force the issue early, filing for renewal in 1831. Jackson,
in a dra-
matic message, vetoed renewal of the Bank charter, and Congress
failed to pass it over his veto.
Triumphantly reelected on the Bank issue in 1832, President
Jackson disestablished the BUS as a central bank by removing
Treasury deposits from the BUS in 1833, placing them in a num-
ber of state banks (soon called “pet banks”) throughout the coun-
try. At first, the total number of pet banks was seven,
but the Jack-
sonians, eager to avoid a tight-knit oligarchy of privileged banks,
increased the number to 91 by the end of 1836. In that year, as
its federal charter ran out, Biddle managed to get a Pennsylvania
charter for the Bank, and the new United States Bank of Pennsyl-
vania managed to function as a regular state bank for a few years
thereafter.
Historians long maintained that Andrew Jackson, by his reck-
less act of eliminating the BUS and
shifting government funds to
pet banks, freed the state banks from the restraints imposed upon
them by a central bank. In that way, the banks allegedly were
allowed to pyramid money on top of specie, precipitating an
unruly inflation later succeeded by two bank panics and a disas-
trous inflation.
Recent historians, however, have demonstrated that the cor-
rect picture was precisely the reverse.
2
First,
under the regime of
Nicholas Biddle, BUS notes and deposits had risen, from January
1823 to January 1832, from $12 million to $42.1 million, an
annual increase of 27.9 percent. This sharp inflation of the base
of the banking pyramid led to a large increase in the total money
supply, from $81 million to $155 million, or an annual increase of
10.2 percent. Clearly, the driving force of this monetary expansion
208
The Mystery of Banking
2
For an excellent survey and critique of historical interpretations of
Jackson
and the Bank War, see Jeffrey Rogers Hummel, “The Jacksonians,
Banking and Economic Theory: A Reinterpretation,”
The Journal of Liber-
tarian Studies
2 (Summer 1978): 151–65.
Chapter Fourteen.qxp 8/4/2008 11:38 AM Page 208
of the 1820s was the BUS, which acted as an inflationary spur
rather than as a restraint on the state banks.
The fact that wholesale prices remained about the same over
this period does not mean that the monetary inflation had no ill
effects. As “Austrian” business
cycle theory points out, any bank
credit inflation creates a boom-and-bust cycle; there is no need
for prices actually to rise. Prices did not rise because an increased
product of goods and services offset the monetary expansion.
Similar conditions precipitated the great crash of 1929. Prices
need not rise for an inflationary boom, followed by a bust, to be
created. All that is needed is for prices to be kept up by the arti-
ficial boom, and be
higher than they would have been
without the
monetary expansion.
Without the credit expansion, prices would
have fallen during the 1820s, as they would have a century later,
thereby spreading the benefits of a great boom in investments and
production to everyone in the country.
Recent historians have also demonstrated that most of the
state banks warmly supported recharter of the Bank of the United
States. With the exception of the banks in New York, Connecti-
cut, Massachusetts,
and Georgia, the state banks overwhelmingly
backed the BUS.
3
But if the BUS was a restraining influence on
their expansion, why did they endorse it?
In short, the BUS had a poor inflationary record in the 1820s,
and the state banks, recognizing its role as a spur to their own
credit expansion, largely fought on its behalf in the recharter
struggle of the early 1830s.
Furthermore, the inflationary boom of the 1830s began, not
with Jackson’s removal of the deposits in 1833, but three years
earlier, as an expansion fueled by the central bank. Thus,
the total
money supply rose from $109 million in 1830 to $155 million at
the end of 1831, a spectacular expansion of 35 percent in one
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