Wall Street History: The Bank War & The Shift of Financial Power to New York

At the time construction of the Erie Canal was begun in 1817, Philadelphia (the second largest city in the United States) was the nation’s financial center. Although there were successful banks in New York, Philadelphia, one of America’s leading seaports, had been the capital during the American Revolution and of the nation (1790 to 1800), and so was considered the financial center of the country.

This is not to say there was not some rivalry between financial institutions located on Wall Street in New York and Chestnut Street in Philadelphia, but the latter was the site of the first bank established in the nation in 1781, the Bank of North America, and more importantly became the site of the First Bank of the United States, which Treasury Secretary Alexander Hamilton had promoted.

The Bank of the United States was empowered to take all U.S. Government deposits and to lend funds to other banks. Although it had 20% private stockholders, it was largely controlled by the U.S. Government (and thus the Treasury Department) and quickly became the most important financial institution in the country. As a result, a number of European financial institutions began to locate their offices in Philadelphia.

The Bank of the United States was viewed as an important factor in creating the modern credit system in America, and along with state banks fostered the expansion of the American economy, including land sales and speculation in the Old Northwest and Missouri territories.  Originally chartered for 20 years, in 1811 President James Madison let its charter expire (owing in part to the Jeffersonians hostility to a large central bank). It was viewed by many eastern merchants as essential to growth, and in 1816 they convinced Madison to recharter it for another 20 years (until 1836).

While the Bank of the United States tried to manage speculation, particularly in government lands, it also attempted to cut back on credit for western land sales by requiring that payments be made in specie. This had the effect of forcing a number of land speculators in Kentucky and other territories into economic distress. One western lawyer, sometime politician, and later militia commander, Andrew Jackson, like a number of his colleagues, came to believe that the Bank of the United States was the agent of the moneyed interests in the East designed to oppress common people. This set up the so-called Bank War between President Andrew Jackson and Bank of the United States President Nicholas Biddle which would dominate the nation’s politics of the early 1830s.

By the 1820’s the Bank of the United States was, like the country, prospering. Because it received deposits of all federal government funds, it was well-capitalized and because it could accept State Bank notes it was in a position to control the flow of credit throughout the nation as well as the money supply. Under its chairman, the aristocratic Biddle, it was sometimes criticized as favoring mostly Federalist New England merchants and meddling in politics.  In fact, the more Democratic-Republican oriented Bank of Manhattan and other allied New York banks were resentful of its power.

President John Quincy Adams and his Secretary of State Henry Clay, who were elected in 1824, were known to be supporters of the Bank of the United States. After Jackson was elected over John Quincy Adams in 1828, Henry Clay suggested to Biddle that he seek its recharter (due in 1836) early when supporters of the Bank (by then primarily the Whig party) had a comfortable majority in Congress. This set up a controversy over whether Jackson would veto the bill to recharter the Bank. Jackson engaged in a significant public relations campaign rallying western farmers, workingmen and supporters of the Democratic-Republicans in support of his vetoing the Bank. It was said that some Wall Street merchants were particularly resentful that an increasingly larger source of federal revenues were resulting from tariffs on goods coming to Europe through the Erie Canal in New York City which were in effect being used to build up the deposits in the Bank of the United States. After his election in 1832, Jackson did in fact veto the recharter four years before its was set to expire.

Biddle retaliated by trying to constrict credit so as to force a recession that he hoped would bring Jackson to relent. This in a sense proved to be counterproductive. Public opinion continued to swing behind Jackson. The continued strength of the New York banks, such as the Bank of Manhattan, now fortified by surpluses from canal revenues from the Erie Canal Fund were able to offset Biddle’s efforts.

At one point Jackson instructed his Secretary of the Treasury Roger Taney to stop depositing federal revenues in the Bank of the United States and deposit them in state banks (the so-called “pet banks”), many of which tended to be on Wall Street. The net result of this effort was that the charter of the Bank of the United States expired in 1836, and although Biddle attempted to recharter it as a Pennsylvania Bank, it failed in 1841. Thereafter Wall Street, with its private banks in New York, would become the nation’s financial center, although there would be a severe financial downturn with the Panic of 1837 which would ultimately contribute to Martin Van Buren, Jackson’s Vice President, losing the Presidency to the Whigs in 1840.

Meanwhile in 1835 there were a number of calamities that struck the city of New York, including a sever cholera epidemic that killed thousands and a great fire in December 1835 that destroyed a significant part of the city south of Wall Street, including its newly constructed merchants exchange. The great fire caused the bankruptcy of many of the nation’s insurance companies (significantly, located in Hartford, CT) and contributed to a great pessimism in the commercial community.

However, the owner of a hotel in Hartford named Joseph Morgan took a different approach with respect to the fire. With a group of associates he recapitalized the Aetna Insurance company, and immediately sent Aetna agents down to the smouldering rubble of Wall Street to announce that anyone who had the good fortune to insure with Aetna would be paid 100 cents on the dollar for their losses, no questions asked. As merchants began to rebuild more robust Greek revival structures on Wall Street (some of which survive today), the agents of the Aetna would return selling new casualty insurance policies with premiums that were two or three times the pre-fire premiums. It was said that Morgan and his associates quickly tripled their investment. This would be a significant foundation of the wealth of the Morgan family.

Joseph’s son Junius Morgan would later join with the Baltimore merchant George Peabody in London to become a leading agent for British capital investing in railroads and other enterprises. Junius’ son and Joseph Morgan’s grandson, John Pierpont Morgan, acting initially as the agent for British capital in New York, would become the dominant figure on Wall Street and in American finance by the turn of the 20th century. By that time Wall Street would the unquestioned center of American, and soon international, finance.