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Chapter I.: history of american currency. - William Graham Sumner, A History of American Currency, with Chapters on the English Bank Restriction and Austrian Paper Money, to which is appended “The Bullion Report” 
A History of American Currency, with Chapters on the English Bank Restriction and Austrian Paper Money, to which is appended “The Bullion Report” (New York: Henry Holt and Company, 1884).
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history of american currency.
The English Government made no objection to the emigration of the Puritans to New England, save that they carried money out of the realm. The earliest settlers carried very little; other forms of capital were more valuable to them, and they had no use for it, save in exchanges amongst themselves. Yet Winthrop wrote to his son, in 1630, especially to bring £150 or £200 in money. Later settlers brought money to exchange for cattle, seed, and other forms of capital which the first colonists had already accumulated. In this form, the law that every community will have so much of the precious metals as it needs for its exchanges* vindicated itself in their case.
Of the value of money amongst them we may judge from the following incidents:
A married clergyman was allowed £30 per annum.
Josias Plaistowe, having stolen four baskets of corn from the Indians, was to repay eight and be fined,£5.
Carpenters, sawyers, joiners, and bricklayers (whose services were in great demand, and had a monopoly price), were forbidden to take over 12d. and afterwards 2s. per day. Penalty, ids. to giver and taker.
Magistrates had 3s. 6d. and deputies 2s. 6d. per day.
Ed. Palmer, being found guilty of extortion in charging 13s. 4d. for the wood-work of the Boston stocks, was fined £5, and condemned to sit in the stocks one hour.
In January, 1631, the crops having failed in England, and no crop having yet been raised in Massachusetts Bay, grain was at famine prices. Including freight, wheat was 14s. per bushel, peas ids. Indian corn from Virginia 10s. Many cattle died. A cow was worth £25 or £30.
The President of Harvard College was condemned to pay an usher £20 for flogging him.
When exploring parties penetrated to Long Island Sound, they found along its coasts tribes of Indians far more civilized than those who had been met farther north. The cause or indication of their superiority was that they had a circulating medium. This consisted of beads of two kinds, one white, made out of the end of a periwinkle shell, and the other black, made out of the black part of a clam shell. These beads were rubbed down and polished as articles of ornament, and arranged in strings or belts into jewelry, being objects of real beauty when the colors were artistically combined. These beads and belts were used by the Indians themselves as money, and were real money. They regarded one black bead as worth two white. This money was called wampumpeag or wampum, or peag.
The colonists began to use it first for exchanges with the Indians, and then amongst themselves. It was first made legal tender only for 12d. in Massachusetts, but by custom it became the prevailing currency. The white man also proved his superiority by counterfeiting it. A fathom or belt of wampum consisted of 360 beads. One fathom of white would buy furs which were valued at 5s. sterling, and one fathom of black would buy furs worth 10s. Therefore,
These were the rates at which the peag first circulated among the colonists, and its operation is in many respects worthy of study. It was, for the Indians, in their limited community, a perfect money. They divided their labors, some hunting and fishing, some, who lived on the shore, making peag. They made as much as they chose or could. It was a product of labor, and subject to demand and supply. It was valued as jewelry, and when thus made up and appropriated, it passed out of circulation. Prices must have fluctuated in it according to the active circulation which extended several hundred miles inland westward. It was subject to deterioration by wear and use.
When the colonists, who were in exchange relations with a world which used gold and silver, began to use it, other currency laws came into operation. It was not exportable, would not satisfy foreign debts, was not desired by the whites, save for the conventional purpose of money.
The colonists began, soon after the settlement of Massachusetts Bay, to use a barter currency,* ostensibly because they had not money enough: really because they wanted to spare the world's currency to purchase real capital, which was their true need. The currency history of this country has been nothing but a repetition of this down to the present hour. It has always been claimed that a new country must be drained of the precious metals, or that it could not afford so expensive a medium. The new country really needs capital in all forms. The only question is, whether, being poor and unable to get all that it wants, it can better afford to do without foreign commodities or without specie currency. No sound economist can hesitate how to decide this question. The losses occasioned by a bad currency far exceed the gains from imported commodities. The history of the United States from the landing of Winthrop to today is a reiterated proof of it. The best protection to native manufactures is to keep a due proportion of the national capital in a specie circulation, and do without, or find substitutes for, or learn to make, the things which the people cannot afford to buy from older and more advanced countries.
Credit, in its legitimate forms, is priceless to a new community, but when used in illegitimate forms, as in a pure credit currency, or in a currency into which credit enters as an indefinable element, it makes legitimate credit impossible. This history will do little more than to expose the errors involved in mistaking credit currency for money, and money for capital—errors which are repeated to-day by the new States—and to show the bad results of those errors.
The barter currency was inferior to gold and silver in cost. When corn and beaver, and, in fact, all other products, were made legal tender, no one would pay debts in specie. It was hoarded and paid away for imports.
A barter currency is also the most rapid of all currencies in its depreciation. If a cow will pay taxes, the leanest cow will be given. If corn will pay a debt, the corn which is of poorest quality, or damaged to a certain extent, will be given.
If a large number of commodities are made legal tender, the poorest quality of the commodity, which may be cheapest at the time of payment, will be given. Credit operations are therefore made almost impossible.
Some ludicrous complaints, on the part of the tax-gatherers, scattered up and down in the records, bear witness to the fact that this was all experienced in New England. The more barter currency was used “because money was scarce,” the scarcer money became. Prices rose to fit the worst form of payment which the seller might expect.
Accordingly, in 1640, prices having risen so much that the nominal “penny” in the barter currency had fallen, we find the Massachusetts Courtre-rating wampum at four of the white and two of the black for a penny, to the amount of 12d. Interest was 8 per cent.
During the ten years, then, from 1630 to 1640, the specie brought over, and that gained by trade with the West Indies and Virginia (not yet great) had been steadily exported. Merchants had found the colony a good market. In 1640, Winthrop tells how the merchants came and drained off the people's cash. That he should not have understood the case is not strange, but that people nowadays should not have learned from the experience of two centuries and a half, and the teachings of science, any better than to repeat the same theory, is astonishing.
Meantime silver prices had, of course, fallen enormously. Now came other circumstances to prostrate the colony. The emigrants ceased to come, on account of the prospect of a new state of things favorable to them at home. Merchants came, but no longer found a market. The project of moving away was broached and earnestly debated in the colony. This tended to still further depress the price of all fixed improvements and stock. Cows were valued in taxation, in 1646, at £5; horses four years old, £6.
In the first years, 1630–1640, 22,000 people came over. For some time after 1640 more went back than came. The settlers had gained by sales of stock, etc., to successive new arrivals. A farmer had clothed his family on one cow sold annually from his stock. £192,000 had been spent on the colony, “ a dear purchase, if they had paid nothing to the Council of Plymouth and nothing afterwards to the sachems of the country.”
Under the new circumstances they turned to new industries, and, so far from being ruined, were far better off. In 1641 corn would buy nothing, but was legal tender for debts. They turned to ship-building, carrying between Virginia and the West Indies, fishing, seal fishing on the Isle of Sable, and lumbering. These industries all prospered. In 1643 the crop failed, and corn was sold only for ready money or for cattle, at 12d. more per bushel than for cash.
In 1648 it was necessary to order that only such peag as was unbroken and of good color should pass—legal tender up to 12d.
In 1649 the colony treasurer was forbidden to take peag. The inhabitants began to reject it, but the court then ordered that peag should be legal tender for 40s., the white at eight and the black at six for a penny. Disputes arising about the barter currency for taxes, three appraisers were provided for, one to be chosen by the treasurer, the second by the owner, and the third by the marshal.
THE “PINE-TREE” COINAGE.
Coin was now coming in freely by the trade with the West Indies. The buccaneers also spent a great deal of their booty in the colonies, but it all just as steadily went out. In 1652 Massachussets set up a mint at Boston to coin this metal and try to keep it in circulation. They coined shillings, sixpences, and threepences, and continued to do so for many years, but, as it was a breach of the prerogative to coin, they dated all the coins 1652. The coins were to be of sterling alloy, 11/12 fine, and the shilling worth Iod. sterling. The mint master had 15d. in 20s. for coining. As silver was worth 5s. 2d. sterling per oz., if the New England shillings had been equal to Iod. sterling each, silver should have been worth 6s. 2½d. New England currency per oz., but as the mint master kept 15d. out of every 20s., silver was worth 6s. 7d. New England currency per oz., if the coin was up to its own standard. It would therefore have been 22 per cent, worse than sterling. The English Mint declared it not of even weight or fineness, and it was taken in England only at 25 per cent. discount. The normal rate, therefore, was 6s. 8d. per oz. The law forbade exportation on penalty of forfeiting all visible estate. Of course this restrained but it did not prevent it. This currency, known as the “pine-tree” currency, forms the standard by which calculations were made from this time on.
Meantime the barter currency was continued, and another act passed in 1654 provides that all contracts in kind shall be so satisfied. In 1655, a constable brought cattle to the treasurer for taxes which were so poor that he would not take them. In 1657 another prays for relief because, having taken boards for taxes, the treasurer would not allow him as much as he allowed for them. In 1658 it was ordered that no man should pay taxes in “lank” cattle. In fact the barter currency continued general.
In 1655 the colony accounts allow for £35 ids. peag burned with the treasurer's house, and contain an entry of eighteen strings of peag at six a penny.*
Accordingly, the silver money no sooner appeared than it was either smuggled out of the country or clipped. The principle laid down by Sir Thomas Gresham in Queen Elizabeth's time, that a better and a worse currency cannot circulate together, but that the worse will drive out the better, was the only secret. If the better currency could not be exported, it was clipped down to the rate of the inferior currency, or rather below it, in order to be on the safe side, and pay rather less than more than one need.*
The silver which came to the colony consisted for the most part of Spanish pillar coins. On account of the heavy mint charges these were not taken to the mint. They were not allowed to be circulated. The dollar, or piece of eight, was worth 4s. 6d. sterling, or 6s. New England curency. In 1672 a law was passed allowing these pieces to circulate at 6s. and other pieces in proportion. In 1675 the mint was leased again, in spite of prohibitions from England. In the same year, 25 per cent. discount on barter taxes was allowed for cash, and afterwards 50 per cent. In the same year, it was provided that, instead of transporting barter payments of taxes to and from the treasury, the transfers should be made by paper orders. Meantime, the coin was sent to England and to the other colonies, and was extremely scarce in Massachusetts.
In 1686 a bank was proposed, to issue notes. Its history is obscure, and though it seems to have made issues, they soon disappeared. Andros stopped the mint about 1688. It formed one of the chief charges against the colony on account of which the charter was revoked in 1684.
THE FIRST EXPEDITION AGAINST CANADA,
RESUMPTION IN MASSACHUSETTS.
Parliament voted to ransom Louisbourg from the colonies. The sum coming to Massachusetts was,£138,649 sterling, which at eleven for one, the ruling exchange, would nearly cancel the paper. Hutchinson proposed that they should ask Parliament to ship to them their share of the payment in silver dollars and copper coins, and that these should be used to cancel the paper as far as they would go, the rest to be called in by tax. After considerable opposition this course was adopted. The silver was sent over and exchanged. Prices were adjusted to this new measure, and the silver remained in circulation when it no longer had a meaner rival. The “ shock” which was apprehended did not occur. The only shock was to Rhode Island and New Hampshire, who found their trade transferred to the “ silver colony,” and their paper suddenly and heavily depreciated. The West India trade of Massachusetts had been largely done through Newport. It was now transferred to Salem and Boston In 1752 a Newport merchant, Joseph Whipple, who was deputy governor at the time, failed. Failures “had been almost unknown in Newport,” and Mr. Whipple was constrained to resign his office.
The apprehensions of loss and danger from the change in Massachusetts led to some demonstrations of riot, but the change took place so quietly and easily that these fears were not realized and the tumult subsided. Trade had been immediately before (1749–50) at the lowest ebb. Ship-building and fisheries had declined, and people were moving away. Trade now revived steadily and rapidly, and we hear no more of “scarcity of money” until the next violation of the laws of circulation.
The following table shows the depreciation of Massachusetts paper:
|ex. on london||silver per oz. in the currency.|
|ex. on london||silver per oz. in the currency.|
The following table shows the depreciation of the paper of the several colonies:
|Pennsylvania||160||180 and 190|
|Virginia||120 and 125|
Douglas, though bitterly opposed to paper money, opposed violently the plan of Hutchinson. His own history shows that he was irascible and impracticable. He thought the measure too sudden, and wanted to use the English payment by drawing bills of exchange on long time and selling them for the bills of credit. If a contraction had been practicable it ought certainly to have been gradual and careful, but this was out of the question with a currency sunk to 1/11 of its denomination, and a bankruptcy could not be too sharply and definitely accomplished when resolved upon.
ACTION OF CONNECTICUT.
His plan was followed in Connecticut, the bills being drawn at three years' date, and the consequence was that the paper was not withdrawn before the next war called for new issues.
ACTION OF RHODE ISLAND.
Rhode Island went on upon the paper system. In 1750 the paper-money party were in the ascendant, and the ninth bank was issued for,£25,000. It was for the purpose of giving bounties on manufactured wool, and whale and cod fisheries. “In June, 1751, the act was amended. The bounties were abolished; that on manufactured wool as being displeasing to England, the others as useless.” Rate in 1750: Notes of ninth bank, 6s. 9d.=13s. 6d. new tenor =54s. old tenor. Rate in 1757: 6s. 9d. of ninth bank=16s. new tenor=64s. old tenor. In 1756, new bills were issued at 6s. 8d. per oz., payable in two years, called “ lawful money,” and some efforts at reform began to be made. The notes were no longer legal tender, and in 1763 a scale of depreciation was fixed for the settlement of old debts by the courts. It put one Spanish milled dollar, of the value of 4s. 6d. sterling, at £7 in old-tenor notes in 1763.*
LEGAL-TENDER PAPER ABOLISHED.
In the year 1751 Parliament passed an act forbidding any more legal-tender paper issues, and allowing no issues, save in the form of exchequer bills, redeemable by taxes in a year, bearing interest, or, in case of war, similar issues redeemable in four years. The colonies now set to work earnestly, though with only partial success, as above shown, to retire their old issues.
A new war with the French in 1756 involved them once more in war expenditures, and bills of the above description were issued. They were of small denominations, bore interest, and circulated only until the interest accumulated so much as to make them worth hoarding. Remittances were continually received from England to partially reimburse the colonies for their expenses, and by these funds, and by taxes, the bills were redeemed to such an extent as to save them from great depreciation.
Early in the eighteenth century Virginia adopted tobacco as a currency. It was deposited in warehouses, and the receipts for it passed as currency. It was a true money, but not a good one, as it naturally fluctuated considerably in value. In 1755 Virginia issued paper money.*
North Carolina issued paper to build a palace for the governor. A similar project was started in New Jersey, but it never passed the legislature.
DOUBLE STANDARD TRIED IN MASSACHUSETTS—OTHER
Scarcely had specie come into circulation in Massachusetts when it was found that, although the remittance had been in silver, gold from the West Indies began to stay in the colony. The question of making it legal tender as well as silver soon began to be agitated. It circulated of course, not being legal tender, at its weight. An act was passed in 1762 to make gold legal tender at 2½d. per grain. At this rate it was more profitable for the debtor to pay in gold than in silver. The currency was depreciated five per cent. by this operation, and, as Hutchinson declared at the time must follow, this drove silver out of circulation. Some hints also show that barter currency was still allowed in the payment of taxes. Silver now became scarce, and the next stage was a new agitation in 1767 for paper money.
In 1768 the House resolved that “in order to prevent the unnecessary exportation of money, of which this province has of late been so much drained,” they will do without foreign superfluities, and encourage the manufactures of this province. The same doctrine has been preached and avowed ever since, as the sum and essence of political economy, but it has been a signal failure. The colony was drained of money (silver) because it had adopted another legal tender, gold, which, though the best money for large exchanges, was so rated that it was the cheapest means of payment. It alone therefore remained, and the other metal was exported. It was not, however, exported for nothing, and no resolutions could make the people desist from using foreign superfluities which came back to pay for it. The same violation of coinage laws was twice repeated under the federal constitution, as we shall see below. In the same year (1768) the Massachusetts Council petitioned the House of Commons for relief from the new tax laws, pleading the great scarcity of money, which they ascribe to the balance of trade being against them.
Mr. Hickcox, writing on the New York paper money,* says that the colony traded in 1720 with Madeira, the West Indies, and England. He expressed still more explicitly the theory underlying the above view on the subject. The trade “ to the West Indies was wholly to the advantage of New York, while that to Madeira was to our loss, the province consuming more wine from thence than could be purchased with its commodities. The money imported from the West Indies was not sufficient, however, to preserve a specie currency, a large amount being necessary to balance the exchange with England.”
The errors involved in this way of looking at the matter were most clearly exposed in connection with the “ Bullion Report,” and will be found noticed in Chapter II.
In 1763 Parliament declared any colonial acts for issuing paper money void. Franklin wrote a pamphlet in opposition to this act. He said that gold and silver owe their value chiefly to the estimation in which they happen to be among the generality of nations and the credit given to the opinion that they will continue to be so held. “ Any other well-founded credit is as much an equivalent as gold or silver.” When exchange rose he thought that this was only an advance in ex change, not a fall in paper. In 1773 Parliament allowed any bills issued by any colony to be a tender at its treasury. In 1774 Massachusetts was out of debt.
In 1775 representatives of the colonies of Connecticut and Rhode Island met the Congress of Massachusetts to concert measures for the war.
It was agreed, as their money was paper and they could not offer anything else, that this should be allowed to pass in Massachusetts.
CONTINENTAL PAPER MONEY.
The colonies now went into the Revolutionary War, many of them with paper already in circulation, all of them making issues for the expenses of military preparations. The Continental Congress, having no power to tax, and its members being accustomed to paper issues as the ordinary form of public finance, began to issue bills on the faith of the “ Continent,” Franklin earnestly approving. The first issue was for 300,000 Spanish dollars, redeemable in gold or silver, in three years, ordered in May and issued in August, 1775.
Paper for nine million dollars was issued before any depreciation began. The issues of the separate colonies must have affected it, but the popular euthusiasm went for something. Pelatiah Webster,* almost alone as it seems, insisted on taxation, but a member of Congress indignantly asked if he was to help tax the people when they could go to the printing-office and get a cartload of money. In 1776, when the depreciation began, Congress took harsh measures to try to sustain the bills. Committees of safety also took measures to punish those who “forestalled” or “ engrossed,” these being the terms for speculators who bought up for a rise. The tyranny of the government was of course only a stimulus to the private committees. It is natural to suppose that malicious and criminal persons assumed the duty of public regulators, and committed those acts of violence and wrong which equal or surpass anything of the kind under any despotism, but such an error as a legal-tender act, enforced by pains and penalties, is responsible for the secondary evils which are sure to flow from it. Webster says of the paper: “ We have suffered more from this cause than from every other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy.” The enemy, perceiving the terrible harm the Americans were doing themselves, thought it well to help on the movement. They counterfeited the bills and passed them through the lines.
At the end of 1779 Congress was at its wits' ends for money. Its issues had put specie entirely out of reach, and the cause was in danger of being drowned under the paper sea.
Webster says: “ The people of the States at that time had been worried and fretted, disappointed, and put out of humor by so many tender-acts, limitations of prices, and other compulsory methods to force value into paper money, and compel the circulation of it, and by so many vain funding schemes, declarations of promises, all which issued from Congress, but died under the most zealous efforts to put them into operation and effect, that their patience was all exhausted. I say these irritations and disappointments had so destroyed the courage and confidence of the people, that they appeared heartless and almost stupid when their attention was called to any new propositions.”
The French alliance helped more by giving means of procuring loans in Europe than by military assistance. Congress promised to limit its issues to $200,000,000, and tried a new form of note; also loan offices and lotteries. Over 350,000,000 were issued in all, but it is doubtful if more than 200,000,000 were out at any one time.
In the spring of 1780 the bills were worth two cents on the dollar, and then ceased to circulate. Specie now came into circulation, being brought by the French, and also that expended by the English passing the lines. The paper was now worth more for an advertisement or a joke than for any prospect of any kind of redemption. A barber's shop in Philadelphia was papered with it, and a dog, coated with tar, and the bills stuck all over him, was paraded in the streets.
On account of the peculiar character of American society, there are few family traditions of the Continental currency; but the contemporary literature shows that the suffering it caused was wide-spread and intense. It fell most heavily on the most patriotic and most helpless. Phillips quotes a letter addressed by a lady to the “ Pennsylvania Packet” in 1779, saying that her father had left her a competence which her guardian had invested in real estate six years before. He now proposed to pay her fortune in paper. It is only a single instance.
“ The gradual depreciation was urged as a reason why the notes should not be redeemed at par. It was said to operate as a tax; as a most equal tax, because it acted in proportion to the amount held. The rich suffered largely on their vast sums; the needy but slightly on their scanty pittances. How fallacious these reasonings, with which the Congress and the people solaced themselves, are, must be apparent. Poor consolation it was to those who had been beggared confiding in the honor and in the honesty of their country, to hear that their ruin had merely been a gradual tax; to know that from the operation of tender laws their property had been taken away and given to others; to see the wealth accumulated by the dishonest multitudes of contractors and the many defrauders of that unhappy period, and to feel that it had been plundered from their own coffers for the aggrandizement of such people.”* The trouble is that the government cannot make a forced loan by legal tender issues, without giving the opportunity for private individuals to take “ forced loans” from their neighbors.
“ If it saved the State, it has also polluted the equity of our laws, turned them into enemies of oppression and wrong, corrupted the justice of our public administration, destroyed the fortunes of thousands who had most confidence in it, enervated the trade, husbandry, and manufactures of our country, and went far to destroy the morality of our people.” †
It ought to be noticed that this paper was vaunted as “ the safest possible currency,” which “nobody could take away.”
BANK OF NORTH AMERICA.
December 31, 1781, the Bank of North America was chartered with a capital of $400,000. It took its origin in a union of citizens of Philadelphia, formed in the preceding year, to supply the army with rations. They were allowed to form a bank, and, as it seems, issue notes to buy the articles required. Congress ordered bills drawn on American ministers abroad to be deposited in the bank as a guarantee of payment. $70,000 in specie were subscribed in 1782 by individuals, and the remainder by the government out of the proceeds of a foreign loan. It issued convertible notes, redeemable in Spanish dollars; but the people were slow to take them. According to the story given by Gouge, the Bank was not over strong, and tried to keep up its credit by parading and handling over its stock of silver. However, it made large dividends, and was attacked by a rival which it was obliged to absorb, and secondly by an effort to have its charter repealed. The latter effort was successful so far as the state charter was concerned. It went on under the charter of the Continental Congress until 1788, when it was re-chartered by Pennsylvania. It exists yet.
RENEWED AGITATION IN FAVOR OF PAPER
In 1785 and 1786 an insurrectionary movement, known as Shay's Rebellion, broke out in New England. It was an insurrection of debtors who were suffering from the collapse of the currency and return to specie values. They clamored for paper.
“ No desperately indebted people can long endure a regular, sober government.” This insurrection was put down by force, but Massachusetts passed a law delaying the collection of debts.
In Rhode Island this movement was not riotous, but took the form of a political movement. The paper money party carried the elections in 1786, and began a new period of this mania for their colony.; £100,000 were issued by a vote of the rural districts against the cities. The bills were to be loaned on mortgage of land for fourteen years. They depreciated at once Merchants refused to deal, and closed their shops. The farmers retaliated by refusing to bring produce to the cities, and thus the urban and rural populations were pitted against one another in a ridiculous warfare which brought business to a stand-still. In Providence it was agreed to enter into intercourse for necessaries so far as parties could agree, and to borrow $500 to send abroad for grain. The farmers met and petitioned the Assembly to enforce the penal laws in favor of the paper money. By these laws cases involving legal tender took precedence of all others, and must be tried within three days after complaint entered, without jury, and with three judges a quorum. The decision was final. The fine for the first offence was from £6 to.£30, and for the second offence, from £10 to £50. A protest by the representatives of the large towns against this law was not allowed to be recorded.
John Trevett, of Newport, complained of John Weeden, a butcher, for refusing bank paper. The five judges agreed that the act was unconstitutional. A special session of the Assembly was convened, before which the judges were summoned to “ assign the reasons and grounds” of the late decision. Three judges came. Two were sick. The hearing was postponed. A test act was prepared and sent to the towns for approval, but it went too far. Only five towns approved. It proposed to disfranchise any one who refused the bills at equality with metal. With all this, money was so scarce that land rents were paid in corn, and barter became common.
It was now determined to pay off the debt of the colony, except the 4 per cents, one quarter at a time, in the bills received for taxes. Any holder of colony securities who did not come up to take his notes within a set time forfeited his securities. The whole debt was paid off in this way within two years. Three months after it was issued, the paper stood six for one gold. The question of ratifying the new constitution now coming up, the paper money party was for state rights, and the specie party for the federal constitution.
In the spring of 1787 there were twenty bills in equity filed in court for the redemption of mortgaged estates. “ The suitors came prepared with paper money in handkerchiefs and pillowcases to redeem their lands.” It was moved to have the bills counted, and the tender recorded, but the court held that it had nothing to do with the money before rendition of judgment, nor was it for them to be instrumental in proving a tender. They refused to entertain any motion with the latter intention. The Assembly next removed four of the judges who declared the legal-tender act unconstitutional. In June, 1787, the paper was at eight for one. In 1789 it was at twelve for one. In September of that year the action of the legal-tender act was suspended; October 12 the depreciation was legally fixed at eighteen for one, and debtors were allowed to pay in produce.
If paper-money issues, tariff laws, and bounties on exports can make a nation great and prosperous, Rhode Island ought to have been the first State in the union in point of wealth, though the last to enter it
The historian, Arnold apologizes for her dilatoriness in joining the union by the extraordinary degree of liberty her citizens had enjoyed, and their jealousy of having it curtailed. They may have had la Liberté in Rhode Island; they did not have liberty.
It appears that all the provinces were struggling with paper issues during the period of the old confederation. Specie was scarce in some, and plentiful in others, according to the amount of paper outstanding. The Congress of the confederation had not the power to tax, and its efforts to obtain the consent of the States to its fiscal legislation failed. Its certificates of indebtedness were worth only twelve or fifteen cents on the dollar. A coinage law was passed in 1786, but no coins of gold or silver were struck. Copper coins were made, but they were below standard and depreciated.
ASSUMPTION OF THE STATE DEBTS.
One of the first acts of the Federal Congress was to provide for the settlement of the outstanding accounts. $21,500,000 were apportioned to the States to assume their indebtedness, subscriptions being received in their paper at a discount, but as the federal debt at once rose in value, the transaction was very favorable to the holders of State obligations. The amount actually assumed was $18,271,814. At the same time the States were credited with advances made to the confederation, and charged their quota of its expenditure. Thus some appeared as creditors and others as debtors. The debtor States never settled the account. The creditor States were paid. The whole transaction was criticised by Mr. Gallatin* as unwise and wasteful. It met with much opposition, especially from the South, and there were always rumors of bargain in connection with this act and the removal of the capital to Washington.
BANKING ON CONVERTIBLE CURRENCY.
We come now to the period in which the currency consisted more or less of bank-notes, nominally convertible, issued by chartered banks. The system to which it has most analogy is that of the Scotch banks, although of these latter only three are chartered, the others being joint-stock companies and partnerships. We shall have abundant proof that this system of free banking requires, as its indispensable conditions, moderation, sagacity, and scientific knowledge on the part of the bankers. Without these qualities in the managers, it is as wild as any scheme of paper money. Men who believe that “ banking” consists in making paper issues and loaning them, making them as large as possible and stimulating them by all artificial means, and discouraging conversion as much as possible, may, as we shall see, bring down more ruin on the community by this engine than by any other.
The Bank of North America had already been founded. Its success in earning dividends led to other similar enterprises. Massachusetts chartered the Massachusetts Bank in 1784. Soon after, a bank was chartered in New York and another in Maryland.
PAPER MONEY AND THE FEDERAL CONSTITUTION.
In 1787 the Federal constitution was framed. It contains a clause that no State shall “ coin money, emit bills of credit, or make anything but gold or silver coin a tender in payment of debts.” The framers of the document thus fixed their condemation of the old paper system, and the people, smarting under recent experiences, acquiesced.
It was proposed in the constitutional convention to give to Congress the right to emit bills of credit, but the proposition was defeated nine States to two. (Madison Papers, III. 1,344.)
Two questions have been raised under this clause: I. Can a State authorize banks to do what it cannot do itself? As the confederation had already chartered the Bank of North America, it does not seem that the “ bills of credit” were understood to cover bank notes. The courts have held that a State may authorize bank issues when itself owns all the stock, the legislature appoints the directors, the faith of the State is pledged for the redemption of the bills, and they are receivable for public dues, provided the capital is paid in and the bank may be sued. (Story, 4th ed., I. 227, note.)
2. Can the national government do what the States cannot do under this clause? The legal-tender cases have recently decided this question in the affirmative. Mr. Gallatin said, in 1831, of Congress: “ As this body has no authority to make anything whatever a tender in payment of private debts, it necessarily follows that nothing but gold and silver coin can be made a legal tender for that purpose, and that Congress cannot authorize the payment, in any species of paper currency, of any other debts but those due to the United States.” This is only important as showing the belief of prominent public men on this point in earlier times. For them it was a simple matter of course that Congress could not pass a legal-tender act of any kind, how much less one which should apply to existing contracts. The legal-tender decision did as great a wrong as the Dred Scott decision, and the latter instance shows us that it is not useless to discuss a constitutional question, even after the court has decided it. It will not probably take a war to overthrow the principle of the legal-tender act, but it may take a national bankruptcy.
THE FIRST BANK OF THE UNITED STATES.
The first United States Bank was chartered by Congress in 1791. Its capital was $10,000,000, to be paid, one-fourth in cash, the rest in bonds of the United States. The charter was to run for twenty years. It issued no bills under $10.
Other banks were now formed very rapidly. The following list is given by Gouge, though he says that it is not full:
|1792. . . . .||8|
|1793. . . . .||3|
|1794. . . . .||0|
|1795. . . . .||5|
|1796. . . . .||1|
|1797. . . . .||0|
|1798. . . . .||0|
|1799. . . . .||3|
|1800. . . . .||2|
|1801. . . . .||3|
|1802. . . . .||4|
|1803. . . . .||15|
|1804. . . . .||10|
|1805. . . . .||4|
|1806. . . . .||4|
|1807. . . . .||9|
|1808. . . . .||1|
|1809. . . . .||3|
|1810. . . . .||8|
|1811. . . . .||11|
|1812. . . . .||19|
In 1794 the first silver was actually coined, the dollar weighing 416 grs., 1485 parts pure to 179 parts alloy. Its pure contents were, there fore. 371.25 grs. Gold was first coined in 1795, the eagle weighing 270 grs., 11/12 fine, so that one dollar contained 24.75 grs. pure gold. It will be observed that where two metals are thus made legal tender, and there is both a silver “ dollar” and a gold “ dollar,” the question of relative value of the two metals is involved. It was assumed in the above rating that silver was to gold as 15 to 1. We have had one instance before us already when Massachusetts, in 1761, overrated gold in the coinage and drove out silver. If the rating should be correct at the time of passing the coinage law, yet the fluctuations which are continually taking place in the relative value of the two metals would in time disturb the relations, and only one metal would circulate, viz., the cheaper one. France has changed to a silver currency only, and then to a gold currency only, by these fluctuations since her mint law fixed the relation in the coinage. The ratio of 15 to I was, at this time, unjust to gold. The actual market value being 15¼ to 1. We shall have occasion to notice the operation in this case.
BANK ISSUES IN NEW ENGLAND.
The development of banking took place first in New England. It was of the kind later known as “ wild-cat” banking. The new financial machine seemed so powerful and beneficent that all that was necessary was to work it to the utmost. Notes under $5 were not allowed in Massachusetts until 1805, but after that smaller denominations were allowed, and finally notes were issued as low as 25 cents, and, by the law that paper drives out specie to the lowest denomination to which it is issued, there was no specie in the New England States. The stock of specie in bank was insignificant, and was moved from bank to bank to meet the inspectors' visits. The downfall came in 1809. One bank in Massachusetts had $40 in specie; another nothing. The system of subscribing to capital by notes was, as it appears, universal. The Farmers Exchange Bank of Gloucester, R. I., founded in 1804, was probably the worst case. Its capital was $1,000,000. Only $19,141.86 were ever paid in, and of this the directors withdrew what they paid in, leaving $3,081.11. One Dexter bought out eleven of the directors for $1,300 each, paid out of the bank's funds. He borrowed of the bank $760,265. When it failed it had $86.46 in specie; bills out unknown; the committee estimated them at $580,000. South of New England banks were fewer, and there was no disturbance. Silver was plentiful in the West. The exportation from Mexico was through the United States.
After this crash, the New England States passed severe banking laws, with penalty of twelve per cent, interest on all notes not redeemed on demand. In 1813 the New England Bank was chartered as a bank of redemption at Boston, in order to keep the paper of banks in the adjacent country at par. It accomplished this object, but was exceedingly unpopular with its country clients. This was the origin of the Suffolk Bank system.
BANK ISSUES IN THE MIDDLE STATES.
The banking mania now broke out in the Middle States. In 1810 Pensylvania found it necessary to forbid the issue of notes by incorporated companies — bridge companies, etc. The charter of the Bank of the United States expired in 1811, and its renewal met with such vigorous opposition that it was defeated. The constitutionality of the charter by Congress was doubted from the outset. This bank, so far as we can judge from the information we have in regard to it, was soberly managed, successful, and beneficial in restraining the issues of the smaller banks. It was on this latter account especially, and also because others desired to form small banks, that a strong party was formed against the renewal of its charter. The same influence defeated its efforts to get a charter from the State of Pennsylvania. Great fears were entertained that a severe crisis must follow the winding up of the United States Bank, but they were not realized.
The note circulation of the banks of the country in 1811 is estimated by Gallatin at 46,000,000.
The field being thus cleared, twenty-five charters were passed through the Pennsylvania legislature in 1812–13, but all vetoed. In the following session forty-one banks, with $17,000,000 capital, were chartered by Pennsylvania over the veto. In a report to the Pennsylvania Senate made in January, 1820, by a committee of which Condy Raguet was chairman,* it is stated that at this time prices were low in New England, and specie was flowing thither.
The country being now at war, Mr. Eppes, of the Ways and Means Committee, thus explained the financial measures by which it was proposed to carry on war (Winter of 1813—1814).
There were $75,000,000 bank capital, and $100,000,000 circulation and discounts (deposits). Deduct forty-seven millions circulation required; there remain fifty-three millions, “of which we propose to borrow thirty millions.” In 1812 the government borrowed six millions from banks, and four millions from individuals at par. In 1813 it borrowed twenty millions, allowing one hundred and thirteen for one hundred paid. In 1814 it borrowed fifteen millions; twelve millions nett, allowing one hundred and twenty-five for one hundred received. No more was to be had. No tax was laid until January 1, 1814. The loans nearly all came from the Middle States, the New England States being strongly opposed to the war, as foolish, unnecessary, a help to Napoleon, and completing the ruin begun by the embargo.
The revenue for 1812, '13, and '14 was twelve millions. The peace expenditures had been eight millions. Treasury notes for one year were issued in 1812 to the amount of three millions, interest at five and two-fifths per cent., receivable in taxes. Six millions were issued in 1813; eight millions in 1814. By 1814 prices were rapidly advancing, business was brisk, and importations were great. Pennsylvania notes were at fourteen per cent, discount. It was complained at Philadelphia that silver flowed to New England and was there exported. The importations came through New England. There was, therefore, now an “adverse balance of trade,” between the Middle and New England States. It was also claimed that the New Englanders were buying bills drawn for the supply of English troops in Canada with their surplus silver.
The New England Bank having collected over $100,000 worth of the New York bills which flooded New England, sent them home for redemption. The silver was loaded and on its way to Boston, when the Collector of New York stopped it at Chester, and ordered it to the Manhattan Bank, of which he was a director. He said he suspected that it was to be sent to Canada. The President of the United States ordered it to be given up.
On the 30th August, 1813, the directors of the chartered banks of Philadelphia published a circular, in which they said that, on account of the blockade, exportation of produce was impossible. Hence specie had been exported, and “ as the importation of foreign goods in the Eastern States has been very large, it has for many months past occasioned a continual drain from the bank.” They also refer to the English bills of exchange. For a time they had been able to draw from the Southern States (the New Orleans banks suspended because “ a contraband trade was drawing off the specie”), but this was no longer possible. “ It became a serious consideration whether the banks should continue their exertions to draw within their vaults the specie capital of the country, and thus facilitate the means of exporting it from the United States, or whether they should suspend the payment of specie before their means were exhausted.”
This plausible explanation appealed to the popular prejudice against exporting silver, but evidently concealed the true relation of facts. The silver went to New England unquestionably. On the Ist June, 1811, the banks of Massachusetts held $1,709,000 in specie;
It went thither because there was a sound currency and low prices there, and went away from the Middle and Southern States because displaced by redundant paper and consequent high prices. It was because the Pennsylvania banks had issued paper until it was at a discount, that, when they got the silver into their vaults, they could not keep it there, but it was demanded of them and exported. When the New Englanders took it they gave something for it, and there was an unusual importation from New England. They also used it. Having far more than they needed, they exported it either directly to Europe or by buying bills payable in London, and increased their imports. I know of no more complete illustration of the true doctrine, and of the error by which it is beclouded
There was at the same time a movement of specie to Ohio, Kentucky, and Tennessee, where there were no banks.
SUSPENSION OF 1814.
In 1814 all the banks, save the New England banks, suspended. In the year 1815 the Pennsylvania banks increased their loans $10,000,000. Business was active and prices high. The merchants agreed to the suspension if specie payments should be resumed after the war. Small coin disappeared and tickets were used. Notes were depreciated from twenty to fifty per cent Importations, especially of articles of luxury, increased. Credit was great and expanding, prices continually rising.
The Secretary of the Treasury now began to be engaged in the money-market. He tried to get the banks to come to some agreement which should bring about a uniform currency, but he failed. He then ordered that taxes should be received only in specie, Treasury notes, or notes of banks which received Treasury notes at par. The banks received them at par when they were at or above par in the market, but not otherwise. The banks which took Treasury notes issued bills for them, so that the issues of the Treasury stimulated those of the banks. The notes of the latter when issued accumulated in the banks which did not take Treasury notes, so that the Treasury received the notes of debtor banks when it would not receive those of creditor banks. At the same time, while loans increased three per cent, on capital, there was $3,000,000 less mercantile discount, the rest being on governments, and the government Treasury held bank notes instead of Treasury notes. These bank notes would not pass thirty miles from the place at which they were issued. The paper prosperity was now in full tide (1815). Gouge quotes a pamphlet of Mr. Matthew Carey, in which he called this the “ golden age” of Philadelphia.
The ideas about money and currency which had prevailed in England in 1810 and 1811 now appeared here, as they always appear where paper money is in use. It was said that silver had risen (though the Pennsylvania Senate Committee say this notion was abandoned by the end of 1815), and that a dollar was an ideal unit. Dr. Bollman proposed a scheme for a National Bank to issue notes redeemable in six per cent. government stock, which would keep them from depreciation and tie them to a fixed value. State banks were to issue notes and redeem them in this paper. Carey said it was a “ magnificent” plan.
Madison recommended another national bank, but vetoed the first bill:—for a specie bank, as not adapted to the currency. Peace was ratified in February, 1815, and the Conservatives now held that a national bank was necessary to hold the State banks in check. They did not want it to begin under a suspension. A second charter was passed. The capital was to be $35,000,000.
There were immense importations in this year. The English merchants exported enormously* after peace was declared, anticipating demand. These goods were forced to sale here as well as elsewhere. The prices proved unremunerative to the foreign owners, and also ruinous to the injudicious enterprises which, having been undertaken here under the protection of war, had taken permanent form. These were by no means so numerous or extensive as is sometimes asserted and generally believed, but there were such. This brought us the boon of our first strong protective tariff, though the average duties were only about thirty per cent, on dutiable. The principle of protection had been adopted in 1789, and the rates of duty, very low at first, had been steadily increased by successive enactments. The tariff of 1816 was avowedly carried as a realization of the “ American system,” but afterwards it came to be referred to, in the retrospect, as a British free-trade tariff.
The great importations gave the government a large surplus revenue. It had $22,000,000 nominal balance in the Treasury, but it consisted of bank-notes which could only circulate in a small district around their place of issue, and the places where the government was creditor and held the notes were not the places where it wanted to pay its floating debt. New seven per cent, notes were issued to pay the quarterly interest, and, to pay the interest at Boston, January 1, 1817, the government was obliged to borrow $500,000 of the United States Bank before it opened. Banks which were government depositories refused to pay government drafts, save for current expenses, and they controlled other banks because they held government deposits in the bills of the latter.
SECOND UNITED STATES BANK.
On January Ist, 1817, the Second United States Bank opened. By the charter its capital was to consist of $7,000,000 government subscription, 7,000,000 specie, and $21,000,000 government stock or specie. It began business with $1,400,000 in specie, $14,000,000 in stocks, and the rest in stock notes. $2,800,000 were soon due on the second instalment, but this would come for the most part from notes or discounts of the bank itself. Only $32,400 of it were paid in specie. The third instalment was still worse. The bank discounted its own stock at par to enable the instalment to be paid. “ The discounts, the payment of the second instalment, the payment of price to the owner, the transfer, and the pledge of the stock were, as it was termed, simultaneous operations.” In August, 1817, the bank discounted its own stock at 125. The facilities for stock-jobbing were excellent, and they were used.
Congress resolved that after February 20th, 1817, only specie, Treasury notes, and notes of specie-paying banks ought to be taken by the national Treasury. The banks refused to resume before July, 1817. New York passed a law imposing twelve per cent. interest on notes not redeemed, and the banks finally agreed to resume on February 20th, if the United States Bank would extend its discounts as they contracted. This was agreed to. The bank allowed $30,000,000 discounts the first year, and the Committee of the Pennsylvania Senate say that it more than made up for the contraction of the State banks, and that the resumption was only nominal.
The Western banks were still comparatively sound, silver being at six per cent. premium there, and fourteen per cent. in Philadelphia. The Southern banks had joined the inflation. There were fourteen banks in Virginia, North and South Carolina, and Georgia, in 1814, and twenty-three in 1815.
In 1817 a case at Richmond, after specie payments were resumed, gives an insight into the state of things. A man having presented ten one-hundred-dollar notes for redemption was refused. He could not get a lawyer to take a case against the bank for a long time. Finally, having obtained judgment, the sheriff was sent to collect. The president of the bank was taken before the court, but refused to pay. The bank was closed by the sheriff, but soon after opened and went on.
The inflation during this year was increased by the government paying off eleven millions of the public securities held by the bank. The note circulation at this time is estimated at one hundred millions. It is to be noticed that the banks were as recalcitrant about giving statistics, either to the Secretary of the Treasury or private investigators, as about any of their other duties, so that we have no trustworthy statistics.
CONDITION OF THE UNITED STATES BANK.
In March, 1818, the discounts of the United States Bank were forty-three millions, eleven millions on stock. The notes could not be signed fast enough. It had two millions in specie. Our knowledge of its affairs at this time is derived from the report of Mr. Cheeves, who became its president during this year, and three years afterwards delivered a report stating how he found the bank, and what he did to save it. It now had eighteen branches, but never over $3,000,000 specie in them all. Its operations in the West drew that region into the prevailing mania. Its branches paid out their own notes and held those of the State banks as far as possible. They redeemed their own notes by drafts on the East. They thus obtained the specie of those States, and the States had credits at New York for the value of the same, which they used for enlarged purchases. The West therefore now entered on the “ golden age.” There were forty-three banks in Kentucky, ten in Tennessee, and eight in Ohio in 1818.
The bank now bought seven millions bullion in the West Indies at a cost of $800,000 expenses. It was exported as fast as it was imported. In April, 1818, fifteen months after the bank started, it was doubtful whether it was solvent. Energetic measures of contraction were adopted. It was ordered that discounts be reduced by November 1st, $2,000,000 at Baltimore, $2,000,000 at Philadelphia, $700,000 at Richmond, $500,000 at Norfolk. $4,500,000 contraction was accomplished, but more was urged, as silver was yet at ten per cent. premium.
The parent bank refused the notes of its branches, and they of each other, and called on the State banks to pay balances in specie. It was proposed that the government should issue Treasury notes, and a meeting was held at Philadelphia, Mr. Carey in the chair, which appointed a committee to petition Congress to pass a law forbidding the exportation of specie. The committee refused to serve.
In November, Congress appointed a committee of investigation, which reported a resolution that a scire facias should issue for the forfeiture of the charter of the United States Bank. This was lost, forty members of Congress being stockholders. John Randolph said a man might as well go to Constantinople and preach Christianity, as to go to Congress and preach against banks.
Mr. Cheeves now became President, vice Mr. Wm. Jones. The total contraction this year was six millions, all in the North and East. The issues in the South and West were increasing.
On April 1, 1819, the state of the bank was: specie, $126,745.28; notes, $6,000,000; due other banks, $79,125.99; due government, $500,000; due Barings, $900,000. There were $267,978.09, in the mint, and $250,000 specie on the way from the West. The New York and Boston branches were in worse condition. The Baltimore branch had given $3,000,000 discounts, of which the parent bank had no knowledge, apparently from corrupt motives. $1,671,221, were lost there. The total losses to date were $3,500,000. Dividends for $4,410,000 had been paid, of which $1,348,553 had been gained by interest on public securities. Net loss over $500,-ooo. The bank now took the most energetic measures to save itself, and in seventy days was once more solvent, but it had ruined the community. The “ golden age” was now far in the past, and was seen to be only a gilt-paper age after all. The ruin was almost universal.
CRISIS OF 1819.
In August, 1819, 20,000 persons were seeking employment in Philadelphia, and there was a similar state of things in New York and Baltimore. Thirty trades which employed 9,672 persons in 1816, at Philadelphia, employed only 2,137 in 1819. Trades which employed 1,960 persons, at Pittsburg, in 1815, employed only 672 in 1819. The papers were filled with advertisements of sheriff's sales.
All this was used as an argument then, and has been so used since, to prove that we needed “ protection to American industry.”
The committee of the Senate of Pennsylvania, already referred to, ascribed the distress to abuses of banking, and a similar committee of the House traced it back to the expansion of banking in 1814. “ In consequence of this most destructive measure, the inclination of a large part of the people, created by past prosperity, to live by speculation and not by labor, was greatly increased. A spirit in all respects akin to gambling prevailed. A fictitious value was given to all kinds of property. Specie was driven from circulation as if by common consent, and all efforts to restore society to its natural condition were treated with undisguised contempt.”
Niles' Register, quoted by Gouge, says of the prevailing extravagance: “ The prodigality and waste of some of these [speculators] were almost beyond belief. We have heard that the furniture of a single parlor possessed (we cannot say owned) by one of these cost $40,000. So it was in all the great cities—dash—dash— dash—vendors of tape and bobbins transformed into persons of high blood, and the sons of respectable citizens converted into knaves of rank— through speculation and the facilities of the abominable paper-money system.”
Land in Pennsylvania was worth on the average, in 1809, $38 per acre; in 1815, $150; in 1819, $35. The note circulation of the country in 1812 was about 45,000,000; in 1817, 100,000,000; in 1819, 45,000,000.
The newspapers of 1819 contain numerous accounts of riots, incendiary fires, frauds, and robberies. The House committee spoke of the “ change of the moral character of many of our citizens by the presence of distress.” The distress extended to New England, but was less severe there than elsewhere. In the West it was intense. In Kentucky stay laws were passed which were distinctly unconstitutional, but, the court having so decided them, a new court was appointed which reversed the decision. Old Court and New Court became political issues. The New Court party carried the State until 1826, when the disorganization and misery occasioned by the laws led to a revulsion, and the laws were set aside. Similar laws were passed in Tennessee, Gen. Jackson vigorously opposing. The banks of the South pretended to pay specie, but Gouge quotes an eye-witness in regard to the proceedings of the Darien Bank, Georgia. One who presented a bill must make oath in the bank before a justice of the peace that the bill was his own, and that he was not an agent for any one. He must also make this oath before the cashier and five directors, and must pay $1.37½ on each bill. The United States Bank protested $500 of the bills of the Bank ol Georgia, and sold them at auction. When specie was demanded, cents were counted out at the rate of $60.00 per day.
Stagnation and distress lasted throughout 1820. Prices were at the lowest ebb and liquidation went slowly on. Wheat was at 20 cts. per bushel in Kentucky. A man in Western Virginia stopped Niles' Register because one barrel of flour used to pay a year's subscription; now three barrels would not. At Pittsburg flour was $1 per barrel, boards 20 cts. per hundred, sheep $1. Imported goods were at old prices. The banks settled down to quiet regularity. Notes were for the most part brokers' merchandise, but others circulated at a discount only equal to the cost of transporting specie from the place of issue to the place of circulation. Money was plentiful in the hands of those who had no debts to pay, where of course it must settle whenever the social machinery comes to a stand-still. They would not lend or invest, though the papers were filled with advertisements. Rent of a given house in Philadelphia fell from $1200 to $450, fuel from $12 to $5.50, flour from $10.00 to $4.50, beef from 25 cents to 8 cents per Ib. Printing was little done. School-books were a drug. Niles says that five years before, stores on Market Street were cut in two and then not enough. Dwelling-houses were in great demand. The stores were now reunited, and houses more than enough. The population of Baltimore decreased 10,000 between 1815 and 1820. Rents on Market Street were $250,000 less in 1820 than in 1815. Wages were low on half time.
In 1820 Virginia forbade notes under $5.
During 1821 the general stagnation continued. Liquidation went on slowly. Investments were only gradually taken up as confidence revived. In April of that year Kentucky notes exchanged for silver 210 for 100. Tennessee notes were at 10 per cent, discount until 1830. Comptroller's warrants were issued in Alabama, which, in order to make them more attractive, were printed on silk paper.
In June an expansion began, and by October there was a well-marked upward movement, but in the fall of 1822 there was a reaction, woollen and cotton goods falling 50 per cent. in a few weeks in December. In 1823 the circulation of the United States Bank was very low—$4,081, 842, but there was a great creation of banks, and insurance and other companies at New York. Later in the year the United States Bank received the notes of all its branches, and began to expand.
CRISIS OF 1825.
In 1824 all the banks expanded. Pennsylvania re-chartered the banks of 1814. A new tariff was obtained raising duties to 35 per cent., and a grand era of prosperity was expected. In the spring of 1825 fifty-two charters were petitioned for in New York for banks and insurance companies. When charters could not be obtained o: New York, they were obtained in New Jersey, and the banks were established on the west bank of the Hudson. In Kentucky there was anarchy. Alabama and Tennessee notes were at a discount. Indiana, Illinois, and Missouri were still suffering from the “ relief” system (stay laws against the collection of debts, etc.). The New York and Boston city banks were fighting the country issues, which, being current and depreciated, drove out the better notes of the city banks. The Bank of the United States increased its issues over 3,000,000.
In the meantime business was reviving in England, manufactures especially being very prosperous, and creating a great demand for raw materials.* Heavy orders for cotton ran its price up here to 27 cents. Corn was pulled up to plant cotton, and an active speculation in it began. The excess of exports over imports of specie in 1825 were $2,646,290. The excess of exports over imports of merchandise were $549,-023. In July the fall in prices in England brought a fall here. Fifty failures took place in New York before December. Banks failed in large numbers. The United States Bank was in trouble. The government wanted to pay off seven millions through the bank, but delayed this operation at the request of the latter, giving occasion to one of Jackson's subsequent charges against it. When it was done the bank became debtor to the State banks and could not redeem its notes, explaining that bills drawn to pay English troops in Canada and for the formation of a bank in New Orleans had shortened specie supplies. It will be observed that the outflow of specie must always take place in that form which at the moment gives greatest profit, though the cause is always the same, and the usage is to explain the cause by the form of the export. The causes mentioned could have had no effect whatever unless there had been overissues.
In 1826 there was dulness and reaction throughout the year. The cotton crop was poor. There were applications for charters for 123 banks and insurance companies in New York, which were refused. In April, 1826, ten or twelve failed and a run followed; but the banks held out. In this year the importations of merchandise exceeded the exportations by $5,202,722; the importations of specie exceeded the exportations by $2,176,433. The method of importation was to buy bills, get long credit for duties, and send the cargos, as soon as received, to auction. The auctioneer's notes were discounted, new bills bought, and the transaction repeated as long as rising prices and easy credit made it possible.
The crisis of 1825 was by no means so great in this country as in England. The country was not yet recovered from the convulsion of 1819. The Western States especially had, as yet, not escaped from the effects of that crisis. The speculation here was led off by the excitement in England, especially in cotton. The joint-stock-company mania seems also to have broken out here by contagion or sympathy. The banks, instead of applying any check to the unhealthy movement, or using any conservative measures, joined freely in the excitement. The crisis was not a bank crisis. Suspensions were not in fashion, and the few banks which did suspend failed. The prudent refusal of the New York legislature to grant the charters asked for during the last two years was amply justified.
In 1827 money was plentiful. In 1828 it was plentiful until May, when there was great scarcity, renewed in September. In May, 1828, the highest protective tariff before 1864 was passed. The percentage of duties on total imports in 1830 was 30.93, and on dutiable, 47.46. In 1829 money was scarce until July, when it became plentiful. President Jackson opened the attack on the United States Bank in his first message in December of that year. In 1830 money was plentiful. An English writer of the period speaks of specie as flowing to America from all parts of the world, and Niles' Register quotes a contemporary as complaining of the over-abundance of silver, and wishing some gulf might open to swallow it. The Bank of the United States increased its loans. During 1831 it continued this movement, increasing its loans from forty to sixty millions, as President Jackson charged, in order to manufacture popularity. In October, 1831, the money-market became stringent. In 1832 the United States Bank still further extended its discounts to seventy millions.
INVESTMENTS OF FOREIGN CAPITAL.
About the year 1830 American securities began to attract English investments. Some stock of the United States Bank had been held by foreigners from still earlier date, but large transfers of it occurred late in the twenties. State and canal stocks were also sold abroad in 1828–1832. The opportunities for remunerative investment of capital in this country waited only for improved transportation to present themselves. Canals were the first movement in this direction, and steamboats the next; but, in the decade from 1830 to 1840, railroads being introduced, the industrial development of the country went on with gigantic strides. At the same time the old restrictive system was partially broken down, first by the freeing of some raw materials in England under Mr. Huskisson's administration, then by the modification of the Navigation Acts, extorted from England by Prussia in 1825, by which the trade with the British West Indies was opened—an advantage which did not accrue to the United States, on account of diplomatic mistakes (this country claiming as a right what was offered as a privilege) until 1830, and thirdly by our lame compromise tariff.
The interesting period whose history we have next to pursue, cannot be understood if observed from a narrow standpoint, and interpreted by subordinate incidents. The introduction of the new means of intercourse produced a development of industry so great as to amount to a revolution, so sudden as to create a convulsion. It required for its guidance, above all, financial skill; for it caused a strain upon the existing capital of society beyond what it was able to bear. This led to the usual resort to credit, and to credit in its most explosive forms, bank discounts and paper currency. The downfall at the end of the decade was the result of too headlong a career of prosperity, or of the intoxication which comes to men when they find themselves in control of undreamed-of powers of production. The two greatest commercial nations, England and the United States, were naturally the first to avail themselves of the new inventions, and they felt the crisis the most severely. They were tied together by the capital loaned by the elder to the younger nation. Some asserted at the time that specie currency would hold the two together, and render every circumstance of the one important to the other; others affirmed the same of paper currency. Neither party was on the right track. Evidently the bond which bound them was the credit extended to America by England, and the crisis in either country cannot be understood without reference to the events and movements in the other.
CURRENCY AND TARIFF AS POLITICAL ISSUES.
Unfortunately during this period—the period in which financial and fiscal questions were studied and understood by the American people better than at any other time in our history—those questions were made issues in party politics. I see no reason why they should not be political issues. Indeed, I am convinced that such questions never will be settled until they become political issues. But the reason why the struggles of the thirties proved so fruitless in the end was that parties did not divide according to intelligent conviction in regard to tariff and hard-money, but parties already formed took sides on these questions. President Jackson, elected as much for military prestige as anything, had imbibed from what he had seen of paper money in Tennessee and Kentucky a fierce, but not too intelligent, detestation of it. He committed his friends and the democratic party to hard money. Thus thousands of men who were democrats on previous issues became hard-money men without knowing why. Mr. Clay committed himself to protection without any thorough knowledge or true conviction of the principles involved. He carried the Whig party (proper exceptions being understood) into the support of protection. Mr. Webster, originally free trader and hard-money man by the convictions of a sober and clear reason, gave his support to protection because Massachusetts had been turned from a commercial into a manufacturing State, and, as he thought, could not go back. He advocated the bank originally for the purpose of checking paper issues by hundreds of petty banks. In the party contest he found himself committed to the bank so far that he could not draw back even if he wished. Mr. Calhoun, a protectionist in 1816, when it was thought that cotton needed protection, turned free trader when the South came to bear the burden of protection without any benefit. Thus it appeared to be a mere question of interest. If Thomas H. Benton's story is correct, the compromise tariff of 1833 was made to save Mr. Calhoun from a trial for treason, and to enable Mr. Clay to retire from a position from which he found it impossible to advance on account of his enemies, or to retreat on account of his friends. Looking at the history of these three men, one is forced to believe, that if any one of them had been less politic and more honest to his convictions, he might have been far more successful. It remains yet for some statesman to show that the. commonplaces about “ yielding to circumstances” and “ doing what you can” are only a petty wisdom; that, so far from being the grand principles of politics in a republic, the latter is just the place for that man to succeed who, by showing that he understands himself, and knows whither he wants to go, proves to the mass that he is fit to lead. The time must come when the people will learn that to rule by the small men is the most expensive and ruinous of all methods of government. History will, moreover, set its verdict upon the position of the South in 1832, selling their product in a free market and buying their manufactures in one loaded by obstructive taxation; that, although the means they employed were unlawful, and their conversion to free trade was due to self-interest, yet their grievance was great and their protest was just. Probably this will come about when the farmers of the West, who have inherited the grievance of the South, shall have learned, as they will learn, what it is which really afflicts them, and shall have broken the system to pieces. The history we have now to follow will show that when existing political organizations take up scientific questions as party capital, they use them only to support ambition, and the questions reach no satisfactory or permanent solutions. It is a vital question for the republic whether parties shall form and reform around issues as they arise, or whether the issues shall arise under and inside of permanent party organizations.
WAR BETWEEN THE ADMINISTRATION AND
THE UNITED STATES BANK.
In 1832 the bank petitioned for a renewal of its charter which was to expire in 1836. In speaking in favor of a renewal, Mr. Webster said:
“ A disordered currency is one of the greatest political evils. It undermines the virtues necessary for the support of the social system, and encourages propensities destructive to its happiness. It wars against industry, frugality, and economy, and it fosters the evil spirits of extravagance and speculation. Of all the contrivances for cheating the laboring classes of mankind, none has been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man's field by the sweat of the poor man's brow. Ordinary tyranny, oppression, excessive taxation, these bear lightly on the happiness of the mass of the community, compared with fraudulent currencies and the robberies committed by depreciated paper. Our own history has recorded for our instruction enough, and more than enough, of the demoralizing tendency, the injustice, and the intolerable oppression on the virtuous and well disposed, of a degraded paper currency, authorized by law, or any way countenanced by government.”
The bill passed both Houses, and was vetoed by the President on the 10th July. It being now evident that the bank must expire unless some influence could be brought to bear to change the President or win two-thirds of Congress, a violent warfare was begun by the bank. The power of its interest at the time is attested by any amount of evidence. Mr. Wm. Gouge published his work on the History of Paper Money in 1833, in which he bears the strongest testimony to the power of the bank corporations throughout the country. The expressions used now in the West in regard to railroad corporations are not stronger than those used by many writers at the period under review in regard to “ banking”—by which they meant the issue and loan of notes nominally convertible but really inconvertible, and thus subject, in their ex pansions and contractions, to nothing but the will of the bankers themselves. It is certain that the banks paid no more heed to the laws of the State than they did to the laws of prudence or of banking science, and that they paid very little heed to either. This veto was the cause of some genuine anxiety and of some manufactured fears in regard to the business future, and played a prominent part in the political canvass of 1832. Jackson defeated Clay, the latter representing bank, tariff, and internal improvements, by 288 to 49 in the electoral college.
The President, in his message in December, 1832, recommended the sale of the seven millions stock of the United States Bank which was owned by the nation, and the appointment of a committee to investigate its affairs. Bank shares fell from 112 to 104, but on a favorable report by the Treasury agent they recovered to 112. This report showed over seventy-nine millions assets; liabilities, thirty-seven millions; leaving forty-two millions: thirty-five millions capital, and seven millions surplus. But when the Government desired to pay the three per cents., in July, 1832, the bank agreed to pay the interest on them until October, if the payment might be delayed so long. It then negotiated a loan of five millions from Barings to make the payments of drafts on government deposits held by it, which would be made to carry out the payment of this stock. The reason given for negotiating this loan was fear of cholera. These operations raised questions of the safety of the public deposits, but the Committee of Ways and Means (Polk dissenting) offered a resolution that the deposits were safe. It was passed, 109 1046. The motion to sell out the public shares was lost, 102 to 91, through the influence of the bank, which, as was afterwards discovered, had a large number of debtors, attorneys, and stockholders in the House.
THE COMPROMISE TARIFF.
In 1833 was passed the compromise tariff, by which duties were reduced gradually to 20 per cent, in 1842. This tariff was deceptive and complicated. It had no principle of economic science at its root—neither protection nor free trade. It was patched up as a concession, although it really made very little, and its provisions were so intricate and contradictory that it produced little revenue. Specific duties were unaffected by it, and these included books, paper, glass, and sugar. It did not run its course without important modifications in favor of protection, for it could not bind future Congresses, and the doctrine of the horizontal rate of 20 per cent.—a doctrine which has no scientific basis—produced an increase on many articles. It raised the cost of cheap woollens, much worn, and, as it did not provide for any other source of revenue, it was certain that it could not last. It was a compromise between Clay and Calhoun only, but it gave Calhoun the chance to say, as he did often, that the warlike attitude of South Carolina, in 1832, coerced national legislation. It taught Southerners to believe that a warlike attitude was all which was necessary; and the violation of the act in 1842 was used with immense force to justify the repeal of the Missouri Compromise. It would lead me away from any present subject to unravel the effects of the tariff, but I insist strenuously upon this, that the political and financial history of the country are interwoven throughout, and that neither the currency nor the tariff nor the politics can be satisfactorily treated, save as a whole. Take the statistics, and review them in view of the tariff only, and your inferences are vitiated by the currency. Take the same data, and look at the currency only, and you go astray because you neglect the tariff. Neglect the political intrigues which wove the two together, and you cannot explain the motives of legislation. You argue from the authority of common conviction, when the true explanation is log-rolling.
REMOVAL OF THE DEPOSITS.
After Congress adjourned, September 22, 1833, the President ordered Mr. Duane, the Secretary of the Treasury, to remove the public deposits from the United States Bank. He refused to do so, and was displaced by Mr. Taney, who did it. The order was that collectors should send no more money to the bank, but to authorized depositories, to be chosen amongst the State banks. There was no positive and sudden transfer of the amount in bank, but it was proposed to draw for it at the proper intervals.
The war was now in full blaze. The bank had circulated documents during the canvass of the previous year, showing its services and merits. Against this proceeding I see no valid objection. The documents were “ political,” because the question of the bank's existence had become political. It was justified in defending itself. But in August, 1833, it altered its policy. It rapidly contracted its loans, giving as a reason the necessity of providing for the transfer of the deposits, a reason which the facts did not warrant.
On the assembling of Congress, December, 1833, the message announced the step taken, giving as grounds the misconduct of the bank in attempting to control the election, and the unsoundness of the institution. The President also charged the bank with now creating an artificial stringency in order to make itself appear necessary to the community. The bank question occupied a great part of the session. Mr. Clay attacked the President for removing the Secretary. The Senate resolved (28 to 18) that the reasons for removing the deposits were unsatisfactory, and that the President had usurped unconstitutional power over the Treasury by removing the Secretary. The House never noticed the resolution, but resolved (134 to 82) that the bank ought not to be rechartered nor the deposits restored.
DISTRESS OF 1834.
The recharter of the bank being now definitely refused, a number of small banks were organized to take its place. But before they could get into operation the contraction of the bank had time to operate upon the market. Many deputations came up to Congress to complain of distress, and many memorials were sent up. The excitement was great throughout the country. It was asserted, however, on the other side, that all this distress was manufactured by the bank interest, in order to gain a recharter, and that loans were refused to some and granted freely to others, who used them to charge usurious. rates. Benton asserts that two cases were discovered, one in which a broker received $1,100,000 to use in this way, for which he charged 2½ per cent, per month. Prices did fall very slightly in 1834 as compared with 1833, taking them over 80 articles, but some advanced, and the fall on none was great.
The aggregate amount of loans and of circulation in the country increased steadily all these years. * I have not been able to find any statement of the loans of 1833, but the circulation, even of the United States Bank, was not contracted in 1834, and, taking the whole number of banks, there was an increase. The business of the country was increasing quite as rapidly, and it is impossible to ascribe the fluctuations of prices to the sole action of the currency. The fears, real or manufactured, of a crisis on the winding up of the national bank, account for the decline which took place.
CHANGES IN THE COINAGE.
By the law of 1789 the exchange of sovereigns (20/21 of a guinea) for American coin was fixed at $4.44 4/9. It is not known how this ratio was determined. The old exchange of a Mexican dollar was 4s. 6d. sterling, but Gallatin says that there was no specimen of that coin which was worth this estimate. The coinage law under which coins were first struck in 1794 and 1795 fixed the ratio of gold to silver at i to 15, the silver dollar being 416 grains, 371.25 grains pure, and the gold dollar 27.0 grains, 24.75 grains pure, the alloy counting for nothing. The actual rate of gold to silver was at that time different in different countries, but in England it was 15.2 to I. Gold was therefore underrated in the coinage, and it was easier for a debtor to get silver to the amount of one dollar than gold to the amount of one dollar. Silver accordingly became the real measure used, and gold bore a premium.
The contents of a sovereign are 113.001 grains (full weight 123.274), supposing it to be up to standard, 916⅔ in the 1000 fine. Our mint, in 1839 and again in 1863, declared it to assay only 916.5 in the 1000. At the ratio of 15.2 to i, 371.25 grs. pure silver would be equal to 24.424 grs. pure gold, and a sovereign would be worth $4.626 of American silver. In American gold the same coin would be worth $4.565. In 1831 Gallatin took 15.6 to i as the existing ratio in England, at which rate a sovereign was worth $4.75 in our silver. The difference between the coinage rating and the true value of the metals was thus greater in 1830 than in 1795, and gold was at a premium, on the average, in 1830, of five per cent, selling price.
The figures above given show the par of the coins grain for grain, but coins are worth more than bullion, being manufactured, that is, an ounce of gold in coin must buy more goods than an ounce of gold in bullion. The difference is the cost of manufacture. Gallatin says that it took two months to coin bullion left at the mint, which involved a loss of one per cent, interest. There was no seigniorage or charge for coining. In England there was no seigniorage, and the loss of interest was represented by the difference between the mint price of bullion, £3 17s. 10½d. per ounce, and the market price, which was then generally £3 17s. 6d., * that is, it cost 4½d. to get an ounce coined. If coins are exported they lose the value of their own coinage, and must pay that of the country to which they go. Freight and insurance must also be paid. The cost of coining here being one per cent., the cost of freight etc. one per cent, more, and the cost of English coinage a slight addition, coin could not be exported unless exchange was a fraction over two per cent, above par. When an American had to pay $4.656 to discharge one pound sterling debt, he would ship gold. He could not ship silver to profit until he had to pay $4.845 for a pound sterling. From 1795 until 1821 exchange was almost always favorable to this country. After 1821 it often ruled adverse. Gold was shipped. The following table from Senate document 290, 1st Ses. 26th Congress, shows the movement from 1824–1833, the gold and silver not having been separated before 1824 in the returns. The figures are in thousands:
|GOLD BULLION.||GOLD COIN.||SILVER BULLION.||SILVER COIN.|
|Excess of Imports.||Excess of Exports.||Excess of Imports.||Excess of Exports.||Excess of Imports.||Excess of Exports.||Excess of Imports.||Excess of Exports.|
The following table shows the amount of both metals coined in the same years, two figures being omitted:
The strong- movement of metal to this country is apparent. In great part it was a real transfer of capital. Of all the gold which came in and was coined the Secretary of the Treasury said, 1836, that not over $1,000,000 remained in the country in 1834, “and of that small amount only a very diminutive portion was in active circulation.” The fact is certain that the law of the mint gave the country a silver currency only, and that gold was exported or melted.
The par of exchange with Great Britain remained at $4.44, and this being taken as 100, exchange was quoted at 105, 106, etc.
These circumstances had attracted attention at various times, and efforts had been made to change the law. Congress, however, hesitated to touch so delicate a matter as the coinage, especially as even experts could not tell accurately what the real ratio of gold to silver was. President Jackson, being determined to introduce a specie currency, the matter was necessarily taken in hand. By an act of June 28th, 1834, the gold eagle was made to weigh 258 grs., standard .899225, that is, its pure contents were 232 grs., or 23.20 grs. to the dollar. Under this regulation silver was to gold as 16 to I. This ratio was fixed upon in a blaze of exultation about the recent discoveries of gold in North Carolina, which, though known to exist since 1801, had only been developed since 1828, and extravagant hopes were entertained of finding “a new Peru” in the mountains of Georgia and the Carolinas. It was thought by some that it would “encourage the miners” to overrate gold in the coinage. In 1837 silver and gold were both made exactly nine-tenths fine, but the pure contents of the silver dollar remained the same as before, the gross weight being reduced to 412.5 grs. The gold dollar now contained 23.22 grs. fine.
There were two different dollars after these changes, as much as before. The silver dollar remained as before, but the gold dollar was now worth less than before. The gold dollar had formerly been worth in the silver coinage $1.038, taking the true ratio to be 15.6 to I, which was asserted by the best authorities to be the true one at that time. The new gold dollar was worth, at the same ratio, in the same coin, 97.5 cts. As before no one would pay a debt with gold dollars, so now no one would pay with silver dollars. Silver went out of circulation and became the better metal to export, while, for the same reasons, gold became the better remittance this way. The only silver which could circulate here was that which was worn or clipped until it was not worth more than silver was rated at in our coinage. All the worn-down Spanish pillar pieces came here, because they had a value here higher than anywhere else in the world. While the mint was coining fine American pieces, scarcely one was to be seen in circulation. The people were obliged to use the smooth shillings, which produced a quarrel at almost every exchange as to whether you could “see the pillars,” until somebody “crossed” them, and they sank into unquestionable dimes. They were generally overrated at that.
Thus, according to the great principle which has governed our fiscal legislation down to the present time, the discovery of gold in the United States was made, as far as the intention of the legislators could do it, to render gold more expensive to the people of the United States than it had ever been before. The absurdity of attempting to influence the price of gold must, however, be plain to every one. We might as well attempt to gain time for the American people by passing a law that all clocks should lose an hour a day.
Prices of goods adjusted themselves to the new dollar. The relations of gold to silver and to goods the world over remained unaltered, and the adjustment of values by the exportation of silver and importation of gold went on in spite of all laws. The experiment cost every creditor 2.5 cts. on every dollar due, and the wrong bore immense interest when this action of the government was made a basis of argument, in the legal-tender cases, to prove that Congress had the constitutional right to issue legal-tender paper, and interfere with existing contracts, because it had already debased the coinage—that is, in the middle of the nineteenth century the United States had committed the greatest wrong charged against the tyrants of the middle ages, and one which no modern despot had dared to repeat, and therefore it had a right to perpetrate another folly which is not yet quite so thoroughly exposed.
The pound-sterling, being now reckoned in the current gold of this country, was worth $4.8665, if of full weight and standard. This dollar, 23.22 grains of pure gold, remains still the definition of “one dollar” in the United States. Other coinage laws, to be mentioned below, have never touched this. The par of exchange for the sovereign has also remained unchanged, but, as the coinage expenses must be lost by export, light coins which cannot be current in England are sent here as bullion. The mint, in 1863, reported sovereigns worth, when new, $4.8391; on the average, $4.8206. The old par $4.44, being retained, actual par was 1.09 7/10. The Chamber of Commerce of New York petitioned, in 1839, that this system of reckoning might be changed, and the exchange quoted in dollars and cents. This was never done until 1873, and January 1, 1874, the method of quoting 4.86, 4.87, etc., came into use. In 1853 the law imposed a seigniorage of one-half of one per cent for coining. The par of $4.86 is “ideal.” If the sovereign weighed and assayed up to this, the seigniorage in this country for recoining would reduce its value to $4.84. If the cost of transporation was one per cent., no sovereigns could come until they were down to $4.80. If the mint assay is to be taken, they could not come until they were worth only $4.78. For the same reasons American gold coin is worth one-half of one per cent more in coin than a? bullion. This is lost when it is shipped. Shipment costs something over one per cent. Taking these expenses all together at two per cent., if $4.866 of our coin is worth £1, no one will pay more than $4.957 for exchange before shipping. If $4.84, are worth one sovereign, coin will be shipped at $4.936, gold.
In 1873 Congress fixed the Custom House valuation of a sovereign at $4.86. By the new coinage law of the same year the seigniorage on gold is reduced to 1/5 of 1 per cent, and provision is made to pay for bullion at the least possible delay. This has greatly improved our foreign exchange relations, but the seigniorage is still too high *
WAR WITH THE BANK CONTINUED.
In the message, December, 1834, the President made known to Congress that the bank had retained dividends due the nation on its stock, to reimburse itself for a draft on the French government which it had negotiated, and which had not been honored because the treaty had not been ratified by the French Chambers. The bank was forced by suit to pay the dividends.
He also said that the bank, after contracting its loans from August, 1833, to June, 1834, had as suddenly extended them. The amount was seventeen millions. He took this as proof that the previous curtailment had been wanton and unnecessary, and placed the bank in the position of having manipulated the money-market solely to carry its own point.
In fact the bank, finding that other banks were taking its place, and that it was robbing itself without coercing the public, had changed its course.
The deposits were now put in designated banks which issued no small notes, and which kept one-third of their circulation represented by specie. Many banks bought or imported gold in order to meet this latter requirement. The general government also used its influence successfully with nearly all the States to have laws passed forbidding small notes.
The prohibition of small notes is a measure which is simple, but very important for the results it effects. The principle is that paper issues displace coin of equivalent denominations. If paper is issued for sums of $0 and above, it may be issued to the amount of the coins of that and higher denominations which the public require, and no more. If issued for $5, the paper may be increased by the amount of half-eagles, which the public formerly used, and no more. Therefore, if it is desired to use paper to a certain extent, but not to displace specie entirely, the simplest way to accomplish this is to limit the paper to a certain denomination, say $10. Then half-eagles, and pieces of $3.00, $2.50, and $i would circulate, and would form a. stock, which, in the absence of any usury law, might be drawn into bank in a crisis. At the same time, this restriction goes far to make convertibility genuine. Convertibility in the currency is like conscientiousness in a man—it has many grades, and is valuable in proportion as it is strict and pure. The prohibition of small notes does more than any other arbitrary rule to ensure convertibility. It also secures to the poor the use of a value currency for their exchanges, and to the whole community the same currency for the exchanges which are made for consumption. These principles were recognized in England in 1827, * when the notes under £5 were abolished, and President Jackson's administration sought to put them in operation here. The Scotch banks still issue £1 and £2 notes, but they manage them very conservatively, and their example furnishes no argument. They seem to be such sagacious bankers as to need no limitations; therefore they do not need this one; but when limitations are needed, this is the simplest and most efficacious.
Such were the movements up to 1835, to which the subsequent developments must be traced as their origin. The lowering of the standard caused a rise in prices. The easy credit obtained in England for stocks and securities, the low rates for money here on account of the multiplication of small banks and increase of capital devoted to banking, the actual strong and great development of the country, combined to encourage a spirit of speculation and enterprise which, in this country, have never needed urging.
To show the actual development which was in progress, it is sufficient to notice the number of miles of railroad built in these years. Railroad building was not a subject of unhealthy speculation, and the crisis did not, as it appears, stop an unnatural development in this respect, but rather checked a species of enterprise which, without it, might have gone on to produce great and healthy prosperity.
|1830.... none built. 23 in operation.|
The object on which speculation fixed especially was real estate, either in the Eastern cities or the Western States. The improved communication with the East by the Erie Canal (built in 1817–1825) had done wonders for the development of the territory bordering on the lakes. The advance in values there had been of the kind to produce a speculative mania. In 1835 the canal was enlarged and its benefits increased in a far greater ratio, but the speculative mania outstripped all reason. It did not follow, from any of the facts of the case, that mere speculative holders in the East could realize quick and solid gains from Western lands. The advantage of improved communication fell suddenly on those already settled in the West, and promised sure and steady development to those who should settle there and wait, but nothing more.
The progress of this mania is best shown by the returns of sales of public lands. (Sums in millions.)
City real estate, especially in New York and some of the Southern cities, was also a favorite subject of speculation. New York gained by the canal, becoming from that time the emporium of the country, but, according to a table given by Grosvenor, New York city real estate was assessed at 309,000,000 in 1836, and it did not again reach 300,000,000 until 1851.
The advance in the Southern cities was due to the advance in cotton, and that had its causes in England.
AFFAIRS IN ENGLAND.
After 1832 the monopoly of the Bank of England was restricted to a circle of 65 miles around London. Within that circle strong joint-stock banks were formed, on unlimited liability, to do a true banking business, discount and deposit, but without issues of notes. Beyond that limit joint-stock banks were formed, which did issue notes on the American or Scotch plan. They called it the Scotch plan, but they managed it more in the American fashion. This extension of banking fell in with the industrial development already noticed, and with a great prosperity of cotton, silk, and iron manufactures, and with a series of good crops. The natural consequences followed —rising prices of manufactures, cheap food, demand for raw materials, easy credit, and hopeful speculation. The rapid increase of capital encouraged railroad building and American investment.
The effect on cotton is the one which most interests us.
The average prices for the year 1833 were, 11½ and 13½ cents, and for 1834, 11⅓ and 13¾. For 1835 the prices were:
This was at a time when the supply was increasing both from this country and from India, but it was now certain that cotton was to be the great American staple until the abolition of corn laws in Europe. Even at this time there was a duty of 3 cents per Ib. on cotton, levied in 1790 to secure the “home market.”
It therefore appeared that the Southern cities were to see great prosperity as cotton markets, and at Mobile especially the speculation in real estate was great. To borrow Grosvenor's figures once more, real estate in Mobile was assessed as follows:
|1834 ..........||$4,000,000||............. 980|
|1835 ...........||6,000,000||............... 788|
In 1848, with 1,217 polls, the assessment was just under nine millions. The cotton culture does not require nor build up great cities.
The following table shows the bank expansion throughout this period. It is taken from Condy Raguet's “ Currency and Banking,” and the circulation of specie is added from the report of the Secretary of the Treasury, 1837. Pitkin (Statistics, pp. 450) gives specie for 1834, at 27.3 millions. Five figures are omitted in the table.
(It will be observed that the banking capital went on increasing. The banking capital of this country in 1854 was only 332 millions.)
It will be evident, from the facts already stated, that the movements of this period had their origin in a number of natural and legitimate causes. The removal of the deposits from the United States Bank gave a great stimulus to the creation of small banks, which could not go on in safety save under a strict system of convertibility. The administration thus pulled down with one hand what it built up with the other, by trying to introduce a specie currency. The bank expansion, however, was not properly a cause. It simply went along with and sustained a movement whose causes were independent. It is a very easy method of explaining mercantile and industrial movements to ascribe them entirely to expansions and contractions of the currency, but, on a currency even nominally convertible, the currency inflation does not lead off.* The mania for sudden riches gets possession of the community, and the banks fall in with, aid, and stimulate it. The blame cannot be simply thrown upon the banks for “causing” the trouble. They have a certain function to perform, and they fail to be faithful to it, and this failure takes off the legitimate check to over-speculation. Banks collect the capital of the country from the hands in which it lies idle, and transfer it to those who lack capital, but could use it to advantage. Over-speculation is speculation which outstrips the capital of the country. It is the pitfall which stands always open in a new country. The banks being thus the transfer agents through whose hands the capital passes, are the ones to know and give warring when it is used up. This they should do naturally by raising the rate of discount, and the usury law, which makes this impossible, is fairly chargeable with a large share of the mischief which is usually ascribed to bank expansions. For, the capital passing out of the bank in the form of discounts and bank-notes, the bank has no means of profiting by the increased demand for, and value of, capital save by increasing these items, that is, passing over to the most perilous forms of credit, while the public, obtaining the notes which represent capital and those which are credit, precisely in the same form, and, at first at least, on the same terms, has no warning when the line is passed.
Condy Raguet gives descriptions of ordinary bank operations in the period before us, which were reckless in the extreme, but they were nearly all devices for evading the usury law. Men who had embarked in speculations clamored for increased issues on any terms, in a manner which has become very familiar to our experience. They formed a public opinion which forbade any one to test the foundations of credit. The enhanced prices and expanded credit continually absorbed the new issues, and no depreciation occurred until a shock to credit and prices from outside causes produced a collapse. The banks suspended, escaped the results of their share of the folly, and loaned their irredeemable notes at high rates; but the public, conscious that it had been humored in its wish by the excessive issues, could not be severe with them. It is idle for either party to blame the other. They went hand-in-hand in folly.
Affairs on the other side of the water were in much the same condition. There was a new demand for capital there also. The new joint stock banks in England, and similar institutions in Belgium and France, pursued much the same course, though not to the same degree, as our banks. The note issues of the Bank of England and of the joint-stock banks were not excessive and did not increase, but the methods of banking pursued by the latter were such as to call down blame from those who had favored joint-stock banks most zealously, and the rule observed by the Bank of England at this time did not prove sound in practice.
“DISTRIBUTION” OR “DEPOSIT” OF SURPLUS
The session of 1835–6 was not marked by financial legislation, save by one plan proposed this year and carried out the next, which added a new element to the financial situation. If there is any property which is of little value, real estate or stocks, some plan is sure to be proposed for selling it to city, town, State, or nation. If the nation or any subordinate body holds any property, stocks or real estate, which is valuable, some one raises the question what to do with it? The answer is: Why do anything? If the public owns good property, why not keep it? But an intrigue for bringing about the sale is very sure to be planned by those who want to buy, or for dividing by those who want to receive. The lands owned by the general government have always been subject to such intrigues, and at the period under review many schemes were proposed for dividing them among the States, though none of them actually received shape in Congress. A still more attractive object for distribution appeared in the surplus revenue. The public debt was now nearly extinguished. It stood on the 1st January in each year as follows, in millions.*
There was a surplus in the Treasury, and it was anticipated that there would be a surplus until the compromise tariff was in full effect, of nine millions a year on the average. Mr. Clay wanted it divided. Mr. Calhoun introduced the subject. He at first wanted the Constitution amended to satisfy certain scruples of his, but soon dropped this notion. Mr. Webster favored the division. The administration opposed it, and wanted the lands surveyed and sold at $1.25 per acre, with a homestead provision for actual settlers, surplus revenue to be spent on national defences. The bill for distributing the income from lands sold to the States passed the Senate, but never came up in the House. The Senate passed a bill in 1836 for “depositing” the surplus revenue (being regarded as the part which came from land) with the States, subject to call. The plan for distribution found no chance in the House, but that for “depositing” was passed by a large majority. It was declared that the name only was changed and that the “deposits” could never be recalled, and so the event proved, but the protest was unheeded. The President unwillingly signed the bill, this being the session before the Presidential election. In his next message, December, 1836, he expressed his fears of the measure, but that whole session was agitated by schemes for distributing land and revenue, and a second “deposit” scheme for the surplus of 1837 was passed by the House as a rider on an appropriation bill. The Senate not concurring, the entire appropriation bill was lost.
Several outstanding claims of the United States for embargo damages and blockade captures against France, Spain, Portugal, Naples, and Denmark were settled at this time, and the payments were imported in specie in 1837, in furtherance of the plan for a specie currency. The coin was used in public payments, and in the first instalment of the distribution.
THE “SPECIE CIRCULAR.”
On the IIth July, 1836, the President issued the famous “Specie Circular,” by which he ordered agents for the sale of public lands to take in payment only specie. It was based on the old law of 1816, mentioned above, by which the Secretary was ordered to receive only specie, or Treasury notes, or notes of specie-paying banks. The notes of Eastern banks were carried West for a “good circulation,” and “coon-box banks” were set up in the Western States, which issued notes in easy loans to land speculators. These notes were practically inconvertible, and might be issued in any amount. The consequence was that the title to land was passing to speculators, and the Treasury was being filled with worthless paper. The best justification of this measure was, as Benton says, that ten millions of paper on its way to the Land Office was arrested by this circular.
When Congress met (December, 1836) it passed an act rescinding the specie circular, after a long and acrimonious debate. The bill was not sent to the President until the day before the close of the session, and he did not sign it, so that it did not become law. In the course of the debate there were abundant prophecies of coming trouble. Mr. Calhoun did not vote on the bill, and in giving his reasons said: “ He believed the state of the currency was almost incurably bad, so that it was very doubtful whether the highest skill and wisdom could restore it to soundness, and it was destined at no distant day to undergo an entire revolution. An explosion he considered inevitable, and so much the greater the longer it should be delayed.”
THE PENNSYLVANIA BANK OF THE UNITED
The Bank of the United States, whose charter had now expired, obtained a charter from the legislature of Pennsylvania in a section of a road bill, “by bribery, as subsequent legislative investigation proved.” It had not yet paid back the government stock or the government dividends, and it continued to reissue the notes of the old United States Bank which it received.
One effect of the changes in the coinage in 1834 had been to make gold the better remittance this way. This being the metal on which English banking was based, the movement had importance for the English banking and commercial world which silver remittances had never had. In April, 1836, the gold reserve of the Bank of England began to be lowered. This went on all summer. The speculation had also reached a point at which the rise was stayed. The Bank rate was raised to 4½ in July, and 5 in September; American bills were refused discount. Prices fell and money was withdrawn. A Parliamentary report, which criticised the joint-stock banks severely, added to the prevailing uneasiness. *
In November, 1836, the Agricultural Bank of Ireland and the Northern and Central Bank of Manchester were in difficulties which forced them to call on the Bank of England for aid. They received it on condition of winding up. This was the first blow of the crisis which convulsed Europe and America. The shock upon the London Exchange developed weakness in three houses doing large business with, and giving extended credit to, this country. † The importations here had been very rapidly increasing, and had been extraordinarily large in 1836. Taking merchandise only, the excess of imports over exports had been very large from 1831 on. The following table shows the excess of imports or exports of coin and merchandise during this period:
|Excess of Exports.||Excess of Imports.||Excess of Exports.||Excess of Imports|
Thus there had been imported, according to the statement, during the six years ending Jan. 1st, 1837, over 130,000,000 more merchandise than had been exported, and a net import of specie in the same time of over 34,000,000. The movement of the metals I reserve for another section. It is evident here that the imports had not been paid for in coin, exported either by the balance of trade or by the depreciated currency. Allowance must be made for the error in all statements of export and import due to the method of estimating them. The excess of imports contains freights and profits. American shipping at this time was steadily increasing. It increased in spite of this crisis without interruption, and it did the larger part of the American foreign trade.
The freights, therefore, added little to foreign payments.
Due allowance being made, it remains true that the imports had not been paid for in merchandise or metal. They had been balanced by securities exported—in other words, they had been bought on longer or shorter credits. It does not appear from the above figures, or from any evidence, that any considerable amount of securities was sent back during the panic; rather the contrary. Outstanding business obligations were, however, called in by English creditors.
The revulsion in England had also acted disastrously on the price of cotton. This ran for the year 1836 and the beginning of 1837 as follows:
It remained at the latter figures throughout
Nowhere had the paper-money mania raged worse than in Mississippi, where the banks operated as cotton factors, manufacturing money to carry cotton, as they needed it. In March several New Orleans houses were in trouble, and were forced to apply to the banks there for extra aid. Next the pressure was felt in New York, and by April the crisis was general throughout the country. There were one hundred failures in New York in March, and the losses were fifteen millions.
The New York and Philadelphia banks, including the Bank of the United States, made advances to the merchants to the amount of $1,500,000; the Bank of the United States loaning bonds payable in London, Paris, and Amsterdam. These bonds sold well, but at rates which made the loans cost the merchants two per cent. per month, and the United States Bank held all the best paper which was running to maturity. *
The rule of the Bullion Committee, * that banks should discount freely in the face of panic, seems to be here obeyed after a certain fashion, but the committee contemplated the loan of notes by a bank whose credit cannot fail in the wildest panic; not the loan of post notes (as these “bonds” were), on which the merchants must pay a second discount; nor the loan of notes of suspended banks, on which the merchants must suffer a loss. Their rule cannot be obeyed by banks which work up to the utmost verge of capital and credit in the best times, and have no margin for safety in a crisis. The latter can only suspend, escape all the results of a folly in which they had full share, and then loan their notes at exorbitant rates to the merchants who are yet out in the financial storm. This has been the process here in every crisis, and probably will be as long as people stand it without complaint. †
In March a meeting was held at New York, which was addressed by Mr. Webster. He ascribed the distress to the interference of the government with the currency, and to the “specie circular.” A committee of fifty was sent to Washington to ask for the rescinding of the circular. In the address to the President (Van Buren) they said: “The value of our real estate has, within the last six months, depreciated more than forty millions.” “ Within the last two months there have been more than two hundred and fifty failures.” “ A decline of twenty millions of dollars has occurred in our local stocks.” “The immense amount of merchandise in our warehouses has, within the same period, fallen in value at least thirty per cent.” “Within a few weeks not less than twenty thousand individuals, depending on their daily labor for their daily bread, have been discharged by their employers, because the means of retaining them were exhausted.” They ascribe all this, as they say, not to undue extension of mercantile enterprise, but to the attempt to substitute a metallic for a paper currency, the removal of the deposits, and the specie circular, “ which withdrew the gold and silver of the country from the channels in which it could be profitably employed.” “We therefore ask whether it is not time to interpose the paternal authority of the government, and abandon a policy which is beggaring the people.” In a subsequent meeting, at which the committee reported that they could obtain nothing from the President, a resolution was passed in which the defeat of Mr. Clay's land bill was alleged as another cause of the trouble.
In May a run began on two New York banks, of which one failed. Three banks in Buffalo failed next. The New York banks then suspended in a body May loth, a law being passed by the legislature to allow them to suspend for one year. Amongst the direct causes of suspension was the demand upon the government deposit banks for the first two instalments of the 40,000,000 surplus to be paid in specie into the State treasuries, under the deposit-distribution act. These banks having now stopped payment, the government deposits were locked up, or must be taken in depreciated notes. The other banks throughout the Union followed the example of the New York banks, the New England banks holding out longest. The notes of all the banks fell to a discount, specie disappeared, and notes of every description were issued. The New York banks began to contract in order to be ready to resume, but the actual diminution of the circulation throughout the country was very small. Nearly all the banks made money out of the suspension, and paid large dividends during the year.
Two instalments of 10,000,000 each having been paid in specie to the States, one in January and one in April, under the distribution act, and a deficit in the revenue being probable, a special session of Congress was called for September, the government still attempting to continue specie payments.
The message at the opening of the extra session proposed that the Treasury keep its own deposits (the plan afterwards adopted), and that a bankruptcy law for banks and corporations should be passed. Neither was passed. The President made known an estimated deficit of 6,000,000, and proposed to meet it by retaining the fourth instalment of the surplus to be distributed, and to issue Treasury notes to provide for immediate necessities. The third instalment had been paid on the first of June to the States in notes. As for demanding back the “ deposit,” no one spoke of it. The States were generally demanding the fourth instalment.
The Treasury notes were issued, bearing interest, and running as low as $50. As for the fourth instalment, the payment of it was put off until January 1, 1839, and then made imperative on the Treasury. When the appointed day came, however, the Treasury had a deficit and could not pay it, and it was abandoned by the States.
Some States were led by this distribution into expensive improvements and debt, others distributed it per capita, a few shillings per man, “ which was received with contempt by some, and rejected with scorn by others;” others divided it amongst the counties, and others refused it. As a measure of popularity-hunting, it failed.
We hear a great deal of wailing about the national debt, and English history is full of such lamentation, but nations go on prospering while the debt stands still, and a forty-million surplus works demoralization far and wide. Where the carcass is, there will the eagles be gathered. Recent experience shows us that, even under a great debt, when there is a surplus revenue wrung from the people by taxation, it is more likely to increase the appropriations than to lessen the debt. The project for giving back to the people money taken from the people by taxation, was opposed to all sense and reason, and the idea of distributing the proceeds of sales of public lands in largesses was unstatesmanlike to the last degree.
The distresses of 1837 were aggravated by a failure of the wheat crop. In that and the following year this country imported bread-stuffs from the Mediterranean.
MEASURES FOR RESUMPTION.
In January, 1838, several Boston banks were insolvent. The Massachusetts country banks were in bad condition. The best of them had $I in specie for $11 in circulation, and the worst (Berkshire) 1 to 25.
A meeting of bank delegates was called by the New York banks for November 27, “for the purpose of conferring on the time when specie payments may be resumed with safety, and on the measures necessary to effect that purpose.” The convention did not meet, on account of the refusal of the United States Bank.
Meantime the New York banks had been vigorously contracting to prepare for resumption. Their issues were reduced from $25,480,000, January 1, 1837, to $12,920,000, January 1, 1838. The exchanges turned and gold flowed in, the Bank of England sending £1,000,000, an act which Macleod vehemently condemns, seeing that the exchanges were adverse.*
Early in 1838 Congress passed an act to forbid the Pennsylvania Bank of the United States from using old notes of the United States Bank: penalty, on the president or agents, fine not to exceed $10,000, and imprisonment not less than one nor more than five years. Meantime, the bank, finding that it could sell its post notes in Europe, had issued more of them and made a business of it.
April 15, 1838, a convention of 143 bankers met at New York, by invitation of the New York banks, to discuss resumption. The majority wanted to resume January 1, 1839, but the New York banks were under the compulsion of State law to resume May 10, 1838. They resumed on that day, and nearly all the other banks in the Union, except those of Philadelphia, followed. Philadelphia bills were at a discount in New York, and prices were higher in Philadelphia than in New York. A balance of trade adverse to Philadelphia arose between the two cities, with a movement of specie from Philadelphia.* The New York legislature passed a bill in this year providing for securing bank-notes by a deposit of stocks.
A committee of New York merchants now gave a statement of the causes of the suspension far more correct to the facts than the one made in the first heat of excitement. “ The immediate causes which compelled the banks of the city of New York to suspend specie payments on the Ioth of May last are well known. The simultaneous withdrawing of the large public deposits, and of excessive foreign credits, combined with the great and unexpected fall in the price of the principal articles of our exports, with an import of corn and bread-stuffs, such as had never before occurred, and with the consequent inability of the country, particularly in the South-western States, to make the usual and expected remittances, did, at one and the same time, fall, principally and necessarily, on the greatest commercial emporium of the union.”
In July, 1838, the United States Bank called a convention of bankers at Philadelphia, at which it was agreed to resume August 13. The example of the banks which had resumed made it necessary for others to follow. Thus, at the end of 1838, the great majority of the banks throughout the country had resumed, at least nominally. The Bank of the United States had given as a reason for not resuming with the New York banks, that it was bound to consider its weaker brethren. All the questions between this bank and its enemies must be decided now in view of subsequent developments, which all went to show that the bank was at this time in no condition to perform its functions, but was working mischief.
REVIVAL OF BUSINESS.
During the year 1838 there had been a general revival of trade. The Bank of England rate was from 2½ to 3½ per cent. During the whole of that year. This led to increased investments in American securities. “ Bonds of all kinds issued by the Bank of the United States, by the various States in the Union, and by numerous private undertakings, were poured upon the English market, and found eager purchasers.”* This served as a further extension of credit on American debts carried over by the operations of the Bank of the United States and others from the previous crisis. It is important, as showing that besides the strenuous efforts made by Americans to pay (a fact to which there is the best testimony), and the amount lost in bankruptcy, the time for liquidating the debts of America to Europe was greatly extended.
Towards the end of the year there were symptoms of further trouble. The exchanges became adverse, and the stock of gold in the Bank of England declined until October. In that month the Bank had,£2,525,000 in bullion notes, £17,612,000; and deposits £6,734,000. In May the rate was 5 per cent.; June 20, 5½; August 1, 6; September, 6½. In the autumn the Bank of Belgium failed, and there was a run on the banks at Paris. * The Bank of England borrowed £2,500,000 of the Bank of France through Barings. After October gold began to flow into England, and the pressure subsided.
These incidents again reacted on this country. The suspension had not been followed by any great reduction of paper here, but had rather enabled the banks to go on without reducing; only at New York, where they were most exposed to the action of an adverse exchange, and where the legislature had taken prompt measures of compulsion, was there a thorough reduction.
THE BANK CRASH OF 1839.
The Bank of the United States during the year 1838 became involved in cotton speculations, assuming the troubles to be over, and buying for a rise. On the revival of business in England in that year cotton did rise, and in May, 1839, it was at 16 cents, but from that time it declined again. It was not above II cents in 1840 (September), not above 11 cents in 1841 (February), not above 9 cents in 1842 (March), and not above 8 cents in 1843 (October). It did not reach 12 cents again until February, 1847. To the bank this course of the market was ruinous. It made the utmost exertions to sustain itself by the sale of bonds in Europe, and by issuing post notes which were sold in New York and Boston at 18 to 24 per cent, discount. Several banks failed in different parts of the Union, and the struggle to sustain specie payments became very severe. Throughout the Western States, especially in Michigan and Illinois, the failures were numerous. The banks of Mississippi, which, as above stated, had become extensive dealers in cotton, of which they were carrying large quantities, were nearly all ruined, and their notes, and those of the various joint-stock companies which had issued notes, were at from 25 to 60 per cent. discount. The State of Michigan was engaged in building railroads, and was involved in debt. The roads were sold to incorporated companies at a loss of almost their entire cost. Alabama had created a debt of fifteen millions to found a banking system. This was nearly all lost. In 1838 Mississippi borrowed seven millions in bonds to found banks. This debt was repudiated.
It afterwards came out that the Bank of the United States was carrying on operations at this time for which no condemnation could be too severe. As the New York banks were staggering under the effort to avoid new suspension, which the United States Bank eagerly desired, it took the step of selling exchange in New York, and using the notes and checks obtained in order to make a run on the New York banks for specie, which it shipped to meet the exchange when it fell due. This almost incredible action is stated and described in detail by Mr. Cowperthwaite, formerly assistant cashier of the bank, in an explanatory letter to Mr. Biddle, published with other similar documents, in Nilesȧ Register, April 24, 1841. It, however, met a fit reward. The United States Bank was deeply in debt to Europe, and relied on the success of its manœuvre to meet the bills, but it drew so rapidly and recklessly that it could not send notice of the drafts, and on the 16th of September, 1839, one of its drafts was refused at Paris. It then tried to effect loans in Holland, and, failing, it applied to the Bank of England, where the rate was now 6 per cent. This Bank was itself in as severe straits as at any time in its history, but it loaned a small sum. Macleod quotes the New York Evening Post on the operations of the bank at home, showing that it owed from ten to twenty millions in New York and $800,000 in Boston. It appears that the prestige of the bank was not broken until this time, and that the question between it and its opponents was held open. On the loth of October, 1839, it closed its doors and was followed by nearly all the banks in the South and West. The New England and New York banks held out bravely, but, taking the country over, this was the real collapse of the banking system which had been growing up. 343 out of 850 banks closed entirely, and 62 partially. Of the government deposits some two millions were lost.
The second suspension lasted in Pennsylvania until January 15, 1841, being limited by statute. As soon as the Bank of the United States opened a run upon it began, and it closed finally on February 4, 1841. This led to a third suspension, and specie payments were not definitely resumed until March 18, 1842.
The London Bankers' Circular* said that four million pounds sterling of the stock of the United States Bank was held by Englishmen,£20,000 by the people of Guernsey. Its capital was a total loss, and the seven millions United States stock subscribed into the capital of the bank by the government is mentioned by the Secretary of the Treasury (Finance Report, 1872, p. 18) among the items of the debt for which no cash ever came into the Treasury, i.e., it was created for this purpose.
The speculation in Western lands and city lots burst in 1837, but the banks escaped by suspension. As will be seen by the table given above,* the currency was not greatly reduced in 1837 and 1838, and, as will be seen by the diagram opposite p. 227, prices of staple articles were arrested in their fall in 1838. The blow fell upon speculative investments, articles of luxury, and imported articles, the prices of which always feel paper inflation most. Nor was the fall of prices from 1839 to 1843 due to any forced contraction of the currency. The more correct explanation of the phenomena is that the destruction of the banking system brought with it a collapse of the industry of the country. The revulsion was so complete that it could not be arrested until industry came almost to a standstill and took a fresh start. 1841 was considered comparatively a year of prosperity, but on January 1, 1844, the banks held forty-six millions in specie against forty-four millions of circulation,† and money was easy at 3½ and 4 per cent. The year 1843 was one of the gloomiest in our industrial history. The grand promise of ten years before was now entirely obscured. Mortgaged property was passing into the possession of mortgagees. Factories were idle. Trade was dull, investments slow. All the natural advantages of the country were present unimpaired, but the haste to realize them had brought ruin which time only could repair. The year 1843 was one in which the ideal of some economists was realized. We exported forty millions more merchandise than we imported, and we imported twenty millions more specie than we exported, but the significance of these facts was simply this: we were paying up for the grand times of the years before. It was like the spendthrift living low to recover his position, and we were doing it by producing mainly for export, at prices low enough to suit the creditors. The patient being in this low state the doctors gave him another dose of protective tariff, and, as he got better, they have published the case in their almanacs ever since.
MOVEMENTS OF SPECIE, 1830–1840.
The cases we have had to deal with hitherto have presented us with the simple phenomenon of the export of the precious metals and increased importations of commodities, due to the repetition of the grossest error possible in currency—the attempt to use two kinds of circulating medium, one inferior to the other. In no other way than this can a country be “ drained of its specie,” and in no other way can a permanent and heavy “ balance of trade” against it be brought about.* It may indeed send money abroad to support armies, or to buy food, or for foreign investment, but these are arbitrary acts, not effects of the laws of trade. Their influence is also slight and temporary, for the specie tends at once to return, if it is needed, to where it was. The United States do not need to contemplate either of these contingencies.
The case now before us is different. We have here a large excess of imports over exports, a vitiated currency, and at the same time a flow of specie towards the country.
The Secretary of the Treasury speaks of the movement of specie which escapes the Custom House. He does not seem to place implicit reliance on his statistics, and it must be understood of them that they are not trustworthy, either as to goods or specie, save for general results. The fact, however, may be accepted as true, that the movement was as here shown.
There were certain arbitrary interferences with the natural movement. The banks were induced by government regulations to import specie, and the government itself caused payments this way to be made in coin at every opportunity. By altering the rating of gold to silver also it made gold a profitable remittance to this country until the metals and prices had adjusted themselves to the new arrangement. The operations of the Bank of the United States in 1839 were of a character to traverse all natural laws, and render scientific inferences extremely difficult.
None of these things, however, could have kept the specie in the country, if there had not been other causes at work.
Condy Raguet says that there were but very few small notes in the country until after the suspension of 1837. The habit of calling for specie had never been formed, and it was sternly discountenanced by public opinion. It is indeed extraordinary that, as the currency increased so rapidly, it should not have depreciated, for the fact, as shown by public documents, is that it did not depreciate more than the cost of transporting specie from the place of issue to the place of circulation; but this fact is a strong support of the opinion stated above, that the bank expansion only kept pace with the speculative expansion and rise of prices, and that the issues, although opposed to all sound rules of banking, and sure in the end to prostrate banks and dealers together, were not made faster than they were called for.
Beyond and below all these circumstances we must look for a more permanent law of the movement of the metals, and we find it in the scientific principle which these things only modify more or less. The metals move away from the country in which prices are high to the country in which prices are low, that is, they go from the countries where they have low value to the countries where they have high value. Evidently in a natural state of things there would be some things in each country (those for whose production that country has the best advantages) which would be lower in price, would be given in larger quantity for a given quantity of the precious metals, in that country than in others. The movement of metal from country to country would in that case be very slight, but whenever the average of prices in one country rose above the average in others, an outflow of specie would bring them down to the level, and whenever they fell below the average, an influx would raise them. Some argue that high prices make prosperity: others that low prices make prosperity. High and low prices are only relative terms, and in fact have no meaning when we embrace the production of the world. The true place for prices in each country to occupy is in their due relation to the general average the world over, for then each country gets the utmost possible gain from its relative advantage in those things which it can produce best. The movement of specie would therefore be, if the whole world used the metals and regulated prices by them without interference, as regular, as self-controlled, and as beneficent as the movement of the tides. This, too, is the grand fundamental reason why inconvertible paper is a suicidal folly in the country which adopts it.
In the case before us prices were unduly inflated by speculation and over-issues in nearly all the countries of Europe, as well as in this country. Hunt's Merchant's Magazine for July, 1844, gives a table of English prices showing that if the prices for fifty articles in
|1833 be taken as||.............||1,000|
|1834 would be||.............||1,099|
|1835 would be||.............||1,150|
|1836 would be||.............||1,346|
|1837 would be||.............||1,133|
This relative inflation in the countries with which our relations were closest, shielded us from the effects which must have followed if their finances had been in a sound condition.
There was one thing, however, which was dearer here than in Europe, and which therefore made this the best market for those who wanted to sell or lend it, and that was capital As has been said above, the country was new, its natural advantages undeveloped, and only just made available by improved means of commmunication. The remuneration for all sorts of investment was high. In the crisis of 1837 the crash was not in production, but in those real estate investments which were to become profitable by the results of productive labor. Even in 1837, and especially in 1838, the European investments in American securities were, as we have seen, very large in amount. When the Bank of the United States finally failed it owed in Europe over fifteen millions. Its failure, with the total loss of its capital, much of which was owned in Europe, the failure of many injudicious enterprises, and, above all, the repudiation of indebtedness by several of the States, ruined American credit abroad. Up to 1840, however, that credit had been high, and it was acknowledged that in 1837 the American merchants had generally exerted themselves to the utmost to meet their obligations. These continual loans and investments from Europe kept down the exchanges. They were transferred, as far as it was profitable to do so, in goods, for the rest, in specie, and the surplus import of merchandise and specie, was, in great part, a real transfer of capital highly advantageous to all parties concerned. The same may be said in general of that “ increasing indebtedness to Europe” which has been going on more or less ever since, and has caused so many good people great anxiety.
FINANCIAL MEASURES FROM 1840 TO 1850.
The second suspension of the United States Bank in 1839, and its operations of that year, cost it a great many of its friends. The administration of Mr. Van Buren clung to the hard-money policy, and opposed any national bank. But the fight was not yet over in fact, the few next years were full of financial legislation and of battles over bank or no bank.
In 1840 the Independent Treasury Act was passed, by which the government was to take the custody of its own funds. It was not passed without fierce opposition, especially from those who saw in the specie circular the beginning of all the woes of the country. As that had withdrawn the support of the government acceptance from the bank issues, so this would withdraw the public funds from use as banking capital. The specie circular did indeed withdraw powerful support from the bank-notes, which enjoyed credit While the government received them, which they did not possess when refused at the Treasury, but if A is a man of doubtful credit, and gains confidence by being supposed to be a friend of B, an honest man, and if B declares that he is not a friend of A, A may lose the credit he enjoyed, and be ruined; but who except A will lay the blame of that ruin on B ? The Independent Treasury Act accomplished the “divorce of bank and State,” and we, who have that battle to fight over again, can see in it only wise statesmanship.
It was proposed in England that the holders of State bonds should try to get Congress to assume the State debts as had been done in 1791.* Sydney Smith wrote a letter to Congress petitioning that this might be done, † and representing that he and other liberals had staked both their word and their money on the honor of the American Republic. After a strong contest resolutions were passed to crush any hopes of success in such an attempt. The opposition was based, not on the impropriety of the assumption of State debts by the general government, but on the necessity of resisting the dictation of foreign bankers. The foreign bankers were only trying to collect their debts, and this story, colored by tradition, still injures American credit, especially in England.
In 1841 Mr. Harrison became President, and called an extra session of Congress for May 31st of that year. This session was held under Mr. Tyler, and was marked by some of the worst legislation ever passed since the Constitution was adopted. Mr. Tyler had become a whig, though formerly a democrat. To this he owed his place on the ticket, and it soon seemed to the whigs that with President Harrison they had lost the victory, for which they had waited so long and worked so hard.
The first act of the session was the repeal of the Independent Treasury Act. Mr. Clay had proposed three other important measures for the session: a national bank, an increase of duties, and a land distribution bill. Before any of these latter could be acted on, a Bankruptcy Act was introduced by the Senator from Mississippi. This act was bargained off for the Bank Act and the Distribution Act, and the three went through together.
Benton says of the Bankrupt Act: “ It applied to all persons in debt—allowed them to commence their proceedings in the district of their own residence no matter how lately removed to it—allowed constructive notice to creditors in newspapers—declared the abolition of the debt where effects were surrendered and fraud not proved.” He says that the number of men who had failed and wanted to get clear of encumbrances for starting anew was estimated at one hundred thousand.
The Land Distribution Bill was the new form of the bill for assuming the State debts. The income from public lands (less than one and a half millions in 1846) was to be divided amongst the States to help them pay their debts ($170,000,000). It contained a proviso that if duties above 20 per cent. should ever be laid, this act should be suspended. When the tariff was passed it contained a proviso that it should not suspend the Land Distribution Act, but it was vetoed.
The Compromise Tariff had cut down the revenue from customs without providing any other resource. During its first years it had produced a surplus, but its last years, falling in with the “ hard times,” had left a deficiency. The debt increased as follows:
|Jan. 1, 1840||.....................||$5,125,077.63|
|Jan. 1, 1841||.....................||6,737,398.00|
|Jan. 1, 1842||.....................||15,028,486.37|
|July 1, 1843||.....................||27,203,450.69|
From this time it decreased until 1847.
As for the bank, President Tyler took a whim in regard to the word “ Bank.” He wanted it to be called the Fiscal Agent, or something “ fiscal.” He vetoed two bills passed for incorporating such an institution, the relations of which to the Treasury promised great mischief, if either had gone into operation.
The Treasury, being still unable to pay specie by the failure of a loan authorized at the special Session, began to pay congressmen in Treasury notes. Benton caused one of the checks to be protested in January, 1842. Specie payments were soon after resumed by the government, and did not cease until 1862.
Two tariffs having been vetoed in 1842, because they provided for the distribution of the revenue from public lands, a third was passed, which raised duties above twenty per cent., and so suspended distribution.
In 1843 the Bankruptcy Act was repealed, having been found in its operation to be worse for debtors than for creditors. The man who availed himself of it could obtain no further credit.
Thus the legislation of these years came to nothing but the new tariff, and the excitement of party contests only served to keep the country anxious, and to restrain it from entering on the new career. The government was now, however, fixed in the hard-money system, and the subtreasury system, by which it was so entirely severed from the money-market that, fortunately, the bankers and merchants could afford to laugh at the insignificance of the government on their arena. Its position was never so strong or sound as when, in this point of view, it was most ridiculous.
The nation had too much energy and too vast opportunities to long remain inactive. From 1844 on, things began to mend. Banks began to expand once more with the growth of trade. Prices advanced, and in 1846 a new tariff once more relaxed the restrictions of trade. In 1847 the failure of the crops in Europe gave a market for bread-stuffs, of which nearly 37½ million dollars' worth were exported. The total exports of that year were larger than for any preceding year, 158,000,000. The imports of specie exceeded the exports by more than 22,000,000. The abolition of the corn laws in England opened a permanent market for the surplus product of the West, and the settlement of that portion of the country took new form. As soon as the famine was felt in Ireland, its population began to apply the only true cure of the trouble—emigration— and the revolutionary struggles on the continent in the year 1848 contributed to increase emigration to this country by their failure.
The extension of railroads kept pace with the other developments, which it in turn helped to multiply.
Finally, the discovery of gold in California in 1847 added another powerful element to the industrial development of the time.
PERIOD FROM 1850–1862.
The outlook in 1850, with abundant emigration, a new empire arising on the Pacific, the prospect of becoming the granary as well as the cotton-field of the world, ship-building increasing year by year, and no cloud of war or political disturbance visible, was very flattering. The only hindrances to a speedy realization of these golden dreams were want of capital and want of technical and scientific training. Railroad building at the West must, in the nature of things, outstrip the settlement of the region. It is the chief form in which capital is applied to the settlement of the country, but evidently it is a case in which the returns from the investment cannot be immediate, and in every such case in which the supply goes ahead of the demand there is especial need of care, foresight, and judgment.
For the supply of capital there was recourse naturally to the older countries. The injury done to American credit in 1837–40 had hardly yet been healed, but in 1854 it was estimated by the Secretary of the Treasury, on reports called for by him, that there were 200,000,000 dollars worth of State, railway, and other bonds and bank-stock held abroad.* In 1857 the amount of English capital invested here was estimated at 400,000,000. While naturally turning to the older countries for supplies of capital, there has always been a certain prejudice here against foreign investors. Our “foreign indebtedness” has been a cause of serious and sincere anxiety to many, but the more we can borrow, so long as we know how to invest it productively, the better, and our credit—our power to borrow abroad—is the possession which it is most essential for us to preserve intact.
CAPITAL AND CURRENCY.
Our other resource when straitened for capital, the one to which we had betaken ourselves before, was now also employed—a multiplication of the paper representatives of capital. Capital is that portion of all the previous product of a nation which at any given time is available for new production. This will be a certain amount of tilled land, houses, buildings, stock, tools, food, clothing, roads, bridges, etc., etc., which have been made and are ready for use in producing, transporting, and exchanging new products. These things are all the product of labor, and require time for their production. Nothing but labor spent upon them can produce others, and time is required for this labor to issue in new and increased possessions. Currency only serves to distribute this capital into the proper hands for its most efficient application to new production. Banks, it must be repeated, only facilitate the transfer of capital from hands where it is idle, or is distributed in too small quantities, into hands by which it will be usefully employed, being collected in the necessary amounts. Currency, therefore, is not capital, any more than ships are freight; it is only a labor-saving machine for making easy transfers. Banks do not create wealth, they only facilitate its creation by distributing capital in the most advantageous manner. If, therefore, currency is multiplied, it is a delusion to suppose that capital is multiplied, or, if “money is plenty,” by artificial increase of its representatives, it is only like increasing the number of tickets which give a claim on a specific stock of goods—the ticket-holders would be deceived and could, in the end, only get a proportional dividend out of the stock. If banks not only lend capital but also lend “ coined credit,” some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found that they represent nothing; then “ credit breaks down,” and there must be a settlement, a liquidation, a dividend, and a new start. We do not get away from the facts at all. The real amount of capital which we possess is divided up, and we have to make up our minds that we possess only 50 or 75 per cent. of what we thought we possessed. We put smaller figures for everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begins again.
Some have wondered that we go on in this way with a grand crisis only once in twenty years, while the oldest and most prudent nations have one every ten years. The explanation no doubt is, that the future which we discount so freely honors our drafts on it. Six months’ restraint avails to set us right, and our credit creations, as anticipations of the future product of labor, become solidified. So long as we understand that we have anticipated future production, and must apply that production to make good the anticipations, we run on without very great risk, but whenever we lose our heads in the intoxication of our own achievements, look on the credit anticipations, which are only fictitious capital, as if they were real, use them as already earned, build other credit expansions upon them, do away with our value money and export it to purchase articles of luxurious consumption, then we bring a convulsion and a downfall. The mistake is then; realized, the lesson is taken to heart for a little while, but a new generation grows up which forgets or never knew the old experience, and the mistake is repeated. The relations of trade are often spoken of as a machine, and such indeed they ought to be—a complex machine, with parts so regulated that it can go on at any speed and for any length of time, without danger of anything more than an occasional and temporary derangement; but this reckless, although skilful, extension of groundless credit is more like the performance of the juggler who keeps first three, then four, then five, and so on, balls in the air at once. If he goes on continually increasing the number, it is physically certain that he will sooner or later miss one of them, and the whole will fall to the ground in confusion.
The bank expansion from 1848–1851 was as follows:
These figures are not as trustworthy as one might wish. They represent the status on January I, or as near that date as possible, and minor fluctuations are not represented. A well-defined movement, however, was apparent before 1851. The currency set towards the financial centres, country banks keeping their balances generally in New York. These balances were required in the fall, and the withdrawal of them produced con traction and stringency at that season. Weekly bank statements were not made by any banks until August 6, 1853, when the New York banks began the custom, and others gradually followed.
In 1851 there was an export of gold with unfavorable exchange, and a drain upon the banks. As no reports were published, the extent of this drain was not known, but a writer in 1857 states that it amounted to twelve millions in June and July, and that the stock remaining in the New York banks was only six millions. The consequence was a sharp contraction and great suffering, which finally caused the Secretary of the Treasury to buy bonds for the relief of the market
The same course of events, more or less marked, occurred throughout this period. Currency flowed to New York during the summer, was loaned on call (interest being paid for deposits), was withdrawn in the fall, producing contraction of loans and stringency.
It was asserted at the time that the worse the currency the more mobile it will be, and the assertion is true; but it is still more true that when the currency is unequally bad it will flow to the financial centres. Gold was being exported as a commodity all the time, but the exchanges showed the pressure of the redundant paper at New York, and caused a demand of gold for export with chronic overtrading. This was, according to the doctrines of the Bullion Report (discussed in Chapter II), a warning that the issues were excessive. The New York banks of course felt the weight of the evil. The warning came to them in actual experience, but the pressure of the country issues, which were never regulated by the exchanges at all, continued, and the metropolitan banks do not seem to have taken measures to restrain them.
The usury law, although disregarded in private practice, made it impossible for the banks to publish a usurious rate, and thus control discounts by this means. They could only exert a direct contraction on their issues and loans whenever the drain upon them made it necessary, and the pressure of this was, of course, most severe in the city itself.
STATE OF AFFAIRS IN 1853–4.
In 1853 the fears of war in Europe produced anxiety with regard to financial affairs both in England and here. The bank rate was at 5 per cent. throughout the autumn in London. Railroad building here amounted to 2,452 miles in that year. Stock speculation was unusually active throughout the winter and spring, and prices Were high. Undefined fears of the effects of a European war led to greater restraint in loans during the summer, and stocks suffered a fall. Many of the earlier speculations in exports to California had proved disastrous, and their results now accumulated. The discovery of a fraudulent issue of two millions of New York and New Haven Railroad stock was followed by similar discoveries in regard to some other stocks, and the result was a panic on the exchange,
|Jan. 1, 1854||$204,600,000||188,100,000||59,400,000|
|Jan. 1, 1855||186.900,000||190,400,000||53,900,000|
“ The prosperity which prevailed almost universally up to the middle of last year  had made our business men so confident in their own strength that all classes had expanded their engagements far beyond the protection of their own resources, and were exposed to the storm which began to gather on every side. The first great shock to credit was the discovery of the Schuyler fraud, which brought to a stand nearly all those works of internal improvement for whose successful completion a large share of public confidence was so necessary. From that moment sacrifice began... The war in Europe created more or less money pressure abroad, and capitalists there were less liberal in their investments here, at a time when their assistance would have been most acceptable.” The wheat crop was small and the cotton production lessened by the pressure of cholera. “ A worse panic began in the interior, and especially in the West and North-west. In Ohio, Indiana, Illinois, Michigan, Wisconsin, Iowa, and Missouri, and, to some extent, in the States on the south of the Ohio, a large circulation of bank-notes mostly of the free banks, had been obtained through expenditures for railroad purposes, and the general expansion of business. When the contraction began, this circulation came in rapidly, and found the banks wholly unprepared to meet it.... All the banks which held balances at the East drew for them, and borrowed to the extent of their credit besides, while between twenty and thirty, perhaps more, of institutions which were really solvent were compelled to suspend payment. A large number of private bankers were carried down in the crash, and the distress became general. During all this severe pressure in the money market, and general disturbance of public confidence, it is a cause for congratulations, that the mercantile community have stood the trial so nobly.... The reason of this may be found in the increased supply of metallic currency remaining in the country. Over one hundred millions in gold coin have been added to the circulation of the United States since the discovery of gold in California. Thus, although the rates of interest have been high for nearly eighteen months, there has been no such scarcity of money as has been felt in former periods of commercial embarrassment,... The banks have been severely tried, but those in our largest cities (with the exceptions before noticed) have mostly stood the shock unmoved.”*
CRISIS OF 1857.
In 1856 railroad building once more extended to 3,642 miles, nearly all in the Western States. The spring of 1857 being very late, and the prospect for the crops bad, many prophecies of trouble were published, but, as the season turned out well, the fears were dispelled, and scarcely any one seems to have apprehended the coming trouble. A fall in stocks, however, took place in the summer, to the great embarrassment of the large number of persons who held call loans for which they had given stock collateral. The first actual shock was the failure, on the 24th of August, of the Ohio Life and Trust Co., which had borrowed largely on call in New York, and loaned the funds where they were not immediately available. The liabilities were about seven millions. The credit of this institution had been very high, and its failure was followed by a general desire to test the foundations of credit. Such an attempt could not do otherwise than produce a general downfall.
|per ct. specie to cir.||Per ct. specie to cir. and deposits||Per ct. specie to cir.||Per ct. specie to cir. and deposits.|
|Middle States ......||37.35||11.79||37.2||11.5|
|Western States ......||21.5||15.8||18.3||13.2|
|Southern States .....||27.4||15.4||21.7||13.2|
At this period no rule seems to have governed issues save to keep one-third of the circulation in specie, and in some States even this dwindled down to one tenth or one-twelfth. Such a rule, however, is entirely fallacious, as any other arbitrary rule of reserve must be, and it proved in the time of trial that there was no strength to endure, any shock.
The New York banks expanded and contracted in 1857 as follows:
|Jan. 3, 1857.||109, 100,000||11,100,000||8,600,000||95,800,000|
|Apr. 4, 1857.||114,800,000||11,500, 000||8,800,000||97,300,000|
|July 3, 1857.||115,000,000||12,800,000||8,900,000||98,800,000|
|Aug. 8, 1857.||122,000,000||11,700, 000||8,900, 000||94,400,000|
|Aug. 29, 1857.||116,500,000||9,200,000||8,600,000||84,800,000|
|Oct. 17, 1857.||97,200, 000||7,800, 000||8,000,000||52,800,000|
|Nov. 28, 1857.||94,900, 000||24,300,000||6,500,000||79,500,000|
|Dec. 12, 1857.||96,500, 000||26,000, 000||6,300, 000||75,300,000|
The loss of the steamship “Central America” with over a million of treasure enhanced the stringency.
A large number of failures of banks and firms, especially brokers, produce dealers, and persons depending on Western collections, took place in September. Bills on the seaboard were hardly obtainable in the interior at 10 and 15 per cent. premium. On the 12th and 13th of September the banks of Philadelphia, Washington, Baltimore, and many interior towns suspended. Stocks fell 40 or 50 per cent., and 20,000 persons were thrown out of work in New York City within a fortnight. The universal demand of the banks was for relief by expansion, but the contrary course was pursued with the utmost vigor. There was indeed no room for expansion. The utmost resources had been employed in good times, and there was no reserve strength. The hoarding of currency which takes place at all such times still further enhanced the trouble.
The “panic” immediately followed, but, as was said often at the time, it broke out first inside the banks. When it was seen that no help was to be expected, and that the banks of New York and Boston were likely to suspend, there began a run on the deposits. On the 13th of October the New York banks (with one exception) suspended. They were followed in a few days by the Boston banks, and by the others who had hitherto held out, with only a few exceptions.
Exchange now fell to 100 and even to 90, and bills were not saleable. Exports almost ceased, and gold began to move this way. The increase in the stock in bank appears in the above table. The New York banks agreed to take country bills at par, interest to be charged after December 1st. The country issues, thus encouraged, formed remittances, which were redeemed by drafts against the produce which they caused to be forwarded.
The state of things was better in New Orleans than elsewhere. The banks there had been stronger than anywhere else. Of nine banks, only four suspended at all, and they only for a few days.
The Pennsylvania legislature authorized the suspension until May. In New York the Constitution forbade the legislature to authorize suspension of specie payments either directly or indirectly. The judges of the Supreme Court, however, met and agreed not to grant any in junction unless the bank was insolvent or guilty of fraud. Thus even a constitutional provision proved as ineffectual as any law had ever been— I will not say to prevent a suspension, for the suspension was inevitable, but to enforce a system of banking which would not lead to suspension, and the plan of securing circulation by pledge of stocks proved unavailing to allay a panic.
The Secretary of the Treasury interfered again in this case by purchasing bonds.
In the inquiries which were made as to the causes of the crisis, the state of the currency was generally recognized as the root of the trouble. The over-trading, over-importation, stock speculation, extravagance, etc., were generally ascribed to this, but there were some who found other causes for the crisis. One writer, after enumerating these secondary incidents as causes, gave another, as the immediate occasion, and that was —the telegraph. He thought nothing could cure the trouble permanently but a protective tariff. Others ascribed it almost entirely to the payment of interest on deposits, and some States passed laws forbidding this. The payment of interest on deposits is like every other business risk,—the man who undertakes it must measure his own ability to do it, and the lender or depositor must judge whether the person or institution to whom he lends can do what is undertaken.
The newspapers were also filled with homilies on extravagance and exhortations to “ confidence,” but the matter is, in a panic, that the confidence, so long entertained, is now recognized as unfounded. It is the force of the truth which makes the trouble, and how can it avail to try to make men still delude themselves? In general, however, the fact was recognized, that the great means of keeping the business of the country sound, so far as any thing can control haste for riches, is to keep the currency sound, and that the only way to keep the currency sound is to have it actively and actually converted into coin. Convertibility is not enough, if it is only nominal, and if no one tests its reality because public opinion frowns on such an act, or bank displeasure follows it.
The pressure passed away in the course of the winter. The liquidation was rapid, and by spring business was again in motion. The New York banks resumed on the 12th of December, and others followed gradually and informally. In the spring money was very easy, and United States Treasury notes were sold at an average of 4½ per cent. interest.
In the meantime the surplus revenue had been applied to the reduction of the public debt, which, in 1853, was 67,000,000, and in 1857 (July Ist), 29,000,000. In March, 1857, the tariff was reduced to an average of 20 per cent. on dutiable imports.
ALTERATION OF THE COINAGE.
The law of 1834, having underrated silver in the coinage, had the effects described above (page 110). In March, 1853, a law was passed,* similar to the English law of 1816, to obviate the difficulty of throwing either one or the other metal out of circulation. On this plan, silver is purposely overrated in the coinage so that it is worth more as coin than as metal. There is, therefore, a loss in exporting or melting it. The silver dollar was not altered, but it had disappeared and ceased to be a coin of the country. The fractional coins were made to weigh: 50 cts., 192 grains standard (nine-tenths fine); 25 cts., 96 grains. At the rate of 15.625 to I for silver to gold, two half dollars are worth. 9533 of a gold dollar. This fractional silver was coined by the government out of purchased metal, and not upon demand of holders of bullion. These coins were therefore made legal tender only for sums less than five dollars. It is evident that this was no depreciation of the coinage.
The reaction from the crisis of 1857 was so rapid and complete that its lesson was only partially learned. Things went on until the war very much in the old way. The state of the currency is sufficiently shown by the following table:
|Jan. 1, 1857||214,700,000||230,309,000||684,400,000||58,300,000|
|Jan. 1, 1858 ....||155,200,000||185,900,000||583,100,000||74,400,000|
|Jan. 1, 1859 ....||193,300,000||259,500,000||657,100,000||104,500,000|
|Jan. 1, 1860 ....||207,100,000||253,800,000||691,900,000||83,500,000|
|Jan. 1, 1861 ....||202,000,000||257,200,000||696,700,000||87,600,000|
|Jan. 1, 1862 ....||183,700,000||296,300,000||646,300,000||102, 100,000|
|Jan. 1, 1863 ....||238,600,000||393,600,000||648,600,000||101,200,000|
In March, 1858, Mr. Balfour, of Boston, classified the note issues of the country as follows;
|Notes for||$I||to the amount of||7,000,000|
|Notes for||2||to the amount of||4,000,000|
|Notes for||3||to the amount of||3,000,000|
|Notes for||5||to the amount of||15,000,000|
|Notes for||10||to the amount of||5,000,000|
|Notes for||20||to the amount of||13,000,000|
|Notes for||50||to the amount of||12,000,000|
|Notes for||100||to the amount of||8,000,000|
|Notes for||500||to the amount of||35,000,000|
|Notes for||1,000||to the amount of||30,000,000|
|Notes for||5,000||to the amount of||2,000,000|
THE CURRENCY AT THE OUTBREAK OF THE
No year in American history has been more prosperous than was the year 1860. The cotton crop of that year was unprecedented, reaching 4,600,000 bales. The grain crops, although not so extraordinary, were very good. After the election in November the attitude of the Southern States created great anxiety in commercial circles. Business was contracted, imports declined, and finances were arranged in anticipation of a coming storm. Foreign exchanges fell, and gold began to be imported, prices being low and imports suspended.
During the winter, the Southern members of Congress took their departure, and, after the inauguration of President Lincoln, increased revenues being required, the tariff was revised. The opposition to protection being withdrawn, this tariff revision, undertaken for revenue, was carried out in the interest of protection, and in a manner hostile to revenue, thus weakening the country at the very moment when it needed its utmost strength. This result being at once experienced, an effort was made at the extra session of Congress to secure a modification of the protective features, but without success. The country was once more embarked on the protective policy, which received an extension in the following years unexampled save by the most unenlightened nations on earth.
The opinion being circulated that the war was to be short, and that the people would not submit to taxation, the financial measures of the session were confined to the provision for 50,000,ooo of demand notes, 250,000,000 of 7 3/10 Treasury notes to run three years, and a six per cent. loan of 250,000,000 to fund the Treasury notes. A property tax was apportioned amongst the States, but part of it was repealed as impracticable, part was paid by charges for sums expended in fitting out troops, and it produced no active revenue to the general government. Its nett result was to establish the machinery which was afterwards used in collecting internal revenue.
The people were in the meantime contracting their expenses, closing up their engagements, practising economy, and in general adjusting their affairs to war circumstances in the manner which common-sense dictated. The banks were in a conservative position, and the weak ones were strengthening themselves to the utmost of their ability. The imports were small and the exports large, for, although cotton was no longer an available export, the grain crop was large and sold at good prices. The exports of merchandise exceeded the imports by 67,000,000, and the imports of specie exceeded the exports by 16,000,ooo. This movement began in November, 1860, and lasted until December, 1861. Evidently the natural laws which bring to every financial situation its own cure were here in full operation. In the fall of 1861 the government borrowed IOC,000,000 in gold of the banks, in two instalments, and 50,000,000 more in its own paper.
Such was the situation when Congress met in December, 1861. Never did any man have such an opportunity to win immortality as a financier as was now offered to Mr. Chase. The situation had at this moment few difficulties. The people were less sanguine that the war would be short than they had been in the previous summer. They had contracted their expenses to the lowest point, and production was reduced to the necessary supply for consumption. They held their disengaged capital ready to the demand of the government, if it should act with promptness and decision, and support its own credit. Nor was it the capital of the country alone which was available. War taxes must and always do trench upon income. It was the active productive power of the nation, which might be turned to war making, which was the great resource. The nation was not only willing to be taxed, but itself understood generally that only when it was being taxed could it give full credit to its own paper promises. The Congress, moreover, was ready to give to the Secretary all he asked. If he had been the minister of the Czar he could not have disposed more absolutely of the national resources. All that was needed was a firm, clear, bold policy, showing that he understood himself and the situation.
The Treasury report presented no such policy. It did not take the lead at all. It discussed government paper disparagingly, suggested a national banking system tentatively. It only showed that the nation was drifting into financial embarrassments for want of a policy. The real financial question of the day was: whether we should carry on the war on specie currency, low prices, and small imports, or on paper issues, high prices, and heavy imports. The alternative was not understood because no one distinctly comtemplated the latter course, but it was sure to be the result of drifting under no policy.
The complications with England about the Trent case came upon the reaction of disappointment at the message and report, and in December gold began to be exported. On the 17th of that month the New York banks stoutly resolved that suspension was unnecessary, but the drain upon their gold went on as follows:
From this time it began to increase again, and was 30,000,000 on March 8.
In the last days of December, 1861, all the banks suspended. This they did without any earnest attempts to avoid it, and certainly without any necessity. Instead of regarding a suspension as a calamity to be submitted to only after years of war, when the national resources should be actually exhausted (as the suspension of the Bank of England proved that it is), many looked upon it as the natural preparation for war.
This suspension greatly complicated the situation. Gold rose to a premium of one or two per cent., at which it remained until April. The 202,000,000 of bank paper, or rather the 150,000,000 in the Northern States, proved the stumbling block in the way of all sound financial measures. The influx of the precious metals in the previous year together with the supply from California, and the amount previously existing, gave 200 or 250 millions of gold in the Northern States on the 1st of December, 1861, together with 150,000,000 of bank paper, an amount amply sufficient to float government loans, or to allow 200,000,000 of government notes to be issued, if the bank-notes had been withdrawn. This specie, however, could not stay in the country, if the bank-notes remained, filling the channels of circulation, and not subject to redemption, so soon as the government made any additions.
The specie borrowed by the government from the banks, and expended, would have found its way back to the banks if unimpeded in its circulation, that is, if it had been the only currency; but, with irredeemable notes afloat and gold at a premium, this gold was withdrawn and hoarded, and only appeared again to be sold at the high premium two or three years after.
The government could not borrow more gold of the banks, having exhausted their stock, and, if it borrowed further, must take irredeemable notes which might be multiplied to any amount. This was made the great argument for the Legal Tender Act, and was another way in which the bank-notes clogged the movements of the government.
The economy of convertible paper issues is assumed and repeated by many persons who have never taken the pains to analyze that economy to see wherein it consists, and how great it is. I am not prepared to take “ total abstinence “ ground against paper issues, because I believe that they may be made useful and economical, though we have not yet learned how to do it, but whenever the account is made up of the advantage and cost to the American public of their bank issues, there will be a heavy charge on account of the loss and mischief they caused at the outbreak of the war, to say nothing of the previous losses from panics and commercial crises which they helped to bring about.
It would be tedious and unnecessary to follow here the various financial manoeuvres of the winter of 1861 and 1862. It is a simple record of temporary makeshifts alternating with one another, frittering away the credit of the government, disregarding its true resource in the patriotism of the people, and offering large profits to those who handled the government loans. Of the banks, those which clung to the old-fashioned principles of finance, disapproved of the course things were taking, and refused to participate, found themselves losing. Those which fell in with the new order of things made enormous profits.
THE LEGAL TENDER ACT.
The embarrassments of the government becoming greater and greater, the bill for an issue of legal tender notes was hastily prepared and offered in the House. Mr. E. G. Spaulding, of Buffalo,* claims to have been the author of this act, and no counter-claimant has ever arisen. The act was earnestly opposed by some of the oldest and best members of both houses, but it Was pressed as “ necessary,” and forced through with the energy and decision which, earlier in the session, so much needed to be exerted in another direction. So far as I know, Mr. Owen Lovejoy is the only man who is on record as having put his finger on the irredeemable bank-notes as the greatest evil in the situation. The bill was signed on the 25th February, 1862.
This act was passed, as the debate shows, as a temporary war measure. On the part of its advocates, Mr. Thaddeus Stevens at the head, it was urged and probably believed, that the legal tender clause would prevent depreciation and give credit to the notes.
Pelatiah Webster wrote in 1791: “The fatal error, that the credit and currency of the continental money could be kept up and supported by acts of compulsion, entered so deep into the minds of Congress, and of all departments of administration through the States, that no considerations of justice, religion, or policy, or even experience of its utter inefficacy, could eradicate it. It seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common sense, and even common safety. This ruinous principle was continued in practice for five successive years, and appeared in all shapes and forms, i. e. in tender acts, in limitations of prices, in awful and threatening declarations, in penal laws with dreadful and ruinous punishments, and in every other way that could be devised, and all executed with a relentless severity, by the highest authorities then in being, viz., by Congress, by assemblies and conventions of the States, by committees of inspection (whose powers in those days were nearly sovereign), and even by military force; and, though men of all descriptions stood trembling before this monster of force, without daring to lift a hand against it, during all this period, yet its unrestrained energy proved ever ineffectual to its purposes, but in every instance increased the evils it was designed to remedy, and destroyed the benefits it was intended to promote. At best its utmost effect was like that of water sprinkled on a blacksmith's forge, which indeed deadens the flame for a moment, but never fails to increase the heat and force of the internal fire. Many thousand families of full and easy fortune were ruined by these fatal measures, and lie in ruins to this day, without the least benefit to the country, or to the great and noble cause in which we were then engaged.
“ I do not mention these things from any pleasure I have in opening the wounds of my country, or exposing its errors, but with a hope that our fatal mistakes may be a caution and warning to future financiers, who may live and act in any country which may happen to be in circumstances similar to ours at that time.”
Here was a warning from our own history of what must be the tendency of any legal tender law, whether more or less stringent. So far from sustaining, it could only injure the credit of the paper.
The precedent of the English Bank Restriction was frequently and erroneously referred to, and inferences were drawn which were simply ignorant. The spirit of the debate was that of panic. The finances had been allowed to drift into a serious condition, and then, instead of applying, cool and calm reason to find out and correct mistakes, recourse was taken to the last and most desperate resources. The financial interests of a great nation for an indefinite future were staked upon a desperate resource, to tide over a temporary exigency. When the lessons of history were quoted they were answered by the flag and the eagle. When caution was urged in view of possible future exigencies, it was answered by prophecies of military success and denunciations of rebels. When the need of deliberation was urged, it was answered by clamor in regard to the necessities of the government. When it was said that irredeemable paper had always wrought ruin, it was answered that our resources were unlimited, and that these precedents did not make a rule for us. When it was prophesied that the paper would depreciate, and that we should not be able to retrace our steps, the prophets of evil were indignantly pointed to the “pledged faith” of the United States, and asked if they thought that would be violated. The inference that the notes must be made legal tender, because the government needed money, was never analyzed, and its fallacy never shown. The question whether it is necessary to issue legal tender notes is a question not of law, but of political economy, and political economy emphatically declares that it never can be necessary. The proposition involves an absurdity. Whatever strength a nation has is weakened by issuing legal tender notes.* One might as well say that it is necessary to open the veins of a weak man who has a heavy physical task to perform. All history shows that paper money with a forced circulation is not a temporary resource. It cannot be taken up and laid down as we choose. It is a mischief easily done but most difficult to cure.†
EFFECTS OF LEGAL TENDER ISSUES.
The notes were first issued in April, 1862. Gold began to rise and to be exported. The following table from the “ Merchants’ Magazine,” for July, 1862, shows how immediate and direct was the effect.
|GOV. PAYT'S||BANK. DEPOSITS.||SPECIE.||EXPORT SPECIE.||GOLD. PREMIUM.||EXCH. ON LONDON.|
|April 12 ..........||4.6||93.7||34.5||1.5||1¾||111¾|
|April 19 .........||12.5||95.1||34.6||.6||1¾||112|
|April 26 .........||24.7||101.8||35.2||1.1||1½||112½|
|May 3 ...........||22.7||109.6||35.1||.7||2¾||113½|
|May 10 ...........||17.1||115.5||32.2||1.5||3¼||114|
|May 17 ...........||9.8||120.0||30.2||1.0||3⅜||114|
|May 24 ..........||10. 4||122.6||30.6||.9||3½||115|
|May 31 ...........||6.8||125.4||34.3||.8||3⅝||114¾|
|June 7 ..........||6. 5||125. 5||31.2||1.6||4¼||115|
|June 14 ..........||9.8||125.6||31.1||2.0||6⅞||118|
|June 23 ..........||8. 4||126.6||31.0||3.1||7||121|
High gold and exchange stimulated exports, for high nominal prices were realized, but, as home prices advanced, and the foreign prices of export were governed by foreign circumstances, these. large returns proved fallacious, and the heavy pressure on the Western agricultural interest began, which led to an outburst, in 1873, of loud and ill-directed complaints. Heavy imports followed upon heavy exports of merchandise and gold, and the paper inflation and fictitious prosperity enabled people to pay heavy duties, large gold premium, and high exchange for the imported articles. The mills, forges, and factories were active in working for the government, while the men who ate the grain and wore the clothing were active in destroying, and not in creating capital. This, to be sure, was war. It is what war means, but it cannot bring prosperity.
One immediate effect of the Legal Tender Act was to destroy our credit abroad. Stocks were sent home for sale, and, as Bagehot shows, * Lombard Street was closed to a nation which had adopted legal tender paper money. No sales of bonds could be made in England until the war closed, and the amount of legal tender to be issued was finally fixed by facts. The loans at home were scarcely more successful. Much was said in Congress about the disgrace of “shinning “ through Wall Street to borrow money for national use, and a foolish pride of seeing the bonds quoted at par, led to such restrictions on the Secretary that he was obliged to resort to the most disadvantageous transactions with lenders, and to continue paper issues until a six per cent. bond sold at par indeed, but for a currency worth from 60 to 70 cents on the dollar. The notes he paid out to government creditors were accumulated in banks, and then deposited again in the United States Treasury at five per cent.
By August all specie had disappeared from circulation, and postage-stamps and private note-issues took its place. In July a bill was passed for issuing stamps as fractional currency, but in March, 1863, another act was passed providing for an issue of 50,000,000 in notes for fractional parts of a dollar—not legal tender. For many years the actual issue was only 30,000,000, the amount of silver fractional coins in circulation in the North, east of the Rocky Mountains, when the war broke out. In 1872 this issue was forced up to between 40 and 50,000,000, producing a redundancy and enhancing retail prices.
The Legal Tender Act provided for funding the notes in six per cent. 5–20 bonds. Very few were so funded even with money at four per cent., an instructive fact for those who now hope to fund the outstanding notes by simply allowing it to be done. However, this fixed the price of a six-per-cent. bond at par in paper, and, as the Secretary might not sell below the market price, he could not negotiate with bankers on terms which allowed them a profit. This clause was, therefore, repealed.
The interest on the bonds was payable in gold, duties being payable in gold, but the 50,000,000 of notes issued in August, 1861, and 10,000,000 in February, 1862, were receivable for all dues. They were at a premium just less than gold, for the payment of duties, and very little gold came in until these notes had all been paid in. During 1862, the government bought gold to pay interest. It was not until 1863 that the popular sales of bonds afforded a steady resource of means of payment, and the duties produced a gold income for paying interest. The advance of prices, however, had vastly increased the expenditure of the government, and the sum total of the debt is increased to an amount, which it would be idle to try to estimate, by the paper inflation.
On the 25th of February, 1863, the National Bank Act was passed, but it did not go into operation, and did not affect the situation, until two or three years afterwards.
On the 23d of March, 1863, Congress passed the 900,000,000 Loan Act, allowing the Secretary to borrow that sum in ten-forty bonds at not more than six per cent., or 400,000,000 of it in Treasury notes at not over six per cent., legal tender, redeemable in paper in three years, or 150,000,000 of it by issuing legal tender notes. All the old notes which were fundable in six per cent. bonds were called in, and exchanged for new notes not so fundable, and the Secretary was allowed to sell bonds below the market price.
Gold being at 140–150, that is, the paper dollar worth 65 or 70 cts., 75,000,000 ten-forties were taken at about par at six per cent. The Secretary was now led to try the ten-forties at 5 per cent., but the currency was not sufficiently depreciated to float them at or near par, and they were not taken. He then used his alternatives, issuing 175 millions one and two year Treasury notes. Gold rose to 200–220 or above, making the paper worth 45 or 50 cts., at which point the 5 per cent, ten-forties floated. The amount sold up to October 31st, 1865, was $172,770,100. Mr. Spaulding reckons up the paper issues which acted more or less as currency, on January 30th, 1864, at $1,125,877,034. 812,000,000 bore no interest. He disapproves of the 900,000,000 Loan Act on account of the discretion it allowed to the Secretary, and the inflation to which it led; but a policy like that of the Legal Tender Act collects errors as it advances, and those who inaugurate it should know that they can never control it, nor throw off responsibility for its ultimate consequences.
June 17th, 1864, Congress forbade time rates for gold. The effect was to enhance the premium, and, on July 2d, the law was repealed. The Legislature of New York had previously attempted to stop speculation in gold by forbidding banks to loan on bills of foreign exchange, one of the most legitimate operations in banking.
By an act of June 30, 1864, the greenbacks are not to exceed 400,000,000, and “ such additional sum, not exceeding 50,000,000, as may be temporarily required for the redemption of temporary loans.”
By successive amendments during the years 1861–1866, the tariff had been extended to cover over 1,500 different articles, and had been adjusted and readjusted, by those who had the manipulation of it, until it had established an iron-bound system of protection. The duties collected in 1865 were 54 per cent. of the dutiable imports. Such a rate was hostile to revenue. It produced 84.9 millions.*
The internal taxes had also been multiplied on what Mr. Wells aptly described as the Donny-brook Fair principle—wherever you see an article, tax it. In 1866 the receipts from internal taxes were 309.2 millions, and from customs 179,000,000.
The patriotism and devotion with which the American people recognized the necessity of taxation and submitted to it, are not surpassed in history; but their sacrifices were abused on the one hand by interested parties, so that the taxes were paid without accomplishing the object, and, on the other hand, their sacrifices were wasted by unscientific taxation.
The increase of internal taxation was made a pretext for increase of duties, but when, under Mr. Wells’ recommendations, internal taxes were gradually abolished, no reduction of duties followed. After 1870 some reductions were made, but now, in 1874, with a threatened deficit of revenue, the great need of the country is for some man to introduce thorough and comprehensive reforms in the interest of revenue—to perform the role of Sir Robert Peel in the early forties.
The people of the United States have a patriotic attachment to the “ greenback,” because they think that it “ saved the country.” A gallant Senator, who is an advocate of inflation, recently grew indignant at the opponents of paper money for reflecting on the “blood-stained green-back.” Under the contagion of the poetry, one might reply that the fear now is, lest, if the Senator has his way, the greenback may not yet also be stained with tears.
On the 31st of October, 1865, the total debt was, $2,808,549,437.50; the greenbacks issued, $428,160,569; the National Bank notes, 185,000,000; State Bank notes, 65,000,000; fractional currency, $26,057,469.20* ; total currency, $704,000,000.
CONTRACTION OR INFLATION ?
The war being ended, the financial question took this form: Shall we withdraw the paper, recover specie, reduce prices, lessen imports, and live economically until we have made up the waste and loss of war, or shall we keep the paper as money, export all our specie which has hitherto been held in anticipation of resumption, buy foreign goods with it, and go on as if nothing had happened?
Mr. McCulloch, who was now Secretary of the Treasury, proposed to contract the inflated paper, and pursue the former alternative. On the 18th of December, 1865, the House voted, 144 to 6, to authorise a contraction of 10,000,000 in the next six months, and of 4,000,000 per month after that. This operation went on until January, 1868, but, in the meantime, the National banks were going into operation, being allowed 300,000,000 of circulation, 150,000,000 apportioned by population, and 150,000,000 by banking capital, and their notes more than compensated for the greenbacks withdrawn. During the year 1867, also, war fears being laid aside, speculation had sprung up and begun to absorb the redundant paper. The turning point at which the greenback contraction met the bank-note expansion was January, 1868. On January 1, 1866, the banks stood as follows:
During the whole year 1866, there was a superabundance of currency at New York, and money ruled at 5 to 7 per cent. for the best 60 day two name paper.
January Ist, 1867, the banks stood:
In January there was a crisis in stocks, and the rate was 8 to 10 for the same paper as above. For the next six months the money market was dull and easy. In July many dry-goods firms failed, and rates were 8 to 10. August and September were easy, but in October the rate was again 10.
On the first day of January, 1868, the banks stood:
At this juncture outcries were raised against contraction by those who were engaged in the movement of expansion, though, in regular business, credit was still kept in the narrow bounds to which it had been reduced during the war, and the people at large, understanding that the Legal-Tender Act was a war measure, and expecting in good faith that resumption must follow peace, had made their arrangements accordingly. Congress forbade any further contraction, and we turned to the second of the above alternatives, which we have since consistently followed.
PAPER MONEY WITH A FIXED LIMIT.
The era of paper money on which we then entered has one peculiar feature, unprecedented, so far as I have been able to learn, in the history of paper money. Our paper money is redundant, but fixed in amount. The greenbacks stood, when Mr. McCulloch's contraction was arrested, at 356,000,000. The bank-notes were fixed at 300,000,000, but subsequently, July, 1870, 54,000,000 more were authorized. The fractional currency was fixed at 50,000,000. The bank-notes have never quite reached 350,000,000, and the fractional has never reached its limit. The withdrawal of the three-percent. compound interest notes, which had been held as bank reserves, operated as a contraction, but the allowance to the country banks to keep ⅗ of their reserves in the redemption cities operated as expansion. Allowing for these variations, the limit of legal currency was fixed, until the Fall of 1873, at 750,000,000. Nearly every nation which has ever used paper money has fixed its amount, and set limits which it has solemnly promised again and again not to pass, but such promises are vain. The intention, when they are made, is honest, but it is impossible to keep them. A man might as well jump off a precipice intending to stop half way down. It remains to be seen whether we too, when the redundancy is absorbed by high prices and excessive credit, will break over the limit, as every other nation has done, under the inevitable constraint which it then imposes,—but the phenomena thus far, are those of a redundant paper with a fixed limit.
COURSE OF THE MARKET.
To trace out its operation would require a history of the money market for the last six years. The inflation of credit which went on all over the country so soon as it was understood that specie payments were indefinitely postponed, is only imperfectly presented in the following table showing the state of the National Banks at different dates.
In 1868 the market was easy, save in March and April, when the rate varied from 8 to 12, and in October, November, and December, there being a lock-up in November, and the Western demand making itself felt. In 1869, the market was stringent throughout the year. It was declared in October, to be “worse than for eight years.” Stock speculation was active, and it was remarked that it was continually absorbing more and more currency. The redundant paper in New York was absorbed, and the state of things was realized which was to come three years later for the country at large.
The high rates of 1869 drew funds to New York for loan on stock security. The year 1870 was marked by great ease. Money flowed into New York in abundance. Rates on call were from 4 to 6, and on best paper 6 to 7½ throughout the year. The only excitement was in July and August, at the breaking out of the war in Europe.
In 1871, the demand of funds for railroad ‘ building became very marked. The market was easy until September, when it was quoted stringent, though rates were not high. This lasted during the autumn, and was ascribed to the “movement of the crops.”
In 1872, there was nothing remarkable until the crop movement began again, when the rates advanced sharply, and commercial paper could not be quoted. The Secretary of the Treasury issued 5,000,000 of the 44,000,000 withdrawn by Mr. McCulloch. His efforts to withdraw these 10 again kept the market stringent, and rates excessive, throughout the winter.
During these years large quantities of American securities were negotiated in Europe. These were very moderately estimated—for the first three-quarters of 1873—at 100.000.000.
In 1873, the farmers’ movement against the railroads impaired confidence in railroad bonds as an investment. When the crop movement began again the demand of the country banks led to a demand from the city banks upon the brokers, and precipitated a panic on the stock exchange. The failure of several large banking houses engaged in the sale of railroad bonds increased the excitement. The closing of the stock exchange, and suspension of the city banks, obliged the country banks to contract their loans, and brought the industry of the country to a standstill. There was little or no “panic” outside of New York, but it is evident that a crisis in the operation of the paper money had been reached, and that crisis involved a reduction of prices and business. As the stock exchange was the place at which the redundent currency was employed, the crisis was first developed there, by the demand for the return of the surplus. The shock, however, was transferred to the regular industries of the country. The expansion by the issue of a part of the 44,000,000 gradually restored the prices of stocks, but production was restrained, and the effect which lasts yet, and promises to last longest, is the reduction of wages.
During the crisis greenbacks were hoarded, which was thought to prove “how good they were.” If the currency consisted of clam-shells, and a crisis should come, in which it was to be feared that clam-shells might be scarce, clam-shells would be hoarded; much more if there was fear that the next currency might be pebbles.
Studying these facts in the light of the previous history, we perceive that the annual pressure in the autumn, increasing in force from year to year, was a premonition of the effect which must be apprehended whenever the expansion of credit and prices should have absorbed the entire redundancy of the currency. We have seen in the history of the Massachusests colony that each new issue was followed in a few years by a new crisis, and an outcry about hard times and scarce money. The law which governs this is apparent. The rise of prices and multiplication of credit operations will go on to absorb any amount of currency whatever. If then, the amount be fixed, the expansion must come up to and press against this fixed barrier. This pressure will become apparent first at that season of the year at which the normal requirement is greatest. At that time there will be great distress occasioned by the need of withdrawing currency from the use in which it is engaged. As it cannot be imported, and the law forbids its increase, there is no relief. It must be withdrawn, and the consequences must be endured. Then it is said that the currency is not elastic, and schemes are invented for making it so; but no device whatever can make it elastic. An elastic body is one which will both expand and contract, but a paper currency never contracts itself. Any device which has elasticity for its object will have expansion for its effect.
In its more general effects, the paper currency with a fixed limit produces a steady advance in the rate of interest, and also a reduction of prices. These effects are both traceable in the history of the last five years. The whole story which precedes goes to show that the value of a paper currency depends on its amount. At the time Of issue, or during a war in which the issuer is engaged, it depends in some degree on his credit; but when it settles down in peace as the normal medium of exchange, its value comes to depend almost purely on its amount. This amount, of course, is relative to the requirements of the country for the purpose of performing its exchanges. What the requirement is, however, no man can tell. There is no rule for finding it. It does not depend on population, or wealth, or the amount of the exchanges. It bears no fixed relation to any known or ascertainable quantity. An agricultural country wants more, for the same population and wealth, than a manufacturing country. A sparsely populated country wants more, other things being equal, than a densely populated one. A country in which the means of communication are poor wants more, other things being equal, than a country with good means of communication. It is idle to attempt to compute it at so much per head, or so much per thousand of wealth. Currency is economized also by banking arrangements and clearinghouse processes; the requirement is reduced by railroad extension, and all facilities of communication.
How far these conflicting influences have affected the actual requirement of the United States for circulating medium on a specie basis no one can even guess. It is properly an empirical question. We can only try. If we had a currency of specie value, we should get just as much as we need, and then we should know how much that is, but then, too, we should no longer care. Statisticians would be interested in it, but the finance and business of the country would not hang upon it.
If, then, we assume that, on the whole, this country does require more than it had in 1861, this increase of the normal requirement goes on inside of and under the paper expansion. It produces a pressure on the inflated speculative prices from within, at the same time that they are restrained without by the fixed limit of the paper. The effect must be a reduction of prices; and such a reduction having occurred within the last five years is the best proof that the currency requirement is greater than it was.*
In view of all this, the notion of “ growing up “ to the fixed volume of the currency receives its just appreciation. The London “ Economist” unfortunately seemed to lend some countenance to this notion during the month of October, 1873, and it was taken up on this side of the water by some who enjoyed considerable influence as conservative authorities.
If we suppose the requirement of currency to increase from the growth of wealth and population faster than it decreases from improved communication and banking facilities, then a certain growing may be admitted, but, as it goes on, it exerts a slow, gradual, and pitiless contraction on prices, broken only, in Spring and Fall, by a succession of commercial crises. If then, there was backbone enough in the nation to endure this without having recourse to expansion, the growth might go on for ten or twenty years, by which time perhaps 750,000,000 of currency might be the specie requirement. No historical precedents exist to guide us in judging whether this process would indeed go on under such circumstances. As a matter of speculation, I am inclined to believe that the actual course of things would be that after every crisis wages would fall, industry would be checked, and the country would be slowly and gradually arrested in its entire industrial life. The nearest analogies are in the history of Massachusetts,* and in the history of England from 1812 to 1819.* Evidently, before any such state of things came about we should break out of the restraints in some way, but then there would be an end of the growing up. According to present appearance, the first shock is to push us into inflation, and so the hypothesis falls to the ground.
However, to pursue the supposition, granting everything, when we grow up to 750,000,000, we cannot resume. At that point there may be no premium on gold, and prices may be at specie level, but there would still be no specie in the country. To carry on specie payments would require at least 250,000,000 of gold. We must either buy this, and cancel an equal amount of ’ paper to make room for it, or wait to grow up 250,000,000 more.
No notion which has been propounded in regard to our situation is more plausible, or involves more practical impossibilities than this of resumption by “ growing up.”
If, now, anyone is disposed to believe that there are any circumstances in this country, which are so different from those of other countries that inferences from the history of the latter are of no value for the former, here is.∼ the history of the currency of this country, briefly and cursorily presented, but sufficiently to show how, from the very outset, our industrial development has been crippled by bad arrangements in this respect. English writers have lately given up the discussion of currency questions, and have taken the tone of passing by people who bother their heads about this subject as “ possessed.” The same tone has been borrowed here by a certain school which imports its tone even more than its ideas. No one knows what a sick and weary subject paper money is unless he has made it a specialty. I have stated, below,* in its more proper connection, the distinction which is here to be observed; when the currency is sound it takes care of itself, and other considerations of far higher scientific character come in to require attention: when the currency is redundant, irredeemable paper, it floats everything, and becomes a prime consideration. The English are fortunate in having experience only of a sound currency, and being able to make light of evils they do not know, although they must yet again take up the subject, for, that the Bank Act of 1844 is not a scientific settlement of the currency question, is proved by the fact that it could not be imitated by any other nation.
For us, the currency question is of the first importance, and we cannot solve it, nor escape it, by ignoring it. We have got to face it and work through it, and the best way to begin is, not by wrangling about speculative opinions as to untried schemes, but to go back to history, and try to get hold of some firmly established principles, from which we can proceed with some confidence and a certain unanimity.
We often boast of the resources of our country, out we did not make the country. What ground is there for boasting here? The question for us is: What have we made of it? No one can justly appreciate the natural resources of this country until, by studying the deleterious effects of bad currency and bad taxation, he has formed some conception of how much, since the first settlers came here, has been wasted and lost.
EXPLANATION OF THE DIAGRAM.
The heavy line being taken as zero point, or equality of exports and imports, the—— line shows the excess of exports or imports of mer chandise, by its variations above or below that line, exports being reckoned downwards, and imports upwards. The line——marks the excess of imports or exports of specie in the same manner. The dotted line............ denotes the amount of bank or other paper per capita. The light dotted line between the year 1848 and the end shows the production of gold in California.
The line of prices at the top of the diagram is made by adding the lower annual averages given in the Finance Report of 1863 down to that year. From 1864–1873 the line is formed by adding the January quotations from the table given in the Finance Report for 1873. Over eighty articles are included in each, but they are not the same articles. Therefore the scale is rewritten to bring the starting point in 1864 even with the ending point in 1863, and the two parts should only be compared for relative fluctuations. In the last-mentioned table a hundred-weight of iron and of hemp was taken, instead of a ton of each, as given, and railroad bars were struck out because not given in 1864. Evidently the relation between the prices of 1863 and 1864 does not appear at all.
[*]See p. 250.
[*]In 1635 musket bullets were used for change at a farthing apiece, legal tender for sums under 13d.
[*]For this, and many other citations from the Colonial Records, I am indebted to Felt's Mass. Currency.
[*]In 1873 the United States coined a “trade dollar” with the purpose of getting a share of the China banking and exchange business. The project was in every way fallacious, but the dollars were made worth $1.03 in gold and, coming into circulation in Nevada, were clipped.
[*]“Bank,” as the word was used before the Revolutionary War, meant only a batch of paper money, issued either by the government or a corporation. The impression seems to have remained popular, that the essential idea of a bank is the issuing of notes. Gouge, accepting this definition, assailed all “ banking.” The notes issued in banks, or masses as loans, were pure paper money, and may be distinguished from the Treasury notes issued for the current expenses of government.
[*]The great philosopher was not unbiassed in his judgment. He printed the bills, having written a pamphlet in favor of them, and he says, “ It was a very profitable job and a great help to me.” Looking back upon it later, he argues that it was a good thing, “ though I now think there are limits beyond which the quantity may be hurtful.”— Works, II. 254.
[*]Potter, R. I. Paper Money in Phillips' Colon. and Contin. Parency, I. 100.
[*]There are hints that it had made issues.
[*]See Potter l. c., and Arnold's Rhode Island.
[*]Phillips' Colon. and Continent. Paper Money. Vol 1.
[*]Albany, 1866, page 21.
[*]Political Essays. Philadelphia, 1791.
[*]Phillips: Colonial and Continental Paper Currency, II. 175.
[†]Webster l. c. 175, note.
[*]Sketch of the finances of the United States. 1796.
[*]Extracts are given in the appendix to Raguet's Currency and Banking Philadelphia, 1840.
[*]See Chapter II. p. 283.
[*]See Chapter II. p. 302.
[*]See table, p. 123.
[*]Since 1844 the Bank is obliged by law to give its notes at £3 17s. 9d for all bullion offered, reducing the difference between coin and bullion.
[*]Ernest Seyd: Suggestions in Reference to the Metallic Currency of the United States of America. London, 1871 (for private circulation). The best book on the general subject is the same author's Ballion and Foreign Exchanges. London, 1868.
[*]See page 302.
[*]Branches counted separately.
[*]See page 253.
[*]Finance Report, 1872, p. 374.
[*]Gitbart's “Banking”; Macleod's Dictionary, art. “ Banking in England”; Tooke's “Prices,” Vol. II.
[†]Wilkes, Wilde, and Wiggins, celebrated at the time as “the three W's.”
[*]Macleod. I have not met with mention of this elsewhere.
[*]See page 250.
[†]There is a very erroneous opinion prevalent, that the English government allows the Bank of England to suspend in a crisis. There is nevel any question of the kind. The run on the Bank in a panic is not for gold, but for notes, that is, for discounts. If, however, there is an export of gold at the time, the notes are taken to the issue department and gold demanded According to the charter, the Bank can circulate only fifteen millions in notes on government security, and for all other notes it must have gold, sovereign for sovereign. If, therefore, there is a drain on its bullion, it must contract, or keep all notes handed in for gold. This heightens the panic. The action of the government is to recommend the Bank to disregard the clause governing circulation. It promises to ask Parliament for indemnity. The Bank then discounts freely for solvent parties, but at high rates. This always kills the panic as panic. The crisis runs its course. Erroneous assertions have been made to the effect that the whole crisis comes to an end. This is not the case. Also that the Bank never has to avail itself of the permission. This also is an error. In 1847 and 1866 there was no over-issue. Prices fell, the exchanges turned, gold came in, and the trouble died out in two or three days, but in 1857 the bank issued £900,000 more than the law would have allowed. They were retired again within a week. Evidently when a bank has over thirty million pounds' circulation, of which fifteen millions are secured on government debt, and the rest by coin, then,£900,000 over-issue cannot affect its credit. It has a reserve strength which it can put forth in a panic.
[*]In a sketch of the life of James G. King in the Merchants' Magazine for January, 1854, it is said that he negotiated this loan from the Bank of England to enable the American banks to resume; and the object was the ultimate advantage from setting American business once more in operation.
[*]Condy Raguet, Currency and Banking.
[*]Gilbart, “ Banking,” 218.
[*]Quoted by Benton.
[†]Hunt's Magazine, July, 1844. The returns were probably incomplete.
[*]See p. 263.
[*]See page 55.
[†]The text of it is McCulloch's Dict., Art, “ Funds.”
[*]He said that the amount was not greater in 1853 than in 1829.
[*]Merch. Mag.: December, 1854.
[*]See p. 292.
[*]Financial History of the War.
[*]See the extracts from the debate of 1819, especially Lord Grenville’s speech, p. 296.
[†]See Chapter III.
[*]Preface to the last edition of the “ English Constitution.”
[*]Finance Report, 1872.
[*]The annual aggregate clearings from 1853 to 1862 averaged 5,000,000,000. In 1863 they were 14,000,000,000 and rose steadily. This is introduced only as a general indication of the increase of transactions.
[*]See the Diagram at the end of this Chapter.
[*]See p. 23.