The Panic of 1819 (27 page)

One monetary expansionist, “Agricola,” is interesting for his denunciation of state debtors’ relief laws, such as stay and appraisement, which he denounced as pure “quackery.”
²⁹
All that we really needed was money, he said. Let Congress, therefore, give the people a circulating medium for internal purposes. Although he signed himself “Agricola” from Ontario, New York, the writer conceded
that he was also a merchant and manufacturer and claimed that the lack of circulating medium was oppressing the industrious and the middle classes.

One North Carolinian advocated inconvertible government paper while also proposing the abolition of incorporated state banking.
³⁰
Gold and silver were foreign commodities, he declared. Paper was the best medium, precisely because no intrinsic property was being employed as money. The writer estimated that the total United States revenue was $25 million, and that the first issue of government paper should also be $25 million. This limitation on issue would insure against depreciation of the paper. The issue of notes could be stopped by the government whenever they depreciated in relation to specie. Also, the government could call on holders of its bills to fund them by purchasing interest-bearing government bonds. The writer urged that the notes be first used to acquire mortgages on real estate. The government’s debt would then be offset by its mortgage assets. He envisioned a maximum issue of $50 million.

Another leading promoter of a national paper plan was the fabulous merchant and financier James Swan.
³¹
Swan accepted all the arguments of the critics of banks against bank paper. Indeed, he went further than Law, asserting that banks should be forced to pay their obligations in the same way as private individuals, so that the over-speculative banks might pay the penalty for their errors. He believed the remedy to be a new type of paper money that would not only eliminate the deficiency of specie, but also “give new life to our sunken trade, nourish the agricultural industry, create commercial wealth, and even render gold and silver altogether useless.”
The basis of this paper would be the approximately 800 million acres of public land owned by the United States government. Valued at its legal minimum sale price of two dollars per acre, the government owned the unalterable and undepreciable capital sum of $1.6 billion. On this capital, the government could certainly issue $150 million in notes, bearing a 3 percent interest. The government would lend its notes in individuals, to merchants on their inventories, and to proprietors on real estate mortgages. Since the loans were to be at 6 percent, and the notes would pay 3 percent to their holders, the effect was to charge a rate of 3 percent. The notes would be distributed to each state, in proportion to its population, and would be receivable at the Treasury and for state land sales and taxes. Based on a far greater amount of land capital than on scanty specie capital, they could not depreciate; indeed, asserted Swan, they would command a premium over specie, since they would bear a 3 percent interest, and since the Treasury would no longer receive specie. According to Swan, this unique interest-bearing feature of the new currency was its principal superiority to bank paper, which was not interest-bearing and “consequently [there was] no benefit in keeping it. Hence everyone sought to employ it, which caused a great rapidity in its circulation.” Swan did not even think that a legal tender provision would be necessary, since the public would eagerly welcome an interest-bearing currency.

Some plans for a national inconvertible paper were more modest than any of the aforementioned, and simply involved the issuance of a few million dollars in new Treasury notes, which would be loaned to the banks at 5 to 6 percent interest to ward off specie runs.
³²

Proposals for an inconvertible federal paper money only fleetingly reached the stage of Congressional consideration. One instance was the resolution, in late 1819, by Representative Charles C. Pinckney of South Carolina, for the establishment of a government paper money system. The New York
American
was outraged.
³³
Surely, it warned,
Congress could not entertain such a proposition for a moment. It would inevitably banish specie from the country, depreciate the currency, greatly increase the cost of living, and defraud the honest debtor. The country, asserted the
American
, had sufficient specie in circulation and had succeeded in bringing prices down again “to their just level,” injuring in the deflationary process only the speculators on credit. Naturally, these speculators would like to return to the “system of fictitious values” built upon immense paper issues.

Although no direct action was taken on Pinckney’s proposals, more support was given in the House for a serious inquiry into the possibility of a government paper plan, and the House passed a resolution in July, 1819, requesting the Secretary of the Treasury to report measures “to procure and retain a sufficient quantity of gold and silver coin in the United States, or to supply a circulating medium, in place of specie.” The conservative press was shocked at this resolution, which formed the basis for Secretary Crawford’s famous Report on the Currency of the following year.
³⁴
One of the most bitter attacks was leveled by the fiery William Duane, publisher of the Jeffersonian Philadelphia
Aurora
, and a powerful figure in Pennsylvania politics. In an open letter to Langdon Cheves, president of the Bank of the United States, Duane, in his typically vitriolic style, charged that Congress was about to set up a new Continental currency, the object of which was to ensure the supremacy of the villainous Bank of the United States.
³⁵
Hezekiah Niles went so far as to suspect Crawford of secretly plotting the establishment of a paper system.
³⁶

Crawford’s Report was sent to the House the following February.
³⁷
It is true that he concluded against an inconvertible paper plan
and that this ended any Congressional action on the subject. However, he did present a plan which he considered the best of any possible paper currency scheme. This plan has been unduly neglected by historians, for it presented many interesting facets and aroused considerable controversy in the contemporary press. Crawford, far from being a straightforward enemy of paper expansion, throughout his report found himself in a quandary on the paper money issue. He first stressed the disadvantages, and then the advantages, of a national inconvertible currency.
³⁸
On the one hand, he recognized that paper issues would drive specie out of the country and lead to a rapid depreciation in the value of the currency. On the other hand, he maintained that an increase of paper issues increased monetary demand for goods, and hence caused production to rise beyond the level it would attain under a purely specie currency. Therefore, the current sudden contraction of paper money not only sharply lowered prices and injured debtors but also hampered enterprise and production. He acknowledged that falling prices benefited the export market, but pointed out that they also depressed the prices of all non-exportable goods, such as land and houses. Crawford, in fact, far more sophisticated than Law or the other national currency advocates, recognized that
falling
prices were far worse for enterprise than simply
low
prices. Stated Crawford:

A manufacturer will not hazard his capital in producing articles, the price of which is rapidly declining. The merchant will abstain from purchases, under the apprehension of a further reduction in price, and of the difficulty of revending at a profit.

The advantage of paper money, then, was to stimulate production and enterprise, particularly in contrast to the wringer that the specie system was currently imposing on the economy.

The paper money plan outlined by Crawford was as follows: The government would issue Treasury notes and put them into circulation in exchange for specie or for government bonds (“stock”) at
par. The holder would have the option of converting the notes into
government bonds
(“stock”) at any time. These bonds would be yielding a low rate of interest. The banks would be completely relieved of any obligation to pay their notes in specie; instead they would be obliged to redeem them in Treasury notes. As a check on banks, only the national currency would be receivable in payments to the government. Furthermore, the banks would be required to buy government bonds on the latter’s request.

Now, suggested Crawford, suppose the demand for money in the economy rose. This would push the market rate of interest above the rather low rate of interest set on government bonds. Individuals and banks would then exchange their government bonds for the national currency at government offices, and relend the money at the higher market value rate of interest. In this way, by issuing more currency as the demand increased, the market rate of interest would be driven down to the official rate on government bonds. Conversely, suppose that the demand for money fell. Then, the market rate of interest would fall below the rate of government bonds; holders of the paper currency would exchange it for government bonds in order to reap the higher interest return on bonds. The government would retire the currency handed in, the supply of money in circulation would fall, and the market rate of interest would rise to that on government bonds.

Crawford, by postulating a paper currency convertible into government bonds, expected that in this way the supply of currency would be automatically regulated so as to set the market rate of interest equal to the rate paid on government bonds. Further, the supply of currency would be regulated by the demand for it. Under this plan, Crawford believed that there could be no excessive issue of the money supply. If the issue of paper became excessive, the rate of interest on the market would fall, and, as we have seen, holders of paper would exchange it for government bonds, reducing the supply of paper in circulation. Thus, both the supply of currency and the rate of interest would be automatically regulated.

Crawford finally rejected his own plan, with considerable reluctance. He did it primarily because the record of governments
showed that they could not be trusted with paper money, that they would inevitably abuse this power through excessive issues, and burden the economy with all the consequent evils of inflation and depreciation. His second reason was the location of the major monetary troubles in the South and West, which contributed a large part of the federal revenue through public land purchases, while the government spent most of its revenue in the East. As a result, there was a permanent drain of the currency from the West and South, a drain unjustly ascribed in those regions to the Bank of the United States, and this would continue whether the currency was specie or paper. So the regions with the greatest deficiency of currency could not be helped by a national paper. There was no alternative but to conclude that the national suffering must continue until property values and wages had fallen to where the banks would be able generally to resume specie payments.
³⁹

Crawford’s final rejection of a national paper scheme was no great inspiration to the hard money stalwarts, who resented his doctrinal concessions to inconvertible paper, and his proffered, if finally rejected, plan for a national currency. Thus, William Duane, of the Philadelphia
Aurora
, simply dismissed the plan as a “tissue of absurdities.”
⁴⁰
More interesting was the reaction of Thomas Ritchie, publisher of the important Richmond
Enquirer
, fountainhead of Virginia Jeffersonianism,
laissez-faire
, and hard money doctrine. Ritchie penned a very intelligent critique of the Crawford Report, including its sections on the causes of the crisis, in three articles in the
Enquirer
.
⁴¹
Crawford admitted, began Ritchie, that no paper money could succeed unless protected from excessive issue to the same extent as specie, with the latter’s universality of use throughout the world. Ritchie maintained that only specie or paper convertible into specie could avoid depreciation. Specie-convertible paper was protected from excess issue because an external drain
would “restore the equilibrium.” Crawford, on the other hand, suggested substituting for this specie convertibility a new type of convertibility—into funded government bonds. But in contrast to the relative stability of the value of specie, the universal medium, the value of government bonds fluctuated very rapidly. Their value, continued Ritchie, was affected by numerous factors: the prospects for profit; the quantity of bonds on the market; the status of the government debt; and the prospects of war or peace. Crawford, for example, admitted that in times of war or emergency, his proposed currency would collapse completely, whereas specie always rose in public esteem under crisis conditions.

Ritchie then turned to the automatic regulatory feature of the plan that had so recommended it to Crawford. First, Crawford had contended that an excessive paper issue would cause interest rates on the market to fall below the interest rates on government bonds, and thus impel holders of currency to convert their holding into bonds. But this argument assumed that the “rate of interest necessarily depends on the quantity and value of money in circulation.” This, asserted Ritchie, was clearly incorrect. In Ricardian fashion, he declared that the value of money and the rate of interest depended on different principles. The former was determined by the proportion between the “circulating medium and the quantum of exchanges.” The latter depended on the “real or supposed profit of capital; the profit of capital depends on the proportion between the quantity of capital and the demand for its profitable enjoyment.” A fourfold increase in the money supply, said Ritchie, would raise prices by four and reduce the value of money by one-fourth, but it would not affect the
rate
of interest. The
amount
of interest and the amount of principal on any transaction might increase fourfold, but this need not change the rate.