Effects of Abolition of the Second Bank of the United States - Essay Example

The Economic Consequences of the Abolition of the Second Bank of the United s The Economic Consequences of the Abolition ofthe Second Bank of the United States Introduction The Second Bank of the United State of America started in February 1816 and operated for 20 years up to 1836. It was the second Hamiltonian National Bank that was authorized by the U.S Federal government. Although the bank was privately owned, it had some public duties since it handled financial transactions for the federal government of America. In addition, the bank reported to the Congress and the treasury department of the united state of America. During its tenure, the second bank of the united state of America was the world’s largest financial institution. In 1837, the bank failed to renew its charter after Nicholas Biddle, the bank’s president, clashed with Andrew Jackson’s administration thereby leading to the liquidation of the bank in 1838 (Wilentz, 2008). Although proponents of the abolition of the Second Bank of the United States argued that the bank was responsible for inflation and was only improving the fortunes of an elite few, it played a number of critical roles with the primary responsibility being the main fiscal agent for the federal government thereby assisting in the stabilization of the economy and property values. For example, being the exclusive fiscal agent of the Federal government, BUS assumed a number of important economic roles some of which included holding and transferring all the U.S payments, deposits and receipts of nearly every government transaction as well as processing of tax payments. In this regard, the BUS was the exclusive depository of the Federal government, a role which made it the principal customer and stockholder. As a result, the abolition of the Second Bank of the United States in 1836 resulted in a diverse number of economic consequences some of which included inflation, increased national debt, unemployment among other. This paper critically analyzes the various economic consequences of the abolition of the Second Bank of the United States in 1836. Loss of saving and investment One of the immediate economic impacts of the shutdown of the second Bank of the United States was the loss of savings and investments. This was particularly attributed to the fact that the bank maintained the exchequer account where the federal government deposited its revenue for use by its agencies. Dowd, K, Hutchinson, M. (2010, 70) suggests that the Second Bank of the United States acted as the federal government banker. More importantly, the bank managed the accounts for departments and government ministries as well as Individual investors held both saving and liquid accounts. These accounts held a large sum of money and consequently, the closure of the second bank of the united state of America lead to a loss of large sum of money. The loss of savings and investments that followed the abolition of the BUS may have also resulted from the fact that the bank liquidated without proper structures that would have enabled investors to withdraw their savings (Dowd and Hutchinson, 2010, 79). For example, Individuals save money to be invested in various sectors of the economy. Consequently, when this saving is lost, a low level of investment was experienced. Low level of investment leads to excitement lack in growth and development. The investments of the Federal government were also affected since the BUS was the primary fiscal agent for the government, holding government deposits, making its payments as well as helping the government to issue debts to the public. Failed Tax System and Government Revenue Collection Another likely consequence of the closure of the Second Bank of the United States was a reduction in the efficiency of Tax system and federal government revenue collection. Although the critics of the bank cited numerous ills attributed to it, with some arguing that it was only improving the fortunes of an elite few, it is important to note that the BUS played a critical role of facilitating the collection of revenue. The bank held major accounts for tax collection for the principle tax collector. When the bank collapsed, the revenue department became nonfunctional since it lacked a platform to carry out its functions. According to Helmer (2010, p.28), when the government is unable to collect revenue, vital organs of the government fail. On the other hand, when organs such as security are nonfunctional, the economy of the country is directly affected. This was evident in the year 1837 after the collapse of the second bank of the united state of America. Lastly, the nation also experienced massive corruption during and after the abolition. This was because apart from the failed tax system, other departments also received a major blow when the government was unable to raise revenue to finance regulatory department which lead to massive looting of public properties. Corruption, looting and stealing of public fund denied the federal government funds to carry out its function. Failed services small financial institutions Experts concur that the failure to renew the charter of the BUS and its consequent abolition resulted in the failure of small financial institutions across the country. According to Dowd and Hutchinson (2010), this was largely because apart from being the federal government banker, the Second Bank of the United States played an important role of being a banker for other smaller banking institutions. In this case, BUS offered various services to micro finances institutions and commercial banks. On the other hand, the second bank maintained savings from commercial banks, offered credit facilities, managed settlement accounts with foreign banks among other services. However, in an attempt to solve the panic, inflation and economic crisis that followed the abolition of the BUS, President Jackson issues the famous “Specie Circular” which demanded that all buyers of government properties had to pay in gold or silver. The result was a staggering demand for specie which many local and state banks did not have. This led to the collapse of many commercial banks. Panic and Depression Speculation and increased credit that resulted from the abolition of the Second Bank of the United States contributed to the depression of 1837 that took the country almost a decade to recover from. This was because the money lending functions of the BUS were taken over by smaller local and state banks that soon sprang up thereby feeding an expansion of credit and speculation and leading to inflation and a mild depression. For example, following the abolition of the Second Bank of the United States, President Jackson through his secretary of Treasury withdrew the federal money from the bank and attempted to reinvest it in various local and state banks, canal construction, land sales, cotton production and the manufacturing boom of the period (Hammond, 2003). However, the bank’s practice of using paper notes not backed by silver or gold reserves soon created a rapid inflation coupled with mounting state debts. Then, in an attempt to solve the crisis, President Jackson issues the famous “Specie Circular” which demanded that all buyers of government properties had to pay in gold or silver. The result was a staggering demand for specie which many local and state banks did not have. This led to the collapse of many banks. On the other hand, it was the collapse of the local and state banks that caused the Panic of the 1837 thereby throwing the economy into depression. The depression that resulted from the abolition of the Second Bank of the United States almost caused an economic collapse. Economists use this term to describe a wide range of poor economic conditions. The condition is characterized by prolonged severe depression coupled with a high rate of bankruptcy and unemployment, Helmer (2010, p.14). When the economy collapses, effects such as hyperinflation, civil unrest, and social chaos are unavoidable. When the bank was abolished in 1836, majority of the economic activities came to a halt. Hyperinflation Hyperinflation is a situation where an economy experiences a very high accelerating inflation rate. After withdrawing the federal money from the bank, President Jackson attempted to reinvest it in various local and state banks, canal construction, land sales, cotton production and the manufacturing boom of the period. However, the bank’s practice of using paper notes not backed by silver or gold reserves soon created a rapid inflation coupled with mounting state debts. It has the immediate effect of depreciating the local currency’s real value. According to Dubofsky (2013, p.97), the collapse of the second bank of united state of America reduced the ability of the population to their holding of money. When these conditions persist, locals are unable to obtain food, clothes and other basic needs. The general price level of commodities in the united state of America increased rapidly, leading to inability of the population to obtaining basic commodities (Dubofsky, 2013). When the bank collapsed, the local currency value depreciated. This made the locals prefer holding foreign currency to local currencies. This is because the value of items in the economy remained stable when purchased using foreign currencies. Dubofsky, M. (2013, pg 110) conclude by adding that the collapse of the bank, followed by hyperinflation placed export in the death bed. This is because export from the united state of America became too expensive when compared with export from other economies. The economy experienced currency crisis due to the abolition of the second bank of the united state of America. The currency crisis scared away local and foreign investors leading to further economic breakdown. Civil unrest leading to disruption of economic activity Civil unrest, also known as civil strife or civil disorder, is typically used by law enforcers to describe any act of unrest caused by people. Civil unrest is symptomized by social-political problems, protests and civil disturbance. Dowd (2010, p. 40) argue that the economic collapse caused by the abolishment of the second bank of the united state of America attracted major public expression displeasure. In the matter of civil unrest, Dowd, Hutchinson (2010) concludes that the uprising or civil unrest and disorder in the year 1840 in the united state of America was coined to the collapse of the economy. When the second bank of the united state of America collapsed, a large number of people were impoverished. Many became jobless leading to hopelessness. Civil societies and other groups representing people’s interests staged demonstrations to put pressure on the government to correct the runaway poor state of the economy. Illegal parades, riots and other forms economic sabotage paralyzed the already unstable economy. Increased crime rate further crippled the economy as the normal lives of those citizens not involved in the chaos were disrupted. They were unable to obtain to work and their ability to acquire basic needs was put in jeopardy. Unemployment Increased unemployment was also an important economic consequence of the abolition of the BUS. According to Helmer (2010), unemployment was one of the main effects of economic crisis after the downfall of the second bank of the united state of America. In their work Helmer, J. (2010, pg 15), define unemployment, also known as joblessness, as occurrence where people are willing and able to work at the existing labour rate but can not secure a job. ‘’ a large number of Americans was directly or indirectly employed by the second bank of the united state of America. Some were employed in the bank as loans officers, cashiers, managers, cooks and cleaners. All these people lost their source of livelihood’’ Helmer, J. (2010, pg 19). In extension, the closure of the second bank of the united state of America indirectly rendered many jobless. Some of these people were suppliers while others indirectly depended on the banks employees. According to Helmer (2010, p.25), the effect of unemployment caused by the closure of the second bank of the united state of America was severe to the economy. They included reduced consumer spending power, loss of finance and slowed rate of development. Conclusion In conclusion, the abolishment of the second bank of the united state of America worsened the fragile economy for almost a decade. Although the bank was privately owned, its abolition in 1836 resulted in a diverse number of economic consequences some of which included inflation, increased national debt and unemployment. This was primarily attributed to the fact that the BUS the exclusive fiscal agent of the Federal government and therefore, assumed a number of important economic roles. References Dowd, K., & Hutchinson, M. (2010). Alchemists of loss how modern finance and government intervention crashed the financial system. Chichester: Wiley. Dubofsky, M. (2013). The Oxford encyclopedia of American business, labor, and economic history. New York: Oxford University Press. Chauffour, J. (2011). Trade finance during the great trade collapse. Washington, D.C.: World Bank. Hammond, B. (2003). The Second Bank of the United States. Transactions of the American Philosophical Society, New Ser.43, 1, 80–85 Helmer, J. (2010). Moon handbooks. Berkeley, CA: Avalon Travel. Wilentz, S. (2008). The Rise of American Democracy: Jefferson to Lincoln. New York: W.W. Horton and Company. Read More