A Brief History of Panics and Their Periodical Occurrence in the United States Part 4

President Adams favored small paper notes of 25 to 10 cents, to the extent of $1,000,000. From 1831 to 1837, $3,400,000 twenty-five cent notes, $5,187,000 ten-cent notes, and $9,771,000 five-cent notes were issued. To prevent an abuse of this it was necessary to resume a metallic circulation immediately. In 1833 the amount of small notes issued had already reached $37,000,000; in 1837 it became $73,000,000; it even exceeded these figures; it was this circulation of small paper notes that had to be made smaller than $120,000,000

Notwithstanding these frequent panics the national prosperity and the increase of wealth were unquestionable and astonished all observers.

From 1817 to 1834 the national expenses diminished from $39,000,000 to $24,000,000, decreasing even to $14,000,000 in 1835, while the income grew to $37,000,000.

From 1826 to 1836 the condition of business, despite the panic of 1831, grew easier. Industries, agriculture, and commerce were prosperous and every enterprise was successful. Both in New Orleans and in New York there was much building, and more than 1508 houses were erected between January 1 and September 1, 1836. This general prosperity carried with it the seeds of trouble.

The rapid increase of the National revenue gave birth to the belief that capital had increased in the same proportion. This superabundance of income produced temporarily by the inflation in business was recklessly thrown away. People speculated in land, projected a hundred railroads, ca.n.a.ls, mines, and every sort of scheme, which would have absorbed $300,000,000 if carried out.

The national capital being insufficient, loans were made in England and Holland, where the rate of interest being more moderate stimulated the pa.s.sion for enterprises. Finally, in order to stop the flow of English capital to America, the Bank of England raised the rate of interest; this brought people to their senses. They saw the impossibility of carrying out a third of their schemes. Cotton fell, and panic seized the public.

Since 1818 a period of flow and ebb in trade had been seen every five or six years, but this stoppage was much more serious. The lack of ready money and capital destroyed confidence. Money was not to be had upon any collateral; and the banks stopped discounting. The people lacked bread, the streets were deserted, the theatres empty; social observances were in abeyance, there were no more concerts, and the whole social round was stopped.

The Bank of the United States used various expedients to temporarily moderate the crisis until the very moment that it burst all the more violently in 1839, and brought about a new and radical reform.

From the time that the separation of the Bank of the United States from the Government and the cessation of its operations as the National Bank was brought about, the quotation on bank notes considerably decreased, as well for those payable at sight as for the deferred notes payable in twelve months. The President sent an agent to London to raise money upon the bank shares.

Fearing that General Jackson would not establish a new bank, and by way of counterpoise, one hundred banks were created with a capital of more than $125,000,000; issues of bank stock were not to exceed three times the amount of the capital, but this provision was not observed; the issue was without regulation and without limits, and during an inflation in prices of the necessaries of life which had doubled in value, and which had turned the people's attention to agriculture. The price of land had for some time advanced tenfold, and the advance in cotton caused the Southern planters to abandon indigo and rice.

Imports in 1836 exceeded the exports by $50,000,000, which had to be paid in gold or silver. This outflow of metal created a great void.

The advance in the discount rate in the Bank of England under such circ.u.mstances came like a thunder-clap, and the distended bladder burst.

Banks suspended payment, and bank notes lost from 10 to 20 per cent.

Exchange on France and England rose to 22 per cent., all metal disappeared from circulation, and a thousand failures took place. The English export houses lost from L5,000,000 to L6,000,000 sterling; values fell from maximum to minimum. The losses in America were even greater; cotton fell to nothing. At the worst of the panic people turned to the Bank of the United States, and its President, being examined as to the means of remedying the trouble, stated that it was above all necessary to maintain the credit of the Bank of England in stead and in place of private credit, which had disappeared. He proposed to pay everything in bank paper on Paris, London, and Amsterdam.

When the panic came the Bank was very much shaken. At the beginning of April, 1837, the New York banks suspended payments because demands for hard money for export played the chief role; the other banks suspended in their turn, promising to resume with them.

The Bank of the United States, suspended also, Mr. Biddle, the President, a.s.serting that it would have continued to pay were it not for the injury done by New York. This was false, for the New York banks shortly after resumed payment, hoping they would be imitated, but the other banks refused to do so. Mr. Biddle wished, in the first place, to await the result of the harvest. To uphold the Bank, he tried to bring about exchanges, both with banks and general business, not only in America but in Europe, in order to establish a unity of interests which would sustain him and conceal his real condition. In this he was successful to a certain degree, for in 1840 in his balance sheet $53,000,000 of paper of the different States was shown up. He wished above all to secure the monopoly of the sale of cotton: a senseless speculation hitherto unexampled, [Footnote: A similar episode has occurred in our time in the speculation in metals by the "Comptoir d'Escompte."] the like of which may never be seen again.

Whilst the Bank came to the relief of New York business through its exchange and its deferred notes, Biddle posed as the great cotton agent, on condition that the Bank's agents should be consigned to at Havre and Liverpool. In their embarra.s.sment this proposition was accepted by the planters. Cotton was thus acc.u.mulated in those two places. This monopoly advanced the price, and vast sums were realized, which enabled him to enlarge the scope of his business. In 1837 he was enabled by this means to draw on London for L3,000,000 sterling; the difference between 5 to 6 per cent. interest and discount at 2 per cent. produced a very handsome profit. The cotton merchants prospered as well as the exchange agent, and Mr. Biddle paid the planters in bank notes which the Bank could furnish without limit, while he received in Europe hard money for the cotton; this aroused opposition.

In the second half of 1837 he established in Missouri, Arkansas, Alabama, Georgia, and Louisiana a number of new banks, to make advances to the planters, and to sell their products for them in Europe. They started with very slight capital, they observed no rules in issuing paper, their bank notes fell 30 per cent. in 1838, and the planters would not take them.

The Bank of the United States, fearing lest foreign capitalists should take advantage of the difficulties of the planters by buying this cotton, cheapened on account of the enc.u.mbrances upon the district producing it, resolved to come to the rescue of the Southern banks, and to join them in their operations by purchasing their shares and their long-time paper, having two years to run. It thus put $100,000,000 into the business, and in 1838 it had loaned them upon their cotton crops not less than $20,000,000 at 7 per cent. payable in three years.

It had bought the bank shares at 28 per cent. below par; through its help they had risen again to par; and then it threw them upon the London market, which absorbed them. In order to explain the immense credit enjoyed in Europe by the United States and their banks, we must observe that the extinguishment of the National obligations through surplus crops threw a false light upon the credit of the States, as well as particularly upon that of the corporation. For many years American investments had been sought for above all others in London, and as nothing happened during the first year to destroy that confidence, the amount thus employed increased from $150,000,000 to $200,000,000 in 1840. In Pennsylvania $16,000,000 of European money was used in the Bank of the United States, and $40,000,000 in those of the different States, all of which was payable in two or three years.

Mr. Biddle had succeeded in sustaining the different States with the National credit. He knew how to utilize the credit of American goods in Europe, and drew from the London market an immense sum against exchange long-time paper and paper payable in America. The Bank's paper fell from 4 to 6 per cent., and it was in such demand that the Bank of England took it at 2 to 3 per cent. discount. But finally the market had all that it could take. The attention of merchants was attracted to Mr.

Biddle's gigantic speculations, who paid paper in America and collected hard money in London. Business interests complained about the contraction in the market. The Bank's stock of cotton increased steadily, and between June and July it rose from fifty-eight to ninety million bales.

This speculation had already yielded $15,000,000 profit, but the market was overloaded, and quotations could not keep up. The planters had made a great deal by the advance in cotton, but the paper money remitted them lost from 15 to 25 per cent. A panic was approaching. The cotton crop, amounting to 400,000 bales, was one fifth less than was expected; they awaited an advance in price, but the contrary occurred. The high prices had brought out all the stored cotton; the factories had reduced their work. Nevertheless bale after bale was forwarded to Liverpool and to Havre. The sale in this last port in February and March, 1839, having produced a loss, they continued to store it. As soon as Mr. Biddle was aware of this stoppage he sought to hide the difficulty by extending his business. He proposed to start a new bank in New York (the other had headquarters in Philadelphia) with a capital of $50,000,000. He once more issued long-time paper, and bought with American paper ca.n.a.ls, rail-roads, and shares which he threw upon the English market. This lasted until the long-time paper lost 18 per cent. in America, and until American exchange and investments were no longer received on the Continent.

The Parisian house of Hottinguer like its other agents, sold little until the first of July, and when it saw that the effort to monopolize cotton could not succeed, fearing to continue this gigantic operation, it declared that it employed too much capital. In the midst of all this, some new bills of exchange reached Paris without consignment of corresponding value; and the house of Hottinguer protested.

Hope of Amsterdam discontinued his connection. The London agent called upon the Bank of England for help, which was granted upon the guaranty of certain firms of that place and a deposit of good American paper.

Rothschild accepted the refused bills of exchange, after having found out that a sum of L400,000 would suffice for Mr. Biddle's agent; these L400,000 offered as a guaranty consisted of Government stock, and of shares in railroads, ca.n.a.ls, and banks. This agreement was not given out freely, which still further increased the feeling of distrust. A crisis in which $150,000,000 of European capital were destined to be engulfed was rapidly approaching.

BREAKING OUT OF THE PANIC OF 1839.--The English papers had already warned the people to be distrustful. The _Times_ said it was impossible to have any confidence in the Bank as long as it would not resume specie payments. Mr. Biddle defended himself through papers paid for the purpose, finally in the Augsburg Gazette, while he waited for the soap bubble to burst. His retained defenders claimed that the 150,000 bales of cotton sent to Europe had not been sold, but received on commission. Advances in paper had been made which in the month of August, 1839, were to be paid in notes by the Southern banks, for a new grant made to the Bank by the State of Pennsylvania permitted it to buy the shares of other banks, and by this means to gain their management; their notes lost 20 to 50 per cent. as compared with the Northern banks.

Through his profit upon the difference of the notes, and through the payment for the cotton in paper, and through the sale of bullion exchange, Mr. Biddle had made five to six million dollars, which lay at his command in London.

The protection of his bills of exchange made a great impression in England; the rebound was felt in America, where the panic, moderated in 1837 through the intervention of the Bank, burst forth with renewed fury in 1839, and brought about the complete liquidation of that establishment.

At the same time the English market was very much pressed, for, according to a notice of the Chamber of Commerce, the number of that year's bankruptcies was greater than usual. From June 11, 1838 to June, 1839, there were 306 bankruptcies in London, and 781 in the "provinces,"--in all, 1,087. At Manchester there were 82, at Birmingham 54, at Liverpool 44, at Leeds 33. The London Exchange was flooded with unsalable paper, an occurrence which had also taken place on a smaller scale in 1837.

Such was the interruption of business that interest for money rose to 20 per cent., and the discount rate for the best paper to 15 or 18 per cent.

The various States in the Union had contracted debts with inconceivable ease, and interest payments were provided for by new loans. President Jackson declared it necessary to make a loan in order to pay interest moneys. It was deemed inexpedient to impose new taxes to provide for the cost of the public works. Great was the embarra.s.sment in America, and as no more money came from England, it was necessary for the Americans to look for it in their own country.

Business circles were flooded with long-time paper running at a discount of one half of 1 per cent. a month. Discount rose to 25 per cent. The panic was so great that all confidence was destroyed. The Bank of the United States, in order to maintain its credit, paid its depreciated long-time paper.

The struggle between the Bank and its opponents, led by President Van Buren, re-commenced. These last declared that the Bank had erred in circulating the $4,000,000 of notes of the old bank, which should have been retired coincidently with the charter; and the Senate forbade their circulation.

The Government claimed large sums from the Bank, the statement of which showed close to $4,000,000; and, as it could not secure this amount in money, it was decided to issue $10,000,000 of Treasury bonds. The Bank party wished to push the Government into bankruptcy, in order to induce it to turn to them for help, and, through the issue of "circular specie," oblige it to adopt a system of paper money.

A bill was brought forward with this view. Biddle, who wished to increase the circulation, said he could resume specie payments, and thus forced his shares to rise; but the rejoicing of the Bank party was soon disturbed by the fact that collectors of taxes were forbidden to receive any bank note for less than $20, which was not redeemable in hard money.

After a struggle of eight years the separation became complete, and the administration of National finances was withdrawn from the Bank.

In 1836, a law was pa.s.sed providing that upon the expiration of its charter, the National funds should be again deposited with it, as soon as the Bank resumed specie payment. Upon the suspension in 1837, the Government was forced to abate the law, in order to protect the specie, and imposed on its financial and postal agents some of the duties of the Treasury. In 1840, the management of the public Treasury const.i.tuted a separate and distinct department. Such was the liquidation following the panic, that Congress granted the Bank three months in which it must either resume specie payment or liquidate. To conform to this decree the State of Pennsylvania fixed the resumption of specie payments by its banks, for January 15, 1841. The shares of the Bank, which had yielded no dividend in 1839, and offered a similar outlook for the first half of 1840, fell to $61. They had been quoted as high as $1,500. General liquidation and a loss of 50 per cent. was inevitable. This occurred in 1841. Thus ceased for a time the bank mania in the United States.

We will recall here Buchanan's opinion about the Bank: "If the Bank of the United States, after ceasing to be a national bank, and obtaining a new charter in Pennsylvania, had restrained itself to legitimate banking, had used its resources to regulate the rate of home exchange, and had done everything to hasten the resumption of specie payments, it would have resurrected the National Bank.

"But this is no longer possible; it has defied Congress, violated the laws, and is mixed up in politics. The people have recognized the viciousness of its administration; the President, Mr. Biddle, has concluded the work Jackson began."

Tables indicating the banks which suspended during the panic: In 1814, 90; in 1830, 165; in 1837, 618; in 1839, 959. The last panic, from 1837 to 1839, produced, according to some pretty accurate reports of 1841, 33,000 failures, involving a loss of $440,000,000.

PANIC OF 1848.--The entire discounts, which had risen to $525,000,000 in 1837, fell to $485,000,000 in 1838, only to rise again to $492,000,000 in 1839, and the real liquidation of the panic occurred only then.

Discounts fell at once to $462,000,000, then $386,000,000; the abundance of capital, and the low price at which it was offered, cleared out bank paper until it was reduced from $525,000,000 to $254,000,000 in 1843.

[Footnote: We have not the outside figures, the maximum or minimum.]

The metallic reserve increased from $37,000,000 to $49,000,000 (1844); the circulation was reduced from $149,000,000 to $58,000,000.

The number of banks in 1840, from 901 fell to 691 in 1843, and the capital itself from $350,000,000 in 1840 was reduced to $200,000,000 in 1845 and to even $196,000,000 in 1846.

All these figures clearly indicate liquidation. The market, freed from its exchange, was enabled to permit affairs to resume their ordinary course.

In fact an upward movement was taking place. Discounts rose from $264,000,000 to $344,000,006 in 1848.

Banks increased from 691 in 1843 to 751 in 1848, and their capital grew from $196,000,000 in 1846 to $207,000,000. The paper circulation rose from $58,000,000 to $128,000,000 in 1848. Deposits from $62,000,000 reached $103,000,000 in 1848. The metallic reserve alone fell from $49,000,000 in 1844 to $35,000,000 in 1848.

The consequences of the European panic were felt in America, but without causing much trouble. The liquidation of the panic of 1839 was barely over, and was still too recent to have permitted sufficient extension of business.

Embarra.s.sments were slight and brief; discounts, nevertheless, fell from $344,000,000 to $332,000,000.

The store of bullion, in spite of the surplus and the favorable balance produced by the export of grain to Europe, fell from $49,000,000 to $35,000,000; with the following year the forward movement recommenced.