Banking & Politics: As Old As The Republic

Recently, banks have won the right at the right to charge up to $4 for use of their ATM. They won this right after years of lobbying heavily at the federal level. Other rights they have won with their Pac dollars during the last several years include: the elimination of many of the interstate banking regulations; saving banks have moved into commercial banking; commericial banks moved into financial services and there have been bank mergers all over the country eliminationing tens of thousands of jobs. All these changes in regulations meant millions more for the bankers. As the S&L scandal proved, millions more for many of our nations elected officials and their friends.

Banking regulations are intimately connected to politics, and the politics of banking is a high stakes game which is not widely understood by the public. Banking regulations influences both the local and national economy and affect the adequacy and availability of financial services.

It is important to understand that the intimate relationship between politics and banking policy is not new, nor is its economic influence unique. In fact, a review of New York's economic history and banking policy from 1784 to the Civil War clearly shows that banks and banking policy were central to the stateÕs economic

development (and closely intertwined with politics). It also shows that an intelligent banking policy can further economic development; bad policy can wreak economic havoc.

In New York City, the intimate relationship between banks and politics began when the Bank of New York was chartered in 1784. Founded by Alexander Hamilton, the bank was the only one in the city until 1799. While unquestionably the bank was important - it provided capital to a money-starved economy - it was often used by Hamilton and his associates for political purposes. It furthered the Federalist Party and the conservative economic policies it espoused. Merchants who disagreed with Hamilton's political point of view ran the risk of having their loans called in at election time.

The Federalist policies of paying federal and state debts in full as well as the chartering of the First Bank of the United States in 1791, had a profound effect on the economy. They were not only instrumental in creating the property following the ratification of the Constitution, but also increased the influence of the wealthy in the politics of the 1790's.

Just as important to New York was the chartering in 1799 of the Manhattan Company, which ultimately established the city's second major bank - a direct rival to the Bank of New York and its Federalist policies. The Manhattan Company was chartered by Aaron Burr, to bring water to the city, in an effort to reduce the perils of the summer yellow fever epidemics. The Manhattan Company's charter was broad enough to permit excess funds to be invested in banking. In effect, the Manhattan Company became a bank and soon rivaled the Bank of New York in financial and political importance. The use of this loophole by the Manhattan Company would have warmed the hearts of many modern bankers, who have sought to extend their institution's influence through the exploitation of similarly ambiguous state banking laws provisions.

At the time, it was alleged that Burr bribed New York Assemblymen to insure passage of the Manhattan Company charter. There would be many similar allegations about the passage of bank charters over the next 40 years.

The Bank of Manhattan became instrumental in the rise of Tammany as a political force (according to Gustave Myer's History of Tammany Hall, without the Bank of Manhattan, "Tammany would have been quite ineffective"), and an important factor in the election of Thomas Jefferson and Aaron Burr in 1800.

In fact, that election had the effect of breaking the Federalist control of New York's commercial and financial institutions. The number of banks chartered in the U.S. rose from 28 in 1800 to 89 in 1811. By 1816, it was up to 250. Since the only currency (other than gold and silver) was bank notes, a banking charter literally meant having a license to print money.

The circulation of more notes from newly chartered banks enlarged the monetary supply, creating capital from an expanding economy - all of which were important to the city's economic growth. The effect of the new banks is evident from the fact that the original capital for the Erie Canal came from these local banks. In fact the largest initial purchaser of Erie bonds was the Bank for Savings of New York (an institution whose first deposits came from working men and their widows). The state's completion of the canal in 1825 was the seminal event in New York's rise as the world's premier financial center.

On the other hand, the proliferation of banks in the 30 years following Tammany's rise was hardly viewed at the time as a blessing. A number of the new banks were of questionable solvency; employers often insisted on paying wages in banknotes; wage earners feared the bank whose notes they had been paid in would notes they had been paid in would fail. The men behind the banks also had a hand in the mistrust of banks: an 1833 State Legislature report found that nearly every Tammany leader held stock in a new bank. A key demand of the reform movement was the banknotes not be circulated, because gold and silver were the only safe - and constitutional - currencies; that no new bank charters be granted and some existing ones be revoked.

Struggle for control of Tammany between the bank conservatives and the more radical Equal Rights Men continued throughout 1830's Nationally, banking policy had an even more profound and political effect as at the state level. The charter of the First Bank of the United States established by Hamilton, expired in 1811 and was not initially renewed. In 1816, however, President Madison rechartered it as the Second Bank of the United States on the ground that it was the only hope to restore U.S. currency after the War of 1812.

Both the First and Second Banks of the United States were private banks (although the government owned 20% of the stock). Foreign investors held the majority of the stock. Although privately owned, it had an exclusive right to federal deposit thus it functioned like the Federal Reserve - controlling the money supply and the flow of credit. The Second Bank was run by its president, Nicholas Biddle. It was critical in the rapid growth of the American economy under President Jackson. Unfortunately, by the 1830's the bank and its activities were mired in politics.

President Andrew Jackson, like traditional Jeffersonian Democrats, opposed large, centrally controlled financial institutions. Thus Jackson and his supporters charged the Bank was a tool of the moneyed aristocracy and was used to oppress the working people. Shortly after his election, Jackson urged the Bank's charter be modified in 1835, when it came up for renewal - touching off the so-called "bank war." Biddle clumsily used the Bank's resources to gain political support for its recharter (a congressional investigation revealed that the sudden support of Tammany leaders for pro-bank candidates resulted from loans at favorable rates).

Jackson's veto of the rechartered bank became a major issue in the 1832 election, and support by the uncorrupted elements in Tammany of Jackson - and Tammany leader Martin Van Buren - helped lead to Jackson's re-election and Van BurenÕs selection as vice president.

Jackson's veto of the recharter in 1932, and the subsequent withdrawal of federal deposits from the bank, had broad repercussions. One effect was to shift the financial center of the country from Philadelphia to New York, where it remains to this day. A second and more far-reaching effect was to cause the Bank of the United States (allegedly to prepare for the liquidation required by the presidential veto) to contract the nation's money supply, causing widespread economic panic and a depression which reached its full effect in the term of Van Buren - Jackson's hand-picked successor. Because Van Buren and the Democrats acted under a faulty economic theory - that strong federal regulation of banking and financing oppressed the workingmen - they were unable to effectively deal with the depression. The result was Van Buren's defeat when he sought re-election in 1840.

In contrast to federal banking policy, New York's policy (also heavily influenced by Tammany) was much more far-sighted and intelligent. The Erie Canal was financially successful beyond its most enthusiastic backers' wildest expectations. Toll revenues in the first year exceeded $1 million; by 1840, revenues exceeded $2 million annually (ultimately more than $130 million in tolls where collected by the state). The $7 million borrowed to build that Canal Fund Revenues - administered by a state agency - were shrewdly deposited in local (though politically-favored) banks, with a view to furthering economic development across the state. The deposit and lending policies of the Canal Fund served to halt to some extent the chaos caused by federal banking policies following the demise of the Second Bank of the United States. Additionally, in 1839, New York set up the Safety Deposit Fund, which all state banks were forced to join, The Fund insured depositors against bank failures, and Fund officials had the right to review the solvency of New York banks. This was the forerunner of the Federal Deposit Insurance Corporation, and generally of state and federal banking regulations and legislation - the subject of such current controversy.

From 1830 to the Civil War, New York State was a pioneer in banking regulations, which were later copied throughout the nation. NYS state regulations played a prominent role in the state's rise as the nation's unquestioned financial center (reached at the time of the Civil War), and in the general prosperity the state enjoyed from 1800 to 1860.

This history has broad implications for the current debate over banking regulations. The issues involved in bank regulation and deregulation, as in the 1830's and 40's is not whether banks should be regulated, but rather to what extend regulations intelligently meet the needs of the economy; to what extent it furthers the public interest. The large amounts of money at stake, combined with the high cost of modern political campaigns, must also raise questions about the potential influence of bank money in politics. While the issues of bank policy are complex and hard to understand, they are much too important to be left solely to bankers, lawyers or even bank regulators, but should instead be debated by the community as a whole.


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