Martin Van Buren and Andrew Jackson Organize a Tea Party: Part Three

Everywhere Lafayette went there were toasts and celebrations, and the Marquis would be called on to tell his hosts of his wonder at the extraordinary pace of change. He was happy to do so. What had been un-surveyed wilderness was now titled and developed land that was bought and sold with the same volume and in the same amounts as the bills of exchange traded in Paris. The farmers he met talked as much about the prices and cost of credit for buying more land as they did about the prospects for the coming harvest on the acreage they already owned. Families’ plans were to borrow, buy, improve and sell land and then buy more land. When young people talked of the frontier, their ambitions were to move west and deal in the new land, not to settle it. The United States was experiencing an extraordinary financial revolution. Inheritances and current payouts of the Revolutionary War and War of 1812 veterans’ pension and pay claims supplied millions of dollars in negotiable script. The incorporated state banks, life insurance and trust companies were writing $500 and $1,000 mortgages secured by first trust deeds on half sections and sections of public lands. Hundreds of thousands of people had cash and credit for gambling on the future prices of American land, and the government was continuing to make more of it through its auction sales.

The Marquis de Lafayette was happy to join in. He had acquired his first parcel in 1803 when Congress awarded him 11,520 acres of land in the Louisiana territory as back pay for his services as a major-general in the American Revolutionary Army. He had lost all his French property to the Revolution and then to Napoleon for being that most difficult of all people – someone who believed the law should respect individual liberty. The congressional grant proved to be his financial salvation; over the next decade, he was able to survive using the proceeds from the sales of pieces of his American property. By 1814, he had sold it all and was able to write to Jefferson that he was financially secure. From his American friends Lafayette would learn that he would make even more money if he got the lawyers involved and had the titles to all his parcels perfected. He took their advice. When, after his farewell tour, he returned to France in 1825, he carried with him verified titles to his property in Florida and he began, once again, to turn property into cash. Lafayette would never return to the United States, but he would, through his property agent in France, support the emigration of a group of Breton farmers and their families to Lake Lafayette. After they discovered how impossible it was to grow carrots, cauliflowers and potatoes in dry cotton land (Lake Lafayette was locally named Prairie Lake because of the frequent droughts), the French immigrants would escape to New Orleans. By 1840 Lafayette’s heirs would sell the remaining interests in the Florida land grant. They would be, as Lafayette had been, grateful to his adopted country for the cash produced by the alchemy of American real estate.

English visitors in the 1820s saw the same transformations that Lafayette witnessed, but they were not at all impressed. (They were also not awarded any grants of land.) Americans, they noted with distaste, seemed to think only about money and prices and trading. Far too few Americans were becoming the self-sufficient yeomen agriculturalists of Thomas Jefferson’s vision, and far too many Americans were gambling on prices for raw land as if they were playing faro on the felt tables of the new riverboats. What both the English visitors and domestic political observers from the settled Atlantic coast did not see was the extent to which all the buying, selling and moving on had some economic sense in the 1820s. The invention of the steamboat had created a nearly inexhaustible demand for boiler fuel. Along the shipping routes of the larger rivers and Great Lakes, an industrious family could, in a single year, log and stockpile enough firewood to pay the government’s price for the wooded acreage they had bought. The following season they could offer the improved land for sale at a premium. The commercial expression “free and clear” has its origins in this period when settlers would offer land grant property free of mortgages and claims and cleared of all timber.

As a New York State politician, Martin Van Buren had not only seen the boom in the turnover of property, money and credit money firsthand; he had helped it along by promoting the network of state-chartered banks. As each stage in the construction of the Erie Canal progressed, the towns along the route would enjoy increases in commerce that went far beyond the amounts paid for the laborers’ wages. Growth in local land speculation, banking and credit would literally spring up from nothing. Sections of Clinton’s ditch would be dug out, graded and puddled; locks would be built; and almost simultaneously, local banks would open for business and begin lending money to farmers, merchants and freight forwarders. The loans would be made in the bank’s own notes that would immediately begin circulating within the community and be exchanged for the notes of the banks in the other towns now connected by the canal. Jacob Perkins, owner of the patent for stereotype engraving and printer of the Second Bank of the United States’ notes, observed that the fever for money was so intense that, “upon the erection of a new bank, we are presented with counterfeit bills, before we have had opportunity to examine the real.”

The brilliantly original scholar Marcello de Cecco enjoyed reminding his astonished audiences at financial conferences that 19th century America (what he and fellow Italians have always called the United States) violated all the rules of economic development. It was the one place in economic history where credit created capital before the population had any monetary savings. The new state-chartered banks would be founded with capital from the investors and directors that was often nothing more than their promises to pay money. Those promises would be paid by the banks’ founders taking out loans from their own banks and then depositing the borrowed bank notes as their promised capital contributions. The scarce supplies of actual specie – English guineas, French and Spanish gold coin, sterling and Spanish silver dollars – would be shared among the banks as the necessary legal minimum of specie required for a new bank’s incorporation.

For the John Quincy Adams administration, these miracles of money and credit creation by Van Buren’s and other Democrats’ state-chartered banks were anything but wonderful. In the respectable financial opinion of the already established money center banks, this growth was appallingly similar to what had been carried on in Scotland as “free” banking. It was dangerous and immoral; and it should be, under federal law, illegal. The National Republicans, like all patriotic Americans, wanted to see further development in the Northwest and Louisiana territories and the new states west of the Appalachians; but, like all sensible people, they knew that growth based on wildcat finance was doomed to failure. Development should follow the orderly pattern that James Monroe and Henry Clay and President Adams had established. To allow the business of credit to grow without regulation was to risk the very kind of crash that Britain and the United States had gone through in 1819 when even the Second Bank of the United States had come close to failure. The American political economy could not survive in a system in which discounting was without central control; the directors had to use the bank’s powers to restrain the state-chartered banks from continuing such unchecked expansion. Nicholas Biddle, the new president of the Second Bank of the United States, agreed. Under his direction the bank had been regulating the note issues of the state-chartered banks by collecting them in its branches and returning them to the issuers for exchange in specie.

The Democrats howled their opposition. The “era of good feelings” had come from what the states and the people had done, not the national government. As New York State had shown, the states could take responsibility for their own improvements, and state-chartered and private banks could provide the capital. The states were themselves the government best-qualified to control dangerous local speculation. Andrew Jackson had raised the question of the overreach of federal authority ever since he became a senator. Martin Van Buren had done the same. Both of them had pointed out how, with John Marshall’s Supreme Court and now Nicholas Biddle’s bank, the American people were no longer living under rules that they and their elected representatives made. The Democrat Party would restore the rules of law and money that the people had chosen when they established the United States of America and elected General Washington as its first president.

In practical political terms, Jackson and Van Buren had to choose: Would they attack the Supreme Court or the national bank? Their platform had to be simple. As Van Buren confided to a journalist in the late spring of 1828 campaign, “our people do not like to see publications from candidates.” In the end, the Democrats’ choice of a target came down to which voters Andrew Jackson would prefer to offend. Jackson’s runaway victory in the popular vote in 1824 had not come close to winning him the White House. To get there, he and his new party would have to win electors in the states where the legislators and not the voters made the decisions. Martin Van Buren had made speeches attacking the Supreme Court’s assertion of national authority; but, even as he criticized John Marshall and his opinions, Van Buren was careful to include heaps of praise for Virginia’s greatest lawyer. Almost all of the federal legislators were themselves lawyers; they could hardly be expected to approve of an outright attack on the high priest of their chosen secular religion. There was also the matter of Virginia’s electoral votes. Losing the state to Crawford had cost Jackson the 1824 election. Insulting its most famous current officeholder was hardly going to help the Democrats’ chances this time around. In attacking the Second Bank of the United States, Jackson and Van Buren took no such risks. Jackson had won 74% of the votes in Pennsylvania and all of its 24 electoral votes in the last election; attacking the most important banker in Philadelphia was not going to risk winning again in 1828. (In fact, it did not; the Democrats won 66% of the votes in the winner-take-all race.)

Attacking “the bank” also allowed Andrew Jackson to raise the very issue over which even the lawyers in Congress were still divided. Did Congress have the power under the Constitution to delegate to a central bank the creation of money? The charter of the First Bank of the United States had avoided that question by not giving the bank the power to print notes that were equal to coins as legal tender. The charter of the Second Bank had given its bank notes the status of money. If Congressman Madison had opposed Washington’s first national bank and prevented having its charter from being extended, by 1816 President Madison was explaining why notes issued by the second bank of the United States were not only as good as gold but better.

For Van Buren and Jackson this was nonsense. The powers granted to the Second Bank of the United States by the Madison administration and Congress and confirmed by the Supreme Court were a particularly dangerous innovation upon Constitutional principles. Giving the Second Bank of the United States the power of issue – the ability to create legal tender by ledger entry and distribution of its own bank notes – was granting to the federal government very absolute power that Washington had been so careful to avoid in his design of the American political system.

The central bank that the National Republicans so ardently supported was, by far, the largest enterprise in the country. It had hundreds of employees in a time when a business was “big” if it had a dozen. It had grown like Hobbes’ Leviathan to own all. In addition to the headquarters in Philadelphia, the bank now had 25 branches: Boston, Buffalo, Burlington (VT), Charleston, Chillicothe (OH), Cincinnati, Fayetteville (NC), Lexington (KY), Louisville, Middleton (CT), Mobile, Natchez (MS), Nashville, New Orleans, New York, Norfolk, Pittsburgh, Portland, Portsmouth, Providence, Richmond, St. Louis, Savannah, Utica (NY) and Washington, D.C.

If the country was prosperous it was because state-chartered and private banks were providing credit to the farmers and businesses of the country. In the next panic, the central bank would look first to protect its own hoard of coin reserves just as it had in 1819 when it almost failed. In abandoning the national rule for money, as Congress and the Second Bank of the United States had, prior administrations had allowed the clever and connected people to gain first access to the unconstitutional power of issue. The central bank offered no actual restraint to the government’s capacities for financial extravagance in an emergency. At best, it allowed administrations and Congress to maintain the pretense that they somehow managed the economy by determining whose credit was worthiest. Everyone of any sense knew that there was a shortage of gold and silver coins in the country. That was why paper notes circulated in place of coins for the smallest denominations. Even as the Second Bank of the United States was exercising its power to call in state bank notes for specie exchange, it was allowing its own notes to be accepted as payments on the sales of public lands.

Under George Washington’s guidance, the Democrats argued, the Constitution had been drafted to limit the powers of all governments to create money. Only Congress had that authority, and Congress’ only power was to decide what amounts of precious metal would qualify as currency to be coined. Under the Constitution the American people had been trusted to understand the difference between coin and paper, between money and the promise to pay it. They now made that distinction each day in deciding which bank notes to trust and for how much. They knew a bank’s promise to redeem a note for a coin was based on the assumption that people would not, in fact, ask for all their notes to be exchanged for money at once. If every bank note outstanding was to be redeemed at one time, there was no bank that could live up to its promise – not the Bank of England, not the Second Bank of the United States. The Second Bank of the United States was now considered “safe” because it now held more than half the specie reserves of the entire country, thanks to the deposits of the federal government’s collections of the tariff. The people could be trusted in their own dealings in credit because they have something to lose. Congress and state legislatures had to be restricted because their sovereign immunity makes them incapable of experiencing personal financial risk. That is why it was a violation of the nation’s constitution for any government to presume, as Congress now did, that it could authorize the printing of money.

To this legal argument, Martin Van Buren added his own understanding of American political economy. In his meetings with members of Congress and state legislators, Van Buren repeatedly explained how the structure of central banking was flawed. The existence of the Second Bank of the United States exaggerated the actual liquidity of the nation’s money supply because it presumed that its own paper could be infinitely negotiated without a discount. The state-chartered banks notes changed hands within the boundaries of each bank’s market; but, at the same time, no one from another part of the state or a different state was inclined to accept a “foreign” bank note at par until experience had confirmed the soundness of the other bank’s promises. The Second Bank of the United States with its branches was supposed to solve this problem through its ability to make interbank transfers; but, in fact, it used its branch network to avoid redemptions. Individual holders of Second Bank of the United States’ notes could only tender them for exchange at the branch that issued them. By literally papering over gold’s (and silver’s) permanent scarcity, a central bank allowed Congress to pretend that the country had far more money than it did. The wildcat banks did not make the same pretense; in offering and exchanging their own and other local banks’ mediums of exchange, they dealt in credit. They knew that their ability to lend and their borrowers’ ability to spend were limited by their discounts the market applied to their bank notes.

The central bank system that Madison had promoted and John Quincy Adams and the National Republicans assumed that the national bank could enjoy permanent arbitrage between the government’s borrowings and its own cost of funds. Hamilton’s prediction had come true; with the federal taxpayers as guarantors, the presumed safety of the national debt had bound the wealthy to the government. Thomas Jefferson had advised Lafayette to put his spare cash to work in Treasury bonds. However, Van Buren argued, the price of the Hamiltonian system was a permanent squeeze on the people who were not rich. Sooner or later, because of war spending, the country would be faced with demands for payment in coins that it did not have. Even the Bank of England has run short. Instead of pretending that money could be painlessly supplied through printing legal tender, the country was far better off to accept the fact that discounting was required. Instead of compelling people to accept issued currency at par, as the Continental Congress had done, the Congress had to accept the equilibrium of the market. The rich, with their bonds, had to accept the same losses that the poor did with their penny, nickel and quarter shinplasters. The Second Bank of the United States’ management of the expansions and contractions of its own medium of exchange only operated to assure that the holders of Hamilton’s debt gift to the country were protected; it did nothing to create or preserve equilibrium among the voluntary users of credit.

In the interactions between the Second Bank of the United States, the money center banks in New York, Boston, Philadelphia and New Orleans and the “country” banks. Mr. Biddle might think that he was regulating the country’s financial system; but, most of the time, he was the club that the smart money used to beat up their rivals. In New York, Van Buren had watched individual banks accumulate their rivals’ notes and then descend on the Second Bank of the United States’ branch and ask for their exchange. To protect their position, Biddle’s bankers would then make a tender to the rival demanding redemption. The New York banks, both upstate and downstate, had been doing that to one another ever since state-charters were first issued. What Biddle and the National Republicans failed to see was how his bank’s attempt to manage credit was the greatest source of the market’s chronic instability.

When President Washington and the first Congress had established a national bank, its purposes were (1) “fulfilling the engagements of the United States, in respect to their foreign debt;” and (2) “funding their domestic debt upon equitable and satisfactory terms.” As the underwriter for the new federal debt, the bank could offer its own certification of the exchanges for state and continental Treasury’s debts for the new debts of the United States. The official debts incurred by the states and the Continental Congress could not be independently cleared by the Treasury when it was itself one of the debtors whose accounts were part of the restructuring. (That dilemma persists today as the Fed is free both to determine what debts it will intermediate and at the same time certify as its own lawful assets.) The First Bank of the United States did not have any power to issue money; only the U.S. Mint could produce coinage or accept foreign coin of equivalent weight and measure.

The country had unchangeable national money so that Congress, the state legislatures and “the law” had only one measure for pricing their legislations and legal judgments. The federal government must live within the limited boundaries of legal tender for all its collections and expenditures; but, at the same time, people could enjoy the fundamental paradox of all deposit banking: bankers could promise the public that its money was safe in their hands and then turn around as fast as possible issue bank notes and deposit credits (what borrowers today would see as lines of credit) to strangers whom the public did not know. The states had the power to charter financial institutions subject only to the restraint that their laws could not turn a banknote into Constitutional money. But those intermediaries and everyone else, including governments, had to accept the same law: all contracts for the payment of money must use the U.S. dollar as the unit of account; and the U.S. dollar must be, at all times and for all parties, the weights and measures specified by Congress.

It is impossible to know how much Van Buren’s thoughts on the questions of state and national banks and national money actually mattered in the 1828 campaign. Years later Joseph Peyton, a Whig Congressman from Tennessee, would declare, “Martin Van Buren was a mere political parasite, a branch of mistletoe, that owed its elevation, its growth-nay, its very existence, to the tall trunk of an aged hickory.” Andrew Jackson won the 1828 presidential election in the first popular political campaign in American history. The excitement of the 1824 election had been that tens of thousands of newly enfranchised male citizens were voting for the first time. The drama of the 1828 campaign was that at least half a million voters took each side in a political war of blunt slogans and nasty accusations. Andrew Jackson’s wife was a whore; John Quincy Adams had been a pimp working the streets of St. Petersburg (Russia, not Florida). Jackson was a common murderer; Adams conducted seductions around a pool table in the White House. In losing, John Quincy Adams would win nearly five--times the number of votes he had won in 1824; his total of 500, 897 would be more than twice the total number of votes in the previous election. Andrew Jackson would win over 56% of the popular vote and more than two-thirds of the Electoral College vote.

The usual historical perspective is to see Jackson’s 1828 victory as the beginning of the financial saga of the tariff of abominations and the bank war and the specie circular. It was, in fact, the end of the story. In Congress in 1828, before the election, Martin Van Buren would maneuver the Adams administration into passing a protectionist tariff with the highest tax rates yet seen. Once they were in office, the Jackson-Van Buren administration would happily collect the high tariffs even as they put forward much lower tax rates in their own legislation. In picking a fight with Jackson in 1833, John C. Calhoun was arguing about a tariff that had been passed five years earlier; it was, as a political contest, a complete loser whose importance stems entirely from the presumption that it was somehow a precursor to the Civil War. By spending the tariff revenues to retire the national debt and not pay for infrastructure, the new president and his campaign manager assured the loyalty of the, “planters in the south and the plain Republicans of the north.” Just as, “party attachment in former times furnished a complete antidote for sectional prejudices by producing counteracting feelings,” the Jackson-Van Buren Democrats would be bound together by their platform of low taxes, limited government sovereignty, free banking and constitutional money.

No one of any political sense doubted that Jackson had wanted to “kill the bank” even before he became president. No one who knew him believed that he would change his mind. The question was when he would kill the bank, not whether he would do it. Jackson wanted the federal government to follow the literal words of the Constitution. Money would be borrowed and spent by Congress; but it would only be coined. On this question, it is doubtful that Jackson and Van Buren ever held a congressional majority; but events allowed them to achieve their goal without one. Nicholas Biddle, Henry Clay and the supporters of central banking made a political mistake as awful as the military one General Edward Pakenham had made at the Battle of New Orleans. Instead of waiting, they attacked. Had the supporters of the Second Bank of the United States been patient enough to delay their renewal legislation until after the 1834 congressional elections (the year before the second bank of the United States’ charter would expire), the odds are that Jackson might have accepted a renewal that returned the national bank to the limits of the first bank of the United States’ authority. Martin Van Buren would have preferred that as a compromise since it would have established a bank that could act as an independent treasury just as Thomas Willing’s bank had done. But, the Biddle supporters (who were amply bribed) did not wait; they chose a frontal attack that gave Jackson the campaign slogan he wanted for his last campaign as the tribune of the people.

What Martin Van Buren would inherit as Jackson’s successor was the first great property crash in American history and the “delicate question” of slavery.

Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.

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