The Mystery of Banking

Central Banking in the United States I
201
to this mammoth; the banks were so linked together with
the business of the world, that there were very few men
exempt from their influence. The true secret is, said he, the
banks are creditors as well as debtors
and so their debtors fear to tackle the banks. 
Randolph went on to pinpoint the fraudulent nature of frac-
tional reserve banking: 
. . . [i]t was as much swindling to issue notes with intent not
to pay, as it was burglary to break open a house. If they were
unable to pay, the banks were bankrupts . . .
6
The BUS was driven through Congress by the Madison
administration and particularly by Secretary of the Treasury
Alexander J. Dallas, whose appointment had been pushed for that
purpose. Dallas, a wealthy Philadelphia lawyer, was a close friend,
counsel, and financial associate of Philadelphia merchant and
banker, Stephen Girard, reputedly one of the two wealthiest men
in the country. Girard had been the largest single stockholder of
the First BUS, and during the War of 1812, he became a very
heavy investor in the war debt of the federal government. As a
prospective large stockholder of the BUS and as a way of creating
a buyer for his public debt, Girard began to urge a new Central
Bank. Dallas’s appointment as Secretary of Treasury in 1814 was
successfully engineered by Girard and his close friend, wealthy
New York merchant and fur trader, John Jacob Astor, also a heavy
investor in the war debt.
7 
As a result of the deal between the BUS and the state banks,
the resumption of specie payments by the latter after 1817 was
more nominal than real, thereby setting the stage for continued
6
Annals of Congress
, 14 Cong., 1 sess., pp. 1066, 1091, 1110ff.
7
On the Girard-Dallas connection, see Bray Hammond, 
Banks and Pol-
itics in America
(Princeton, N.J.: Princeton University Press, 1957), pp.
231–46, 252; and Philip H. Burch, Jr., 
Elites in American History
, vol. I,
The Federalist Years to the Civil War
(New York: Holmes & Meier, 1981),
pp. 88, 97, 116–17, 119–21.
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inflation, and for renewed widespread suspensions of specie pay-
ment during the 1819–21 panic and depression. A mark of this
failure of redemption was that varying discounts on bank notes
against specie continued from 1817 on. 
The problem was aggravated by the fact that the BUS lacked
the courage to insist on payment of notes from the state banks. As
a result, the BUS piled up large balances against the state banks,
reaching over $2.4 million during 1817 and 1818. As the major
historian of the BUS writes: “So many influential people were
interested in the [state banks] as stockholders that it was not
advisable to give offense by demanding payment in specie, and
borrowers were anxious to keep the banks in the humor to
lend.”
8
From its inception, the Second BUS launched a massive infla-
tion of money and credit. Lax about insisting on the required pay-
ments of its capital in specie, the Bank failed to raise the $7 mil-
lion legally required to be subscribed in specie. During 1817 and
1818, its specie never rose above $2.5 million and at the peak of
its initial expansion, BUS specie was $21.8 million. Thus, in a
scant year and a half of operation, the BUS added a net of $19.2
million to the money supply. 
Outright fraud abounded at the BUS, especially at the
Philadelphia and Baltimore branches, which made 3/5 of all BUS
loans.
9
Furthermore, the BUS attempt to provide a uniform
national currency foundered on the fact that the western and
southern branches could inflate credit and bank notes, and that