Bank Charter

In 1811 the First Bank of the United States' twenty-year charter was set to expire. Henry Clay and other Republicans saw no need to re-charter the First Bank of the United States under the idea that the institution was unconstitutional. Many congressmen felt that the bank was a corporation owned by the federal government, which was forbidden in the Constitution. It was Henry Clay's and other US Congressmen's idea that the state banks should control the money lending system of America. There was also an underlying fear that the Bank was being controlled by British influences, because their ownership of stock, and was often called the "British Bank". With rising tensions between the two countries this could be seen as a real threat. The Bank was also a Federalist Bank controlled by Federalist agendas. The Bank had been known to lend money to Federalist politicians with little if any interest. The Bank was therefore not re-chartered

These men of 1811 made a critical error. By refusing to grant the Bank its re-charter they failed to provide a substitute currency and relied on state banks to provide the national money. State banks were state chartered commercial institutions that controlled their sphere of influence and brought no new capital to their respected areas. These banks were profit-seeking privately owned enterprises. Without the restrictions placed on local banks by the BUS these banks began to loan money to who ever was in need of it. The banks made these loans by ways of paper money or bank notes. Paper money was issued to individuals in place of specie such as gold or silver. The sellers of goods then would take the notes to its bank of origin and redeem the paper for specie. Normally the redemption of notes would drain capital from one point of the country to another part, but often these notes would be left in circulation as currency. It was a banker’s dream that these notes would never be returned for redemption.

It was during this time, being without a national bank, that Briton was in the midst of the Nepoleaonic Wars. Without the dominant capitalist power in the world market, foreign trade became almost nonexistent. This suspension of foreign trade led to America's tremendous growth of domestic manufactures and the beginning of the cotton and woolen textile industries. With the growth of these industries the need for more credit was required since there wasn't enough spice in circulation to handle the demand. Most state banks printed more money than their reserves should have allowed. It wasn't uncommon for local banks to go bankrupt due to their poor bookkeeping and their notes were now worthless. For a short time the problem went unchecked.

At the beginning of the War of 1812 the state banks could no longer support their habit of issuing massive amounts of paper money. During the war sounder banks drained from their vaults what little specie was available in the country. Most of these banks were in New England where the war was becoming increasingly unpopular. Within two years of the start of the war every bank in the middle, western and southern states were forced to suspend specie payments and rely completely on paper money. A majority of these banks had less than a 1/10 of the specie on had to cover the notes. The value of the states' paper money had sharply declined to point where it was worthless.