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Strengthening American Finances Previous Next
Digital History ID 3526

 

The severe financial problems created by the War of 1812 led to a wave of support for the creation of a second national bank. The demise of the first Bank of the United States just before the war had left the nation ill-equipped to deal with the war's financial demands. To finance the war effort, the government borrowed from private banks at high interest rates. As demand for credit rose, the private banks issued bank notes greatly exceeding the amount of gold or silver that they held. One Rhode Island bank issued $580,000 in notes backed up by only $86.48 in gold and silver. The result was high inflation. Prices jumped 40 percent in just two years.

To make matters worse, the United States government was unable to redeem millions of dollars deposited in private banks. In 1814, after the British burned the nation's capital, many banks outside of New England stopped redeeming their notes in gold or silver. Soldiers, army contractors, and government securities holders went unpaid, and the Treasury temporarily went bankrupt. After the war was over, many banks still refused to resume payments in gold or silver.

In 1816, Congress voted by a narrow margin to charter a second Bank of the United States for 20 years and give it the privilege of holding government funds without paying interest for their use. In return, it required the bank to pay a bonus of $1.5 million to the federal government and let the president name 5 of the bank's 25 directors. Supporters of a second national bank argued that it would provide a safe place to deposit government funds and a convenient mechanism for transferring money between states. Supporters also claimed that a national bank would promote monetary stability by regulating private banks. A national bank would strengthen the banking system by refusing to accept the notes issued by overspeculative private banks and ensuring that bank notes were readily exchangeable for gold or silver. Opposition to a national bank came largely from private banking interests and traditional Jeffersonians, who considered a national bank to be unconstitutional and a threat to republican government.

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