During the War of 1812 with England the Government had to depend upon the state banks for financial aid and service. After the dissolution of the First Bank these state banks had sprung up in great numbers, and were poorly supervised and managed. The liquidation of the big bank caused a heavy drain of specie to pay European investors. In 1814 the banks all over the country, except in New England, suspended specie payments. The Government, whose funds were deposited in the state banks, defaulted on the interest of the public debt, and the whole country was in a condition of financial chaos. In this emergency Secretary of the Treasury Dallas proposed a national bank, but it was not until 1816 that the Second Bank of the United States was established.
The charter of the Second Bank of the United States was modeled after that of the First Bank. Its capital was $35,000,000, of which one-fifth was subscribed by the Government, payable in cash or in five per cent government notes. Private subscriptions were payable one-fourth in coin and the balance in government securities. These subscriptions were payable in three installments, 30 per cent at once, 35 per cent in six months, and 35 per cent in one year. The bank was to be governed by twenty-five directors, of whom five were to be named by the President of the United States. It was required to pay a bonus of $1,500,000 in three annual installments. It was to act as fiscal agent of the Government in transferring and disbursing public funds. Provision was made for branches and twenty-five, were finally established. Public funds were to be deposited with it "unless the Secretary of the Treasury shall at any time otherwise order and direct." Note issues were not to exceed the capital, and the bank was required to pay deposits as well as notes in specie, subject to a penalty of 12 per cent. This latter provision was intended to prevent a profit being made by suspending specie payments, as had been done by many of the state banks.
The bank restored financial order and soon brought about the resumption of specie payment. For the first few years, however, it was shamefully mismanaged and narrowly escaped disaster. Stock subscriptions were not*collected promptly, loans were made on the security of the shares before they were fully paid for, and contrary to the charter dividends were paid upon these shares. The officers of the Baltimore branch defrauded it of $1,600,000, and the bank was probably saved from bankruptcy only by the Government's deposit, which amounted to about $8,000,000. In 1819, Langdon Cheves of South Carolina was made president of the bank and he at once set to work to put it on a sound basis. He borrowed $2,500,000 from Europe to strengthen the reserves, compelled stockholders to reduce their loans, regulated the note issues, and reformed the management. Under his able administration and that of his successor, Nicholas Biddle, the bank gained public confidence both at home and abroad and enjoyed a decade of great prosperity.
The bank was at the height of its popularity and influence when Andrew Jackson became President of the United States in 1829. Through no fault of its own it became involved in a political struggle which finally brought about its downfall. Jackson in his first message to Congress questioned both the constitutionality and the expediency of the bank. Certain politicians who desired to secure the removal of the officers of the branch bank in Portsmouth, N. II., for their own private ends, persuaded Jackson that the bank and its management were hostile to his administration. In subsequent messages the President referred again to the bank, but his tone was less hostile. In the campaign of 1832 the Whig party decided to use the great popularity of the brink as a political asset against Jackson, and Henry Clay, the Whig candidate, came out emphatically for a renewal of the charter. Jackson accepted the challenge and renewed his hostility to the bank. While the campaign was in progress, Congress passed a bill giving the bank a new charter and the President vetoed it. The contest was then between Jackson and "the monster"; Jackson was reelected by a large majority. In the following year Jackson caused the government deposits to be withdrawn from the bank and deposited in state banks, and the cancellation of the Government's stock holdings was requested. Before its federal charter expired the bank obtained a state charter from the legislature of Pennsylvania and reorganized with the same capital, .$85,000,000. This was much too large a capital to be employed profitably in legitimate commercial banking in Philadelphia alone. The bank entered into various speculative enterprises, making large loans on the stocks of companies in all parts of the country. The panic of 1837 forced the bank to suspend, and in 1841 it again suspended and went into liquidation. The creditors were finally paid in full, but the stockholders received nothing. The failure of these two banks was due to the fact that they became involved in political strife without any intention of their own, and it seems probable that the fear of political control will prevent the establishment of a great central bank organized on a similar basis in the future.