AMERICAN BANK CRISES IN THE PAST

The 1833 Bank War
The 1933 Collapse of the American Bank System

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The 1833 Bank War

On 10 September 1833, President Andrew Jackson announced that the government would no longer use the Second Bank of the United States, which was actually the country's national bank. He used his executive power to remove all federal funds from the bank.

In 1791, George Washington and Alexander Hamilton had created a national bank to serve as the central repository for federal funds. When its twenty-year charter came up for renewal in 1811, with Jefferson's party in control of Congress, they killed it.

After the War of 1812 between Britain and the US, Congress abounded with political intrigues, unbridled corruption, greed and financial scandals. All of the people's representatives, regardless of any party, agreed on higher customs rates, large and very expensive public works, such as railroads and canals, and a prestigious new national bank, and between them they fought teeth and nails for their own cushy political appointments...

In 1816, five years after this first bank's charter had expired, the Second Bank of the United States was founded. This bank was run by a board of directors with close ties to industry and manufacturing, and it was completely biased toward the urban and industrial northern states. Opening for business in the midst of a postwar boom, the Second Bank promptly discredited itself by speculation, stockjobbing, and, at some branches, outright fraud... But under the discreet management of its second and third president, Nicholas Biddle, it repaired its condition and reputation. By the end of the 1820s it had proved not only useful but, to many eyes, indispensable.

In March 1829, Andrew Jackson became president. He was known as obstinate and brutish, but a man of the common people. He immediately thread on a lot of sore toes in Congress, because he "accidentally" ruined several politicians by not giving in to their incredible spending urges. With borrowed money, they had heavily speculated on new governmental spending, but Jackson stubbornly refused to cooperate.

He almost immediately called for an investigation into the bank's policies and political agenda. He resented the bank's complete lack of funding for expansion into the new Western territories, and he strongly objected to the bank's enormous political and economic power and the lack of congressional oversight over its business.

He made clear that he planned to challenge the constitutionality of the bank, much to the horror of its supporters. In response, the director of the bank, Nicholas Biddle, flexed his own not inconsiderable political muscles, and turned to leading businessmen and influential members of Congress, including Kentucky Senator Henry Clay, to fight Jackson. Later that year, Jackson presented his case against the bank in a speech to Congress, but not surprisingly, it was generally agreed that the bank was indeed constitutional. Nevertheless, behind the scene the controversy over the bank lingered on for the next three years.

In 1832, this invisible power play caused a split in Jackson's cabinet and, somewhat later, the obstinate Jackson vetoed a move by Congress to draw up a new charter for the bank. This entire "war" took place during Jackson's bid for re-election, and the national bank became the subject of a bitter political campaign between the Democratic incumbent Jackson and his opponent Henry Clay. However, Jackson's arguments to serve "the common man" of America instead of a privileged class of wealthy businessmen appealed to the voters, and resulted in his victory.

Empowered by his public mandate, he closed the bank, despite the fierce objections from Congress. On 10 September 1833, Jackson removed all federal funds from the Second Bank of the US, and dispersed them to various state banks, popularly known as "pet banks". In addition, he announced that new bank deposits would not be accepted after 01 October. Jackson finally succeeded in destroying the bank, and its charter officially expired in 1836.

The destruction of the Bank loosed American enterprise from its only central restraint. Gorged with federal deposits and with no one to control their note issues, state banks went on a lending spree that built up a speculative bubble and ended, just as Jackson left office in 1837, in a sickening crash.

However, Jackson did not emerge unscathed from the scandal. In 1834, Congress censured Jackson for what they viewed as his abuse of presidential power during the Bank War. But Jacksonians, now calling themselves Democrats, expunged this Senate record as soon as they gained a majority. Be as it may, Andrew Jackson is the ONLY American president who ever managed to completely pay off the national debt during his presidency !

The 1933 Collapse of the American Bank System


On 09 March 1933, president Roosevelt ordered the Emergency Banking Act, as a national emergency. On Monday 06 March, he had already closed all the banks for four days by declaring a national bank holiday, even though it was an illegal act to do so, but the democratic congress went along with Roosevelt. But the truth was far more terrifying: an acute banking crisis had come to light, or more accurately, no less than the bankruptcy of the entire American monetary and banking system!

Let us review the background. In 1929, the stock market had completely collapsed, and the Great Depression was in full swing. Money became scarce, and its value in real life was plunging. Until this Act was passed in 1933, all bank deposits were backed by gold in the vaults.

The emergency was that customers were lining up at the banks to cash in their money and gold certificates, and claim the gold they supposedly had on deposit. But the banks didn't have that gold anymore, and bank runs and a complete collapse of the financial system seemed inevitable. But what had happened to the gold?

In the United States, gold was legally valued at $35 an ounce. But in Europe the value of gold floated according to the market, and there it was worth $60 an ounce. The rich and well-informed owners of large amounts of gold had already transferred it previously to discrete tax heavens such as Switzerland. But almost all of the American banks simply sold all of the gold that remained in their deposits to European bankers, and they made a huge profit at their customer's expense...

Given the imminent collapse of the banking system (a.k.a. the goose with the golden eggs...), the politicians hastily came to the rescue. But not by punishing the immoral bankers who corrupted the system in the first place, but by some extremely creative footwork! On 05 April 1933, President Franklin D. Roosevelt issued an Order "forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States"...

This order simply criminalized the possession of monetary gold by any individual, partnership, association or corporation! This extraordinary concept immediately "solved" the acute problem of the unrealistic bank customers, who were foolishly claiming their own gold from the righteous bankers, that had surreptitiously sold it...

This perfectly illustrates the absurd political power to change any rules during the game! What if tomorrow any government decides to simply prohibit the possession of your car, or your home?

From then on, payment was not based upon gold anymore, but on Federal Reserve Notes, that could simply be printed whenever necessary, without any backing whatsoever...

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