The Panic of 1819 (18 page)

The
Union
added the argument that it was necessary for the crisis to run its course further, since there were still some basically unsound bank notes circulating in some of the counties. When the true value of the currency became evident, its total supply would contract even further. The paper also developed an interesting reply to the loan office claims of bolstering confidence. Lack of confidence and idle capital, it stated, were due not to purely psychological factors but to the simple fact that there was no good security available. Furthermore, as the state would borrow its sums in bank paper the circulation of the banks would increase, and their issues extended. Eventually, the process of cessation of monetary expansion, calling in of loans, and contraction, would be set in motion
again. Countering the argument of beneficial increase in velocity of circulation, the
Union
declared that increased velocity would only lead to further depreciation of the already unsound currency.
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The West was the major center of state monetary expansion. Yet, Ohio, very hard hit by the panic and in great monetary difficulties, was very spare with such legislation. It directed its attention instead to its famous conflict with the Bank of the United States, which came to a head during this period. Ohio, a thinly populated state, had experienced a great boom in the postwar years, and contained twenty-four banks by the beginning of the crisis. Heavily in debt, much of Cincinnati was foreclosed during the crisis by the branch of the United States Bank. By 1819, only six or seven of the state’s banks were redeeming their notes, the others struggling to continue with their notes greatly depreciated.
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The scarcity of money led to barter in many interior areas. Yet, Ohio did not seriously consider a state bank or loan office plan. Governor Thomas Worthington, in his message to the legislature in December 1818, did propose a state bank because of the disordered state of paper currency and the difficulty in collecting taxes, but nothing came of this suggestion.
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A bill to this effect was introduced in the Senate, but never came to a vote. Governor Ethan Allen Brown, however, in the next annual message, abjured all such remedies for the crisis.
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He added that there must be
further contractions of bank notes rather than an expansion. Brown continued in this position throughout the depression, reaffirming, in December, 1821, his opposition to any system of bank and paper credit as remedy for the distress. The one Ohio act to bolster the money supply was, in February, 1819, to prohibit buying or selling of bank notes below their par in specie. This futile attempt to halt the depreciation of bank notes was not enforced and was finally repealed in January of the following year.
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Most of the banks in Ohio failed during the depression, but, as we have seen, the legislature tried to maintain their notes at par, despite their suspension of specie payments. In December 1819, a committee of citizens of Cincinnati issued a report backing the suspension of the banks and urging continued circulation of the notes.
⁷⁵
The report absolved the banks from all blame for their plight and attributed the distress to the contractionist pressure of the United States Bank, much hated in many states for similar reasons, and to the machinations of eastern money brokers. These expressions of confidence, however, did not keep the bulk of the banks from failure. It is interesting that this point of view was not seconded by the Cincinnati
Gazette
itself, which blamed the banks for unwarranted extensions of their credit and even noted that the United States Bank had been extremely patient with the banks’ failure to redeem in specie.

The neighboring state of Indiana suffered severely from the depression. The state’s major money-making export—grain to New Orleans—declined greatly in value. Land values plummeted, and some formerly flourishing towns became uninhabited.
⁷⁶
As a result, half of the state taxes were in arrears, and the Indiana legislature
petitioned Congress not to prosecute its citizens for non-payment of federal taxes.

The banking situation in the state was unique. The Indiana Constitution of 1816 had prohibited any further incorporation of banks, except for a possible state bank, which would require a minimum specie subscription of $30 thousand.
⁷⁷
This provision effectively confined chartered banking in the state to the two banks established two years before, the Bank of Vincennes and the Farmers’ bank of Indiana at Madison. In January 1817, Indiana adopted the Bank of Vincennes as a state bank, and its authorized capital was tripled to $1.5 million with the state contributing $375 thousand of the increase.

By the fall of 1818, the Farmers’ Bank at Madison, under pressure by the United States Bank and others, suspended specie payment and wound up its operations by 1820.
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Meanwhile, the grandiose plans for a state bank at Vincennes, with fourteen branches throughout the system, could not be consummated. Most of the leading politicians of the state were stockholders of the state bank and the state itself subscribed heavily. With only seventy-five thousand people—almost all farmers—in the state, and a scarcely developed capital market, such a large bank could hardly be floated. The state had therefore no success with an attempted sale of over $2 million in bank stock. Only three branches were finally organized. The bank participated heavily in the boom and received the benefit of federal deposit in the state; but it suspended specie payments during the crisis, and the federal government removed its deposits in July, 1820.

Indiana, in the monetary sphere, thus differed from most other states. While elsewhere people could call for a state bank as a remedy for the crisis, the people of Indiana had already had a state bank and were disgruntled with its record. In Indiana, state banking was
on the defensive rather than the offensive. Among the leading opponents were the large numbers of incoming settlers from other states. These settlers exchanged their specie and Bank of United States notes for state bank notes at the frontier, only to find their value greatly depreciated at the next town. A meeting denounced the banking system of the state as injurious, fraudulent, and dangerous, and decried its political influence. The members vowed not to support any bank director for public office.
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Leader of the opposition to the bank was Elihu Stout, editor of the Vincennes
Western Sun
in Indiana’s leading town. Born in New Jersey, Stout had worked for years in Kentucky and in Nashville, and there had become a personal friend of Andrew Jackson. The leading force on behalf of the state bank was the Vincennes
Sentinel
, the editor of which was an officer of the bank. The “aristocrats” of the Vincennes area, such as United States Senator James Noble, Jonathan Jennings, and William Hendricks, supported the bank.
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The opponents were later to be leaders of the “Jacksonian Democrats” in the state. The opposition pointed to the heavy loans to directors and to leading political figures. It grew more and more exercised because the state continued to accept the unredeemable notes of the bank, notes that continued to be issued in defiance of the bank’s charter. The opposition also pointed out that the state’s receiver of public dues was an officer of the bank. Further, the state, in 1819, deposited $10 thousand of irredeemable bank notes. This was done at a time when the state was short of specie to pay its own officers.
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In late 1818, the legislature had all but unanimously decreed a stay of execution for one year should creditors refuse to accept at par
the paper of those banks of the state, whose “money was current with the markets.”
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Finally, the opposition, headed by General Samuel Mulroy, introduced in July, 1820, a resolution in the legislature to investigate the state bank. The resolution failed.

The opposition was particularly angry because the bank was obligated by its charter to pay specie, yet was continuing operations while refusing to redeem. Representative John H. Thompson moved a bill to require the state bank to pay in specie or forfeit its charter, but the bill was defeated. Leader of the pro-bank forces was Representative Thomas H. Blake of Knox County, the county which included Vincennes. Blake’s major arguments were the dependence of governmental salaries on the notes of the state bank and the assertion that no western banks were paying specie. The state election of 1820 was waged on the bank question. The issue was whether or not the state bank should be compelled to redeem its notes in specie. The voters chose overwhelmingly in the affirmative, and there was a heavy turnover of members of the legislature, even in areas that were formerly strongholds of the bank.

Actually the bank was on the edge of bankruptcy, and had been subject to considerable embezzlement by its officers. The election forced its demise. The bank suspended operations on January 2, 1821, and was forced to end its affairs completely by the following year.
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Richard Damil, at a banquet in honor of General William Henry Harrison, at Vincennes, toasted its demise: “The State Bank of Indiana; more corruption than money.”
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Although the commerce of the neighboring frontier state of Illinois was hardly developed, it chartered four private banks in the postwar years, two of which loaned heavily for public land speculation. The Bank of Illinois, at Shawneetown, was a particular favorite of the state government. As early as the beginning of 1817, Illinois had passed a stay law, postponing all executions for one year unless the creditor agreed to accept the notes of that bank and of several
other banks in surrounding states. When the crisis came, the banks began to fail. There was a mass of unpaid debts, and Illinois note-holders suffered from the wave of bank failures in Ohio, Kentucky, and Missouri, the notes of which also circulated in Illinois. The Bank of Illinois failed by 1823, and another leading bank, the Bank of Edwardsville, which had begun business in the fall of 1818, failed in 1821.
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The other two banks—the Bank of Kaskaskia and the Bank of Cairo—never began operations.
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Illinois was thus confronted not only with a heavy debt burden but with failure by its own and neighboring private banks. Furthermore, the Illinois State Constitution, ratified in 1818, provided that no further banks be chartered in Illinois except a state-owned bank. The route seemed paved for a state-owned bank to come to the rescue. The first step of the legislature was to establish a specie paying bank.
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In the spring of 1819, it chartered the State Bank of Illinois, to be half owned by the state, half by private individuals. Authorized capital was to be the huge amount of $2 million from private sources, plus $2 million from the state, with the state to choose half of the directors. The bank was to have ten branches. Ten percent of the stock would be paid for directly in specie or specie paying bank notes, with a 12 percent interest penalty for any failure to redeem the bank’s notes in specie on demand. Not only was this capital not forthcoming but the new bank could not even attract the $15 thousand in specie capital legally necessary to begin operations. Even a supplementary act declaring state warrants the equivalent of specie could not attract the needed capital. As a result, the bank never began operations, and the charter was rescinded in 1821.

Meanwhile, the fall in prices of land and other property, and the bank failures and contraction of the money supply, added to the distress and to the burden of unpaid debts. A clamor began to arise for a wholly state-owned bank, which would not be hampered in its
operations by any specie paying requirement. The agitation was led in the Illinois House in the 1819–20 session by Representatives Richard M. Young and William M. Alexander, both from Union County in the southwestern tip of Illinois. Union County citizens submitted a petition for the establishment of a new State Bank of Illinois to issue inconvertible paper.
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After the defeat of an amendment to reduce the bank’s nominal capital, and to increase the proportion of paid-in capital, the bill passed the House by the narrowest of margins, fourteen to twelve. Two weeks later, an unusual protest was filed in the House against the bank bill by four Representatives: Wickliff Kitchell and Abraham Cairnes from Crawford County, Raphael Widen of Randolph County, and Samuel McClintoc of Gallatin County.
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These counties are in widely scattered areas of the state: Crawford in the East; Randolph in the West; and Gallatin, a more populous county, in the Southeast containing the town of Shawneetown. The protest assailed the bank bill as unconstitutional. But, in addition, it assailed all banks—even those redeeming in specie—as dangerous, and as creators of false and fictitious habits, corrupting morals by providing “quick and easy access to every luxury and vice.” The proposed state bank, without one cent of specie capital, was far worse. For it was clear that its credit had to depreciate, thus deceiving those who would accept its notes. The paper bank would inject “a false and fictitious currency, which has no intrinsic value, which must depreciate” like the old Continentals. The second economic argument was that the general embarrassments were due to bank credit expansion, and therefore that the bank would also aggravate the depression as well.

Citizens’ meetings in the previously mentioned counties protested against the bill, as did citizens of Bond County, a small county in western Illinois. The Bond County resolution met the relief problem squarely. It stated that the legitimate object of banks was to afford a convenient medium for granting credits on solid
capital, and that they were not suited for projects to create funds for needy individuals.
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It warned against depreciation of the new bank notes. On the other hand, a citizens’ meeting in adjacent Madison County, containing the important town of Edwardsville, supported the new bank as an expression of the state’s duty to afford relief. Support for relief was also given by the Edwardsville
Spectator
, Edwardsville’s influential newspaper.