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Beware of Unintended Economic Consequences

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Unissued bank note from the
Second Bank of the United States

Many observers are beginning to examine the unintended economic consequences of major reform legislation in the areas of health care (The Patient Protection and Affordable Care Act) and financial services (The Dodd-Frank Wall Street Reform and Consumer Protection Act). Such consequences have often followed sweeping actions taken by various elements of the federal government. All three branches have at times seemed equally oblivious to the unintended economic consequences of their decisions.

By definition, the legislative and executive branches must always act in concert to pass federal legislation; frequently, however, one of the two branches is generally acknowledged to have taken the lead in pushing for the passage of a particular bill. Many historic actions initiated by the President, Congress, and the Supreme Court, including Andrew Jackson’s forced closing of the Second National Bank, the Congressional crafting and passage of the Smoot-Hawley Tariff Act and the Supreme Court’s consent to granting corporations the right of “personhood,” have had consequences that resonated across the land long after the death of the individuals responsible for their sponsorship.


The Second Bank of the United States was authorized by Congress in 1816 after representatives from the Madison administration, Congress and the financial community recognized in hindsight the need for a federal institution to regulate the supply of bank credit, maintain a stable currency and handle the government’s receipts and disbursements. The First Bank of the United States had performed some of those tasks with distinction during its existence from 1791 to 1811. However, state bankers resented the intrusion of federal power into the business of banking. The First Bank’s congressional charter was allowed to expire as scheduled in 1811 without any of its erstwhile backers putting up much of a fight.

The Second Bank was a private institution; it could accept deposits, issue and redeem it own notes and carry out all the functions of a commercial bank. It was not authorized to formulate or execute the nation’s monetary policy. Yet, it was partly owned by the federal government and authorized to hold government deposits, handle federal payments and collections and facilitate transfers of federal funds. The Bank had a rocky start, as its first two presidents did not appreciate the institution’s potential function in the economy.

When Nicholas Biddle was elected its president in 1823, he began using the institution’s implied discretionary authority to control the level of money and credit outstanding, and to restrain the expansion of private bank credit. Thus, the Second Bank assumed some of the roles traditionally carried out by a central bank. Biddle exercised his authority partly by managing the Bank’s borrowing and lending activities, i.e. by purchasing bills from other banks and issuing its own notes. The Second Bank quickly became the most important commercial bank in the country. In 1830, it issued more than 40% of all bank notes in circulation and was responsible for 15–20% of all bank lending. At the same time, it influenced the nation’s credit supply by managing its redemption of other banks’ notes.

Biddle realized the importance of using the bank’s extensive branch network to facilitate its operations in both the domestic and foreign exchange markets. State bank notes used in the payment of federal obligations could sit in the vault at one of the Bank’s 25 branches only for as long as that branch did not present it to the issuing bank for exchange for specie.

In acting aggressively and expansively, Biddle made mistakes, and may have sowed at least some of the seeds of the Second Bank’s demise. In response to a banking crisis in 1825, the Bank sold government securities in an effort to increase its cash reserves and its potential to make loans. In doing so, however, it drained money from the banking system at a time when many state banks would have welcomed an increase in the Bank’s purchasing of their notes. Biddle apparently thought he was helping the system with his actions, even though they had the opposite effect.

In vetoing the re-charter of Second Bank of the United States in 1832, President Andrew Jackson consciously acted on a long-standing disdain for banks in general, and that bank in particular. His veto was based as much on political considerations as economic rationale; he acted in a direct repudiation of the Supreme Court’s 1819 decision in McCulloch v. Maryland that a national bank was indeed constitutional. He did not appreciate the value of having not just a national bank to act as the government’s agent in collecting and disbursing funds, but a central bank that could create a uniform national currency, regulate the amount of money and credit outstanding, deal with the effects of unusual international specie flows and act as a lender of last resort for troubled banking institutions. With his veto, the President was striking a blow against the government’s granting of monopoly power to a privately-owned bank controlled by a small group of stockholders.

Whether he realized it or not, he was also sowing the seeds of state regulatory primacy over the banking system. Congress would not authorize a federal institution to exercise any control over the nation’s supply of money and credit for several more decades. Without a central bank empowered to regulate money and intervene in certain aspects of the national economy, the seven financial panics that occurred between 1837 and 1913 had to run their course before coming to an end. To be fair, the Federal Reserve has not been able to prevent or interrupt several financial crises that have occurred since its creation by Congress in 1913. Yet, all but the most strident observers of the economy appear to see the value in having such an institution; it seems inconceivable that any President would try to overturn the nation’s third attempt to create a central bank.


The movement to pass the tariff increases embedded in the Smoot-Hawley Tariff Act of 1930 was started by Republican politicians who wanted to court the farm vote in the presidential election year of 1928. The 1920s had been a period of economic prosperity for many Americans, but not for the 25% of the labor force that made its living on the farm. Those folks had been hurt by falling farm income and farmland prices, high rates of mortgage foreclosures and rural bank failures.

Tariffs on imported agricultural commodities had long been lower than those on most manufactured goods. Throughout 1927 and 1928, Republican legislators from the farm states had been unable to convince their colleagues from the industrial east or Democratic President Calvin Coolidge to approve bills raising agricultural tariffs. Those men thought they had gained additional leverage for their tariff proposals after the Republican landslide of 1928 and the election of Herbert Hoover as President.

In his March 4, 1929 inaugural address, the new President reiterated his longtime support for limited increases in tariffs on agricultural products; he called for Congress to consider that idea in a special session to begin on April 15. Meanwhile, Congressman Willis C. Hawley’s (R-OR) House Ways and Means Committee had spent January and February holding hearings on potential tariff revisions. On May 9, Hawley reported a bill to the full House; responding to the parochial interests of many legislators, his committee crafted a bill raising tariffs on more than 800 products, including a wide range of both agricultural and manufactured goods. Privately, President Hoover urged House members to scale back the increases and concentrate them largely on agricultural products. Just a few weeks later, however, the House approved Hawley’s bill by straight party-line vote.

Space does not permit a complete description of the 10-month debate over the tariff bill that occurred in Senator Reed Smoot’s (R-UT) Senate Finance Committee, or the equally compelling 10-week period of wrangling that occurred in the joint conference committee to reconcile Smoot’s final product with Hawley’s. Suffice it to say that parochial interests, legislative log-rolling and vote-trading were the order of the day; moreover, the steadily worsening economy encouraged the legislators to seek special protections for their constituents. For the most part, President Hoover stayed out of the debate, prompting severe criticism from both contemporaries and historians. His only public statements centered on the importance of enhancing the flexible tariff provision (FTP) that had been part of the Fordney-McCumber Tariff of 1922. In theory, that provision gave the independent Tariff Commission and the President the shared ability to adjust certain tariffs without congressional approval. In practice, however, it proved difficult to implement.


W.C. Hawley and Reed Smoot,
April 11, 1929.

Credit: Wikimedia Commons

The bill that passed both branches of Congress in June 1930 was not crafted by dispassionate lawmakers trying to address an urgent national need, but by political actors responding to a range of pressures. It increased almost 900 tariffs, decreased more than 200 others and left almost 2,200 unchanged from previous levels.

The contemporary record documents the President’s lack of support for the large number of tariff increases included in the final bill. Economists, labor leaders, businessmen, and foreign ambassadors urged the President to veto this product of political compromises rather than economic rationale. However, since it included the enhancement of the FTP that President Hoover had demanded, he felt he had no choice but to sign it.

The Smoot-Hawley tariff increases contributed minimally to the decline in imports from 1930–1933, but were hardly the infant terrible as claimed in the hyperbolic commentary one often hears from various political actors. They certainly did not help the farm community. Instead, Smoot-Hawley had some unintended consequences, two of which are particularly striking.

The first was its contribution to a new climate of protectionism around the world. During its long legislative gestation, several nations protested against the bill’s higher import duties. After its passage, many of them pointed to that law as a justification for revisiting the nature of their own tariff policies. Some of those actions disrupted long-standing trading relationships. Within two years, Great Britain, Germany, and Japan created preferential and discriminatory trading blocs. In another area, the law’s enhanced FTP established new executive branch authority over tariffs.

After the Democratic Party regained control of the presidency and the Congress in 1932, President Franklin Delano Roosevelt sought to change the poisonous atmosphere surrounding world trade. Recognizing Congress’s inherent limitations when crafting national trade policy, he sought that body’s approval for the authority to negotiate bilateral trade agreements with interested countries. After very little debate and very little lobbying by special interest groups, Congress passed the 1934 Reciprocal Trade Agreements Act (RTAA). Thus, that branch permanently ceded its constitutional authority over tariffs to the executive branch. The World Trade Organization (WTO) and numerous multilateral and bilateral trade pacts among nations are the permanent legacies of the Smoot-Hawley Tariff Act.

Museum of American Finance


Arguably, no decision by a branch of the federal government has spawned more long-lasting unintended economic consequences than the 1886 Supreme Court action in Santa Clara County v. Southern Pacific Railroad. Actually, it was not the court’s decision in that case that sparked the controversy, but the assertion made by Chief Justice Morrison R. Waite’s court reporter in a headnote to the decision that the Court believed the 14th Amendment’s equal protection provision did indeed apply to corporations.

At the time, that brief statement did not seem particularly controversial; various Supreme Courts had confirmed that corporations were considered artificial persons in a dozen cases from 1809 to 1885. Yet it signaled the beginning of a long-running debate about the true meaning of those words. In 10 separate decisions during the next 11 years, the Court refined the right of government to regulate the activities of corporations.

Further, in classic applications of the stare decisis doctrine, the Court repeatedly confirmed that corporations were indeed persons, as noted in the Santa Clara v. Southern Pacific decision, and that they were entitled to equal protection under the 14th Amendment. Yet it was a Court reporter’s headnote, not the written opinion of a Justice, that established the amendment’s application to corporations. Subsequent Court decisions in the 19th and 20th centuries reasoned that since corporations were persons, they were entitled to all the protections included in the Constitution.

Since 1886, various Justices have written dissenting opinions regarding the granting of “personhood” status to corporations. It is conceivable that a future Court may revisit the question; many Courts have ignored the concept of stare decisis and reversed the decisions of their predecessors. As noted above, however, in this case there is no decision to overturn, just the periodic affirmations of a concept first articulated in a headnote. It may be more difficult than usual to overturn 125 years of jurisprudence.

In sum, the unintended consequences of this body of case law are quite apparent; corporations have some rights (e.g. free speech) and some protections (e.g. against illegal search and seizure) the framers of the Constitution may not have intended to grant them. It would take much more space to detail the many ways corporations have asserted those rights down through the decades, and how the nation’s economy would have evolved in their absence. It is difficult for legislators, Justices and Presidents to assess the impact their actions may have on future generations. Most people who occupy those positions are much more concerned with the realities of daily life, and with the issues that present themselves for immediate consideration. It falls to historians to remind those in positions of political power to please consider the potential unintended economic consequences of their actions.

–Michael A. Martorelli


Harkins, Malcolm J. “On the Road to Santa Clara and Beyond: Travels With The Supreme Court. Stephen J. Field and the Corporate Person.” 2010.
Available at http:// works/bepress.com/malcolm_harkins/29

Irwin, Douglas A. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton: Princeton University Press. 2011.

Remini, Robert. V. Andrew Jackson and the Bank War. New York: W.W. Norton & Co. 1967.

This article originally appeared in the Winter 2012 issue of Financial History, a publication of the Museum of American Finance.

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