A Brief History of Panics and Their Periodical Occurrence in the United States Part 2

[The various tables spread through this pamphlet are fully explained by their headings and the text.]

In conclusion I wish to express my thanks for the courtesy M. Juglar has extended me, and to state my appreciation of the motives, painstaking patience, and undoubted originality he has shown in explaining and executing so faithfully and with such genius a most laborious and yet spirited work. It is only justice that such an achievement should have been awarded a prize by the French Inst.i.tute (Academy of Moral and Political Sciences) and have gained for M. Juglar the Vice-Presidency of the "Society for the Study of Political Economy."

DeCourcy W. Thom.

Wakefield Manor.

A HISTORY OF PANICS IN THE UNITED STATES CONSIDERED WITH SPECIAL REFERENCE TO AMERICAN BANKS.

The English Colonies soon after their settlement issued paper money.

The first was Ma.s.sachusetts, which issued it even before her independence, in 1690, to obtain funds in order to besiege Quebec.

This example was followed to such an extent that it caused a marked speculation in favor of hard money, varying according to the quant.i.ty of notes in circulation. In 1745, after a successful campaign against Louisburg and the taking of that fortress, two million pounds of paper money were issued, which step decreased its value. When liquidation occurred these paper pounds were not worth 10 per cent. of their face value.

The War of Independence obliged Congress to issue three million of paper dollars. This amount increased to $160,000,000, so that Congress declared, in 1779, that it would not issue more than $200,000,000.

Notwithstanding this guaranty, notwithstanding the forced and legal rating conferred by this enactment, notwithstanding the war spirit, it depreciated; and in 1779 it was necessary to decree that, disregarding its normal value, it should be taken at its face. In 1780 it was no longer taken for customs dues. In 1781 it had no rating and was not even taken at 1 per cent. of its face value.

Between 1776 and 1780 the issue of paper money increased to $359,000,000.

BANK OF NORTH AMERICA.--In 1781 Mr. Morris, Treasurer, persuaded Congress to form a bank (the Bank of North America) with a capital of $10,000,000, of which $400,000 should be turned over to help the national finances. The capital was too insignificant and the course of politics too unpropitious to accomplish this end. However, the example encouraged the States to take up their paper money. Upon the adoption of the United States Const.i.tution the issuing of paper money ceased, and gold and silver were the only means of circulation. Thence arose great embarra.s.sment for the Bank of North America, which, hampered by its loans to the Government, increased its note circulation to an enormous proportion. The ebb of paper through every channel finally aroused the public fears, and people refused the notes. Every one struggled to obtain metallic money, hence it became impossible to borrow, and bankruptcy followed. Such was the, excitement that the Philadelphians as a body demanded and obtained from the a.s.sembly of Representatives a withdrawal of the charter; but the Bank, relying upon Congress, continued until March 17, 1787; succeeded even in extending its charter fourteen years; and later obtained a second extension, limited, however, to Pennsylvania.

The difficulty experienced in the manufacture of money led Mr. Hamilton, Secretary of the Treasury, to propose to Congress in 1790 the founding of a National Bank. After some doubts as to the power of Congress, it was authorized. It began operations in 1794, under the t.i.tle of "Bank of the United States," with a capital of ten millions, eight millions being subscribed by private individuals, and two millions by the Government.

Two millions of the first sum were to be paid in metallic money, and six millions in 6 per cent. State bonds; the charter was to run till March 4, 1811. It seemed to be a good thing for the public and the stockholders, for during twenty-one years it paid an average of 8 per cent. dividends. In 1819 the question of renewing its privileges came up, the situation being as follows:

a.s.sETS. LIABILITIES.

6 per cent. Paper $ 2,230,000 Capital Stock $10,000,000 Loans and Discounts 15,000,000 Deposits 8,500,000 Cash 10,000,000 Circulation 4,500,000

The profits from the Bank, the prosperous state of the country, and the increase of productions led people to think that the issuing of paper money caused it all; seduced by this alluring theory the "Farmers' Bank"

was founded in Lancaster in 1810, with a capital of $300,000. Others followed; such was the mania that the Pennsylvania Legislature was forced to forbid every corporation to issue notes. Despite this preventive message the excitement rose so high that companies, formed to build harbors and ca.n.a.ls, also put notes into circulation; in this way the law was eluded.

From 1782 to 1812 the capital of the banks rose to $77,258,000; upon the 1st of January, 1811, there were already eighty-eight banks in existence. Until the declaration of war (June, 1812), the issuing of notes was always made with the intention of redeeming them, but the over-issue soon became general, and depreciation followed. The periodical demands for dollar-pieces for the East Indian and Chinese trade were warnings of the over-speculations on the part of those companies whose members were not personally liable. Traders, who through their notes or their deposits had a right to credit with the banks, did not hesitate to ask for $100,000, whereas, formerly they would have hesitated to ask for $1,000. The war put a stop to the exportation of precious metals, which, in the ordinary course of things, limits the issue and circulation of paper. The upshot of this was to redouble the note issue, each one believing its only duty was to get the largest amount into circulation. Loans, and enormous sums of money, were distributed above all reason among individuals and among the States. The increase of dividends and the ease of obtaining them extended the spirit of speculation in certain districts, and especially among those who owned land. The remarkable results shown by the Bank of Lancaster, the "Farmers' Bank," which, by means of an extraordinary issue of notes, had yielded as much as 12 per cent. and piled up in capital twice the amount of its stock, caused it to be no longer thought of as a bank intended to a.s.sist trade with available capital, but as a mint destined to coin money for all owning nothing at all. Led by this error, laborers, shopkeepers, manufacturers, and merchants betook themselves to quitting active occupations to indulge in golden dreams. Fear alone restrained some stockholders connected with the non-authorized companies, and led them to seek for a legal incorporation.

In Pennsylvania, during the session of 1812, an act was pa.s.sed authorizing twenty-five banks, with a capital of $9,000,000. The Executive nevertheless refused to ratify it, and returned it with some very well-deserved comments. In a second debate the first resolution was rescinded by a vote of 40 to 38. In the following session the proposition was renewed with more vigor, and forty-one banks with a capital of $17,000,000 were authorized by a large majority; the representations of the Executive proved useless, and they immediately entered upon their duties with an insufficient capital.

To discount their own stock was a soon-discovered method. They thus increased the amount of notes, which depreciated in comparison with hard money, and dissipated on all hands the hope of exchanging with it.

In the absence of a demand from abroad for hard money, the demand came from within our own borders.

The laws of New England, which were very severe upon the banks, had placed a penalty of 12 per cent. upon the annual interest payments of those persons who did not pay their notes. The natural result was a difference of value between New England and Pennsylvania, which measured the depreciation caused by paper in the latter district. As remittances on New England could only be made in hard money, the equilibrium of the banks was disturbed; they were not able to respond to the demands for redemption, and a suspension of payments by the banks of the United States, except those of New England, took place in August and September, 1814.

THE PANIC OF 1814.--An agreement took place at Philadelphia between the bank and the chief houses allied with it to resume payments at the end of the war.

Unhappily, the public did not demand the accomplishment of this promise at the time fixed, and the banks, led on by the thirst of gain, issued an unprecedented amount of bank notes. The general approbation brought about a still further increase in their number: the bank notes of the Bank of Philadelphia were at a discount of 80 per cent.; the others at 75 per cent, and 50 per cent., and metallic money disappeared to such an extent that paper had to be used to replace copper coin. The depreciation of fiat money raised the price of everything; this superficial occurrence was looked upon as a real increase, and gave rise to all the consequences that a general inflation of value could produce.

This mistake on the subject of artificial wealth made landed proprietors desire unusual proceeds. The villager, deceived by a demand surpa.s.sing his ordinary profits, extended his credit and filled his stores with the highest-priced goods; and importations, having no other proportion to the real needs than the wishes of the retailers, soon glutted the market. Every one wished to speculate, and every one eagerly ran up debts. Such was the abundance of paper money that the banks were alarmed lest they could not always find an investment for what they manufactured. It thus happened that it was proposed to lend money on collateral, while the greatest efforts to bring about its redemption were being made. This state of things lasted till the end of 1815, when it was recognized that the paper circulation had not enriched the community, but that metallic money had enhanced.

The intelligent portion of the nation comprehended that even where the estimated value of property had been highest, the true welfare of society had diminished. They learned too late the baleful effects of this circulation of paper money; the greater part of the States and cities had nothing to show for it.

A new cla.s.s of speculators then appeared, trying to pa.s.s these worthless bank notes: forgers of paper money became more active. In the midst of this disorder a National Bank, which should afford a solid basis for the paper circulation, was considered. Influenced by these difficulties, and in hopes of remedying them, the Secretary of the Treasury proposed to Congress, in September, 1814, a few days after suspension, to found a national bank, in order to re-establish metallic circulation, an end which the State banks had failed to accomplish.

This project, which lent the national credit to the capital of the bank, was antagonized by a good many members who exaggerated its consequences; at the same time that they took more or less important sums in bank notes, or borrowed from the banks upon the nation's guaranty, in order to re-establish the public credit and to obtain means for prolonging the war.

CAUSES OF THE PANIC OF 18l4.--The bank directors laid the blame upon the blockade of the ports, which, interfering with, indeed even preventing, the export of products, occasioned the outflow of the metals. The national loans to carry on the war also had their influence. From the beginning of hostilities until 1814 they increased to $52,848,000, distributed as follows: Eastern States, $13,920,000; New York, Pennsylvania, Maryland, and District of Columbia, $27,792,000; Southern and Western States, $11,186,000.

Nearly all of this was advanced by the cities of New York, Philadelphia, and Baltimore. The banks made advances beyond their resources, augmenting their circulation in consequence. [Footnote: The cause of the crisis, according to the Committee of the Senate, was the abuse of the banking system; the great number and bad administration of the banks; and their speculations designed to advance their stock, and to distribute usurious dividends. When the Bank of the United States saw the danger that menaced it, it reduced its discounts and circulation.

The circulation of the country banks fell from $5,000,000 to $1,300,000, and the total circulation from $10,000,000 to $3,000,000.

Increase and Decrease Circulation in Pennsylvania.

City Banks. Country. Total.

1814 ........ $3,300,000 $1,900,000 $5,200,000 1815 ........ 4,800,000 5,300,000 10,100,000 1816 ........ 3,400,000 4,700,000 8,100,000 1817 ........ 2,300,000 3,800,000 6,100,000 1818 ........ 1,900,000 3,000,000 4,900,000 1819 ........ 1,600,000 1,300,000 2,900,000

Number of Banks. Capital. Circulation. Specie.

1811 ... 88 $52,000 00 $28,000 00 $15,000 00 1815 ... 208 82,000 00 45,000 00 17,000 00 1816 ... 246 89,000 00 68,000 00 19,000 00]

From the 1st of January, 1811, to the 1st of January, 1815, one hundred and twenty new banks were registered, thus raising their capital to more than $80,000,000; this increase took place during a war that entirely did away with foreign trade. The expenses of the war declared against Great Britain in June, 1812, were defrayed by notes issued by the banks of the various States. Six million dollars were obtained from them in 1812, in the following year, 1813, twenty million, and then fifteen million in exchange for twelve million of Federal stock, issued at the price of $125 face for every $100 paid in. Until January 1, 1814, in order to avoid taxation, Treasury bonds were issued in addition to what was contributed by the banks.

In 1812 ..................... $3,000,000 " 1813 ..................... 6,000,000 " 1814 ..................... 8,000,000

Up to this time no account of their administration had been rendered, but now Mr. Bland, a Maryland representative, called attention to the fact that all their operations seemed veiled from the public.

Unfortunately we have been unable to find a statement of the discounts.

The suspension of specie payments differed with the corresponding state of affairs in England, inasmuch as it was not general, and, since each State was independent, the depreciation varied. It became very difficult to circulate paper, and the Government was again obliged to issue Treasury bonds, bearing 6 per cent. interest. In February, 1815, peace having been proclaimed, it was hoped that the banks would resume specie payments. There was no sign of it. The re-establishment of peace merely made some of the legal regulations seem less pressing upon the banks.

In the middle of May, 1815, the first English vessel arrived, and business became very active again. In May, June, and July it might have been said "This is the golden age of commerce." Discounts of unsecured paper were easy, and it was not an unusual occurrence to have notes of $60,000 offered.

The banks had authorized a suspension of specie payment in order to force the issue of bank notes, and to stimulate trade, although Mr.

Carey pretends that no over-trading had taken place. He blames them for having restricted their loans in October and November, thus producing a decline in prices; and the necessity of cutting down credits came about, according to him, from the speculations in National securities.

Six Philadelphia banks with a capital of $10,000,000 held $3,000,000 in Government stock.

On the 15th of February, 1815, when scarcely through with all this confusion, an effort was made to re-establish for the second time a United States Bank. It was authorized on the 10th of April, 1816, the Act permitting the formation of a Company, with a capital of $35,000,000, divided into 350,000 shares of $100 each, of which the Government took 70,000 shares and the public 180,000 shares. These last were payable in $7,000,000 of gold or silver, of the United States of North America, and $21,000,000 in like money, or, in the funded debt of the United States either in the 6 per cent. Consolidated Debt at par, the 3 per cent. at 65, or the 7 per cent. at 106-1/2 per cent.; upon subscription $30 was payable, of which at least $5 had to be in gold or silver; in six months after, $35, of which $10 had to be in metal, and twelve months after the same amount was to be paid in the same manner.

The directors were authorized to sell shares every year to the amount of $2,000,000, after having offered them at the current price to the Secretary of the Treasury for fourteen days. The Government reserved the right to redeem the debt at the subscription price.

The charter, made out in the name of the president, ran until March 3, 1836. There were twenty-five directors of the concern, five of whom were appointed by the President of the United States with the consent of the Senate, and not more than three by the State; the stockholders chose the others.

The corporation could not accept any inconvertible property, or any farm-mortgage, unless for its immediate use, either as security for an existing debt, or to wipe out a credit.

It had no right to contract any debt greater than $35,000,000, more than its deposits, unless by special act; the directors were made responsible for every violation, and could be sued by each creditor. They could only deal in gold and silver exchange, and not in other country securities which could not be realized upon at once. The Bank could purchase no public debt nor exceed 6 per cent. interest on its discounts and loans.