H.—Report to the Senate of Pennsylvania on the Money Crisis of 1818

H.

HISTORY OF THE MONEY CRISIS OF 1818.

Extracts from the report of the Committee of the Senate of Pennsylvania, appointed to inquire into the extent and causes of the present general distress.

IN the Senate of Pennsylvania, December 8, 1819. A motion was made by Mr. Raguet and Mr. Grosh, and read as follows, to wit:

Whereas it appears that a scene of distress and pecuniary embarrassment unexampled informer years, has been of late exhibited throughout this commonwealth. And whereas, at a period of general calamity, it is natural for the people to expect from the legislature such an investigation into the causes which have produced the evils under which they labor, as may be likely to mitigate their sufferings, or at least to prevent their recurrence. And whereas, a proper regard for the interests of posterity, as well as of our constituents requires, that an exposition of the actual condition of our suffering fellow citizens, as well as of the causes which have been instrumental in producing their distress, should be recorded in durable characters on the journals of this house. Therefore,

Be it resolved, That a committee be appointed to inquire into the extent and causes of the present general distress, and to recommend to the consideration of the legislature, such measures as in their opinion may be calculated to alleviate the public suffering, and to prevent the recurrence of a similar state of things.

On motion, made on the 10th of December, said resolution was again read, considered and adopted, and

Ordered, That Messrs. Raguet, Hurst, Eichelberger, Markley, M’Meens, Rogers and Breck, be a committee for the purpose therein expressed.

January 29, 1820. Mr. Raguet from the foregoing committee, made report, which was read as follows, to wit.

In the performance of a duty of such high importance as that which has been entrusted to your committee, they have felt it incumbent on them to enter at large into the investigation of the subject contemplated by their appointment, in order that the people of the present day may be correctly informed as to the extent and causes of the evils by which they are oppressed, and that the records of the house may be furnished with a document, which may afford evidence at a future day of the miseries which it is possible to inflict upon a people by errors in legislation and by the bad administration of incorporated institutions.

In ascertaining the extent of the public distress, your committee has had no difficulties to encounter. Members of the legislature from various quarters of the state have been consulted in relation to this subject, and their written testimony in answer to interrogatories addressed to them by the committee, has agreed with scarcely an exception, upon all material points. With such a respectable weight of evidence added to that which has been derived from the prothonotaries, recorders and sheriffs of the different counties, from an intercourse with numerous private citizens residing in different parts of the state, as well as from the various petitions presented to the legislature, your committee can safely assert, that a distress unexampled in our country since the period of its independence, prevails throughout the commonwealth. This distress exhibits itself under the varied forms of

1. Ruinous sacrifices of landed property at sheriff's sales, whereby in many cases lands and houses have been sold at less than a half, a third, or a fourth of their former value, thereby depriving of their homes and of the fruits of laborious years, a vast number of our industrious farmers, some of whom have been driven to seek in the uncultivated forests of the west, that shelter of which they have been deprived in their native state.

2. Forced sales of merchandise, household goods, farming stock and utensils, at prices far below the cost of production, by which numerous families have been deprived of the common necessaries of life, and of the implements of their trade.

3. Numerous bankruptcies and pecuniary embarrassments of every description, as well among the agricultural and manufacturing, as the mercantile classes.

5. A general scarcity of money throughout the country, which renders it almost impossible for the husbandman or other owner of real estate to borrow even at a usurious interest, and where landed security of the most indubitable character is offered as a pledge. A similar difficulty of procuring on loan had existed in the metropolis previous to October last, but has since then been partially removed.

5. A general suspension of labor, the only legitimate source of wealth, in our cities and towns, by which thousands of our most useful citizens are rendered destitute of the means of support, and are reduced to the extremity of poverty and despair.

6. An almost entire cessation of the usual circulation of commodities, and a consequent stagnation of business, which is limited to the mere purchase and sale of the necessaries of life, and of such articles of consumption as are absolutely required by the season.

7. An universal suspension of all large manufacturing operations, by which in addition to the dismissal of the numerous productive laborers heretofore engaged therein, who could find no other employment, the public loses the revenue of the capital invested in machinery and buildings.

8. Usurious extortions, whereby corporations instituted for banking, insurance and other purposes, in violation of law, possess themselves of the products of industry without granting an equivalent.

9. The overflowing of our prisons with insolvent debtors, most of whom are confined for trifling sums, whereby the community loses a portion of its effective labor, and is compelled to support families by charity, who have thus been deprived of their protectors.

10. Numerous law suits upon the dockets of our courts and of our justices of the peace, which lead to extravagant costs and the loss of a great portion of valuable time.

11. Vexatious losses arising from the depreciation and fluctuation in the value of bank notes, the impositions of brokers and the frauds of counterfeiters.

12. A general inability in the community to meet with punctuality, the payment of their debts even for family expenses, which is experienced as well by those who are wealthy in property, as by those who have hitherto relied upon their current receipts to discharge their current engagements.

With such a mass of evils to oppress them, it cannot be wondered at that the people should be dispirited, and that they should look to their representatives for relief. Their patient endurance of sufferings, which can only be imagined by those who have habitually intermingled with them at their homes and by their fire sides, merits the commendation of the legislature, and prefers a powerful claim to their interference.

Having thus enumerated the most prominent features of the general distress, your committee will proceed to point out the cause which in their opinion has occasioned it. That cause is to be found chiefly in the abuses of the banking system, which abuses consist, first, in the excessive number of banks, and secondly, in their universal bad administration. For the first of these abuses the people have to reproach themselves, for having urged the legislature to depart from that truly republican doctrine, which influenced the deliberations of our early assemblies, and which taught that the incorporation of the monied interest already sufficiently powerful of itself was but the creation of odious aristocracies, hostile to the spirit of free government, and subversive of the rights and liberties of the people. The second abuse, the. mismanagement of banks, is to be ascribed to a general ignorance of the true theory of currency and banking, and to the avarice of speculators, desirous of acquiring the property of others, by an artificial rise in the nominal value of stock, and by the sharing of usurious dividends.

In order that this subject may be clearly understood, your committee have thought that the following concise history of banking in Pennsylvania, would be acceptable.

The first bank which was established in the state, and indeed in the United States, was the Bank of North America, which was chartered by congress on the 31st day of December, 1781, with a capital not to exceed ten millions of dollars, and without any limits being assigned as to its duration. This charter was confirmed by the state of Pennsylvania, on the 1st day of April, 1782. This bank commenced and continued its operations upon a capital paid in of $400,000, and as its credit stood high, and the Union was deficient in a circulating medium, it was enabled to extend its issues vastly beyond the amount of its capital. The extent of its loans may be inferred from the rate of its dividends, which were as high as 12 and even 16 per cent. per annum. The extensive and distant circulation of the notes of this bank occasioned by the disbursements of the general government which was a heavy borrower, emboldened its directors, and led them to overstep the bounds of discretion. The channels of circulation becoming overcharged with paper, and the public beginning to doubt the ability of the bank to redeem its notes on demand, naturally led to the consequences, which, with the unerring certainty of fate, will sooner or later result from an evtravagant emission of paper. The notes returned for payment, and with the diminution of its specie means, the bank to sustain its credit, was compelled to resort to the measure of calling upon its debtors for payment. This reduction of bank loans operated in its day, in precisely the same manner that we have seen it in ours. A general pressure for money, bankruptcies, usurious extortions, the disappearance of specie, and an impossibility of procuring loans at legal interest, were among the evils attendant upon it. For the truth of this assertion, your committee beg leave to refer to the journals of the House of Representatives of the 21st and 23d days of March, 1785, by which it will appear, that so great were the evils which resulted from the operations of this bank, that a petition from a number of inhabitants of Philadelphia and of the counties of Chester and Bucks were presented to the legislature, praying for a repeal of its charter. These petitions were referred to a committee, who on the 25th of the same month reported^* that a bill should be brought in to repeal the charter, which was accordingly done al the ensuing session, on the 13th day of September, 1785. The bank however claiming the right of prosecuting its business under the charter which it held from congress, continued its operations, and the legislature at a subsequent date, viz. on the 17th day of March, 1787, revived its charter, limiting its capital to 2,000,000 of dollars, (of which about 830,000 only were raised,) and its duration to fourteen years. This charter has been since extended for two successive periods of fourteen and ten years, on the 29th of March, 1799, and the 28th of March, 1814, and will expire on the 17th day of March, 1825.

On the 25th day of February, 1791, the first bank of the United States was chartered by congress with a capital of ten millions of dollars, and located at Philadelphia. Its charter expired without renewal on the 4th day of March, 1811.

On the 30th day of March, 1793, the Bank of Pennsylvania was incorporated for twenty years. The charter was renewed on the 14th of February, 1810, for twenty years longer, with an increase of capital which is now $2,500,000, and will expire the 4th of March, 1833. This bank was authorised to have branches, of which it established four, viz. at Lancaster, Reading, Easton and Pittsburgh, the last of which has been discontinued.

On the 5th of March, 1804, the Philadelphia Bank was chartered, after having been some time in operation without a charter, to continue until 1st of May, 1814, with a capital not to exceed two millions of dollars; of which 1,800,000 were raised. On the 1st day of March, 1806, it was renewed for 10 years, and will expire on the 1st day of May, 1824. It was authorised by an act of 3d March, 1809, to institute branches, of which it established four, viz. at Wilkes barre, Washington, Columbia and Harrisburg, the last two of which have been withdrawn.

On the 16th of March, 1809, the Farmers and Mechanics' bank was incorporated, with a capital of 1,250,000 dollars, to continue until the 1st of May, 1824.

Some two or three years prior to the expiration of the charter of the Bank of the United States, application was made to congress for its renewal; which having failed, overtures were made to the legislature of Pennsylvania, but without success. The anxiety displayed by the stockholders of this bank to continue their business, and the successful appearance of their dividends added to the location of branches by the Pennsylvania Bank in the country, very naturally excited the attention of the public, and particularly of the inhabitants of some of the interior counties of the state, who fancied that much of the prosperity of cities was to be traced to the establishment of banks, and that if that were the case, there was no reason why the country should not participate in their advantages. Such considerations as these, urged on by the desire of accumulating wealth without the dull exercise of labor, engendered a spirit of speculation. It was supposed that the mere establishment of banks would of itself create capital, that a bare promise to pay money, was money itself, and that a nominal rise in the prices of land and commodities, ever attendant upon a plenty of money, was a real increase of substantial wealth. The theory was plausible, and too well succeeded. The Farmers’ Bank, with a capital of $300,000 dollars, was established in the county of Lancaster, in the beginning of the year 1810, and was accompanied by several others in the city, as well as in other parts of the state.

These early symptoms of a mania for banking induced the legislature, on the 19th of March, 1810, to enact a law prohibiting unincorporated associations from issuing notes, or pursuing any of the operations of banks, but in defiance of its provisions, the system was persevered in, and even companies incorporated for the purpose of constructing bridges, departed from the spirit of their charters, converted themselves into banks, and emitted notes for circulation.

The evils, however, which would have flowed from this banking spirit, would soon have been checked, by the usual corrective, viz. the return of the notes for payment, had not the war which was declared in June, 1812, interposed. Prior to that period, the emissions of our banks were regulated with a constant regard to their liability to be called upon for the payment of their notes in coin. The periodical demand for dollars for the China and India trade, which regularly occurred every spring, was a check upon the overtrading spirit, which has always characterised corporations exempt from individual responsibility. The merchants at that day, were not afraid to demand their rights, and those who held claims upon the banks in the nature of notes or deposites, would make a demand for an hundred thousand dollars, with less hesitation than they now display in asking for a single thousand. Banks were then, what they should always be, the servants of the public, and until they are again reduced to the relation in which they ought to stand to the community, their operations must ever continue to be injurious. Without liability to prompt payment, uninfluenced by any considerations of fear, forbearance, or delicacy, on the part of the public, the community has no guarantee against a depreciated and fluctuating currency.

The war, as might naturally be expected, put a temporary stop to the exportation of specie, and there by removed the only sure check against inordinate issues of paper, which can possibly exist. This cessation of the returning of notes for payment, had the effect of inviting the banks to enlarge their issues. Loans were made to government to an immense amount, and to individuals vastly beyond what the absence of foreign commerce justified, and a gradual depreciation of the currency was the result. The increase of dividends and the facility with which they appeared to be made, extended throughout the whole commonwealth the spirit of speculation, already introduced into some counties. The apparent success of the Farmers' Bank of Lancaster, which from the enormous extent of its issues, was enabled to divide upwards of twelve per cent. per annum; and to accommodate its stockholders with loans to double the amount of their stock, had a powerful influence upon the public mind. A bank by many was no longer regarded as an instrument by which the surplus wealth of capitalists could be conveniently loaned to their industrious fellow citizens, but as a mint in which money could be coined at pleasure, for those who did not possess it before. Under these delusive impressions, associations of individuals sprang up in every quarter, holding out inducements to the farmer, the merchant, the manufacturer and mechanic, to abandon the dull pursuits of a laborious life, for the golden dreams of an artificial fortune.

The liability however to individual ruin, attendant upon unchartered copartnerships, restrained in a degree, the banking mania, and impelled the projectors to apply for a legislative sanction. During the session of 1812-13, a bill to incorporate twenty-five institutions, the capitals of which amounted to 9,525,000 dollars, was passed by both houses of the Legislature by a bare majority of one vote in each. The bill was returned by the governor with his objections, which were sensible and cogent, and on a reconsideration the votes were 38 to 40. At the following session the subject was renewed with increased ardor, and a bill authorising the incorporation of forty-one banking institutions with capitals amounting to upwards of 17, 000,000 of dollars, was passed by a large majority.—This bill was also returned by the governor with additional objections, but two thirds of both houses (many members of which were pledged to their constitutents to that effect) agreeing on its passage, it became a law on the 21st of March 1814, and thus was inflicted upon the commonwealth an evil of a more disastrous nature than has ever been experienced by its citizens. Under this law thirty-seven banks, four of which were established in Philadelphia, actually went into operation, the charters of which will expire on the 1st of April, 1825.

The immediate commencement of a number of these banks, with scarcely a bona fide capital equal to the first instalment, for the convenient mode of discounting stock notes to meet the subsequent payments was soon discovered, increased the mass of paper credits already too redundant, and depreciated the whole circulating medium so far below a specie value, as to excite a want of confidence in its convertibility. In the absence of a foreign demand for specie a domestic one arose. The laws of the New England states had been so rigorous upon the subject of banks which were liable to a penalty of 12 per cent, per annum for the non-payment of their notes, that no depreciation of their currency took place. The consequence thereof was, that the difference between the New England prices of commodities, stocks and foreign bills of exchange, and those of Pennsylvania was equal to the extent of the depreciation of the currency of the latter, and as our bank notes were at that time redeemable on demand, the most profitable remittance which could be made to New England in exchange for her commodities was specie, and this demand created a run upon the banks, which they were not able to withstand. The situation of the southern and of the western banks was precisely similar to that of our own. All had over issued, and a general depreciation had ensued. The same causes produced the same effects, and a general stoppage of payment of all the banks in the United States, except those of New England, took place in August and September, 1814.— The New England demand, it is true, was increased by two causes, viz: first, by facilities in foreign trade through neutral vessels, which were afforded them by an exemption from the blockade of the enemy, and secondly, by a well grounded apprehension, that the southern banks from their extensive emissions would necessarily become embarrassed. Certain it is, however, that all these causes combined, could not have produced a general suspension of payment, had our banks observed the same caution in their issues as that which characterised the banks of the Eastern states.

At the time of the suspension of our city banks a public meeting of merchants and others was held, who publicly sanctioned the measure, under a pledge given by the banks, that as soon as the war was terminated, specie payments would be resumed. That this measure was intended, is evident from the curtailment of loans immediately consequent upon the suspension.

But unhappily the redemption of the pledge was not demanded by the public at the stipulated time, and the banks urged on by cupidity, and losing sight of moral obligation in their lust for profit, launched out into an extent of issues, unexampled in the annals of folly. The fulfilling of a promise to pay money, by tendering another promise equally false, sanctioned by the public acquiescence, led to the organization of additional banks, under the act of March 1814, which had not until then been attempted to be formed, and a scene of indiscretion in the loaning of bank credits was every where exhibited, which realised the anticipations of those who had foretold the ruinous effects of the paper system. Money lost its value. The notes of the city banks became depreciated 20 per cent. and those of the country banks from 25 to 50, and specie so entirely disappeared from circulation, that even the fractional parts of a dollar were substituted by small notes and tickets, issued by banks, corporations and individuals. The depreciation of money enhancing the prices of every species of property and commodity, appeared like a real rise in value, and led to all the consequences which are ever attendant upon a gradual advance of prices. The false delusions of artificial wealth increased the demand of the farmer for foreign productions, and led him to consume in anticipation of his crops. The country trader seduced by a demand for more than his ordinary supply of merchandise, was tempted to the extension of his credit, and filled his store at the most extravagant prices with goods vastly beyond what the actual resources of his customers could pay for, whilst the importing merchant having no guide to ascertain the real wants of the community but the eagerness of retailers to purchase his commodities, sent orders abroad for a supply of manufactures wholly disproportioned to the effective demand of the country. Individuals of every profession were tempted to embark in speculation, and the whole community was literally plunged into debt.—The plenty of money, as it was called, was so profuse, that the managers of the banks were fearful they could not find a demand for all they could fabricate, and it was no unfrequent occurrence to hear solicitations used to individuals to become borrowers, under promises as to indulgence, the most tempting.

Such continued to be the state of things until towards the close of the year 1815. At that time the doctrine so generally taught and so generally received by the great mass of the community, that the paper currency was not depreciated but that specie had risen in value, began to be abandoned. The intelligent part of the people became convinced, that although the nominal prices of property and commodities had been advanced, the substantial wealth of society had absolutely diminished, and the evils attendant upon a depreciated and a perpetually fluctuating currency were universally acknowledged. Each city, town and county, had its own local currency, bearing no equivalency with, or a fixed proportion to any other; the consequence of which was, that a new and extensive class of brokers sprang into existence, who have ever since been supported at the expense of those who have been defrauded by the banks of their just and indisputable rights. Counterfeiters also added to the mass of paper in circulation, and the difficulty of detection where so many signatures were current, invited to an increase of their numbers.

The plan about this time projected of establishing a national bank with a commanding capital, held for than expectation, that the desired restoration of the currency was about to be effected. Petitions in favor of the measure were presented to congress, and the general government weary of the embarrassments to which its fiscal concerns had been subjected, from a currency varying not only in every state but in almost every village, (for the banking system had by this time extended itself through the middle, southern and western states) chartered the present Bank of the United States with a capital of thirty five millions of dollars on the 10th day of April, 1816, with corporate powers which will expire on the 3d of March, 1836.

No sooner was this measure adopted, than the numerous city banks, alarmed for their safety, resolved upon a retrograde movement, and with the reduction of their loans, commenced a reaction, which was accompanied by great mercantile distress. The result of this procedure, however, was a gradual melioration of the currency, insomuch that by the month of July of that year the depreciation of the notes of the banks in Philadelphia was brought to 7 or 8 per cent. and by the month of December to considerably less.

The Bank of the United States, the subscriptions to which were opened on the 1st Monday of July, 1816, commenced its operations about the 1st of January, 1817, and had it been conducted with the discretion and wisdom which were essential to so powerful a machine, its influence might have been productive of the most happy results. The public was aware that the currency of the state banks was still depreciated from excess, and that nothing but a further reduction of their issues, could remove its unsoundness; and yet with this fact, evident to the most limited capacity, the directors of the new bank fancied, that if they could only persuade the city banks to call that a sound currency which was in reality an unsound one, the evil of depreciation would be cured, and they accordingly proposed to them to enter into an agreement to resume specie payments on the 21st of February following. The city banks, sensible that their power over the community was so great, that few individuals would have the boldness to make large demands upon them for coin, and relying upon that forbearance which had hitherto been extended to them by an injured public, who had been for two years and a half paying them 6 per cent. per annum for the use of their dishonored bills, consented to the arrangement, and specie payments were accordingly nominally resumed on the appointed day. We say nominally, because in point of fact, a bona fide resumption did not take place as is evident from the well known circumstance, that for a long time after that period, American as well as foreign coins would command on the spot a price in city bank notes above their nominal value. Depreciation can as well result from the forbearanee of the public to demand their rights, as from the refusal of the banks to pay their engagements; and the arrangement alluded to, was not any real resumption of cash payments, but a mere change of one species of inconvertibility for another. No sooner, however, had the directors of the national bank succeeded in the desirable object of rendering depreciated paper an equivalent for their own convertible notes, than, instead of reflecting from an acquaintance with general principles, and from the experience of the past, that the channels of circulation could contain without depreciation, but a limited amount of paper credits, and that that amount was already in those channels, they began to add to the mass already redundant, by emissions of their own notes; and in the course of a few months added to the mass of bank loans an amount greatly beyond the reductions which had been made. By this means the currency, although nominally convertible, was depreciated below its former low state, and was thrown back, instead of being advanced on the road of restoration; and thus was rendered nugatory all the pain and embarrassment which the public had suffered from the former curtailments of the state banks.

This unwise procedure of replunging the people into the debts from which they had been partially extricated, and of involving others who had hitherto escaped, was continued for a time; but the dreadful day of retribution at length arrived. The bank discovered almost too late, that its issues had been extended beyond the limits of safety, and that it was completely in the power of its creditors. It also foresaw that the payment of that portion of the Louisiana debt, redeemable on the 21st of October 1818, which was held by foreigners, might occasion a demand for a considerable amount of coin, that the enhanced prices of China, India and other goods occasioned by the depreciation of the currency from the over issues of itself and the slate banks, would lead to a demand for specie, and that as it was professedly a specie bank, liable, under a penalty of 12 per cent. per annum to pay its notes on demand, the same delicacy and forbearance would not be extended towards it as to the state banks. These considerations impelled it to seek its safety and from that moment a system of reduction commenced. This reduction operating upon the state banks, which had not profited by the opportunity afforded them of contracting their loans whilst the other was extending, obliged them also to diminish their transactions, and a general curtailment ensued, which has not yet had its consummation. The severity of the second pressure commenced in the city in October 1818, and was continued without intermission for a year; at the expiration of which time it is said that the reductions made there by the national bank alone have exceeded seven millions of dollars, and those by the other banks probably two or four more. The reductions of the country banks during the three last years may be inferred from the following statement which exhibits the amount of their notes in circulation at four different periods.

November 1,	1816,	$4,756,460
Do.	1817,	3,782,760
Do.	1818,	3,011,153
Do.	1819,	1,318,976

From the foregoing history it will be seen, what influence has been produced upon the affairs of the community by the operations of the banking system. Real property has been raised in nominal value, and thousands of individuals have been led into speculations, who without the facility of bank loans would never have been thus seduced. The gradual nominal rise in the price of land, has produced an artificial appearance of increasing wealth which has led to the indulging of extravagance and luxury, and to the neglect of productive industry. Foreign importation and domestic consumption have thus been carried to an extent, far beyond what the actual resources of the country and people would justify, and in pursuing a shadow the community has lost sight of the substance. * * * * * * *

Your committee is sensibly impressed with the dangers which may hereafter arise from the renewal and creation of bank charters, and as they have deemed it to be within the limits embraced by the resolution under which they act, they take the liberty of giving to the Senate their ideas of the provisions which should be incorporated in every charter of a bank hereafter sanctioned by the legislature. They are as follows:

First. A penalty of twelve per cent. per annum in addition to a forfeiture of the charter, should be imposed upon the amount of all notes and deposits not redeemed in specie on demand.

Secondly. No bank should be allowed at any time to loan more than fifty per cent. beyond the amount of its capital.

Thirdly. All profits above six per cent. should be equally divided between the stockholders and the state, the amount accruing to the latter to be specifically appropriated to internal improvements. The justice of this provision is founded upon the consideration, that although high dividends have been made, yet none but the original subscriber gets the benefit of them, for all subsequent purchasers are compelled to pay for the stock a speculative advance upon its par value, at least equivalent to the extraordinary interest.

Fourthly. No director except the president should be re-eligible for more than three years, in any period of six, and none should be entitled to loans beyond a limited amount.

Fifthly. The affairs of the bank and the private accounts of the directors should at all times be open to the inspection of the legislature.

Sixthly. No note for less than five dollars should be issued, inasmuch as no solid system of paper credits can any where exist, unless the minor channels of circulation are exclusively supplied with coin.

Without such provisions as these, the propriety of which has been established by the dear bought experience of the past, your committee conceive, that it will be impossible to guard the public in future, against the evils of excessive issues, which, whenever they are made, must sooner or later re-act upon the community, with effects in a greater or less degree, similar to those which our fellow citizens now so unhappily experience.

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