The Commercial Crisis of 1837

The advantages of a new country were credited to the political institutions of democracy, and increasing pros perity, due to the fresh resources brought within reach, was held to be proof of the truth of the political dogmas entertained by the workers. A sort of boyish exuberance, 371 372 THE FORGOTTEN MAN AND OTHER ESSAYS compounded of inexperience, ignorance, and fearless enter prise, marked politics as well as industry. Jackson's election in 1828 brought to power a party which had been produced by these circumstances. The war debt of 1812 became payable in the years after 1824 and was distributed over the period down to 1835. With growth and increasing prosperity, the revenue in creased with such rapidity that the debt could be paid almost as fast as it became payable. The chief purposes for which the Bank of the United States had been founded in 1816 were to provide a sound and uniform paper cur rency convertible with specie, of uniform value throughout the Union, and to act as fiscal agent for the government, holding the revenue wherever collected and disbursing the expenditures wherever they were to be made. The interest of the government and the people was the motive, and the bank charter was a contract with the Bank to perform the services for specified considerations. One of the consider ations was the right of the Bank to use the deposits as loanable capital. The government was not bound to keep any' balance over expenditure, but the revenue was so large that the Bank came to hold annually increasing average de posits of from five to eight or nine millions of public money, which it used for profit. From this vicious arrangement two consequences followed: first, public attention was directed to the deposits, not as existing for the public service, but for the profit of the Bank; and, second, the public considered itself entitled to claim something of the Bank besides true business credit, in the matter of discounts.

Jackson opened the war on the Bank publicly in his first message. Sharp correspondence had been going on already between the Secretary of the Treasury and the Bank, which had reached such a point that the Secretary had referred to the removal of the deposits as a power in his hands to coerce the Bank. Generally speaking, the THE COMMERCIAL CRISIS OF 1837 373 state of the Bank and the state of the currency were satis factory in 1830, but the Bank had begun in 1827 to issue branch drafts which stimulated credit and soon produced mischief. Of the war on the Bank it is not necessary to speak in detail. In December, 1831, Clay was nominated for President by the National Republicans, and he and his friends determined to bring on the question of the re charter of the Bank as a campaign issue. The re-charter was passed by Congress and vetoed by the President in 1832. The issue in the campaign was thus made up be tween the personal popularity of Jackson and of the Bank.

The former won an overwhelming victory which he con strued to mean that the people had weighed the question of re-chartering the Bank and had decided against it. In September, 1833, he removed the deposits from the National Bank on his own responsibility, and placed them in selected state banks which would agree to keep one third of their note circulation in coin, redeem all notes on demand, and issue no notes under a five-dollar denomina tion. This was to be an experiment. In the meantime the administration was eagerly pressing on the extinction of the public debt. The consequences were such as to prove that, however popular such a policy may be, it may easily be carried too far. The public deposits were loaned by the Bank to merchants, then recalled and paid to the public creditors, and then reinvested by them, so that the money market was subjected to recurrent and sudden shocks. The withdrawal and transfer of the deposits constituted another and more violent operation of the same kind, so that there was a crisis and panic in the spring of 1834. The eight or nine millions of public deposits were a continual source of mischief to the money market. By the contraction of the Bank of the United States to pay the deposits, and the contraction of the state banks to put themselves within the rule for receiving the same, the currency, in the summer 374 THE FORGOTTEN MAN AND OTHER ESSAYS of 1834, was perhaps better than ever before. The coinage act of June, 1834, turned the standard over from silver to gold.

The deposit banks were urged to discount freely so as to satisfy the public with the change. Banks were organ ized in great numbers all over the country to take the place of the great Bank and to get a share in the proAts of hand ling the public money. On January 1, 1835, the debt was all paid and the government had no further use for its surplus revenue. There was but one correct and straightforward course to pursue in such a case and that was to lower taxes so as not to collect any surplus, but this the Compromise Act forbade. The surplus revenue was the greatest annoy ance to the protectionists who wanted to keep duties high for "incidental protection," and they proposed scheme after scheme for distributing the lands, or the proceeds of the lands, or, finally, the surplus revenue itself, so as to cut down the revenue without reducing the import duties. With the increase of banks and bank issues speculation began. It became marked in the spring of 1835 and went on increasing for two ;years. Cotton was rising in price, for the new machinery, and new means of transportation in England, together with the extension of joint stock banks there, had given a great stimulus to the cotton manufacturer. There was an increasing demand for the raw material. It followed that the cities in which the exchange and banking of all this industry were carried pn also enjoyed great prosperity. Railroads were just being introduced and ships were needed to transport the products. Thus from natural causes the period was one of immense industrial development. The great need for carrying it on was capital, and the political incidents which brought about or encouraged the bank expansion may be.

regarded as accidental. The combination of the two in THE COMMERCIAL CRISIS OF 1837 375 fact, however, produced a wild speculation. The banks furnished credit, not capital, and being restrained by usury laws from exerting through the rate of discount the proper check upon an inflated or speculative market they em barked with the business community on a course where all landmarks were soon lost. No sooner, however, was this condition of the com mercial and banking community well established than a new shock was given by another political interference. The administration had now advanced to the point of desiring to establish a specie currency for the c·ountry. The object was laudable and the means taken were proper, but, following as they did in the train of the events already mentioned, they produced new confusion. In 1836 various acts were passed to bring about a specie currency, and in July of that year the Secretary of the Treasury ordered the receivers of public money to take only gold and silver for lands. The circumstances warranted this order. The sales of lands had risen from two or three to twenty-four million dollars in a year, and the amount was paid in the notes of "banks" 1 which deserved no credit. If the nation was not to be swindled out of the lands the measure was necessary. It then became necessary for the purchasers of land to carry specie to the West and vast amounts of it accumulated in the offices of the receivers, or were trans ferred at great trouble and expense to deposit banks. The specie was obtained from the eastern banks, and inasmuch as the whole existing system had pushed them to the utmost limit of expansion, these demands for specie were embar rassing. Two points here deserve notice. It is strang~ to see what a superstition about "specie" had taken 1 Some counterfeiters were arrested at New York in a garret where they had $~O.OOO in notes of the "Ottawa Bank" and $800 in specie. They were very in dignant-said they were a "bank" and were printing their notes at New York for economy. They came so nearly within the definition of a "bank" current at this time that they escaped on this plea.

876 THE FORGOTTEN MAN AND OTHER ESSAYS possession of the public mind. It was regarded as a good thing to have, but too good to use. A specie dollar was regarded as an excuse for its owner to print and circulate from three to twenty paper ones, but it was not regarded as having any other use. The withdrawal of the specie basis from an inflated paper was no doubt a serious blow to the whole fabric, but, if the paper had not been redun dant the transfer of specie to the West could only have forced an importation of so much more. This superstition about specie also prevented any demand upon the banks for speCie for any purpose. Such a demand was regarded as a kind of social or business crime. Hence the "con vertibility H of the notes was a polite fiction. The second point worth noticing is that the bank advocates continually talked about "the credit system" when they meant the system of issuing credit bank notes; and they grew eloquent about the advantages of credit, as if those advantages could only be won by using worthless bank notes and not by lending gold or silver or capital in any form.

We are not yet, however, at the end of the political acts which threw the money market into convulsions. The opposition succeeded, in the summer of the presidential election year, 1886, in passing an act to deposit with the states the surplus over a balance of five millions in the Treasury on January 1, 1837. The amount was thirty-seven millions. This sum was scattered in eighty-nine deposit banks all over the country. Its distribution was, therefore, controlled by local pressure and political favoritism, not by the needs of the government (for it did not need the money at all) or by the demand and supply of capital. The banks had regarded it as a permanent deposit and had loaned it in aid of the various public and private enterprises which were being pushed on every hand at such a rate that labor was said to be drawn away from agriculture so that the country was importing bread stuffs. It was now to be THE COMMERCIAL CRISIS OF 1837 377 withdrawn and transferred once more, and this time it was said that, if these "deposits" were such an advantage, the states ought to have it, and could then, as well as the banks, be called on to give back the money whenever it might be needed. The deposit took place in 1837, in three install ments, January, April, and July, and amounted to twenty eight millions. The fourth installment was never paid.

The money was all squandered or worse. The charter of the Bank of the United States was to expire on the 3d of March, 1836. One year before that time the directors ordered the "exchange committee" to loan the capital, as fast as it should be released, on stocks, so as to prepare for winding up. From this resolution dates the subsequent history of the Bank, for the exchange committee consisted of the President and two directors selected by him, to whose hands the whole business of the Bank was hereby entrusted. The branches were sold and the capital gradually released throughout 1835, but in February, 1836, an act was suddenly passed by the Penn sylvania legislature to charter the United States Bank of Pennsylvania, continuing the old Bank. The act was said to have been obtained by bribery, but investigation failed to prove it. The most open bribery was on the face of it, for it provided for several pet local schemes of public improvement, for a bonus and loans to the state by the Bank, and for abolishing taxes - provisions which secured the necessary support to carry it.

During the year 1836 the money market was very strin gent. The enterprises, speculations, and internal improve ments demanded continual new supplies of capital. The amount of securities exported grew greater and greater and kept the foreign exchanges depressed. American importing houses contracted larger and longer debts to foreign agents. The money market in England became very stringent likewise, and these long credits became 878 THE FORGOTTEN MAN AND OTHER ESSAYS harder and harder to carry. Three English houses, Will son, Wildes, and Wiggins, had become especially engaged in these American credits which they found it necessary to curtail. The winter was one of continual stringency, aggravated by popular discontent, riots, and trades-union disturbances, arising from high prices and high rents. The failures commenced on the fourth of March, 1837, the day that Van Buren was inaugurated, in Mississippi and Louisi ana. Hermann, Briggs & Co., of New Orleans, failed, with liabilities said to be from four to eight millions. As soon as this was known in New York, their correspondents, J. L. & S. Joseph & Co. failed. The first break in the ex panded fabric of credit therefore came in connection with cotton. The price had advanced so much during the last three or four years as to draw man)' thousands of persons who had no capital into cotton production, but the profits were so great that a good crop or two would pay for all the capital. The planters of Mississippi especially had accord ingly organized themselves into banking corporations and issued notes as the easiest way to borrow the capital they wanted. From 1830 to 1839 the banking capital of Mississippi increased from three to seventy-five millions, which of course represented one credit built upon another, on renewed and extended debt, as the old planters bought more slaves and took up more land instead of paying for the old, or as new settlers came in. Mississippi was there fore indebted to the Northeast for the redemption of their immense bank debt, or for the capital bought with it.

The high rates for money in England and this country at last checked the rise in cotton in 1836. Bad harvests and high prices for food fell in with a glut of manufactured cotton, and when cotton began to fall ruin was certain. As soon as the revulsion came it ran through the whole speculative system. The new suburbs which had been laid out in every city and village never came to anything.

THE COMMERCIAL CRISIS OF 1837 379 Western lands lost all speculative value, and railroad and canal stock fell with rapidit J T • The first resort for help was to Mr. Biddle. The calamity most apprehended was a shipment of specie, and the effort was to gain an extension of credit or the substitution of a better for a less known credit. The Bank of the United States had high credit in Europe, and indeed all over the world. Ultimately payment must be made by crops yet to be produced or forwarded. Biddle entered into an agreement with the New York banks which seems to have been only partially carried out, but he sold post notes payable one year from date at Barny's in I~ondon. He received one hundred and twelve and one-half for these, specie being at one hundred and seven. The bonds were discounted in England at five per cent. United States Bank stock was at one hundred and twenty. The situation in England was so serious that all seemed to depend on remittances from the United States. The Bank of England extended aid to "the three W's" to the extent of five hundred thousand pounds on a guarantee made up in the city, and opened a credit of two million pounds for the United States Bank, if one-half the amount should be shipped in specie. To this condition the United States Bank would not agree. The proposition attributed to the Bank of the United States a strength which it did not possess. The management of the Bank of England in this and the two following years was bad, and did much to enhance the mischief in both countries. France partici pated in the distress although there had been no speculation there.

A delegation of New York merchants was sent to Wash ington on May 3 to ask the President to recall the specie cir cular, to defer the collection of duty bonds, and to call an extra session of Congress. In their address to him they sum up the situation: in six months at New York, real 380 THE FORGOTTEN MAN AND OTHER ESSAYS estate had shrunk forty millions; in two months two hundred and fifty firms had failed, and stocks had shrunk twenty millions; merchandise had fallen thirty per cent, and within a few weeks twenty thousand persons had been thrown out of employment. Early in May three banks at Buffalo failed. On May 8, the Dry Dock Bank .(New York) failed. On the tenth all the New York City banks suspended. The militia were under arms and there were fears of a riot. On the eleventh the Philadelphia banks suspended, because the New York banks had, and because, although they had plenty of specie for themselves, they had not enough for the whole" Atlantic seaboard." They said, however, that they were debtors, on balance, to New York. As the news spread through the country, the banks, with few exceptions, suspended.

It was one of the notions born of the bank war that the United States Bank was guilty of oppression when it called on state banks for their balances, and the state banks had practiced "leniency" towards each other. Bank statements of the period show enormous sums as due to and from other banks. This was what carried them all down together, for one could not stand alone unless its debits and credits were with the same banks. During the summer the governors of several states called extra sessions of the legislatures. The President had refused to recall the specie circular, or to call an extra session of Congress, but the embarrassments of the Treas~ ury forced him to do the latter. The collection of duty bonds was deferred and the revenue thereby cut off. The public money was in the suspended banks, and the Treas~ ury, nominally possessed of forty millions, at the very time when part of this sum was being paid to the states, had to drag along from day to day by the use of drafts on its collectors for the small sums received or by chance left over in their hands since the suspension. As notes under THE COMMERCIAL CRISIS OF 1837 381 five dollars had been forbidden by nearly all the states, and as specie was at ten per cent premium, all small change disappeared, and the towns were flooded with notes and tickets for small sums, issued by municipalities, corporations, and individuals.

The most interesting fact connected with this commercial credit is that New York and Philadelphia took opposite policies in regard to it, and thus offered, in their differing experience, an experimental test of those policies. The New York legislature passed an act allowing suspension for one year. The New York policy then was to contract liabili ties and prepare for resumption at the date fixed. The Philadelphia policy, in which Mr. Biddle was the leader, was to wait without active exertions for things to get better. In his letter of May 13 to Adams, Biddle said that the Bank could have gone on without trouble, but that consider ation for the rest forced him to go with them. What especially moved him was that, if the Pennsylvania banks had not suspended, Pennsylvanians would have had to do business with a better currency than the N ew Yorkers, which would have been unfair. Mr. Biddle knew per fectly well that the exchanges would arrange all that.

He was an adept at writing plausible letters. The truth, which was not known until four years later, was that the capital of the Bank had never been withdrawn from the stock loans, that the chief officers of the Bank were plunder ing it, and that suspension was not more welcome to any institution in the country than to the great Bank. The jealousy between New York and Philadelphia was very great at this time. Mr. Biddle's personal vanity seems to have been greatly flattered when, in March, he was called on by the New Yorkers to help them. He was still the leading financier of the country. The business men could not spare him, even if the government had thrown him off. There seems also to be some evidence that he hoped that a 382 THE FORGOTTEN MAN AND OTHER ESSAYS great and universal revulsion would force the general govern ment to re-charter his Bank. The success of his post notes in England and France was another source of gratified vanity to him. In his theory of banking he was one of those who believe that the redemption of the bank note is effected by the merchandise. Hence banking was, for him, an art by which the banker regulated commerce through expansions and contractions of the circulation according to the circumstances which he might observe in the market.

The first effect of the opposite courses taken by New York and Philadelphia was very favorable to his views. The southern trade was transferred from New York to Phila delphia. Southern notes were at a discount of twenty or twenty-five per cent. Receiving these notes from the merchants, the Bank employed them through Bevan and Humphreys in buying cotton. This operation began in July and was intended to move the cotton to Europe in order to meet the post notes of the Bank when they should become due. The firm of Biddle and Humphreys was also formed and established at Liverpool as the agent of this operation. In the extension of the transaction cotton was bought and paid for by drafts on Bevan and Humphreys of Philadelphia, which drafts were discounted by the Bank. Biddle and Humphreys, having sold the cotton, remitted the proceeds to Mr..Jandon, former cashier of the Bank, sent to England as its agent in July. To all this it must be added that the Bank assumed the function of securing, for its producers, a good or fair price for cotton.

Jandon's instructions were to protect the interests of the bank, and" of the country at large." If the Bank had simply been a strong, sound bank, in tent on earning profits, it would have sent two or three millions to Europe, selling exchange at one hundred and twelve, and would not have suspended. The rest of the story would then have been very different for all conTHE COMMERCIAL CRISIS OF 1837 383 cerned. The arrival in June of a ship in England with one hundred thousand dollars specie sufficed to sustain Ameri can credit and to revive American securities. When the credit of a debtor is tainted, nothing revives it like payment. The extra session of Congress met on September 4. The fourth installment of the State Deposit Fund was post poned until January 1, 1839, but it was locked up in the suspended banks and, as the former installments had been drawn from the better banks, the balance due was all in the worst banks of the country, those of the southwestern states. As they had loaned it to their customers, it was, in fact, amongst the people of those states. A law was passed to institute suit against these banks unless they paid on demand, or gave bonds to do so in three installments before July 1, 1839. There were only six deposit banks then paying specie; one was new, four had not suspended, and one had resumed. Power to call on the states for the funds "deposited" with them was taken from the Secre tary of the Treasury and held by Congress. Interest bearing Treasury notes were provided for one year, to meet expenses, and an extension of nine months was given on duty bonds. At this session the sub-treasury system was brought forward as an administration measure.

It split the party. The "bank democrats" (state bank interest which joined the Jackson party in 1832 to break down the United States Bank) went into opposition. The advocates of the "credit system" said the sub-treasury scheme, by giving the government control of the specie in the country, would give it control of all credit. :Mean while Benton said that the eighty million specie in the coun try was its bulwark against adversity, and the Locofocos said that anyone who exported specie was a British hire ling. So that there was a fine confusion of financial notions. In the fall the English money market became much easier, and the same tendency appeared here. Specie at 884 THE FORGOTTEN MAN AND OTHER ESSAYS New York was at about seven per cent premium, but steadily declining. Prices of breadstuffs remained very high (flour nine dollars to nine dollars and a half at New York) and the stagnation of industry was complete. Migration to the West was large.

On August 18 the New York banks called a convention of banks to deliberate on resumption. The Philadelphia banks frustrated the proposition by refusing. A conven tion met in October but adjourned without action until April. On the 7th of April the New York banks had assets two and a half times their liabilities, excluding real estate, and were creditors of the Philadelphia banks for $1,flOO,OOO. They had reduced their liabilities from $fl5,400,OOO on January 1, 1837 to $lfl,900,OOO on Jan uary 1, 1838, and the foreign exchanges were favorable. The bank convention met April I, 1838, and voted by states to resume January I, 1839, without precluding an earlier day. New York and Mississippi alone voted nay, the former because the date was too remote; the latter because it was too early. New England joined Philadelphia and Baltimore for the later day. Mr. Biddle published another letter in which he blamed the rigor of the contrac tion at New York; he wanted to remain "prepared to resume but not resuming," and looked to Congress to do the work. The exchange between New York and Phila delphia was then four and a half per cent against the latter.

The southwestern exchanges were growing worse On May 1, the Philadelphia banks resolved to pay specie for de mands under one dollar. The Bank of England engaged to send one million pounds in specie to support resump tion, and did send one hundred thousand pounds, but then receded from the undertaking; its stock of specie was now very large and increasing. The New York banks resumed during the first week in l\tlay, the Boston and New England banks generally at the same time. Specie was coming into THE COMMERCIAL CRISIS OF 1887 885 New York. On May 31 Congress repealed the specie circular, whereupon Mr. Biddle published another letter saying that since Congress had acted, he saw his way to resumption and would" cooperate." The Bank had, at this time, over thirteen millions loaned on "bills receivable," that is, on securities put in the teller's drawer, as cash to replace cash taken out.

After the adjournment of Congress on July 9 there was a much better feeling, especially on account of the defeat of the sub-treasury bill, and on July 10, Governor Ritner of Pennsylvania published a proclamation requiring the banks to resume on August 13, and to pay and withdraw all notes under five dollars. On July ~3 a bank conven ti~n composed of delegates from the middle states met at Philadelphia. It was agreed to resume on August 13. The Philadelphia banks were obliged to contract very sud denly and money was very dear there. As soon as they resumed there were demands on them from New York, ex change being against them. This caused excitement and indignation. The banks generally declared dividends as soon as they resumed. Elsewhere, here and in England, money was easy and the times rapidly improving. There was, however, a feverish and uncertain market for cotton. Biddle and Humphreys were carrying an immense stock, and buyers and sellers differed as to prices.

On December 10, 1838, Biddle published another letter to Adams in which he reviewed his policy of the last two years, and withdrew the Bank from all its former public activit~T. He says: "It abdicates its involuntary power." He defended the cotton speculations, saying that he had saved the great staple of our country from being sacrificed, by introducing a new competitor into the market. Here then was a buyer who had gone into the market on purpose to "bull" some one else's property. His fate could not l?e very doubtful. At this same time the Liverpool market 886 THE FORGOTTEN MAN AND OTHER ESSAYS was very dull and the spinners were curtailing their de mands because the supply was under the control of specu lators. It was true, as was asserted, that the crop was short, but the buyers took this for a speculator's story, and, anticipating a break in the corner and a fall in price, they refused to buy. The speculation no doubt unduly depressed the price. The southwestern agents of the Bank of the United States were offering advances of from two to five cents above the market price to secure consignments to Biddle and Humphreys, and Mr. Jandon, because he had lost instead of winning confidence, was paying ruinous rates for money to carryon his operations.

During the winter most of the southern and western banks resumed, at least nominally, but as the spring of 1839 approached the southern exchanges again fell and many of the banks suspended again. On March ~9 Biddle resigned the presidency of the Bank, saying that he left it strong and prosperous. The stock fell from one hundred and sixteen to one hundred and twelve, but soon recovered. The money market became stringent again, influenced by fears of the South. In March, by speculative sales, by the diminution of stock, and by the real shortness of the crop, cotton was forced up one and one-fourth pence at Liverpool, and Biddle and Humphreys sold out their entire stock. The net profit was six hundred thousand dollars. This was re garded as a great triumph, and as a complete vindication of Biddle's policy. In July, 1839, the Bank of the United States paid a semi-annual dividend of four per cent - its last one.

The success of the cotton speculation led to a plan for renewing it on a grander scale. On June 6, an unsigned circular was published at New York, which proposed a scheme for advancing three-fourths of the value at fourteen cents on all cotton consigned to Biddle and Humphreys.

THE COMMERCIAL CRISIS OF 1837 387 They were to "hold on until prices vigorously rally." The agent, Mr. Wilder, declared that this had nothing to do with the United States Bank, so far as he knew. It was, how ever, a scheme of the Bank. The Southwestern notes were falling lower and lower, and the post notes issued in the Southwest the year before were now falling due, and were not paid. The pressure of this fell on Philadelphia, where money was up to fifteen per cent and the banks were cur tailing. The news from England was also bad. Cotton was down two cents. The specie of the Bank of England was rapidly declining and money was at five per cent. The arrangements from this side in 1837 had simply consisted in renewals or extensions, and as yet few payments had been made. Stocks, etc., were sent over, but they fell upon a glutted and stringent market and the prices de clined. These securities therefore did not furnish means of payment, and specie shipments were found to be neces sary. The Bank of the United States had prevented any shipment of specie by offering all the bills demanded at one hundred and nine and a half, and Mr. Jandon had been obliged to adopt the most reckless means to meet these bills. In August he wrote to Biddle and Humphreys to supply him with money at any sacrifice of cotton. "Life or death to the Bank of the United States is the issue."

The Bank here urged Bevan and Humphreys to direct their agents to meet Jandon's demands and the Bank assumed the loss. In August the Bank sent an agent to New York, to draw all the bills he could sell on Hottinguer at Paris, to draw the proceeds in specie from the N ew York banks, and to ship it to meet the bills, the object being to force the New York banks to sus pend in order that their example might again be quoted. The Bank also sold its post notes at a discount of eighteen per cent per annum in Boston, New York, Baltimore, and smaller places, and gathered up capital to meet the emer388 THE FORGOTTEN MAN AND OTHER ESSAYS g€mcy at Philadelphia caused by the failure of the Southern remittances. The money markets in all these cities were very stringent until October. On the ninth of that month the Bank of the United States failed on drafts from New York, and on the tenth the news was received that the drafts on Hottinguer had been protested. He had given notice that he would not pay unless he was covered, and the drafts arrived before the specie did. Jandon succeeded in getting Rothschild to take up the bills. The amount was seven million francs.

The banks south and west of New York and some of the Rhode Island banks now suspended again. Specie at Philadelphia was at one hundred and seven to one hundred and seven and one-half. United States Bank stock at seventy. On October 15, it was at eighty, and sold at New York at one-fourth premium. Scarcely any New York City notes were in circulation. This suspension was the real catastrophe of the specu lative period which preceded. A great and general liqui dation now began. Perhaps as many as two hundred of these banks never resumed. The stagnation of industry lasted for three or four years. The public improvements so rashly begun were suspended or abandoned. The states were struggling with the debts contracted. Some repudiated; some suspended the payment of interest. The New England states and New York escaped all the harsher features of this depression and emerged from it first. In proportion as we go further south and west we find the distress more intense and more prolonged. The recovery was never marked by any distinct point of time, but came gradually and imperceptibly.

The credit of the Bank of the United States bore up wonderfully under the shock of its second suspension. Its friends were ready to attribute its misfortunes to con spiracies, jealousy, or any other cause but its own faults.

THE COMMERCIAL CRISIS OF 1837 389 They did not indeed know its internal history. It might have recovered if it had not been ruined from within. The cotton speculations showed a loss, in the summer of 1840, after saddling the Bank with all possible charges, of $630,000 for the speculators. The legislature of Pennsyl vania ordered the banks to resume January 15, 1841. On the first of January, 1841, a statement of the assets of the Bank was made, when it appeared that they consisted of a mass of doubtful and worthless securities. The losses to date were over five millions, according to the report of the directors, but over seventeen millions, taking the stocks at their market value. The Bank resumed January 15, with the other Philadelphia banks, and the great Bank loaned the state four hundred thousand dollars, agreeing to loan as much more. In twenty days the Philadelphia banks lost eleven millions in specie, of which six millions were taken from the Bank of the United States. On February 4 the Bank failed for the third and last time.

Its final failure was said to be due to stock jobbers. Suits were at once begun in such numbers that all hope of ever resuscitating it had to be abandoned. Its deposits, when it failed, were one million one hundred thousand dollars and its notes in circulation two million eight hundred thou sand dollars. Twenty-seven millions out of the thirty-five of its capital were held in Europe. The stock, in March, 1841, was at seventeen. A committee of the stockholders reported in April, showing the internal history of the Bank for five years. This brought out from Mr. Biddle six letters of explanation, defense, and recrimination, which are valuable chiefly for the further insight they give into the history. As to the winding up of the Bank it is very difficult to obtain information. Private inquiries lead to the following results. Three trusts were constituted: one for the city banks to which the Bank owed five or six millions; one for the note-holders and depositors; and one 390 THE FORGOTTEN MAN AND OTHER ESSAYS for the other creditors. The city banks, the note-holders, and the depositors were ultimately paid in full. The other claims were bought up by one or two persons who took the assets. What they made of them is not matter of history.

The attempt of the Pennsylvania banks to resume in January, 1841, had been the signal for similar attempts in the other states. The banks on the seaboard as far south as South Carolina generally resumed, and in the Western and Gulf states some took the same step. All were indebted to the Northeast, and were asked to pay as soon as they said they were ready to pay. Like the Phila delphia banks they succumbed to this demand. The Virginia banks held out until April, when the suspension was once more universal south of New York. All the states except New Hampshire, Vermont, Rhode Island, Connecticut, and Delaware had debts, amounting in all to nearly two hundred millions. The Southern States had generally contracted these debts to found banks. The Middle and Western States had contracted debts for public works. In the former case the profits of the banks were expected to cover the interest on the debt. In the latter case the works were expected to be remunerative in a short time, and the interest was provided for in the mean time by bank dividends (on stocks owned by the state, which only constituted another debt), by taxes on banks, and by royalties. Both schemes were plausible and might have been successful if managed with good judgment and moderation. Under the actual circumstances they were subject to political control, the methods of which were reckless and ignorant. The consequence was that when credit collapsed and the English market no longer absorbed the state stocks with avidity, the states found themselves heavily indebted, bound to pay large interest charges, and without the anticipated revenue. The state banks of the South had loaned their borrowed capital to legisTHE COMMERCIAL CRISIS OF 1887 891 lators and politicians, and had no assets but "suspended debt." The improvement states had become heavily indebted to their own banks and depended on bank divi dends to pay interest. The state banks all held state stocks as assets, and when these declined in value, the banks became insolvent. Thus the banking system was interlocked with the state finances and with the mania for improvements unwisely planned and attempted without reference to the capital at command. The aversion to taxation was very strong, and as taxation was delayed, one state after another defaulted on its interest. The delinquent states were Pennsylvania (which laid taxes in 1840, but inadequate to meet the deficiency), Michigan (of which the Bank of the United States held two millions in bonds not paid for when it failed), Mississippi (of which the same bank held five millions in bonds the obligation of which was disputed and never met), Indiana (whose debt was one-fifth of the total valuation), Illinois, Lou isiana, Maryland and Arkansas, and Florida territory total amount, one hundred and eleven millions. In five years the Bank of the United States gave to Pennsyl vania three millions, subscribed nearly half a million to public improvements by corporations, and loaned the state eight and one-half millions. In 1857-1858 Pennsylvania sold out her works, which had cost thirty-five millions, for eleven millions. The bonds deposited in New York to secure circulation had a par value of four and six-tenths millions, but were worth only one and six-tenths millions on the first of January, 1843. As early as March, 1841, this decline caused a panic in "Safety Fund" and "Free Bank" notes at New York.

Pennsylvania now entered on another experiment which threatened to ruin her remaining banks as the reckless de mands on the Bank of the United States had helped to ruin that institution. On May 3, 1841, the legislature passed, 39~ THE FORGOTTEN MAN AND OTHER ESSAYS over a veto, a "Relief Act." . The object was to secure a loan of three millions from the banks. The Act allowed them to issue that amount in small notes which they were to subscribe to a five per cent loan. They were to redeem the notes in five per cent stock on demand in amounts over one hundred dollars. The stocks were then at eighty and specie at seven per cent premium. The best financial writer in the country .at that time (Gouge) said of this Act: Pennsylvania, "after having bor rowed as much as she could in the old-fashioned way from banks and brokers, and domestic and foreign capitalists, re solved to extort a loan of a dollar a head from every washer woman and woodsawyer and everybody else within her limits who had a dollar to lend. But as washerwomen and woodsawyers and other dollar people cannot long dispense with the use of their funds, it was necessary to give these certificates of loan in a circulating form, so that the burden might be shifted from one to another day by day, or, if necessary, two or three times a day."

The summer of 1841 was marked by intense distress in Pennsylvania. A table of the best investment stocks of Philadelphia shows a shrinkage between August, 1838, and August, 1841, from sixty million to three and one-half millions. The wages class was exposed to the bitterest poverty and distress. The Pennsylvanians attributed the trouble to the want of a protective tariff. For a time, in the autumn, the Relief notes seemed to act beneficially. The banks took them and they circulated at par with the rest of the state currency. In January, 1842, the Girard Bank failed, and about the same time the Pennsylvania and three others less important, and by March a crisis was reached worse than anything which had preceded. A bill was suddenly passed by the legislature commanding im mediate resumption. An amendment was proposed that the banks should no longer be bound to receive the Relief THE COMMERCIAL CRISIS OF 1837 898 notes, although the state should do so. The amendment was afterwards withdrawn, but the Relief notes were ruined.

They fell, some to seventy-five and some to fifty in state currency and then became merchandise, after six months and three days of use. Capital was now not to be had at four per cent per month, but this bankruptcy had cleared the situation. The eleven banks which had not failed agreed to resume on March 18. The exchanges with New York turned in favor of Philadelphia. The years 1842 and 1843 were years of great depression. The banks throughout the west and south were liquidating, after which they either perished or resumed. From 1843 a new sound and healthy development of industry and credit began. The recovery, however, was very slow, and banks sprang up again sooner and faster than anything else. The total amount of Relief notes issued in Pennsylvania was two and one tenth millions. In January, 1843, the amount outstanding was, of depreciated $639,834, of specie value (issued by banks which had resumed) $240,801.

Bicknell's Reporter said: "If anyone can devise an imme diate plan whereby the people can get rid of about $700,000 of paper trash, he will be entitled to the name of a public benefactor." In February, 1843, the Legislature ordered the Treasurer to cancel $100,000 of Relief notes at once and $100,000 monthly until all were destroyed, but in June, 1843, there were still $684,521 out. This is certainly a melanchol;y story of the way in which people who enjoy the most exceptional chances of wealth and prosperity can squander them by ignorance of political economy and recklessness in political management. Banks were regarded as means of borrowing capital, not as insti tutions for lending it. If there was anywhere a group of needy speculators, they secured a bank charter, elected themselves directors, gave their notes for the stock, printed a lot of bank notes, loaned the notes to themselves, and 394 THE FORGOTTEN MAN AND OTHER ESSAYS went out and with the notes bought the capital they wanted. Bank after bank failed with an immense cir culation afloat and no assets but the notes of its directors, who had failed too. When the United States had thirty or forty millions surplus on hand and these banks could get the custody and handling of it for an indefinite period, because the country had no need for it, it can readily be understood why banks multiplied. The banks were en couraged to lend this deposit freely to the public, which they were by no means loath to do, for that was the only way to gain a profit on it. They lent it, not once but two or three times over. The New York bank commissioners pointed out the danger of a system in which the borrower came directly into contact with the bank which issued the currency. If a man was eager to borrow and pay high in terest and the bank had only to print the notes to accom modate him, there was every stimulus to over-issue. If the borrower engaged in any enterprise he raised the price of everything he bought. When he became engaged in his enterprise and wanted more capital, he went back to the bank more eager and more ready to pay high interest than ever, and the operation was repeated. In 1836, on the top of the inflation, the rates for money were twelve and fif teen per cent throughout the year, with a very tight money market. The banks and the business community could not throw the blame on each other. They stimulated each other and went on in their folly hand in hand. The penalties, however, were not fairly distributed. The banks "sus pended," as they called it; that is, when asked to pay their debts, they said they would not; and they enjoyed a com plete immunity in this respect, while people outside who could not pay had to fail.