not revisionist: Timberlake, "The Magazine of History and Biography, 91 (April, 1%7), Independent Treasury and Before the pp. 115-144. Also on pets see Harry N. Scheiber, "The Civil War", Southern Economic Journal, 27 (October, Pet Banks in Jacksonian Politics and Finance, 1833- I%OL oo. 92-103: and idem.. "The Soecie Standard 1841". Journal of Economic Hirfory, 23 (June, 1%)). and ~ankigin thc Unltcd at& Bcfore 1860". pp. 196-214; and John M. McFaul, The Politics of Journal of Econorndc il~vtory.21 (September, 1961). Jacksonian Finance (Ithaca, N.Y.: Cornell University pp. 318-341. Press, 1972). Gatell has directly attacked Benson's 47. George Macesich, "Sourca of Monetary Disturbance allegation that there was no wealth difference between in the United States, 1834-IW", Journal of Economic the panies in "Money and Party in Jacksonian America: History, ZO(Septembe1, IW), pp. 407434. A Quantitative Look at New York City's Men of 48. Milton Eriedman and Anna Jacobson Schwartz. A Quality", Political Science Quarterly, 82 (June, 1%7), Monetary History of the United States, 18671960 pp. 235-252. Finally. see Frank Otto Gatell. "Beyond (Princeton, N.J.: Princeton University Press, 1963). Jacksonian Consensus", in H. J. Bass, ed., The State 49. Jeffrey G. Williamson, "International Trade and of American History (Chicago: Quadrangle Books. United States Economic Development, 1827-1843", 1970), pp. 349-361, an otherwise excellmt article which Journal of Economic History, 21 (September, 1961). unfortunately suffers from a misunderstanding of pp. 372-388. what laissez-faire in banking means. See note 90 below. 50. The long swing and other cyclical concepts have an 35. Gatell. "Sober Second Thoughts", p. 39. extensive economic and historical literature, and I will 36. Jean Alexander Wilburn, Biddle's Bank: The Crucial only mention the books by Williamson and North: Years (New York: Columbia University Press, 1970). Jeffrey G. Williamson, American Growlh and the 37. Wilburn. B~ddle'sBonk,pp. 118-1 19. Balance of Payments, 182LL1913: A Study of the Long 38. James Roger Sharp, The Jacksonians versus theBank Swing (Chapel Hill, N.C.: University of North Carolina Politics in the Slates After the Panic of 1837 (New Press. 1964); and Douglass C. North. The Economic York: Columbia University Press, 1970). Growth of the United Slofes, 1790-1860 (New York: 39. Sharp, Jocksonions versustheBanks, p. 321. W. W. Norton & Co., 1966). For reasons which I 40. William Gerald Shade. Banks Or No Banks: The cannot develop here, 1 consider the concept fundament- Money Isme in Western Politics, 1832-1865 (Detroit: ally flawed. Wayne State University Press, 1972). See also the 51. George Macesich, "International Trade and United article Shade co-authored with Herbert Ershkowitz: States Economic Development Revisited", Journal of Herben Ershkowitz and William G. Shade, "Con- EconomicHistory, 21 (September, 1961). pp. 384-385. sensus or Conflict? Political Behavior in State Legisla- 52. Thomas D. Willett, "International Factors in Specie tors During the Jacksonian EraHglournalof American Flows and American Monetary Stability: 1834-1860". History, 58 (December 1971). pp.pl-621. It is a direct Journal of Economic History, 28 (March, 1968). pp. challenge to the no-issue. "electoral machine" view of 28-50. Jacksonian politics formulated by McCormick in 53. Jawb Meerman, "The Climax of the Bank War: Richard P. McConnick, The Second American Party Biddle's Contraction, 1833-1834". Journal of Polilicial System: Party Formation in the Jocksonran Era (Chapel Economy, 71 (August, 1963). pp. 378-388. Hill, N.C.: The University of North Carolina Press, 54. Peter Temin, The Jacksonian Economy (New York: 1966). W. W. Norton&Co., 1969). 41. David A. Martin, "Metallism, Small Notes, and 55. Peter Temin, "The Economic Consequences of the 164 JEFFREY ROGERS HUMMEL

Bank War", Journal of Polilical Economy. 76 Has Government Done lo Our Money? (rev. ed., (March/April, 1%8), pp. 257-274. Santa ha, Cal.: Rampart College, 1974); and idem., 56. Edward J. Stevens, "Composition of the Money Stock "The Case for a LOO Per Cent Cold Dollar", in Prior to the Civil War", Journal of Money, Credit L. Yeager, ed., In Search of a Monetary Consfilulion andBanking, 3 (February, 1971). pp. 84-101. (Cambridge, Mass.: Harvard University Press, 1%2), 57. Stanley L. Ennerman. "A Note on the Economic Con- pp. 94-136.. sequences of the Second Bank of the United States", 71. Originally, deposits of money within a Bank were

Journalof PoliticalEconomy, 78 (July/August, 1970), considered~~~~~~~ ~ ~ bailments.~ which meant that the monev pp. 725-728. deposited rtill legall; belonged to the depor~torand 58. His dissertation, which I have not examined, is on the bank had to return not only the same amount a\ thissubject. Hugh Rockoff, "The Free Banking Era: A dcpormd but thc exact same physical coins or bullion. Re-Examination", Wniversity of Chicago: doctoral At some point the law was changed, although no one dissertation in history, 1972). has looked into the exact details. It is a good topic for 59. Hugh Rockoff, "Money, Prices, and Banks in the further investigation. Jacksonian Era", in R. Fogel and S. Engerman, eds., 72. 1 am at this point and hereafter using the word The Reinleruretation of American Economic Hirtorv "inflation" in its original sense to mean an increase in (New ~ork:~arper& ROW, 1971), pp. 448-458. the stock of money. The modern definition came about 60. Hugh Rockoff. "American Free Banking Before the because an increase in the price level is frequently a Civil War: A Resxamination", Journal of Economic consequence of an increase in the stock of money. Hklory, 32 (March, 1972), pp. 417-420. 73. Mises favors free banking; Rothbard favors prohibition 61. Roger H. Hinderliter and Hugh Rockoff, "The of fractional reserves. The Austriandefinition of "free Management of Reserves by Antebellum Banks in banking" differs from the regulated system of early Eastern Financial Centers", Exploralions in Economic 19th century America. It is defined as totally unregu- Hislory, I I (Fall, 1973), pp. 37-53. lated bankine.- exceot that everv bank. as in thecase of 62. Hugh Rockoff, "Varieties of Banking and Regional every other firm on thc free market, must stn.71~and Economic Development in the United States, 1840- promptly redccm 1t5obhgauons 1860", Journol of Economic Hirtory, 35 (March, 74 Sometime, as we have polntcd out, governments stmply 1975), pp. 160-181. create the money themselves, as with the Continentals 63. Roockoff, "Varieties of Banking", p. 162. during the Revolutionary War or the Greenbacks

64. Rockoff, "Varieties of Banking", p. 169. Of course, the durine~ ~ ~~~u the Civil War. really interesting question, which no one has yet 75. Hammond, BanksandPolilics, p. 39. tackled, is whether the prohibition of banking had 76. [bid., p. 627. any negative effect on economic growth. 77. On branch banking, see Oliver M. W. Sprague, "Branch 65. Arthur Fraas. "The Second Bank of the United Banking in the United States", Quarterly Journal of States. An lnstrumcnt for an interregional Monetary Economics, 17 (1902-1903), pp. X2-2M).

Unmn". Journal o/Lionomtc Hsrory, 34 (June. 19741, 78.~ This~ ~~~~ factor~ ~ is hinted at bv Sumner. in William Graham pp. 447457. Sumner, A History of ~mericancurrency (New York: 66. Rockoff, "Money, Prices, and Banks", p. 457. Henry Holt & Co., 1874), p. 125. Rockoff, "Varieties 67. Richard E. Sylla. "American Banking and Growth in of Banking", pp. 171-172, attempts to measure the the Nineteenth Century: A Padial View of the Terrain", negative impact of usury laws, but from a totally differ- Expioralions in Economic History, 9 (Winter, 1971- ent perspective to that which I have suggested. 1972). pp. 197-227. 79. Strictly, a cartel is a group of producers who agree to

68. Sylla. "American Banking", p. 209. See Redlich's restrict~~~ ~ ~ araduction. in order to drive un. orices.. Since reply: Fritz Redlich. "American Banking and Growth in banks collude to do just the opposite -expand credit the Nineteenth Century: Epistemological Reflections", whlch lowers interest rates - my uscof thc word rs not Explorations in Economic History, 10 (Spring, 1973). strictly correct. However. 1 bclicvc that my usage is pp. 305-314; and Sylla's rebuttal: Richard E. Sylla, within the spirit of the word. "Economic Historv '"on unten nach oben' and 'von 80. For simplicity, I have been referring to bank notes, oben nach unten': A Reply to Fritz Redlich", Explora- although everything I have written applies with equal lions in Economic Hisfory, I0 (Spring, 1973), pp. 3 15- validity to deposits or to any other form of bank- 318. created money. In a central banking system, the private 69. Jonathan R. T. Hughes and Nathan Rosenberg, "The banks and the central bank will sometimes create United States Business Cycle Before 18M):Some Prob- different forms of money. For example, under the lems of Interpretation", Economic History Review, Federal Reserve System, private banks cannot issue 2nd ser., I5 (1963). pp. 476-493. 1 think that the notes; only the Federal Reserve (central) Banks may do authors are being overly optimistic in confining their so. Such an arrangement has no effect on the nature of statement to before 1860. It applies with equal the relationship. validity to subsequent fluctuations, including especially 81. Donald McCloskey and Richard Zecher, "How the the Great Depression. Gold Standard Worked, 1880-1913", in J. Frenkel and 70. Austrian monetary theory can be found in: Ludwig H. Johnson, eds., The Monetary Approach fo lhe von Mises, The Theory of Money ondCredil (rev. ed., Balance of Paymenls (Pacific Palisades, Cal.: Good- New Haven, Conn.: Yale University Press, 1953); and year, 1975), point this out, but their new alternative Murray N. Rothbard, Man, Economy, and Slate: A theory contains a basic misunderstanding of the nature of arbitrace. Treatise on Economic Principles (2 vals., Princeton, -~ ~-- ~~~~-~ N.J.: D. Van Nostrand Co., 1962). pp.160-200, 661- 82. Rockoff, "Varictics of Banking". p 166. 764. For briefer introductions see Rothbard, What 83. W~llett."International Facrors", p. 49. THE JACKSONIANS. BANKING, AND ECONOMIC THEORY: A REINTERPRETATION 165

84. Fraas' logic, in Fraas, "The Second Bank", poscim, if A Short History of Pawr Money and Bonking (Phila- carried far enough, would show the absurdity of fiat delphia, 1833). but Amasa Walker, The Science of currencies and floating exchange rates. Fraas reasons Wealth (3rd ed., Boston: Little, Brown, 1867), and that if it is a good system between nations, then it must Charles Holt Carroll, Organization ofDebt into Curr- be good between regions. But why stop at regions? Why ency and other Paprs (Princeton, N.J.: D. Van not, as Rothbard, "Case for a 100 Per Cent", pp. 125- Nostrand, 1964). both writing later than Gouge, gave 126, suggests, let every individual issue his own freely lucid presentations that compare favorably with most fluctuating fiat money? modem texts. 85. For the sake of brevity and clarity, 1 have greatly 90. Several authors who have managed to break through oversimplified the theory. For a fuller treatment, see the Hammond imputation of "free banking" to the Ludwig von Mises, Human Action: A Treatise on Jacksonians still &ate that term with lairserlfaire. Economics (3rd ed., Chicago: Henry Regnery Co., See, for example, Gatell, "Beyond Jacksonian 1%3); Rothbard, Man, Economy, and State; and Consensus", and William G. Carleton, "Political Friedrich A. von Hayek, Monetury 7heory and the Aspects on the Van Buren Era", South Atlantic Trade Cycle (New York: Harcowt, Brace & Co., 1933). Quarterly, 50 (April, 1951), pp. 167-185. In contrast, For the best application of the theory to the Great as I have already pointed out, Shade, Bonks or No Deoression. see Murrav N. Rothbard. America's Great Banks; Sharp, Jacksonians versus the Bonk, and De&s,ton (3rd cd . ~&s,City. Mo . Shed & Ward. Rockoff "Varieties of Banking"; are very clear in 1975) Thcrc is no work that applres the theory lo the their understanding of the nature of "free banking". Jacksonian era, a gap 1 hope someday to rectify. 91. Temin, "Jacksonian Economy", p. 80, hypothesized 86. Hammond, "Jackson, Biddle", p. 2. that the silver flow was due to an increased productivity 87. Temin, Jacksonion Economy, gives a good discussion of Mexican mining. Rockoff, "Money, Prices, and of whether the Second Bank was a central bank, Banks", p. 454, corrected Temin, offering the although he does not employ my categories. explanation I have accepted. 88. Rothbard, "Case for a IM)PerCent", p. 111. 92. Of course, 100% reserve banking in the US. would 89. For a discussion of the monetary views of the Jackson- have prevented credit expansion in the US., but there ians, see: Sister M. Grace Madeleine, Money and still would have been fluctuations in the money stock Banking Theories of (Philadel- along with malinvestment induced by capital flows. phia: Smants of the Immaculate Heart of Mary, 1943); 93. This misunderstanding of deposits originated because Murray N. Rothbard, 7he Panic of1819: Reactions and of a meaningless distinction between lodged deposits Policies(New York: Columbia University Press, 1%2); (which were supposedly backed 10040 by specie), and Harry E. Miller, Banking Theories in the United States created deposits. The misunderstanding was shared by Before 1860 (Cambridge. Mass.: Harvard University some, but by no means all, of the Jacksonian hard- Press, 1927); and Lloyd W. Mints, A History ofBanking money theorists. In fact, the correct understanding of 7'keory in Great Britain and the United States (Chicago: deposits came earlier to American economic thought University of Chicaao Press. 1945). The best known than it came to England. contemporary exposition w& by ~illiamM. Gouge,