Second Bank of the United States Chartered, Immediately Plagued by Speculation and Fraud

Congress charters the Second Bank of the United States as a privately owned institution with a 20-year federal charter, five years after the expiration of the First Bank of the United States. President James Madison, who had opposed the First Bank as unconstitutional in 1791, now supports the Second Bank after experiencing difficulty financing the War of 1812 without a central banking institution. The bank is capitalized at $35 million—the largest financial institution in the nation and one of the largest corporations in the world—with the federal government purchasing one-fifth of the shares and appointing five of twenty-five directors. However, opening for business in the midst of a postwar boom, the Second Bank immediately discredits itself through speculation, stockjobbing, and, at some branches, outright fraud.

The bank’s first president, William Jones, proves to be a political choice who knows nothing of banking and demonstrates venality in office. During his tenure, the bank causes distress across the country through speculation on the part of its leaders, who use the institution to enrich themselves rather than stabilize the nation’s currency and credit. Between 1816 and 1818, dishonest managers of the Baltimore branch swindle investors out of more than $1 million through fraud and larceny before being caught. Branch directors engage in self-dealing, making loans to themselves and associates while the institution prints large amounts of paper money to issue loans for land purchases during the western expansion boom. By July 1818, the Second Bank has demand liabilities exceeding $22.4 million while its specie fund stands at only $2.4 million—a dangerously overleveraged 10:1 ratio.

The Baltimore branch scandal forces Jones’s resignation in January 1819, and he is replaced by Langdon Cheves, who continues contracting credit in an effort to stop inflation and stabilize the bank. However, the bank’s efforts to save itself worsen the Panic of 1819, which causes widespread bank and business failures across the nation. The Second Bank’s immediate descent into fraud and speculation establishes patterns that recur throughout American banking history: institutions chartered with public purposes quickly become vehicles for elite enrichment and speculation; political appointments of unqualified leadership enable systematic corruption; and when crises emerge from fraudulent practices, ordinary citizens bear the costs while bank insiders escape prosecution. The scandal fuels popular resentment toward the bank that persists throughout its existence, providing Andrew Jackson with powerful ammunition for his later “Bank War” to destroy the institution he characterizes as a “hydra of corruption.”