The banking system at the time Jackson assumed the presidency was completely different than it is today. At that time, the federal government coined only a limited supply of hard money and printed no paper money at all. The principal source of circulating currency - paper bank notes- was private commercial banks (of which there were 329 in 1829), chartered by the various states. These private, state-chartered banks supplied the credit necessary to finance land purchases, business operations, and economic growth. The notes they issued were promises to pay in gold or silver, but they were backed by a limited amount of precious metal and they fluctuated greatly in value.

In 1816, the federal government had chartered the Second Bank of the United States partly in an effort to control the notes issued by state banks. By demanding payment in gold or silver, the national bank could discipline over-speculative private banks. But the very idea of a national bank was unpopular for various reasons. Many people blamed it for causing the Panic of 1819. Others resented its political influence. For example, Senator Daniel Webster was both the bank's chief lobbyist and a director of the bank's Boston branch. Wage earners and small-business owners blamed it for economic fluctuations and loan restrictions. Private banks resented its privileged position in the banking industry.

In 1832, Henry Clay, Daniel Webster, and other Jackson opponents in Congress, seeking an issue for that year's presidential election, passed a bill rechartering the Second Bank of the United States. The bank's charter was not due to expire until 1836, but Clay and Webster wanted to force Jackson to take a clear pro-bank or anti-bank position. Jackson had frequently attacked the bank as an agency through which speculators, monopolists, and other seekers after economic privilege cheated honest farmers and mechanics. Now, his adversaries wanted to force him either to sign the bill for recharter, alienating voters hostile to the bank, or veto it, antagonizing conservative voters who favored a sound banking system.

Jackson vetoed the bill in a forceful message that condemned the bank as a privileged "monopoly" created to make "rich men...richer by act of Congress." The bank, he declared was "unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people." In the presidential campaign of 1832, Henry Clay tried to make an issue of Jackson's bank veto, but Jackson swept to an easy second-term victory, defeating Clay by 219 electoral votes to 49.

Jackson interpreted his reelection as a mandate to undermine the bank still further. In September 1833, he ordered his Treasury secretary to divert federal revenues from the Bank of the United States to selected state banks, which came to be known as "pet" banks. The secretary of the Treasury and his assistant resigned rather than carry out the president's order. It was only after Jackson appointed a second new secretary that his order was implemented. Jackson's decision to divert federal deposits from the national bank prompted his adversaries in the Senate to formally censure the president's actions as arbitrary and unconstitutional. The bank's president, Nicholas Biddle, responded to Jackson's actions by reducing loans and calling in debts. "This worthy President," said Biddle, "thinks that because he has scalped Indians and imprisoned Judges he is to have his way with the Bank. He is mistaken." Jackson retorted: "The Bank...is trying to kill me, but I will kill it."

Jackson's decision to divert funds drew strong support from many conservative businesspeople who believed that the bank's destruction would increase the availability of credit and open up new business opportunities. Jackson, however, hated all banks, and believed that the only sound currencies were gold and silver. Having crippled the Bank of the United States, he promptly launched a crusade to replace all bank notes with hard money. Denouncing "the power which the moneyed interest derives from a paper currency," the president prohibited banks that received federal deposits from issuing bills valued at less than $5. Then, in the Specie Circular of 1836, Jackson prohibited payment for public lands in anything but gold or silver. That same year, in another anti-banking measure, Congress voted to deprive pet banks of federal deposits. Instead, nearly $35 million in surplus funds was distributed to the states to help finance internal improvements.

To Jackson's supporters, the presidential veto of the bank bill was a principled assault on a bastion of wealth and special privilege. His efforts to curtail the circulation of bank notes was an effort to rid the country of a tool used by commercial interests to exploit farmers and working men and women. To his critics, the veto was an act of economic ignorance that destroyed a valuable institution that promoted monetary stability, eased the long-distance transfer of funds, provided a reserve of capital on which other banks drew, and helped regulate the bank notes issued by private banks. Jackson's effort to limit the circulation of bank notes was a misguided act of a "backward-looking" president, who failed to understand the role of a banking system in a modern economy.

The effect of Jackson's banking policies remains a subject of debate. Initially, land sales, canal construction, cotton production, and manufacturing boomed following Jackson's decision to divert federal funds from the bank. At the same time, however, state debts rose sharply and inflation increased dramatically. Prices climbed 28 percent in just three years. Then in 1837, just after the election of Jackson's successor, Democrat Martin Van Buren, a deep financial depression struck the nation. Cotton prices fell by half. In New York City, 50,000 people were thrown out of work and 200,000 lacked adequate means of support. Hungry mobs broke into the city's flour warehouse. From across the country came "rumor after rumor of riot, insurrection, and tumult." Not until the mid-1840s would the country fully pull out of the depression.

Who was to blame for the Panic of 1837? One school of thought holds Jackson responsible, arguing that his banking policies removed a vital check on the activities of state-chartered banks. Freed from the regulation of the second Bank of the United States, private banks rapidly expanded the volume of bank notes in circulation, contributing to the rapid increase in inflation. Jackson's Specie Circular of 1836, which sought to curb inflation by requiring that public land payments be made in hard currency, forced many Americans to exchange paper bills for gold and silver. Many private banks lacked sufficient reserves of hard currency and were forced to close their doors, triggering a financial crisis.

Another school of thought blames the panic on factors outside of Jackson's control. A surplus of cotton on the world market caused the price of cotton to drop sharply, throwing many southern and western cotton farmers into bankruptcy. Meanwhile, in 1836, Britain suddenly raised interest rates, which drastically reduced investment in the American economy and forced a number of states to default on loans from foreign investors.

If Jackson's policies did not necessarily cause the panic, they certainly made recovery more difficult. Jackson's hand-picked successor, Martin Van Buren, responded to the economic depression in an extremely doctrinaire way. A firm believer in the Jeffersonian principle of limited government, Van Buren refused to provide government aid to business.

Fearful that the federal government might lose funds it had deposited in private banks, Van Buren convinced Congress in 1840 to adopt an independent treasury system. Under this proposal, federal funds were locked up in insulated subtreasuries, which were totally divorced from the banking system. As a result the banking system was deprived of funds that might have aided recovery.

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