The United States Shall Be Paid Only in Its Own Money

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Judy Shelton, whom President Trump has nominated to serve as a Federal Reserve governor, has written about the virtues of the 19th century gold standard and expressed her eagerness to join the central bank in managing the nation’s money supply. That would have been an unacceptable position for anyone supporting the Constitution’s specie standard for money in the 1830s. For those who supported Andrew Jackson, the country could not have a central bank of issue and put a gold standard into practice. To enjoy the virtues of having coin as the only legal tender, the nation’s first central bank of issue would have to disappear.

By the last year of his second term, Jackson had won nearly every fight about the nation’s political economy; but he had yet to win the war to restore “hard money” as the legal tender of the United States of America. The charter of the second Bank of the United States had formally expired as of February 1, 1836, so the country was once again without a central bank of issue and deposit. However, the Bank continued in operations under its new Pennsylvania state charter and still retained the Treasury’s accounts. In practical terms, nothing had changed. The Bank continued to receive deposits from the Treasury and to do everything that the Federal Reserve Banks now do; with its reserve of the Treasury’s own deposits, the Bank could continue to regulate the supply of the country’s credit and currency through its discounting.

The Democrats, the majority in Congress, were nominally members of Jackson’s own party; but only a fraction of them were supporters of the President’s financial policies. The factions led by Senators Clay of Kentucky and Calhoun of South Carolina continued to disagree over the tariff rates; but they agreed that the United States’ money should continue to stay with the Bank. Clay’s supporters – the people Andrew Jackson labeled as “the improvement interest” – expected the Bank’s own note issues and its acceptances of private and state-chartered bank notes to provide the capital for the extension of the National Road and continuing construction of the Chesapeake and Ohio Canal. Calhoun’s faction hoped for a lowering of the tariff rates and had received encouragement from Nicholas Biddle at the Bank. They knew that Vice-President Van Buren, Jackson’s chosen successor, would not want the Port of New York’s collections to be diminished by a tax cut.

Throughout the spring of 1836, the Jackson Administration worked on a deal with those in Congress who wanted the federal government’s accounts to stay with the Bank of the United States. The result was the Deposit Act, which the president signed into law in June. The Treasurer of the United States was authorized to remove the federal government’s accounts would be removed from the custody of the Bank of the United States. Those balances and all future tax deposits would be deposited in banks in the states and territories that qualified under the Deposit Act. The reward for the members of Congress who voted for the legislation was the “distribution”. Under the Act the entire federal surplus above $5 million would be distributed to the custody of the state governments and territories by deposit to their accounts with those Deposit Act banks. The distributions would be made during each quarter of 1837. Levi Woodbury, the Treasurer, informed Congress that, as a concession to practicality, the government would not make an immediate withdrawal from the Bank of the United States. Instead, the Treasury would deposit all incoming tax receipts with the Deposit Act banks and pay the government’s expenses by drawing down the funds still at the second Bank. In its structure Jackson’s bank system actually was closer to the initial design of the Federal Reserve Banks Act of 1913. The second Bank of the United States had been a central bank with branches. The Deposit Act banks, like the Federal Reserve Banks before the 1933 Banking Act, were separate entities each holding their own reserves. The critical differences were the absence of any central Board of Governors and the break-up of the concentrated “reserve” held by the Bank into separate and independent pieces.