A History of Money and Banking in the United States: The Colonial Era to World War II (13 page)

60On the expansion and fraud at the Second Bank of the United States, see Catterall,
Second Bank
, pp. 28–50, 503. The main culprits were James A. Buchanan, president of the Baltimore mercantile firm of Smith and Buchanan, and the Baltimore Bank of the United States cashier James W. McCulloch, who was simply an impoverished clerk at the mercantile house. Smith, an ex-Federalist, was a senator from Maryland and a powerful member of the National Democratic-Republican establishment.

61As a result of the contractionary influence on the Boston branch of the Bank of the United States, the notes of the Massachusetts banks actually declined in this period, from $1 million in June 1815 to $850,000 in June 1818. See Rothbard,
Panic of 1819
, p. 8.

62Total notes and deposits of 39 percent of the nation’s reporting state banks was $26.3 million in 1816, while 38 percent of the banks had total notes and deposits of $27.7 million two years later. Converting this pro rata to 100 percent of the banks gives an estimated $67.3 million in 1816,
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A History of Money and Banking in the United States:
The Colonial Era to World War II

The huge expansion of money and credit impelled a full-scale inflationary boom throughout the country. Import prices had fallen in 1815, with the renewal of foreign trade after the war, but domestic prices were another story. Thus, the index of export staples in Charleston rose from 102 in 1815 to 160 in 1818; the prices of Louisiana staples at New Orleans rose from 178 to 224 in the same period. Other parts of the economy boomed; exports rose from $81 million in 1815 to a peak of $116 million in 1818. Prices rose greatly in real estate, land, farm improvement projects, and slaves, much of it fueled by the use of bank credit for speculation in urban and rural real estate. There was a boom in turnpike construction, furthered by vast federal expenditures on turnpikes. Freight rates rose on steamboats, and shipbuilding shared in the general prosperity. Also, general boom conditions expanded stock trading so rapidly that traders, who had been buying and selling stocks on the curbs on Wall Street for nearly a century, found it necessary to open the first indoor stock exchange in the country, the New York Stock Exchange, in March 1817. Also, investment banking began in the United States during this boom period.63

Starting in July 1818, the government and the Second Bank began to see what dire straits they were in; the enormous inflation of money and credit, aggravated by the massive fraud, had put the Bank of the United States in real danger of going under and illegally failing to sustain specie payments. Over the next year, the bank began a series of heroic contractions, forced curtailment of loans, contractions of credit in the south and west, refusal to provide uniform national currency by redeeming its and $72.9 million in 1818. Add to the latter figure $21.8 million for Bank of the United States notes and deposits, and this yields $94.7 million in 1818, or a 40.7-percent increase. Adapted from tables in Van Fenstermaker,

“Statistics,” pp. 401, 405, 406.

63Rothbard,
Panic of 1819
, pp. 6–10;
Historical Statistics
, pp. 120, 122, 563. See also George Rogers Taylor,
The Transportation Revolution,
1815–1860
(New York: Rinehart, 1951), pp. 334–36.

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89

Before the Twentieth Century

shaky branch notes at par, and seriously enforcing the requirement that its debtor banks redeem in specie. In addition, it purchased millions of dollars of specie from abroad. These heroic actions, along with the ouster of bank President William Jones, managed to save the Bank of the United States, but the massive contraction of money and credit swiftly brought the United States its first widespread economic and financial depression.

The first nationwide “boom-bust” cycle had arrived in the United States, impelled by rapid and massive inflation, quickly succeeded by contraction of money and credit. Banks failed, and private banks curtailed their credits and liabilities and suspended specie payments in most parts of the country.

Contraction of money and credit by the Bank of the United States was almost unbelievable, total notes and deposits falling from $21.9 million in June 1818 to $11.5 million only a year later. The money supply contributed by the Bank of the United States was thereby contracted by no less than 47.2 percent in one year. The number of incorporated banks at first remained the same, and then fell rapidly from 1819 to 1822, falling from 341 in mid-1819 to 267 three years later. Total notes and deposits of state banks fell from an estimated $72

million in mid-1818 to $62.7 million a year later, a drop of 14

percent in one year. If we add in the fact that the U.S. Treasury contracted total Treasury notes from $8.81 million to zero during this period, we get the following estimated total money supply: in 1818, $103.5 million; in 1819, $74.2 million, a contraction in one year of 28.3 percent.64

The result of the contraction was a massive rash of defaults, bankruptcies of business and manufacturers, and liquidation of unsound investments during the boom. There was a vast drop in real estate values and rents and in the prices of freight rates and slaves. Public land sales dropped greatly as a result of the contraction, declining from $13.6 million in 1818 to $1.7 million 64These estimates are adapted from the tables in Van Fenstermaker,

“Statistics,” pp. 401–06, and
Development
, pp. 66–68. The data for 38

percent of incorporated banks in 1818, and for 54 percent in 1819, are
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A History of Money and Banking in the United States:
The Colonial Era to World War II

in 1820.65 Prices in general plummeted: The index of export staples fell from 158 in November 1818 to 77 in June 1819, an annu-alized drop of 87.9 percent during those seven months. South Carolina export staples dropped from 160 to 96 from 1818 to 1819, and commodity prices in New Orleans dropped from 200

in 1818 to 119 two years later.

Falling money incomes led to a precipitous drop in imports, which fell from $122 million in 1818 to $87 million the year later.

Imports from Great Britain fell from $43 million in 1818 to $14

million in 1820, and cotton and woolen imports from Britain fell from over $14 million each in 1818 to about $5 million each in 1820.

The great fall in prices aggravated the burden of money debts, reinforced by the contraction of credit. Bankruptcies abounded, and one observer estimated that $100 million of mercantile debts to Europe were liquidated by bankruptcy during the crisis. Western areas, shorn of money by the collapse of the previously swollen paper and debt, often returned to barter conditions, and grain and whiskey were used as media of exchange.66

In the dramatic summing up of the hard-money economist and historian William Gouge, by its precipitous and dramatic contraction “the Bank was saved, and the people were ruined.”67

THE JACKSONIAN MOVEMENT

AND THE BANK WAR

Out of the bitter experiences of the panic of 1819 emerged the beginnings of the Jacksonian movement, dedicated to hard money, the eradication of fractional reserve banking in general, converted pro rata to 100-percent figures. Bank of the United States figures are in Catterall,
Second Bank
, p. 502. On the contraction by the Second Bank, see ibid., pp. 51–72.

65On Treasury note contraction in this period, see Timberlake,
Origins
of Central Banking
, pp. 21–26.

66See Rothbard,
Panic of 1819
, pp. 11–16.

67Gouge,
Short History
, p. 110.

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91

Before the Twentieth Century

and of the Bank of the United States in particular. Andrew Jackson himself, Senator Thomas Hart “Old Bullion” Benton of Missouri, future President James K. Polk of Tennessee, and Jacksonian economists Amos Kendall of Kentucky and Condy Raguet of Philadelphia, were all converted to hard money and 100-percent reserve banking by the experience of the panic of 1819.68 The Jacksonians adopted, or in some cases pioneered in, the Currency School analysis, which pinned the blame for boom-bust cycles on inflationary expansions followed by contractions of bank credit. Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School.

Indeed, no movement in American politics has been as flagrantly misunderstood by historians as the Jacksonians. They were emphatically
not
, as historians until recently have depicted, either “ignorant anti-capitalist agrarians,” or “representatives of the rising entrepreneurial class,” or “tools of the inflationary state banks,” or embodiments of an early proletar-ian anticapitalist movement or a nonideological power group or

“electoral machine.” The Jacksonians were libertarians, plain and simple. Their program and ideology were libertarian; they strongly favored free enterprise and free markets, but they just as strongly opposed special subsidies and monopoly privileges conveyed by government to business or to any other group.

They favored absolutely minimal government, certainly at the federal level, but also at the state level. They believed that government should be confined to upholding the rights of private property. In the monetary sphere, this meant the separation of government from the banking system and a shift from inflationary paper money and fractional reserve banking to pure specie and banks confined to 100-percent reserves.

In order to put this program into effect, however, the Jacksonians faced the grueling task of creating a new party out of 68Rothbard,
Panic of 1819
, p. 188.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

what had become a one-party system after the War of 1812, in which the Democrat-Republicans had ended up adopting the Federalist program, including the re-establishing of the Bank of the United States. The new party, the Democratic Party, was largely forged in the mid-1820s by New York political leader, Martin Van Buren, newly converted by the aging Thomas Jefferson to the laissez-faire cause. Van Buren cemented an alliance with Thomas Hart Benton of Missouri and the Old Republicans of Virginia, but he needed a charismatic leader to take the presidency away from Adams and what was becoming known as the National Republican Party. He found that leader in Andrew Jackson, who was elected president under the new Democratic banner in 1828.

The Jacksonians eventually managed to put into effect various parts of their free-market and minimal-government economic program, including a drastic lowering of tariffs, and for the first and probably the last time in American history, paying off the federal debt. But their major concentration was on the issue of money and banking. Here they had a coherent program, which they proceeded to install in rapidly succeeding stages.

The first important step was to abolish central banking, in the Jacksonian view the major inflationary culprit. The object was not to eliminate the Bank of the United States in order to free the state banks for inflationary expansion, but, on the contrary, to eliminate the major source of inflation before proceeding, on the state level, to get rid of fractional reserve banking. The Bank of the United States’s charter was up for renewal in 1836, but Jackson denounced the bank in his first annual message, in 1829. The imperious Nicholas Biddle,69

69Biddle continued the chain of control over both Banks of the United States by the Philadelphia financial elite, from Robert Morris and William Bingham, to Stephen Girard and William Jones. See Burch,
Elites
, p. 147. See also Thomas P. Govan,
Nicholas Biddle: Nationalist and
Public Banker, 1786–1844
(Chicago: University of Chicago Press, 1959), pp. 45, 74–75, 79.

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Before the Twentieth Century

head of the Second Bank, decided to precipitate a showdown with Jackson before his re-election effort, so Biddle filed for renewal early, in 1831. The host of National Republicans and non-Jacksonian Democrats proceeded to pass the recharter bill, but Jackson, in a dramatic message, vetoed the bill, and Congress failed to pass it over his veto.

Triumphantly re-elected on the bank issue in 1832, President Jackson lost no time in disestablishing the Bank of the United States as a central bank. The critical action came in 1833, when Jackson removed the public Treasury deposits from the Bank of the United States and placed them in a number of state banks (soon labeled as “pet banks”) throughout the country. The original number of pet banks was seven, but the Jacksonians were not interested in creating a privileged bank oligarchy to replace the previous monopoly; so the number of pet banks had increased to 91 by the end of 1836.70 In that year, Biddle managed to secure a Pennsylvania charter for his bank, and the new United States Bank of Pennsylvania functioned as a much-reduced but still influential state bank for a few years thereafter.

Orthodox historians have long maintained that by his reckless act of destroying the Bank of the United States and shifting government funds to the numerous pet banks, Andrew Jackson freed the state banks from the restraints imposed on them by a central bank. Thus, the banks were supposedly allowed to pyramid notes and deposits rashly on top of existing specie and precipitate a wild inflation that was later succeeded by two bank panics and a disastrous deflation.

Recent historians, however, have totally reversed this conventional picture.71 In the first place, the record of bank inflation under the regime of the Bank of the United States was 70Hammond,
Banks and Politics
, p. 420.

71For an excellent biographical essay and critique of historical interpretations of Jacksonism and the Bank War, see Jeffrey Rogers Hummel,

“The Jacksonians, Banking, and Economic Theory: A Reinterpretation,”
Journal of Libertarian Studies
2 (Summer 1978): 151–65.