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The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836

Author(s):Knodell, Jane Ellen
Reviewer(s):Brennecke, Claire

Published by EH.Net (May 2018)

Jane Ellen Knodell, The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836. New York: Routledge, 2017. xiii + 188 pp. $110 (hardback), ISBN: 978-1-138-78662-2.

Reviewed for EH.Net by Claire Brennecke, Federal Deposit Insurance Corporation.

Many economic historians have analyzed the Second Bank of the United States through the lens of modern central banking. In The Second Bank of the United States: ‘Central’ Banker in an Era of Nation-Building, 1816-1836, Jane Knodell builds on this literature with a unique and nuanced view of the institution. Knodell argues that the Second Bank of the United States did not act as a modern central bank, as it did not provide services to state banks: the Bank did not act as a lender of last resort or issue high powered money for state banks to use as a reserve currency. But neither was the Bank purely a profit-maximizing commercial bank. The Bank acted in the national interest when it took on the role of a fiscal agent for the federal government and when it maintained monetary stability through specie market operations. Knodell draws on a variety of sources to present this case including contemporary accounts, state bank balance sheet data, and Second Bank branch geography.

Knodell begins, in the second chapter, by pointing out that the Second Bank was never intended to explicitly support state banks. Congress chartered the Bank to address specific challenges that the United States government faced in the early nineteenth century. The federal government was more concerned with the possibility of a public finance crisis rather than a banking crisis. The Second Bank was founded in order to create a uniform currency for the national government and transfer public funds around the country. The Bank placed many of its branches to help achieve this goal, as well as placing branches to provide a place to deposit custom duties. It also exploited its monopoly on interstate branching to profit by placing other branches in locations with few state banks and more growth potential.

Modern central banks produce monetary stability in part by issuing high-powered money for commercial banks to use as reserves and by acting as a lender of last resort (LOLR) for banks. Knodell uses state bank balance sheet data to show that those banks never considered Second Bank notes high-powered money. Moreover, the Bank did not even allow state banks to use the Second Bank’s large-denomination notes for interbank payments (p. 104). Neither did the Second Bank create stability by acting as a LOLR to state banks during the crisis of 1825-26.

However, the Second Bank did act to create monetary stability in ways possibly unfamiliar to scholars of modern central banking. Primarily, the Bank managed the monetary system through specie market operations. As discussed in Chapter 4, the Bank accumulated significant specie reserves through its trade in the domestic and foreign bills of exchange markets. These specie reserves allowed the Bank to conduct specie market operations that stabilized the money markets and suppressed private arbitrage. Through these operations, the Bank both earned profit and acted in the national interest.

In this book, Knodell makes a convincing case that the Second Bank of the United States was neither a conventional modern central bank nor a purely profit-motivated commercial bank. Furthermore, she makes excellent use of a variety of data sources to clearly lay out her argument. However, she misses an opportunity to discuss what the history of the Second Bank can tell us about a) the purpose of a central bank and b) the American economy in the early nineteenth century. Modern central banks affect the economy primarily through their interactions with commercial banks. However, the importance of a central bank comes from its impact on the economy, not the specific policies. The book could have gone further to consider how the Second Bank compares to modern central banks in its motives rather than just its policies. Furthermore, the policies of the Bank were specific to the early nineteenth century U.S. economy. The book could have explored what these policies reveal about how the economy functioned historically relative to how it does today. For example, the Second Bank arguably did create high-powered money for merchants even if it did not do so for banks, and so provided a useful service in creating currency for exchange. The Bank allowed non-bank members of the public, but not banks, to redeem notes for specie at par at all bank branches (p. 127). The book could have discussed the goal of the policy, what that goal tells us about central banking, and what the decision to use this policy to achieve that goal tells us about the broader economy. Overall, this book is an important contribution to the understanding of the Second Bank of the United States and an excellent point of reference for scholars of early American economic and political history.

Claire Brennecke is a financial economist with the Federal Deposit Insurance Corporation. Any opinions, findings, conclusions, and recommendations expressed above are those of the author and do not necessarily reflect the views of the Federal Deposit Insurance Corporation. She is the author of “Information Acquisition in Antebellum U.S. Credit Markets: Evidence from Nineteenth-Century Credit Reports,” FDIC Center for Financial Research Working Paper No. 2016-04.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century