The Fed Got Fired Once

Amid federal bailouts or takeovers du jour, a financially activist government was anathema to at least one past administration.
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Amid federal bailouts or takeovers du jour, a financially activist government was anathema to at least one past administration.

Amid the roiling financial news of today are the echoes or panics, depressions and recessions past; we know to be afraid because we've seen what can happen. That the federal government has stepped in, whether using the Fed's money under the mattress or firing up the printing presses, provides a measure of reassurance.

Some 175 years ago, President Andrew Jackson was striving mightily to get the government out of the finance business. His battle was over the Bank of the United States, actually the Second Bank of the United States, a privately run institution that as a "central bank" was a predecessor of the current Fed.

Jackson had a clear animus against the bank, part of it philosophical (speaking in the third person, he announced "to his countrymen very unequivocally his firm determination never to sanction by his approval the continuance of that institution or the establishment of any other upon similar principles") and part of it based on the corruption and ineptness (the bank had overextended itself on land speculation!).

It didn't help that the bank's investors were foreigners (mostly British in those days before China and the Emirates had the wherewithal), and that fact amplified his populist rants against the institution.

His goal wasn't reform but extermination. In 1832, he had vetoed an extension of the bank's charter (which expired in 1836), and the next year he saw a way to deliver a quicker coup de grace — take away the bank's deposits or at least the federal tax revenues lodged there. "It is safer to begin it too soon than to delay it too long," he opined.

On Sept. 18, 1833, Jackson told his cabinet about his intent to deprive the bank of federal money and instead to deposit federal money in state banks. Although his language now appears convoluted, he was by no means subtle:

On the whole, the President considers it as conclusively settled that the charter of the Bank of the United States will not be renewed, and he has no reasonable ground to believe that any substitute will be established. Being bound to regulate his course by the laws as they exist, and not to anticipate the interference of the legislative power for the purpose of framing new systems, it is proper for him seasonably to consider the means by which the services rendered by the Bank of the United States are to be performed after its charter shall expire.

Jackson's actions succeeded, and the bank, upon the expiration of its federal charter, became an ordinary bank and, five years later, went bankrupt. And while he predicted Congress would never again resurrect the central bank, the needs of a growing country (and the spasms of the Panic of 1907) eventually resulted in the creation of the Federal Reserve System in 1913.

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