The Panic of 1819 (3 page)

The boom therefore continued in 1818, with the Bank of the United States acting as an expansionary, rather than as a limiting, force. The expansionist attitude of the Bank was encouraged by the Treasury, which wanted the Bank to accept and use the various state bank notes in which the Treasury received its revenue, particularly its receipts from public land sales.
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The expansion of its note issue encouraged the state banks throughout the country, especially outside New England, to multiply and continue their credit expansion. The number of banks had increased from 246 in 1816 to 392 in 1818. Kentucky alone chartered 40 new banks in the 1817–18 session.
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Bank expansion was spurred by the decision of the Bank of the United States and the Treasury to treat the notes of nominally resuming banks as actually equivalent to specie. The Bank thereby accumulated balances and notes against the private banks without presenting them for redemption. Many of these notes were original Treasury balances which had been deposited with the Bank but not claimed from the state banks. In New England, on the other hand, both the private banks and the branches of the Bank of the United States pursued a conservative policy.
Indeed, they were forced to contract, as the New England branches of the Bank were continually forced to payout specie on the expanded note issue of the western and southern branches, since by prevailing Bank rule, all branches were liable for the notes of all other branches. As a result, the notes of the Massachusetts banks declined from a total of $1 million in June, 1815 to $850 thousand by June, 1818.
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A generally uniform currency prevailed throughout the country, most bank notes circulating at par.
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There were exceptions, however; during 1818, for example, notes of some banks in Pennsylvania were depreciated by as much as 30 percent, and in Virginia, Kentucky, and Tennessee by as much as 12 percent.
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Investment in real estate, turnpikes, and farm improvement projects spurted, and prices in these fields rose. Furthermore, the federal government facilitated large-scale speculation in public lands by opening up for sale large tracts in the Southwest and Northwest, and granting liberal credit terms to purchasers.
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Public land sales, which had averaged $2 million to $4 million per annum in 1815 and 1816, rose to a peak of $13.6 million in 1818.
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Speculation in urban and rural lands and real estate, using bank credit, was a common phenomenon which sharply raised property values.
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Furthermore, this speculation increased Treasury balances in western banks, and added to the flow of the Bank’s notes from west to east. Federal construction expenditures also helped to further the boom: they rose from $700 thousand in 1816 to over $14 million in 1818.
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Beginning in 1816, there was a construction boom in turnpikes, especially in New York, Maryland, and western Pennsylvania.
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Turnpikes were built by corporations, each of which received special charters from the states, and corporations in turnpike construction rivaled new banks in number. The share of transportation in the boom is also demonstrated by high and rising
freight rates on steamboats, which were just beginning operation.
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Shipbuilders also shared in the boom prosperity.
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It does not seem accidental that the boom period saw the establishment of the first formal indoor stock exchange in the country: the New York Stock Exchange opened in March, 1817. Traders had been buying and selling stocks on the curbs in Wall Street since the eighteenth century, but now they found it necessary to form a definite association and rent indoor quarters. The period also marked the beginning of investment banking: commercial banks and individual bankers bought blocks of stock and sold them in small lots on the market or sold the stocks as agents of the issuer. Prominent in this new business were former merchants in foreign trade who had accumulated capital, such as Alexander Brown and Sons, and persons with fortunes amassed elsewhere, such as Astor and Son.
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As a result of the monetary and credit expansion, imports continued at a high rate, exceeding the rising exports, and financed by specie outflow and by credits from foreign merchants. After the rush for imports in 1815 and 1816, import values, though remaining at a relatively high level, declined in 1817. This temporary decline from peak levels was spurred by the uncertainties surrounding the return of the banking system to specie payment in 1817, and the consequent relative slackening in monetary expansion during that period. However, imports increased sharply again in 1818 to $122 million. Imports of foreign goods into Cincinnati—the major western depot—doubled in 1817–18 over the 1815–16 totals.
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In
contrast, prices of imported goods, determined largely by conditions outside America, remained almost constant during these years.

Exports, helped by European prosperity and poor crops abroad, continued to rise in price and value. They rose to $88 million in 1817 and reached a peak of $93 million in 1818. Exports of domestic products also rose to a peak of $74 million in that year. Even reexports reached a postwar peak in 1818, although the increase over 1816 was negligible. Agricultural exports rose to $57 million in 1817 and to a peak of $63 million in 1818, advancing at a faster rate than domestic exports as a whole. Agricultural exports rose by $5 million in 1817 and $5.4 million in 1818, while aggregate domestic exports rose by $3.5 million and $5.6 million respectively. Cotton exports also reached a peak in the latter year.
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Prices of export staples rose even more rapidly during this period. Cole’s index of export staple prices at Charleston rose from 138 in March, 1817 to 169 in August, 1818. A similar rise occurred in Bezanson’s cotton index.
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The net result in the balance of trade was a sharp drop in the trade deficit to $11.6 million in 1817, and a later rise to $28.5 million in 1818.
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The large deficits of the postwar years are partly overstated, for some were offset by earnings of American shipping, which carried almost all American foreign trade—the earnings of which do not appear in the trade balance.
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Troubles and strains, however, began to pile up as the boom continued. The resumption of specie payments by the banks was increasingly more nominal than real. Obstacles and intimidation were the lot of those who attempted to press the banks for payment
in specie.
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As the Philadelphia economist, merchant, and State Senator Condy Raguet wrote to Ricardo:

You state in your letter that you find it difficult to comprehend, why persons who had a right to demand coin from the Banks in payment of their notes, so long forbore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the
interest
of the first to press the banks and the rest are
afraid
. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.
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The consequent loss of confidence in the banks was demonstrated by the emergence of a premium for specie on the market. The discount on bank notes made it more difficult for the banks maintaining specie payment to retain specie in their vaults, since people could redeem their notes for specie, and sell it for bank notes at a discount. Specie came to be at a premium in terms of Bank of United States notes, even though the Bank was required to pay in specie. This reflected a lack of confidence in the Bank’s ability to
continue specie payments. A premium on Spanish silver dollars—the major coin circulating in the United States—appeared in March, 1818, and reached 4 percent by June and 6 percent by November.
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The specie drain from the Bank vaults increased, adding to the heavy external drain for payment of imports. It became evident that the Bank could not long continue expanding its notes and paying out specie at such a rapid rate. Importations of specie from abroad by the Bank, totaling over $7 million and purchased at a heavy price, proved only a temporary expedient. The problem was aggravated by the pressure resulting from rapid repayment of the Federal debt. The autumn of 1818 and early 1819 were the scheduled dates for the repayment of the “Louisiana debt,” which had financed the Louisiana Purchase. Most of this debt—amounting to over $4 million—was owed abroad, and it had to be repaid in specie. The responsibility for meeting the payments fell on the Bank of the United States, the repository for the Treasury’s deposits.

Faced with these threatening circumstances, the Bank of the United States was forced to call a halt to its expansion and launch a painful process of contraction. Beginning in the summer of 1818, the Bank precipitated the Panic of 1819 by a series of deflationary moves. The branches of the Bank were ordered to call on the state banks to redeem heavy balances and notes held by the Bank. The requirement that each branch redeem the notes of every other branch was rescinded, thus ending the liability of the conservative eastern branches to redeem the notes of expansionist branches. The Boston branch began this move in March, and it was made general for all the Bank’s offices by the end of August. The contractionist policy, begun hesitantly under the presidency of William Jones and continued more firmly under the direction of his successor Langdon Cheves, sharply limited and contracted the loans and note
issues of the branches. As a result, total demand liabilities of the Bank, including notes, private and public deposits, declined precipitately from $22 million in the fall of 1818 to $12 million in January, 1819, and to $10 million by January, 1820. Of this amount, notes outstanding of the Bank fell from a peak of $10 million in early 1818, to $8.5 million in the fall of 1818, less than $5 million by the summer of 1819, and $3.6 million by January, 1820. Particularly striking was the decline in the Bank’s public deposits, consisting largely of bank debts accumulated from public land sales. They declined from $9 million in the autumn of 1818 to less than $3 million in January, 1819.
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Another result of contraction was a large rise in the Bank’s specie reserve, which had been about $2.5 million during 1818 and early 1819. As loans were recalled, and the specie drain reversed, specie flowed into the Bank and reached $3.4 million in January, 1820. Specie reserves spurted to $8 million in the spring of 1821, at a time when total demand liabilities of the Bank were less than $12 million.
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The contractionist policy forced the state banks, in debt to the Bank, to contract their loans and notes outstanding at a rapid pace. Total bank notes in circulation were estimated at $45 million in January, 1820, as compared to $68 million in 1816.
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The severe monetary contraction, lasting through 1820, led to a wave of bankruptcies
throughout the country, particularly outside New England. In many cases, banks attempted to continue in operation while refusing specie payment, but their notes depreciated greatly and no longer circulated outside the vicinity of issue. The notes of most of the inland banks depreciated and fluctuated in relation to each other. New England, in contrast, was the only area little touched by bank failures or runs; the banks outside of Rhode Island remained solvent.
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The entire hastily built private credit structure was greatly shaken by the contraction and wave of defaults.
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The financial panic led, as did later panics, to a great scramble for a cash position, and an eagerness to sell stocks of goods at even sacrifice rates.

The severe contraction of the money supply, added to an increased demand for liquidity, led to a rapid and very heavy drop in prices. Although detailed price information is available only for wholesale commodities, there is evidence that prices fell in many other fields, such as real estate values and rents. Most important for the American economy were the prices of the great export staples, and their fall was remarkably precipitate. The index of export staples fell from 169 in August 1818, and 158 in November, 1818, to 77 in June, 1819. A similar movement occurred in the price of cotton and in the Smith and Cole index of domestic commodity prices.
Evidence of falling prices can be seen in freight rates and in the prices of slaves.
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The fall in export prices was aggravated by a fall in European demand for agricultural imports, occasioned by the abundant European crops after 1817 and the crisis and business contraction in Britain during the same period. Values of American exports declined sharply as well. Total exports fell from $93 million in 1818 to $70 million in 1819 and 1820. Re-exports did not contract, and the brunt was taken by domestic exports, which fell from $74 million to $51 million. Of this drop, $20 million was accounted for by agricultural exports ($10 million by cotton and $7 million by wheat and flour). It was a pure price decline, since the physical volume of exports continued to increase steadily during this period.
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Imports fell even more in value than did exports, reflecting the decline in American incomes. Total imports fell drastically from $122 million in 1818 to $87 million in 1819 and $74.5 million in
1820, thus practically ending the specie drain. Imports from Great Britain fell from $42 million in 1818 to $14 million in 1820, and cotton and woolen imports from Britain fell from over $14 million each in 1818 to about $5 million.
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