Trump and the Bank War (Guest Post By Jordan Haedtler)

The erratic presidency of Donald Trump has thrown Washington into a state of confusion over who has the president’s ear and which course of action that will lead to. Describing this dynamic, one Republican lobbyist recently told the New York Times Magazine, ‘‘The added complexity [in the Trump administration] was there was not a single consistent governing philosophy. It was not clear if the president saw trade the way that Gary Cohn sees it or the way Steve Bannon sees it.’’

Bannon may have left the scene, but Trump’s White House is still characterized by tension between the “Bannon wing”—a set of inexperienced “deconstructionists” determined to undermine a host of Washington institutions and norms— and the “Cohn wing”—a set of actors whose pedigree may be more traditional, but whose role in enabling the financial crisis and other Washington failures must not be overlooked. When it comes to shaping Trump’s approach to Wall Street and the Federal Reserve, the “Bannon-Cohn” divide has thrown the D.C. guessing game into overdrive. Politico’s overview of potential next steps at the Fed gave a full spectrum range of plausible options for what Trump will do with the Fed, listing everything from Fed Chair Janet Yellen’s re-appointment to converting back to the gold standard.

Throughout his campaign, Trump pledged to “drain the swamp,” bashing Republican primary opponents like Ted Cruz for their connections to Goldman Sachs, then playing up Hillary Clinton’s Wall Street ties throughout the general election. Guided by Bannon, Trump used images of Yellen and Goldman Sachs CEO Lloyd Blankfein to suggest that he would rid Washington of powerful bankers. But Trump has contradicted himself since taking office by rolling back Wall Street regulations and elevating Goldman Sachs alum to key jobs. Now, the decision for who will be the next Fed Chair is apparently between Yellen (who Trump claims to like), Cohn (the former president of Goldman Sachs), and Wall Street veteran Kevin Warsh. For some, it is comforting that Cohn is overseeing the process for Fed appointments, and is in contention to replace Yellen himself. “Within Trump’s inner circle, a moderate voice captures the president’s ear,” blared the headline of an April profile of Cohn. “So far, so good,” was the relieved reaction from former Federal Reserve Vice Chair Donald Kohn after meeting with Cohn about his approach to the Fed, which reportedly includes convincing Trump to direct his Twitter outbreaks away from the central bank.

To those feeling temporary relief, the story of Trump’s idol Andrew Jackson and the latter’s destruction of an early predecessor to the Fed provides a cautionary tale. During the “Bank War,” Jackson displayed many of the blustery, petty, and capricious characteristics that tend to invite comparisons to Trump. Jackson’s compulsive decision to dissolve the Second Bank of the United States carried political ramifications for decades, and led directly to one of the earliest and deepest economic recessions in American history.

Jackson carried a longstanding grudge with him when he assumed the presidency in 1829. Ever since a land deal had nearly bankrupted him in 1797, Jackson had distrusted the paper money, speculation, and debt inherent in the banking system. “I do not dislike your bank any more than all banks,” Jackson told Nicholas Biddle, the Bank of the United States’ president. Biddle led America’s central bank, controlling the money supply and acting as the steward of federal deposits. Jackson entered office keenly aware that the Bank’s charter would expire in 1836—at the end of a potential second term should he win re-election—meaning that he could exert influence over the bank’s structure by stoking ambiguity about his intentions over re-charter.

Jackson had occasionally let his populist rage at the Bank be known during his 1828 campaign. Nevertheless, Biddle was initially confident that Jackson would support the Bank’s re-charter. In fact, Biddle had even voted for Jackson in 1828. Biddle was encouraged by his first meeting with the president, in which Jackson assured Biddle he was “perfectly satisfied” with his management of the Bank, and had only minor concerns about the Bank’s structure.

Jackson was prone to conspiracy, and believed that the Bank had intervened to deny him the presidency. One theory asserted that a bank branch had funneled money to the National Republican Party to round up “boatmen and loose characters” to vote for John Quincy Adams. Jackson surrounded himself with a mysterious set of advisers who would become known as the “Kitchen Cabinet.” One Kitchen Cabinet member, Amos Kendall, was the editor of a fiercely partisan pro-Jackson paper in Washington, and he worked to nurture Jackson’s anti-Bank impulses. Throughout Jackson’s first term, Kendall whispered conspiracies about the Bank’s supposed political interventionism into Jackson’s ear, and Jackson directed advisers to check the rumors out.

Jackson was agitating to land his first blow against the Bank in his first annual message to Congress. Thankfully for Biddle and his allies, Jackson delegated the task of writing the message to James Hamilton, the son of Alexander Hamilton, the founder of the First Bank of the United States. When Hamilton was presented with an initial draft to work off of, he found it filled with blistering attacks on the Bank. The first draft’s mysterious author was thought to be Kitchen Cabinet schemer Amos Kendall. Hamilton worked through the night to revise Kendall’s draft. The finished product was a vague paragraph that merely suggested that Congress look at revising the Bank’s structure. “Do you think that’s all I should say?” Jackson asked Hamilton upon reading the draft. “I think you ought to say nothing at present about the Bank,” Hamilton replied.

Speculation abounded about the precise nature of Jackson’s true feelings, and Jackson did nothing to clear up the ambiguity. His second annual message to Congress took a much more aggressive stance against the Bank, while his third annual message again suggested the Bank was a question for Congress. Henry Clay believed that Jackson actually favored the bank, and was being unduly influenced by Martin Van Buren. Since most of Jackson’s confirmed cabinet members were pro-Bank, there was good reason to believe that Jackson might ultimately come around. Importantly, the Bank was headquartered in the swing state of Pennsylvania, where it enjoyed the strongest levels of support. It remained unclear what Jackson would do with the Bank should he win re-election, so 1832 was the last year when the Bank’s proponents would have any leverage. Clay shepherded a bill for the Bank’s re-charter through Congress that year, hopeful that Jackson would realize that vetoing the bill might harm his re-election prospects.

It was a gamble that did not pay off. Jackson personalized the conflict. Brandishing his macho persona in a way Trump would admire, Jackson exclaimed, “I will prove to them that I never flinch.” Jackson declined to sign the bank’s re-charter, issuing a veto message that objected to the Bank’s large percentage of foreign shareholders and attempted to re-litigate the Supreme Court’s 1819 decision upholding the Bank’s constitutionality. Jackson further elaborated on his disdain for the courts in his veto message, writing, “The authority of the Supreme Court must not, therefore, be permitted to control the Congress or the Executive when acting in their legislative capacities…”

Still fuming over Clay and Biddle’s ploy to get him to sign re-charter in an election year, Jackson set out to destroy the Bank as quickly as possible. Jackson instructed Treasury Secretary Louis McLane to immediately remove deposits from the Bank. But McLane—along with most of Jackson’s cabinet—refused, concerned about the effects of abrupt removal. Again, the Kitchen Cabinet encircled Jackson and goaded him into action. Kitchen Cabinet member Francis Blair pressed Jackson to “take from [the Bank] the whole of the public money.” Jackson re-assigned McLane and appointed William Duane—an old political foe of Biddle’s—to remove the deposits. Duane and the other cabinet members urged Jackson against the drastic action of vanquishing deposits before the Bank’s charter expired. But Jackson ignored these voices of reason, fired Duane, and, searching for a loyal cabinet member, found only Attorney General Roger B. Taney, who he then granted a recess appointment as Treasury Secretary.

Taney turned to Kendall for a list of state banks to scatter the Bank’s deposits to. One of the largest recipients of deposits was Baltimore’s Union Bank of Maryland, where Taney was a shareholder. Taney was not the only Jacksonian to profit. Aware that Jackson was about to kill the Bank, Kitchen Cabinet member Reuben Whitney short sold his stock in the Bank of the United States. Congress was outraged by Jackson allies’ profiteering. Former President John Quincy Adams, now a member of the House, took to the floor to condemn the manner in which Taney had spread funds “abroad among swarms of rapacious political partisans.” Once Jackson submitted Taney formally as his Treasury Secretary, Taney would become the first cabinet nominee rejected by the Senate.

Undeterred by Taney’s rejection, Jackson doubled his efforts to kill the Bank quickly. At the beginning of 1834, Jackson ordered the Bank to stop payment of Revolutionary War veterans’ pensions and return the money to the federal government. When Biddle refused, contending that the Bank had a legal duty to pay the pensions until its charter expired, Jackson directed his Secretary of War to suspend pension payments. Jackson calculated that the Bank would be blamed when veterans stopped receiving their pensions, charging that Biddle had “not only defied the government but inflicted misery on patriotic Americans who had fought bravely for their country and were now repaid with arrogant contempt.”

As these events unfolded, Clay focused his attacks on the theme of Jackson’s disdain for democratic institutions. Clay delivered a series of impassioned Senate speeches denouncing Jackson and Taney’s actions, and likening the removal of the deposits to “a revolution, hitherto bloodless, but rapidly trending towards a total change of the pure Republican character of the government, and to the concentration of power in the hands of one man.”

Jackson won re-election over Clay in 1832, leaving his adversaries distraught. Nevertheless, Clay continued to seize on Jackson’s destruction of the Bank as a means of organizing Jackson’s opponents. Hundreds of thousands of petitions for restoration of Bank deposits streamed in to Congress from around the country, all strategically orchestrated by Clay. Petitions and public meetings on the subject, combined with Clay’s persistent focus on Jackson’s authoritarian tendencies, unified Jackson’s political foes into a cohesive force for the first time. The Bank War led to the formation of the Whig Party, and though it would be years before Whigs achieved more enduring victories, they immediately capitalized on their newfound unity by making gains in the 1834 congressional elections. Cognizant of the ways in which Jackson’s relentless pursuit of the Bank’s destruction had galvanized the Whigs (and concerned it might imperil his own chances at the presidency in 1836), Van Buren urged Jackson to defuse the conflict. Jackson spurned Van Buren’s advice, telling his most loyal adviser “Your friends may be leaving you—but my friends never leave me.”

The Second Bank charter’s expiration in 1836 coincided with a period of rapid growth and land speculation in the United States. To fund this expansion, states made large new investments in their infrastructure. Without a central bank, the federal government had no means of regulating the money supply or coordinating government spending on public projects. To tamp down on western land speculation, Jackson issued an executive order requiring that lands could only be purchased with gold and silver coin. In response, depositors rushed to their banks to redeem their paper money for hard money. This left banks, especially on the East Coast, with smaller reserves to issue loans. A steep decline in business activity ensued, and the Panic of 1837 sparked a deep recession only weeks after Van Buren replaced Jackson in the White House.

To be sure, the Jackson-Trump parallels are imperfect. Though the Panic of 1837 makes Jackson’s conduct appear just as reckless as Trump’s, Jackson’s grievances with the central bank were far more well-informed, consistent, and coherent than Trump’s. The Second Bank was a private corporation, and fraud and profit-seeking by its leaders had contributed to the Panic of 1819, which devastated the economy and deepened Jackson’s resentments against banking. Biddle managed the Bank more responsibly than his predecessors had, but failed to push Congress to enact the structural reforms necessary to ensure that the Bank would better serve the public interest. Biddle viewed himself as a zealous guardian of the public’s finances, and believed the central bank played a vital role by creating money and facilitating federal spending. He summed up this philosophy: “Gold and silver are for the rich, safe bank notes are the democracy of currency.” Although he believed the central bank was critical to fund internal improvements and provide labor with “constant employment,” Biddle was a staunch defender of the financial system as the channel through which money would eventually be transferred to working people.

Consequently, the Second Bank remained tethered tightly to the financial system, and it furthered regional tensions by distributing money disproportionately to New York and Philadelphia banks. The Bank’s defenders failed to envision a better system, in part because many of them were profiting from the status quo. Jackson’s partisans were not the only “Bank War” combatants who could be accused of kleptocracy. Senator Daniel Webster had started his career as a critic of central banking, but ended up as one of the Bank’s strongest congressional allies after Biddle retained him as a legal counsel and Boston branch board member.

Despite the important differences between the Bank War and the present moment, there are several lessons to take from this dramatic episode in Jackson’s presidency. The first is that it is possible to articulate a populist critique of the central bank’s structure without advocating for its elimination or undermining its role as a regulator. A truly populist approach would combine Jackson’s insistence that the Bank should be a public institution with Biddle’s understanding that the central bank should facilitate public spending and that hard money is too constraining. Like the Second Bank, today’s Federal Reserve remains a partially private entity that too often prioritizes the financial system over the needs of the productive economy. Today’s populists should advocate for the Fed to be made a fully public institution.

The second lesson from the Bank War is that an erratic president must be treated with constant vigilance. To an even more extreme degree than Jackson, Trump prizes loyalty that he does not reciprocate, personalizes conflict, holds grudges, and grows petty when challenged. Like Jackson, Trump has a tendency to make rash and contradictory decisions on a whim. We cannot be mollified by occasional gestures of sanity or assurances that his most “responsible” advisers are winning the day, nor we can allow Trump’s ineptitude to weaken our evaluation of who is a “responsible,” trustworthy actor in the first place. A troubling new standard seems to have emerged under Trump. By scattering his administration with individuals who seek to destroy the very agencies they lead, Trump has successfully shifted our criteria so that Bush-era throwbacks or individuals who helped cause the financial crisis seem like safe, “mainstream” picks. Only in this distorted framework would Gary Cohn—a man once described as a “driving force” behind Goldman Sachs’ deceptive and predatory practices during the housing crash—be an acceptable choice to oversee management of our economy. Only through stunning incompetence has Trump made Warsh—who praised the innovation of risky financial instruments right up until they caused the crisis— seem like a qualified candidate.

The final lesson is one learned by the Whig Party itself. Unifying around opposition to a president can be both helpful and necessary. But even if it leads to short-term gains, it is not enough for the Democratic Party to simply not be Trump. The Whigs, formed out of objections to Jackson and little else, twice managed to win the presidency, but were soon destroyed by their failure to resolve internal ideological tensions. There is a fundamental rift in today’s Democratic Party. Most congressional Democrats are willing to rail against the conflicts of interests posed by Trump’s continued consolidation of wealth, but there is much less consensus about the responsibility that Wall Street figures like Cohn and Warsh bear for concentrating wealth in fewer and fewer hands over several decades. If, like Clay’s Whigs, Democrats organize around opposition to Trump, but never present a positive vision of what they want to do themselves, whatever political gains they make in the years ahead are sure to be shallow and fleeting.