The Panic of 1819 (20 page)

As the loan office swung into action in the summer and fall of 1821, the proponents were hopeful of success. Most of the papers in the state had supported the bill, and they declared that the need for more circulating medium had been met. The
Missouri Intelligencer
went to the extent of urging that specie be permanently replaced by the new paper.
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The same paper argued obscurely that these certificates would meet the need for currency within the state, while interstate debts could be met with farm produce, thus giving the farmer a better chance of marketing his produce. Opponents, led by the Jackson
Independent Patriot
, branded the law the work of sinister selfish groups, particularly speculators and bankrupt spendthrift debtors, who wanted to obtain large amounts of “rag money.” The opponents charged that the inconvertible paper would soon depreciate and drive “real” money from circulation. The advocates of the loan office retorted that the paper was soundly backed by the future resources of the state, by expected future revenues from taxes and land sales.

By January, 1822, the loan office notes began to depreciate. The relief advocates met in January at St. Charles to discuss means to bolster the value of the certificates. To no avail, however. By March, the loan office notes had depreciated to such an extent as to have practically disappeared from circulation. Unreconstructed advocates asserted that the depreciation was due to deliberate attempts of merchants to force down the value for speculative purposes.
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It is true that merchants generally refused to accept the notes, but it
seems evident that the reason was serious doubts on their present and future value. Some merchants took the notes only at a discount, others not at all. Several merchants in the town of Franklin banded together to announce a boycott of the loan office paper, attacking it as “calculated to injure us materially in our business.” One Thomas Willis, a barber of St. Louis, advertised in the press that he would not accept a loan office note “on any terms whatever.”
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The extraordinary rapidity of the collapse of the notes was partly due to unfavorable judicial decisions that spelled the writing on the wall for the loan office. The loan office law was declared unconstitutional by the courts in February and in July, 1822, and the stay laws were overthrown in the same period. In the course of his St. Louis Circuit Court decision in Missouri on February 18, 1822, declaring the loan office act unconstitutional,
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Judge N. Beverly Tucker shed light on some of the reasons behind the loan office legislation. He declared that Kentucky’s inconvertible paper scheme had stimulated exports from there to Missouri, presumably because of low export prices resulting from depreciating Kentucky paper. Missouri, he declared, attempted a paper system to exclude Kentucky imports, a goal which was accomplished.
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The elections, as we have seen, were fought bitterly during 1821 over the loan office and stay measures. The reliefers sought a constitutional amendment to eliminate judicial opposition, and charged that the judges were prejudiced against the notes because they were forced to receive them in salaries. Anti-reliefers called for repeal. The elections were won overwhelmingly by the anti-relief forces.

Governor McNair followed the straws in the wind by not only calling for complete repeal, in his November 4 message to the legislature, but also by stating that the measures had proved unsuccessful
in alleviating the financial distress. McNair concluded that the only effective method of relief was private “industry” and economy. Swiftly, the legislature acted to repeal the loan office law, acting after only $200 thousand had actually been issued. The problem of disposing of the existing notes remained. One proposal to fund the notes at half their nominal value was given scant consideration, and, in a law of December 16, the legislature decided that no renewals of loans would be made, and that all borrowers would be required to pay 10 percent of the principal to the state every six months until the debt was completed. The notes would no longer be received in payment of dues by the state and would be destroyed as repaid.

Banking became a matter of controversy in Tennessee as early as the years of the postwar boom. Many small banks were established in the small rural towns of the state, and these were supported in the rural areas. The press in the two big towns of Knoxville and Nashville, however, sharply criticized this development as dissipating the capital that rightly belonged in the larger, commercial areas.
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Most of these small banks were consolidated in 1818 into branches of one of the leading banks, the Nashville Bank.

As insolvencies developed in the crisis, the banking affairs of the state became swiftly disordered. The Nashville Bank, the Farmers’ and Merchants’ Bank of Nashville, and the Bank of Tennessee (Nashville Branch), all had to suspend specie payments during June, 1819. On June 21, the day before the Nashville Bank suspended, citizens of Nashville had recommended immediate suspension of specie payments by all banks of Tennessee.
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On June 23, the leading bankers of Nashville met at the courthouse and passed an almost identical resolution, urging all the banks to suspend specie payments—while continuing their operations. They insisted that while the banks should suspend specie payments the public should not allow such a step to “impair the credit” of bank paper. By July, every bank in mid-Tennessee had suspended specie payments, and the only
major bank continuing to redeem was the Knoxville branch of the Bank of Tennessee. The Nashville banks issued a statement to justify their suspension. They pointed to the increased demand on them for specie; to meet these calls they would have had to press their debtors and ruin them. The Bank of the United States was blamed for the destructive pressure, as were easterners who turned in Tennessee bank notes for redemption. Therefore, the bank’s suspension while continuing operations was really a humanitarian gesture to shield their debtors and to prevent specie from being drained from the state.
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While the banks quickly found themselves forced to suspend payment, the public was not so eager to maintain the credit of their notes. Creditors such as merchants Willie Barrow and Thomas Yeatman advertised in the press their unwillingness to accept bank notes in payment.
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People turned to the legislature for debtors’ relief legislation and for methods of bolstering and expanding the money supply of the state. As has been stated, the leader of the relief forces, in both fields, was one of the dominant political figures in the state: Felix Grundy, now newly elected Representative from central Davidson County (including Nashville) on a relief platform. In Grundy’s resolutions, presented to the legislature on September 20, he stated that the “present deranged state of the currency . . . requires the early and serious attention of the legislature.” His major concrete proposal at that time was a virtual legal tender law, aimed at bolstering the money supply and aiding debtors—a law to compel creditors to accept bank notes of the state or forfeit the debt.
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Grundy’s bill staying executions for two years unless creditors accepted notes of state banks passed in the fall of 1819.
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East Tennessee was generally a more rural, less commercial area than the central region, but its main distinction was the relative absence of cotton and slave plantations, as compared to mid-Tennessee. East Tennesseans considered the suspension of specie payments by the banks, while continuing in operation, as a plan to evade meeting the banks’ just obligations. There was also a great deal of opposition to the bank suspension in mid-Tennessee. Citizens of Warren County, in that area, petitioned the legislature that banks be placed upon a “constitutional equality with the citizens” in paying their debts, by compelling the banks to redeem their notes in specie as promised. Henry H. Bryan, running for Congress from mid-Tennessee, declared in a campaign circular that

banking in all its forms, in every disguise is a rank fraud upon the laboring and industrious part of society; it is in truth a scheme, whereby in a silent and secret manner, to make idleness productive and filch from industry, the hard produce of its earnings.
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During 1820, the crisis continued to intensify; prices of produce fell, sheriff’s sales increased, and the bank notes, not redeemable in specie, continued to depreciate despite the stay law and the exhortations of the bankers. The cry began to spread that the great evil of the times was the continuing diminution of the currency. Davidson County, especially Nashville, was the center of the agitation. These advocates also began to criticize the banks bitterly for continuing to call on their debtors for payment. The legislature began to be considered the source from which new money should be produced. In the late spring and early summer of 1820, the chorus swelled for a special session of the legislature to supply an increased circulating medium. Typical of the agitation for increased currency at a special session was a petition from citizens of Williamson County, adjacent to Davidson.
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It declared that the banks were
contracting credit rather than affording relief. Relief must be speedily effected to avoid the “ruin” of most citizens of the state. The Nashville
Clarion
lauded the “several men of wealth” who had taken up the “fight for relief.”
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On the other hand, the Nashville
Gazette
opposed the plan.

Grundy prevailed upon the newly elected Governor Joseph McMinn to call the special session for June 26. The Governor, in his message to the legislature, recommended a plan for a state money. He first cited the diminution in the supply of money and the need for its increase. In his plan, the state treasury would issue certificates through a loan office, resting vaguely on faith in public responsibility, and on the usual general pledge for eventual redemption from revenues of public land sales and taxation. Three hundred thousand dollars in notes would be emitted by a loan office under control of the legislature, which would have many branches in the various counties. Its notes would be receivable in dues to the state.
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The proposal was shepherded and considerably expanded in the House by Felix Grundy.
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His bill provided for two loan offices, one in Nashville and the other one in Knoxville, with eight branches between them. Total note issue would be $750 thousand; $488 thousand in the Nashville area, and $262 thousand in the Knoxville area. This, he declared, might be insufficient, in which case the note issue should be increased. The notes would be loaned to individuals on real estate and personal security, at 6 percent; the maximum loan for each person would be $1,000. The maximum denomination note was to be $100, to insure plenty of notes in circulation, and to prevent seepage of large denomination notes out of the state and into the hands of eastern creditors. The notes were to rest on “public faith” and the eventual proceeds of land sales, and were to be receivable in payments to the state. Grundy asserted that the object of the legislation was to aid the wealthy as well as the poor, and that both groups were ardently for the legislation.

To the criticism that the loan office notes would not be accepted by the New York and Philadelphia creditors of Tennessean merchants, Grundy retorted that this would be so much the better, since the notes should stay at home. When that happened, surplus produce of the state could be the medium of traffic, rather than gold and silver. Grundy, in conclusion, lauded his proposal as positive and for the benefit of the community.

Representative William Williams, also of Davidson County, led the opposition to the Grundy plan. He offered two amendments to the bill: one to reduce authorized issue to $500 thousand, and the other to pledge in redemption a definite quantity of treasury surplus, thus effectively converting the plan into a far more limited operation. Both amendments were turned down by almost two-to-one majorities.
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Another major leader of the opposition was Representative Pleasant M. Miller, from Knoxville, who submitted a series of amendments to reduce the branches or add funds for redemption, but all were overwhelmingly defeated. Finally, the Grundy bill passed by a two-to-one vote.
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The passage of the Grundy bill engendered a great deal of bitterness. Protesting legislators submitted two separate resolutions against the bill. On the day of the passage, Representative Sampson David of Campbell County, in East Tennessee, submitted his reasons for voting against the bill. Among them he charged that this was an “untried and dangerous experiment,” that all paper institutions were ruinous to the best interests of the country, and that one man’s property would be used to pay the debts of another. A week later,
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Miller submitted a protest signed by six of the other opponents of the bill, with the result that eight of the thirteen voting against the bill felt it incumbent on them to register a protest. Miller’s statement was more reasoned than David’s. Miller stated that the loan office notes would only be exchangeable in the bank notes of the state, which continued to depreciate. Therefore, the
loan office notes would not be higher in value than the bank notes. In fact, they would be lower, since no funds for redemption would be possible for at least five years. Miller warned that the banks, which were the bulk of the creditors, would not receive the new notes, so that the notes would depreciate still further.

The loan office bill reached the Senate floor on July 14. Senator Samuel Bunch, from East Tennessee, moved to reduce the issue to $500 thousand, but this motion was defeated, and the amendment to make the notes redeemable in specie or specie paying bank notes was rejected by almost three to one. A stay provision for two years, if creditors refuse to accept the notes, was retained by a large margin despite an effort to strike it out. Another limiting amendment was approved, however—Nashville’s Adam Huntsman’s proposal to eliminate the Grundy provision to establish branches in every county. However, amendments to prohibit loans either to directors of the office or to members of the legislature were overwhelmingly rejected.
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