11. The Jacksonian Movement and the Bank War

0:00The Jacksonian Movement and the Bank War Out of the bitter experiences of the Panic of 1819 emerged the beginnings of the Jacksonian Movement, dedicated to hard money, the eradication of fractional reserve banking in general, and of the Bank of the United States in particular. Andrew Jackson himself, Senator Thomas Hart, quote, Old Bullion Benton of Missouri, future President James K. Polk of Tennessee, and Jacksonian economists Amos Kendall of Kentucky and Condi Rigo of Philadelphia, were all converted to hard money and 100% reserve banking by the experience of the Panic of 1819. The Jacksonians adopted, or in some cases pioneered in, the currency school analysis, which pin the blame for boom-bust cycles on inflationary expansions followed by contractions of bank credit.

0:48Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School. Indeed, no movement in American politics has been as flagrantly misunderstood by historians as the Jacksonians. They were emphatically not, as historians until recently have depicted, either quote The Jacksonians were libertarians, plain and simple. Their program and ideology were libertarian.

1:34They strongly favored free enterprise and free markets, but they just as strongly opposed Special Subsidies and Monopoly Privileges Conveyed by Government to Business or to Any Other Group They favored absolutely minimal government, certainly at the federal level, but also at the state level. They believed that government should be confined to upholding the rights of private property. In the monetary sphere, this meant the separation of government from the banking system and a shift from inflationary paper money and fractional reserve banking to pure specie and banks confined to 100% reserves. In order to put this program into effect, however, the Jacksonians faced the grueling task of creating a new party out of what had become a one-party system after the War of 1812, in which the Democrat Republicans had ended up adopting the Federalist program, including the reestablishment of the Bank of the United States.

2:23The new party, the Democratic Party, was largely forged in the mid-1820s by New York political leader Martin Van Buren, newly converted by the aging Thomas Jefferson to the laissez-faire cause. Van Buren cemented an alliance with Thomas Hart Benton of Missouri and the old Republicans of Virginia, but he needed a charismatic leader to take the presidency away from Adams and what was becoming known as the National Republican Party. He found that leader in Andrew Jackson, who was elected president under the new Democratic banner in 1828. The Jacksonians eventually managed to put into effect various parts of their free market and minimal government economic program, including a drastic lowering of tariffs And for the first and probably the last time in American history, paying off the federal debt.

3:08But their major concentration was on the issue of money and banking. Here they had a coherent program, which they proceeded to install in rapidly succeeding stages. The first important step was to abolish central banking, in the Jacksonian view, the major inflationary culprit. The object was not to eliminate the Bank of the United States in order to free the state banks for inflationary expansion, The Bank of the United States Charter was up for renewal in 1836, but Jackson denounced the bank in his first annual message in 1829. The imperious Nicholas Biddle, head of the second bank, decided to precipitate a showdown with Jackson before his reelection effort, so Biddle filed for renewal early in 1831.

3:58The host of national Republicans and non-Jacksonian Democrats proceeded to pass the Recharta bill, but Jackson, in a dramatic message, vetoed the bill and Congress failed to pass it over as veto. Triumphantly re-elected on the bank issue in 1832, President Jackson lost no time in disestablishing the Bank of the United States as a central bank. The critical action came in 1833 when Jackson removed the public treasury deposits from the Bank of the United States and placed them in a number of state banks, soon labeled as The original number of pet banks was seven, but the Jacksonians were not interested in creating a privileged bank oligarchy to replace the previous monopoly, so the number of pet banks had increased to 91 by the end of 1836.

4:43In that year, Biddle managed to secure a Pennsylvania charter for his bank, and the New United States Bank of Pennsylvania functioned as a much-reduced but still influential state bank for a few years thereafter. Orthodox historians have long maintained that by his reckless act of destroying the Bank of the United States and shifting government funds to the numerous pet banks, Andrew Jackson freed the state banks from the restraints imposed on them by a central bank. Thus, the banks were supposedly allowed to pyramid notes and deposits rashly on top of existing species and precipitate a wild inflation that was later succeeded by two bank panics and a disastrous deflation. Recent historians, however, have totally reversed this conventional picture. In the first place, the record of bank inflation under the regime of the Bank of the United States was scarcely ideal.

5:30From the depths of the post-1819 depression in January 1820 to January 1823, under the regime of the conservative Langdon Chivas, the Bank of the United States increased its notes and deposits at an annual rate of 5.9%. The nation's total money supply remained about the same in that period. Under the far more inflationist regime of Nicholas Biddle, however, the Bank of the The United States notes and deposits rose after January 1823 from $12 million to $42.1 million, an annual increase of 27.9%. As a consequence of this base of the banking pyramid inflating so sharply, the total money supply during this period vaulted from $81 million to $155 million, an annual increase of 10.2%.

6:18It is clear that the driving force for monetary expansion was the Bank of the United States, which acted as an inflationary rather than a restraining force upon the state banks. Looking at the figures another way, the 1823 data represented a pyramid ratio of money liabilities to specie of 3.86 to 1 on the part of the Bank of the United States and 4 to 1 of the banking system as a whole, or respective reserve ratios of 0.26 and 0.25. By 1832, in contrast, the Bank of the United States reserve ratio had fallen to 0.17 and and the country as a whole to 0.15. Both sets of institutions had inflated almost precisely proportionately on top of specie. The fact that wholesale prices remained about the same over this period is no indication that the monetary inflation was not improper and dangerous.

7:10As Austrian business cycle theory has pointed out, any bank credit inflation sets up conditions for boom and bust. There is no need for prices actually to rise. The reason that prices did not rise was that the increased production of goods and services suffice to offset the monetary expansion during this period. But similar conditions of the 1920s precipitated the great crash of 1929, an event that shocked most economists who had adopted the proto-monetarist position of Irving Fisher and other economists of the day that a stable wholesale price level cannot, by definition, be inflationary. In reality, the unhampered free market economy will usually increase the supply of goods and services and thereby bring about a gently falling price level, as happened in most of the 19th century, except during wartime.

7:59What then of the consequences of Jackson's removal of the deposits? What of the fact that wholesale prices rose from 84 in April 1834 to 131 in February 1837, a remarkable increase of 52% in a little less than three years? Wasn't that boom due to the abolition of central banking? An excellent reversal of the orthodox explanation of the boom of the 1830s, and indeed of the ensuing panic, has been provided by Professor Temin. First, he points out that the price inflation really began earlier, when wholesale prices reached a trough of 82 in July 1830 and then rose by 20.7% in three years to reach 99 in the fall of 1833. The reason for the price rise is simple. The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9% or an annual rise of 15.3%.

8:57Breaking the figures down further, the total money supply had risen from $109 million in 1830 to $155 million a year and a half later, a spectacular expansion of 35%. Unquestionably, this monetary expansion was spurred by the still-flourishing Bank of the United States, which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2%. Thus, the price and money inflation in the first few years of the 1830s were again sparked by the expansion of the still-dominant central bank. But what of the notable inflation after 1833? There is no doubt that the cause of the price inflation was the remarkable monetary inflation during the same period, for the total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84% or 21% per annum.

9:59But as Temin points out, this monetary inflation was not caused by the liberated state banks expanding to a fairly well. If it were true that the state banks used their freedom and their new federal government deposits to pyramid wildly on top of specie, then their pyramid ratio would have risen a great deal, or conversely, their reserve ratio of specie to notes and deposits would have fallen sharply. Yet the bank's reserve ratio was 0.16 at the beginning of 1837. During the intervening years, the reserve ratio was never below this figure. But this means that the state banks did no more pyramiding after the demise of the Bank Bank of the United States as a central bank than they had done before. Conventional historians, believing that the Bank of the United States must have restrained the expansion of state banks, naturally assumed that they were hostile to the central bank.

10:47But now, Gene Wilburn has discovered that the state banks overwhelmingly supported the Bank of the United States, quote, We have found that Nicholas Biddle was correct when he said state banks in the main are friendly, specifically only in Georgia, Connecticut and New York Bank was their positive evidence of hostility. A majority of state banks in some states of the South, such as North Carolina and Alabama, gave strong support to the bank, as did both the Southwest states of Louisiana and Mississippi. Since Virginia gave some support, we can claim that state banks in the South and Southwest for the most part supported the bank. New England, contrary to expectations, showed the banks of Vermont and New Hampshire behind the bank, but support of Massachusetts was both qualitatively and quantitatively weak. The banks of the middle states all supported the second bank except for those of New York."

11:37What then was the cause of the enormous monetary expansion of the 1830s? It was a tremendous and unusual expansion of the stockpile of specie in the nation's banks. The supply of specie in the country had remained virtually constant at about $32 million from the beginning of 1823 until the beginning of 1833. But the proportion of specie to banknotes held by the public as money dropped during in this period from 23% to 5% so that more species flowed from the public into the banks to fuel the relatively moderate monetary expansion of the 1820s. But starting at the beginning of 1833, the total species in the country rose swiftly from $31 million to $73 million at the beginning of 1837 for a rise of 141.9% or 35.5% per annum.

12:26Hence, even though increasing distrust of banks led the public to withdraw some specie from them, so that the public now held 13% of its money in specie instead of 5%, the banks were able to increase their notes and deposits at precisely the same rate as the expansion of specie flowing into their coffers. Thus, the Jackson administration is absolved from blame for the 1833 to 1837 inflation. In a sense, the state banks are as well, certainly, they scarcely acted as if being, quote, freed by the Demise of the Bank of the United States. Instead, they simply increase their money issues proportionately with a huge increase of specie. Of course, the basic fractional reserve banking system is scarcely absolved from responsibility, since otherwise the monetary expansion in absolute terms would not have been as great.

13:15The enormous increase in specie was the result of two factors. First and foremost, a large influx of silver coin from Mexico, and second, the sharp cut in the usual export of silver The latter was due to the substantial increases in China's purchase of opium instead of silver from abroad. The influx of silver was the result of paper money inflation by the Mexican government, which drove Mexican silver coins into the United States, where they circulated as legal tender. The influx of Mexican coin has been attributed to a possible increase in the productivity of the Mexican mines, but this makes little sense since the inflow stopped permanently as soon as 1837. The actual cause was an inflation of the Mexican currency by the Santa Ana regime, which financed its deficits during this period by minting highly debased copper coins.

14:03Since the debased copper grossly overvalued copper and undervalued gold and silver, both the latter metals proceeded to flow rapidly out of Mexico until they virtually disappeared. Silver, of course, and not gold was flowing into the United States during this period. Indeed, the Mexican government was forced to rescind its actions in 1837 by shifting A bank credit inflation, the magnitude of that of the 1830s, is bound to run into shoals that cause the bank to stop the expansion and begin to contract. As the banks expand and prices rise, specie is bound to flow out of the country and into the hands of the domestic public, and the pressure on the banks to redeem in specie will intensify, forcing cessation of the boom and even monetary contraction.

14:52In a sense, the immediate precipitating cause is of minor importance. Even so, the Jackson administration has been unfairly blamed for precipitating the Panic of 1837 by issuing the Species Circular in 1836. In 1836, the Jackson administration decided to stop the enormous speculation in western public lands that had been fueled during the past two years by the inflation of bank credit. Hence, Jackson decreed that public land payments would have to be made in Specie. This had the healthy effect of stopping public land speculation, but recent studies have shown that the specie circular had very little impact in putting pressure on the banks to pay specie. From the point of view of the Jackson program, however, it was as important as moving toward putting the U.S. government finances on a purely specie basis.

15:39Another measure advancing the Jacksonian program was also taken in 1836. Jackson, embarrassed at the government having amassed a huge budget surplus during his eight Years in Office, ordered the Treasury to distribute the surplus proportionally to the states. The distribution was made in notes, presumably payable in specie. But again, Temin has shown that the distribution had little impact on movements of specie between banks and therefore in exerting contractionist pressure upon them. What then was the precipitating factor in triggering the panic of 1837? Temin plausibly argues that the Bank of England, worried about inflation in Britain and the and the consequent outflow of gold tighten the money supply and raise interest rates in the latter half of 1836. As a result, credit contraction severely restricted the American cotton export trade in London.

16:28Exports declined, cotton prices fell, capital flowed into England and contractionist pressure was put upon American trade and the American banks. Banks throughout the United States, including the Bank of the United States, promptly suspended Specie Payments in May 1837, their notes depreciated at varying rates and interregional trade within the country was crippled. While banks were able to evade specie payments and continue operations, they were still obliged to contract credit in order to go back on specie eventually, since they could not hope to be creating fiat money indefinitely and be allowed to remain in business. Finally, the New York banks were compelled by law to resume paying their contractual Obligations, and the other banks followed in the fall of 1838. During the year 1837, the money supply fell from $276 million to $232 million, a large drop of 15.6% in one year.

17:22Total species in the country continued to increase in 1837, up to $88 million, but growing public distrust of the banks, reflected in an increase in the proportion of money held The Bank's reserve ratio rose from 0.16 to 0.2. In response to the monetary contraction, wholesale prices fell precipitately by over 30 percent in seven months, declining from 131 in February 1837 to 98 in September of that year. In 1838, the economy revived. Britain resumed easy credit that year. When prices rose and a short-lived boomlet began, public confidence in the banks unwisely returned as they resumed specie payment, and as a result, the money supply rose slightly during the year and prices rose by 25%, increasing from 98 in September 1837 to 125 in February 1839.

18:21Leading the boom of 1838 were state governments, who, finding themselves with the unexpected windfall of a distributed surplus from the federal government, proceeded to spend the the money wildly and borrow even more extravagantly on public works and other uneconomic reforms of quote, investment. But the state governments engaged in rashly optimistic plans that their public works would be financed heavily from Britain and other countries and the cotton boom on which these hopes depended collapsed again in 1839. The states had to abandon their projects en masse, cotton prices declined and severe contractionist pressure was put on trade. Furthermore, the Philadelphia-based Bank of the United States had invested heavily in cotton speculation, and the falling price of cotton forced the Bank of the United States, once again, to suspend payments in October 1839.

19:11This touched off a wave of general bank suspensions in the South and West, but this time the banks of New York and New England continued to redeem their obligations in specie. Finally, the Bank of the United States, having for the last time played a leading role in and generating a recession and monetary crisis was forced to close its doors two years later. With the crisis of 1839, there ensued four years of massive monetary and price deflation. Unsound banks were finally eliminated. Unsound investments generated in the boom were liquidated. The number of banks during these four years fell by 23%. The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843. A seemingly cataclysmic drop of 34% or 8.5% per annum. Prices fell even further, from $125 in February 1839 to $67 in March 1843, a tremendous drop of 42% or 10.5% per year.

20:12During the boom, as we have indicated, state governments went heavily into debt, issuing bonds to pay for wasteful public works. In 1820, the total indebtedness of American states was a modest $12.8 million. By 1830, it rose to $26.5 million. But then it started to escalate, reaching $66.5 million in 1835 and skyrocketing to $170 million in 1839. The collapse of money, credit banking and prices after 1839 brought these state debts into jeopardy. At this point, the Whigs, taking a leaf from their forebears, the Federalists, agitated for the federal government to bail out the states and assume their debts. After the crisis of 1839 arrived, some of the southern and western states were clearly in danger of default, their plight made worse by the fact that the bulk of the debt was held by British and Dutch capitalists and that specie would have to be sent abroad to meet the heavy interest payments.

21:08The Whigs pressed further for federal assumption of the debt, with the federal government to The American people, however, spurned federal aid, including even the citizens of the states in difficulty, and the advent of the Polk administration ended any prospects for federal assumption. The British noted in wonder that the average American was far more concerned about his Demonstrating an astute perception of the reckless course the states had taken, the typical American response to the problem, quote, suppose foreign capitalists did not lend any more to the states, end quote, was the sharp retort, quote, well, who cares if they don't?

22:03Now as a community heals overhead in debt and can scarcely pay the interest." The implication was that the disappearance of foreign credit to the states would have the healthy effect of cutting off their wasteful spending as well as avoiding the imposition of a crippling tax burden to pay for the interest in principle. There was in this response an awareness by the public that they and their government were separate and sometimes even hostile entities rather than one in the same organism. By 1847, four western and southern states, Mississippi, Arkansas, Michigan and Florida, had repudiated all or part of their debts. Six other states, Maryland, Illinois, Indiana, Louisiana, Arkansas and Pennsylvania, had defaulted from three to six years before resuming payment.

22:49It is evident then that the 1839 to 1843 contraction was helpful for the economy in liquidating and unsound investments, debts and banks, including the pernicious bank of the United States. But didn't the massive deflation have catastrophic effects on production, trade, and employment as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929 to 1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years In 1929 to 1933, real gross investment fell catastrophically by 91%, real consumption by 19% and real GNP by 30%.

23:41In 1839 to 1843, investment fell by 23% but real consumption increased by 21% and real GNP by 16%. The interesting problem is to account for the enormous fall in production and consumption in the 1930s as contrasted to the rise in production and consumption in the 1840s. It seems that only the initial months of the contraction worked a hardship on the American in Public, and that most of the earlier deflation was a period of economic growth. Salmon properly suggests that the reason can be found in the downward flexibility of prices in the 19th century, so that the massive monetary contraction would lower prices but not particularly cripple the world of real production or standards of living. In contrast, in the 1930s, government placed massive roadblocks on the downward fall of prices and wage rates and hence brought about severe and continuing depression of production and Living Standards.

24:38The Jacksonians had no intention of leaving a permanent system of pet banks and so after the retirement of Jackson, his successor, Martin Van Buren, fought to establish the independent treasury system in which the federal government conferred no special privilege or inflationary prop on any bank. Instead of a central bank or pet banks, the government was to keep its funds purely in specie in its own treasury vaults or its quote, sub-treasury branches and simply take in Banking and Spend Funds from there. Van Buren finally managed to establish the independent treasury system, which would last until the Civil War. At long last, the Jacksonians had achieved their dream of severing the federal government totally from the banking system and placing its finances on a purely hard money, specie basis.