The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editor’s Preface.
• Author’s Preface.
• Banks In the United States.
• Period I.—1630 To 1780.: The Colonists Experiment With Joint Stock Banks of Issue On Land Security, and With Provincial Mortgage Loan Offices Issuing Currency.
• Chapter I.: Banks In the Colonies.
• Period II.—1780 To 1812.: Banks Are Incorporated In the States, Also a Bank of the United States On the Type of the Bank of England. the Colonial Idea Is Continued In Banks of the States, Being Institutions Based Either On the “faith and Credit” of the St
• Chapter II.: The Earliest Banks of Discount, Deposit, and Convertible Circulation.
• Chapter III.: The First Bank of the United States and Its Times.
• Chapter IV.: The Earliest Banks In the Mississippi Valley.
• Period III: 1812 to 1829-32.: Local Banks Are Multiplied to Replace the Bank of the United States. Their Issues Are Stimulated By Their Fiscal Functions, Soon Intensified By War Financiering. a Commercial Crisis Is Produced With a Prolonged Liquidation, a
• Chapter V.: Inflation On the Atlantic Coast.
• Chapter VI.: Inflation In the Mississippi Valley.
• Chapter VII.: The Crisis On the Atlantic Coast.
• Chapter VIII.: The Crisis In the Mississippi Valley.
• Chapter IX.: The Liquidation On the Atlantic Coast.
• Chapter X.: Liquidation In the Mississippi Valley.—relief Measures.
• Chapter XI.: The National Bank and the Local Banks Co-ordinated Into a New System.
• § 1. —: Local Banks On the Atlantic Coast From the Liquidation of 1819-1822 Until the Bank Expansion Produced By the Bank War.
• § 2.—: The Bank of the United States From Biddle’s Accession Until the Bank War.
• Period IV.—1829 To 1845.: The War of the Jackson Administration On the Bank of the United States Breaks Up the Existing System of Banks and Brings In Local Banks Again As Currency-providers and Fiscal Agents. Another Bank Inflation, Crisis, and Liquidatio
• Chapter XII.: The Bank War.
• Chapter XIII.: Measures and Events Antecedent to the Crisis of 1837.
• § 1.—: The United States Bank of Pennsylvania.
• § 2.—: The Multiplication of Local Banks.
• § 3.—: The Inflation of 1835 and 1836.
• Chapter XIV.: The Financial Revulsion; 1837 to 1842.
• § 1,: 1837. The Suspension of Specie Payments. the United States Bank of Pennsylvania In the Crisis. Its Cotton Operations. the Federal Treasury In the Crisis.
• § 2.—: The Resumption of 1838. The New York Plan Versus the Philadelphia Plan.
• § 3.—: 1838 and 1839. Treasury Notes and Bank Notes. Continuation of the Cotton Operations. Second Failure of the United States Bank of Pennsylvania. Second General Bank Suspension, South and West of New York.
• § 4.—: The Banks In the States; 1837 to 1840.
• § 5.—: 1840 and 1841. The Third Failure and Final Bankruptcy of the United States Bank. the Bank Failures of 1841. The Extra Session of Congress of 1841. The Last Attempts to Charter a National Bank. the Pennsylvania Relief System.
• Chapter XV.: The Liquidation; 1842 to 1845.
• Period V.—1843-5 To 1863.: Under the Independent Treasury System, the Regulation of Banking and Currency Is Left Entirely to the States. the Federal Government Handles Only Coin. Banks Organized Under General Joint Stock Laws Gradually, and to a Great Ext
• Chapter XVI.: The Local Bank System. the Gold Discoveries and Consequent Expansion. the Commercial Crises of 1854 and 1857. The Aid Given By the Banks to the Federal Government At the Beginning of the Civil War.
• § 1.—: The Local Banks, By States; 1845 to 1860.
• § 2.—: The Banks At the Outbreak of the Civil War; 1860 to 1863.
• Period VI.—FROM 1863.
• Chapter XVII.: The National Bank System.

§ 2.—

The Resumption of 1838. The New York Plan versus the Philadelphia Plan.

The most serious limitation on investigations in political economy and finance is that we can make no experiments, because we cannot dispose of the time and happiness of men. For this reason any historical incident which satisfies approximately the conditions of an experiment is of the highest value for the purposes of study. It is almost always the case, however, even when we find a typical instance, that we are left to infer what would have resulted if the case had contained different elements from those which it did contain. We have now before us, however, in this history, perhaps the most remarkable case that can be found of a complete experiment, at the same time and under the same conditions, of two different lines of policy. In May, 1837, the cities of New York and Philadelphia were in as nearly the same circumstances in every respect as any two communities well can be. New York adopted the policy of severe contraction, prompt liquidation and speedy re-commencement; Philadelphia adopted that of relaxation, indulgence, delay, and prolonged liquidation.

The opinion was almost universal amongst statesmen, men of business, and students of political economy that nothing could ever restore the currency but another Bank of the United States. Raguet had very much changed his ideas since 1828. He had accepted Biddle’s theories of banking and was a strong adherent of the great Bank. He believed that if any bank paid specie in the midst of others which did not, it would immediately be forced to pay every one of its notes in specie, and he did not make this opinion depend on the fact that all the banks were indebted to each other. He also thought that it was “utterly impossible for banks of two or three millions of dollars capital to exercise an influence over the money concerns of a whole community.” He argued that if the “government patronage” could be pledged to the Bank of the United States, it could resume specie payment in less than ninety days, by means of loans contracted in Europe. He had also adopted the notion that only the power of the general government could save the country, and to the question, How? he answered, “Through the agency of the Pennsylvania Bank of the United States, which, being already in operation, presents the only practicable mode by which immediate action can be effected.” He added a declaration that he wrote without any conference with the authorities of the Bank. His good faith and integrity of opinion are beyond all question. He always insisted that without a bank the government could not bring about a restoration of specie payment.* Calhoun declared in the Senate, September 18, 1837, that specie payments could be restored by re-adopting the Bank, but he would not vote for this, because it was unconstitutional. That all the whigs thought the same goes without saying.

The New York act of May 16, 1837, allowed suspension for one year; forced all the banks which took advantage of it to accept each other’s notes; forbade them to sell their specie; limited their circulation; provided that they should make monthly reports to the Bank Commissioners; and provided that the safety fund banks should have no income from the fund during suspension. All chartered banks which availed themselves of the act must submit to the visitorial power to which the safety fund banks were subject. Finally, they were forbidden to make dividends while suspended, which was the most effective provision of all to enforce resumption.† Really insolvent banks might still be enjoined by the Commissioners, when the others no longer need accept their notes. The law only remitted those penalties which were exactable by the State; forfeiture, etc. The remedies of private creditors remained intact, and if they were not enforced it was only because there was general acquiescence in the prevailing policy.

The leading bankers in New York began to prepare for resumption immediately after the suspension. Elsewhere the banks generally continued to pay dividends, sometimes eight or ten per cent., although they were not paying their debts. August 15th, a meeting of the officers of the New York banks was held, from which a circular was issued on the 18th, to some of the banks of other cities, inviting them to send delegates to a convention at New York in October, at which measures might be concerted for resumption. It was suggested that resumption might be reached between January and March, 1838, although they thought that the foreign exchanges must be reduced to specie par before specie payments could be re-established. The ground taken in this circular was that the banks were bound by law and honor to resume; that resumption did not depend on congressional action but must be accomplished by the banks. To this circular the banks of Philadelphia replied that they fully shared the anxiety for resumption and would join in the convention if it would do any good, but that, without the action of Congress, resumption could be only partial and temporary; hence they declined to appoint delegates. J. Q. Adams reports a conversation which he had with Biddle at this time. Biddle thought that the proposition of the “deposit banks” of New York “was a mere stratagem to procure the restoration to them of the public deposits;” that they knew that resumption was impossible until the foreign debt was paid, “and made the proposal to plume themselves upon it and gain credit for the performance under the delusion of a false promise.” He had told General Hamilton, of South Carolina, that resumption “could not be maintained a week.”

Here the matter rested until after the extra session of Congress, when, October 20th, the New York banks sent out invitations to a convention at New York, November 27th. As an indication of the jealousy existing between the two cities, it is instructive to note that so good a writer as Raguet, when trying to explain why the exchanges were against both Philadelphia and Boston, in November, declared that it was because drafts on New York were not paid, but were thrown back on the other two cities. “What therefore makes New York the creditor city is the fact that she is a debtor.”* As for Boston, the banks there had, since the suspension, pursued a policy of expansion. In general the banking system of Boston at this period was not strong.†

The bank convention sat from November 27th to December 2d. There were one hundred and thirty-five delegates from eighteen States, including Pennsylvania. The opposition was led by Pennsylvania and was dilatory and obstructive in its tactics. The leading proposition was to resume July 1, 1838. The other proposition was to appoint a committee to inquire, and to call together the convention again whenever it should seem best. The convention was adjourned until April 11th, without action.‡

A somewhat acrimonious controversy arose in the New York papers about this convention, and its apparent fiasco. The “American” said: “The most serious obstacle to New York resuming alone is a sort of vague and indefinite belief that unless the United States Bank of Pennsylvania comes into the measure, it cannot be successful.” The “Commercial Advertiser,” comparing all the banks of the State of New York with those of Boston, Philadelphia, and Baltimore, showed that the former were weaker than any of the latter, and repelled the imputation cast on the Bank of the United States by the “Albany Journal” for having attempted to thwart the efforts of the New York banks to resume. The “American” argued that while New York had been reducing her obligations, in order to resume, and Philadelphia had gone on expanding, the latter had won an apparent advantage at the expense of the former, and now New York was told that she should not collect her debts from Philadelphia, and resume, and take the benefit of resumption, but should allow the debt to stand. The “Commercial Advertiser” answered this, which it said was aimed at the Bank of the United States, by referring back to the aid given by Biddle to New York in March; but the “American” returned to the charge declaring that the issue was whether the United States Bank of Pennsylvania would allow the banks of New York to resume without its co-operation. To attribute such a position to that Bank was “a libel upon the common sense, upon the patriotism, upon the character, and the sagacity, of the eminent individual at the head of that institution.”

In January, the New York delegates to the bank convention published a report of its proceedings. They set aside, in the first place, all the “considerations of presumed expediency connected with the general situation of the country,” which had been urged in the convention, but which had nothing to do with the power of the banks to sustain specie payment. In this they referred to all the old familiar methods of arguing on these questions, which Biddle had used so much, and which had been echoed in the convention by his adherents. Against the doctrine of protracted suspension they denied that it would “be advantageous to the community at large; believing on the contrary, as we do, that its general and permanent interest would be sacrificed to temporary ease and particular classes, should the suspension be continued any longer than absolute necessity requires.” “When we see such extensive general, and, we may say, intolerable evils flowing from a general suspension of specie payments by the banks, it is monstrous to suppose that, if they were able to resume and sustain such payments, they should have any discretionary right to decide or even to discuss the question whether a more or less protracted suspension is consistent with their own views of ‘the condition and circumstances of the country.’ ” “It appeared to us that if, after the principal acknowledged cause of the suspension, and which presented the greatest obstacles to resumption had actually ceased to operate, we were permitted to allege conjectures and contingencies as a proper ground for protracting the suspension, there was no time at which some plausible reason of a similar character might not be adduced, and the resumption be indefinitely postponed.” Thus they brushed away the whole sophistry by which the prolonged suspension was defended. In January, the banks of Albany resumed; also the Farmers and Mechanics’ Bank of Hartford, the New Haven Bank, and the Camden Bank of South Carolina. In February, the banks of Maine held a convention, at which they expressed a hope that the adjourned convention would propose an early date.

In March the Committee on Banks made a report to the Senate of Pennsylvania in which the whole Biddle doctrine of resumption was fully expounded. The most effective point was the assertion that the banks could not resume without enforcing a collection of $15 millions or $20 millions from the public.

February 28th, a committee of the New York banks on resumption reported that resumption would be possible on or before May 10th, when the one year for which suspension had been sanctioned by the Legislature would expire. By way of preparation, they proposed that a system of settlement of balances between the banks should be introduced. The associated banks of Boston also proposed the same step and resolved to introduce the prompt payment of balances after resumption.*

The severity of the contraction by which the New York plan had been pursued during 1837 is shown in the following figures, Such a policy could not fail to produce a party of opposition. The demand liabilities of the New York city banks, exclusive of the Dry Dock Bank, were, on the 1st of January, 1836, $26.9 millions; on the same date, in 1837, they were $25.4 millions; and in 1838, $12.9 millions.† April 7, 1838, they had $2.50 of assets for $1 of debt. They also had New York State stocks to the amount of $1 million, for which specie was expected before May 10th. The banks of Pennsylvania owed to the banks of New York city $1.2 million.‡

As the time approached for the re-assembling of the bank convention, Biddle published another letter to Adams. He was bound to find some reasons for not participating in it, and they must be elevated. He declared that, “Our principles incline us to an early resumption; our preparations would justify it; and if we were at all influenced by the poor ambition of doing what others cannot do so readily, or the still poorer desire of profiting by the disasters of others, the occasion would certainly be tempting. * * * The great prerogative of strength is not to be afraid of doing right; and it belongs to those who have no fear that prudent counsels will be mistaken for timidity to examine calmly whether the general interest of the country recommends the voluntary resumption of specie payments in May next. * * * The credit system of the United States and the exclusively metallic system are now fairly in the field, face to face with each other; one or the other must fall.” It is a political struggle, and resumption is wanted for political effect. The Executive is entirely hostile to banks, and resumption can only be accomplished, as it was in 1817, with the help of a Bank of the United States. It is true that exchange is low at New York, but this is only temporary and unimportant. The plan of the Bank of the United States has been especially to produce no fall in prices, and to make no contraction, and to facilitate the shipment of the crops of the South and West, “placing its own confidential agent in England to protect the great commercial and pecuniary interests of the country. This seemed to be its proper function. It was thus that it hoped to discharge its duty to the whole Union.” He blames the New York banks for their rigorous contraction. The New Yorkers have sought loans elsewhere. The effect of this system has been to lower the value of the goods or currency in which the southern and western debtors must pay, and to have the same effect upon our means of paying the foreign creditor. May is a very unfit time to resume. Resumption ought to be general and include the South and West, but they cannot be ready then, because the returns on only a small part of the cotton crop will have been received. The New York men are coerced by their own Legislature, but their law has no importance for anybody else. New York “may perhaps bear it from one than whom she has never had a more true and constant friend, who although an entire stranger, has for a long series of years, done everything in his power to advance her prosperity, and never saw her in any misfortune which he did not anxiously strive to mitigate; but I wish to serve her—not to flatter her. I believe, then, that at this moment New York is in an entirely false position. She is obliged by the existing law to do what she feels to be wrong. Her natural course is to appeal to her Representatives to rectify their mistake, and not to thrust out their own State banks to be crushed by the Executive.” The other States ought to tell New York that they will not unite in this forced resumption. “The banks should remain exactly as they are, prepared to resume but not yet resuming. * * * The American banks should do, in short, what the American army did at New Orleans,—stand fast behind their cotton bales until the enemy has left the country.”

Nathan Appleton’s comment on this letter is: “It announced principles as false in political economy as its whole character was objectionable on the score of mercantile morality. Such was the influence which Mr. Biddle had unfortunately acquired in Philadelphia, that his views, so speciously set forth, were adopted in that city without hesitation, and have continued to control their operations to the present time.” That letter “announced distinctly that the banks should not resume until a change took place in the administration of the federal government. It also announced, in language not to be misunderstood, that no resumption should take place until the United States Bank was restored as the fiscal agent of the government.”*

The bank convention met again April 11th. There were 143 delegates from 18 States. It was voted to resume January 1, 1839, without precluding an earlier date for any who should prefer. New York and Mississippi alone voted No; the latter State desiring to defer resumption until July, 1839. The New England delegates generally joined Philadelphia and Baltimore in favor of a later day. We are somewhat surprised to find the Suffolk Bank leading those who held back from resumption, in Boston, but this is perhaps explained when we learn that, early in 1838, “the Suffolk drew its balance from the United States Bank, and received in payment United States Bank notes, guaranteed to be paid in specie upon resumption. These notes the directors of the Suffolk authorized their cashier to indorse to the amount of $200,000. It also authorized him to issue them; to receive them on deposit; and to pay them in specie upon resumption.”† The Philadelphia banks sent a statement of their reasons for being absent. The chief one was that they did not care to participate in the discussion of a question which the New York banks had decided in advance.‡

Some of the New York banks resumed in April, and those of Boston likewise, for $5 notes. The New York “Journal of Commerce,” of the 23d, said that the resumption was complete. This action of the New York banks set a standard and an example. It became an object of ambition at once for all banks which desired a good reputation to endeavor to follow this example. In May it was said: “Without naming any particular day, it is probable that all the sound banks east of New Jersey will, at an early day, one by one, slide into resumption. No symptoms of resuming have yet appeared in Jersey or Pennsylvania, or any State south or west of her, if we except the arrangement made by the Philadelphia banks on the evening of the 7th instant, of paying out in specie the fractions of a dollar, and the law of Michigan which requires resumption on the 16th of June.” May 31st, Biddle wrote another letter to Adams, saying that, since Congress had repealed the Specie Circular, he saw his way to resume and would do so. He would co-operate with the government. The leadership, however, had passed away from him, and he had to find a plausible pretext for following in a course which he had striven in vain to prevent. The associated banks of Philadelphia resolved that inasmuch as the Specie Circular had been rescinded, they would appoint a committee to confer with the banks of other States about preparations for resumption.

Governor Ritner, however, now took control of the matter. He published a proclamation, July 10th, requiring the banks to resume, and to pay and withdraw all notes under $5 on and after August 13th. July 23d, a convention was held at Philadelphia, at which the banks of Pennsylvania, Maryland, and Virginia agreed to resume August 13th. Those of New England, Kentucky, and Missouri assented to this action. August 15th, the Governor of New Jersey commanded all the banks of that State to resume within fifteen days. The Ohio banks resumed during the summer. Those of New Orleans resolved to resume January 1st, if the United States Bank would provide a currency until a national bank should be established.* All the Charleston banks except the Bank of the State agreed to resume September 1st. In October, the banks of Alabama held a convention but could not agree on a date, and adjourned without action. In general the banks of the southwest made no attempt to liquidate and resume at this time, but were following a policy of inflation. So far as any intelligent action can be traced in their proceedings, they seemed to believe that the price of cotton would rise again, pay all the debts, and bring back prosperity. The Bank Commissioners of Mississippi reported to the Legislature their opinion that the banks of that State could not resume before August, 1839. The Secretary of the Treasury, in his annual report, said: “It is believed that about seven hundred banks and branches, situated in twenty-two States and Territories, have already resumed specie payments. These, including not far from thirty which never suspended, make seven hundred and thirty now paying specie. Seventy more are expected to resume on or before the first of the ensuing month. Of the residue, amounting to about twenty-five, with a capital of from $3 millions to $4 millions, it is believed that six or eight are winding up their concerns because unprofitable; and that the rest are insolvent.”

[* ] 1 Raguet’s Register, 163, 209.

[† ] Gouge, Journal of Banking, 164.

[* ] 1 Raguet’s Register, 176.

[† ] Ibid, 158.

[‡ ] 1 Raguet’s Register, 192.

[* ] 1 Raguet’s Register, 302.

[† ] Report of the Committee of New York Banks on Resumption, February 28, 1838.

[‡ ] “Journal of Commerce” in 1 Raguet’s Register, 366.

[* ] Appleton, Currency, 16. (1841.)

[† ] Whitney, 31.

[‡ ] 1 Raguet’s Register, 352; 2 ditto, 338.

[* ] 54 Niles, 273. See page 299.