The Second Bank and Jackson’s “Banking War” (1816-1836)
In response to the financial chaos after the War of 1812, Congress chartered the establishment of the Second Bank of the United States in 1816, with a term of 20 years and a capital of $35 million, headquartered in Philadelphia. Even President James Madison, who once opposed the First Bank, acknowledged the need for central financial institutions to stabilize the post-war economy. Under the leadership of Nicholas Biddle, the Second Bank was committed to regulating credit and money supply. However, it became the target of President Andrew Jackson’s populist movement against centralized financial power. Jackson referred to the bank as a ‘den of venomous snakes and thieves’, vetoed the renewal of the charter and withdrew federal deposits, effectively destroying the institution.
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Free Bank and “Wildcat Currency” (1837-1862)
From the late 1830s to the Civil War, known as the era of free banking, banking affairs were controlled by state governments, and there was a lack of federal regulation after the collapse of the Second Bank. New York and other states have passed “free banking” laws that allow almost anyone to open a bank as long as they meet basic requirements and provide bond collateral. Without federal supervision, over 8000 different banknotes are in circulation, each traded at different discounts based on the issuing bank’s creditworthiness and the distance to the redemption location. Some institutions known as’ wildcat banks’ operate in remote areas to avoid cashing out, issuing notes that are not fully backed by gold and silver, leading to widespread instability and fraud. In Michigan and other places, bank failures were commonplace, and the panic of 1837 and 1857 strengthened the public’s desire for a national banking framework and a unified currency.
Civil War Financing and National Banking Act (1863-1879)
The civil war triggered a financial revolution, and the federal government was eager to raise funds for the war. Initially relying on bond sales and tax increases, the North soon faced a cash shortage and suspended gold and silver exchanges at the end of 1861, causing currency to disappear from circulation. In 1862, Congress passed the Legal Currency Act, authorizing the issuance of $150 million in paper currency known as “greenbacks”. These non interest bearing Treasury bills were designated as legal currency but not backed by gold. These legal instruments fill the critical currency gap, despite the inflation caused by discount trading on gold. Eventually, approximately $450 million worth of greenback coins were issued, becoming the first large-scale legal tender in US history and continuing to be used until the 20th century. Although the system brought stability and supported victory, it also triggered significant inflation, with prices in the north rising by about 80% during wartime. After 1865, efforts were made to restore the gold standard currency, and finally in 1879, gold and silver exchange was restored at a fixed rate of $20.67 per ounce.