Friday, February 27, 2009

This Day in Business History (Nicholas Biddle, Prototype of the Reviled Central Banker, Dies)

February 27, 1844—Nicholas Biddle, who, as head of the Second Bank of the United States, was once the most important financial official in the antebellum republic, died in disgrace at age 58, his fortune lost and saved from jail by a technicality.

I touched briefly on the Second Bank in my post on Henry Clay’s censure resolution against Andrew Jackson, which had been prompted by the President’s war against that financial institution. But Biddle’s story deserves further exploration.

The go-go years of Wall Street that have so recently and painfully ended didn’t begin with the Reagan Revolution, nor even with the bull market that ended with the Great Depression.

If you want a prototype of the wunderkinds who long ruled The Street before they fell to earth, look no further than to this scion of a famous Philadelphia family, who for a decade bestrode America’s business and political landscape before running into a figure with a will that exceeded his own—Jackson.

Nowadays, Biddle is far less well-known than the mastermind behind the First Bank of the United States, Alexander Hamilton. I don’t think that is because of the precedents set by Hamilton, his part in founding the republic, his epic clash with Thomas Jefferson, or even his tragic duel with Aaron Burr.

More important, Hamilton left behind institutions and a philosophy that have endured. As Gordon S. Wood, the colonial historian, noted in Revolutionary Characters: What Made the Founders Different, the republic we live in today—one with a powerful military, backed by high finance—is preeminently the one envisioned by Hamilton. 

On the other hand, Biddle was so utterly crushed, both by Jackson and his own folly, that, for all his manifest gifts, he left no historical footprint like Washington’s great Secretary of the Treasury.

To be sure, the two men possessed an enormous amount in common. That propelled both men to the top, where they encountered a host of enemies.

But it’s the difference between them—integrity—that has made the difference in how they are remembered. In history as in life, character counts.

Through much of his career, Biddle matched Hamilton in precocity, intellect, ambition, literary flair—and, finally, political recklessness. Consider the following similarities:

* Promise at a young age—Hamilton came to the attention of elders through his work as a sharp-eyed shipping clerk in the West Indies; Biddle enrolled at the University of Pennsylvania at age 10, then, when that school balked at graduating him quickly, he moved on to the College of New Jersey (now Princeton University), where he spoke as valedictorian of the class of 1801, at age 15.

* Son-in-laws of wealthy men—Hamilton married a daughter of wealthy upstate aristocrat and Revolutionary War General Philip Schuyler; Biddle, who, coming from a prominent old Philadelphia Quaker family, did not need the social connections as much as the up-from-nowhere Hamilton, still managed to do well by wedding the daughter of a wealthy Philadelphia merchant named John Craig.

* Personal magnetism—Neither man was particularly tall but struck all who met them with their conviviality and good looks. Hamilton had such an eye for the ladies as a dashing young officer that Martha Washington called her tomcat “Alexander Hamilton”; Biddle made his own vivid impression with his chestnut hair, flashing eyes and fair complexion.

* Writing talent—Though he died before his 50th birthday, Hamilton wrote so much that his collected papers number 27 volumes. Biddle’s public life began with a well-received history of the Lewis and Clark expedition, and he served as an editor of the literary journal Portfolio.

* Protégé of a President—At least partly through their writing skill, both men came to the attention of influential mentors. Hamilton served on the staff of General George Washington in the American Revolution, then kept his chief’s loyalty when his plans as Secretary of the Treasury came under attack by Thomas Jefferson. James Monroe, who as American envoy to Great Britain became impressed by Biddle’s skill as his secretary, saw in him someone who could keep a steady hand on the Second Bank of the United States, nominating him as a director. (Having destroyed Hamilton’s bank, the Democratic-Republicans rued their folly when they had no major financial institution with which to fund the War of 1812.)

* Legal backgrounds—Hamilton and Biddle were lawyers before they became masters of finance—and, in certain ways, what they learned about the importance of contracts stood them in good stead as they built their mighty financial institutions.

As head of the Second Bank, Biddle presided over a revival of American commerce after the War of 1812. By issuing uniform currency, it ensured stability. By issuing interregional loans, it helped expand the republic to the limits of the frontier.

Had John Quincy Adams won reelection in 1828, all would have been well for Biddle and the imposing Greek Revival building on Philadelphia’s Walnut Street from which he directed the nation’s financial activities. 

Adams and Secretary of State Henry Clay both believed in the “American System” of protective tariffs and federally sponsored internal improvements, which called for the kind of strong central financial direction that Biddle’s bank could have provided.

But Jackson won that hotly contested race, and Biddle’s refusal to take seriously well-substantiated charges that several bank branches had shown favoritism toward Adams supporters put him on the radar screen of a new President already disposed to view bankers with suspicion. (Involvement with a Philadelphia speculator in 1795 nearly ruined Jackson.) 

It didn’t help that Biddle kept "on retainer"—i.e., bribed—such major politicians as Senator Daniel Webster.

Here is another way in which Biddle resembled Alexander Hamilton: an astonishing capacity for political miscalculation. Hamilton’s hotheaded denunciation of President John Adams for pursuing a peace overture from France opened the way toward victory by the Democratic-Republicans, and his own increasing political marginalization before his death. 

Likewise, Biddle’s decision to seek early renewal of the Second Bank’s charter (Jackson would never reject the charter during an election year, he guessed wrongly) spelled doom for him and the bank.

We need not go into the long, circuitous fight over "The Bank War" (which, if you want more detail, is recounted in this excellent episode of the NPR series "Planet Money.") 

What concerns us here is what it meant for Biddle. He thought he could prove the indispensability of the Bank by curtailing credit. All this did was provoke a downturn and prove Jackson’s point that the financial institution was dangerous.

By the end of 1834, Biddle’s credit-curtailment policy had proved so calamitous that he had to duck angry mobs in the city where he and his family had once been hailed.

After Jackson crushed the Second Bank, Biddle attempted to kept it going as a commercial institution, the U.S. Bank of Pennsylvania. But his old financial wizardry failed him, when—in a forerunner of our recent financial disaster—he authorized a series of risky loans.

One Biddle scheme—using bank funds to corner the market on cotton—led to utter catastrophe, as he and other directors were indicted for fraud and theft. He got off with the help of his lawyers, but investors lost faith in the bank, and Biddle's reputation was ruined. 

He spent his last years on Andalusia, the estate his father-in-law had built. In the acid words of poet-editor William Cullen Bryant, Biddle lived out his life “in elegant retirement, which, if justice had taken place, would have been spent in the penitentiary.”

It’s a short, perilous path from power brokering to white-collar indictment—one repeated years later by another purported Pennsylvania financial wizard, Andrew Mellon. 

Charges were also dismissed against Mellon, posthumously (though his recent biographer David Cannadine has argued convincingly that the real offense of the longtime Republican Secretary of the Treasury was conflict of interest rather than tax fraud).

Biddle was right that the nation needed central financial direction. But his career demonstrated the charges of opponents such as Jackson that such an institution was also a breeding ground for corruption that endangered the republic. 

The eventual structure of the Federal Reserve—12 independent regional banks with a central board—sought to recover the strengths of the institution that Biddle created but with crucial checks on its authority.

And here, a final word on Biddle's crucial difference with Hamilton. 

Though his involvement with Maria Reynolds ignited America’s first political sex scandal, Hamilton never benefited financially from any of the financial schemes he proposed. (It’s instructive to compare his private legal practice with that of Burr. Once, working on the same case, Hamilton charged a client considerably less for the same work amount of work put in by Burr.) 

Honor was so central to the man dubbed “the bastard son of a Scotch pedlar” by John Adams that he risked his life for it.

In contrast, Biddle became so intoxicated by his power that he used his office to maintain his control at all costs—and he lost everything in the process, including his good name.


bjn2727 said...

good job mike
enjoyed it

James Higham said...

The country needs anything but central bank direction. Hamilton was even more of a criminal than Biddle and should have had angry mobs after him as well.

To excape these crises we're in, the Treasury needs to issue U.S.notes, buy out the Fed bonds and raise the reserve requirements on indicidual banks in proportion to prevent inflation.

Then it will be time to round up the central bankers and put them on trial.