The Panic of 1819 (30 page)

⁴¹
“On Crawford‚s Currency Report,” Richmond
Enquirer
, March 21, 1820; March 28, 1820; April 7, 1820.

⁴²
“Justinian,”
Remarks
, p. 40.

⁴³
Madison to C.D. Williams, February 1820. James Madison,
Writings
, Gaillard Hunt, ed. (New York: G.P. Putnam’s Sons, 1910), vol. 9, pp. 26–27.

⁴⁴
Niles’ Weekly Register
15 (January 9, 1819): 364.

⁴⁵
Ibid., 17 (December 11, 1819): 227.

⁴⁶
Ibid., 16 (July 31, 1819): 320.

⁴⁷
“Seventy-Six,”
Cause of and Cure for Hard Times
(New York, 1819).

⁴⁸
Washington (D.C.)
National Intelligencer
, May 19, 1819. Also the Norfolk
Herald
, May 29, 1819.

⁴⁹
New York
National Advocate
, September 7, 1818. Also see “Solon,” Philadelphia
United States Gazette
, December 24, 1818. “Solon” attacked the East India trade on the familiar ground of imbalance and absence of possible reciprocity. Also see “Franklin,” Baltimore
Federal Republican
, July 23, 1819, “Hominius Amicus,” Washington (D.C.)
National Intelligencer
, May 15, 1819;
Niles’ Weekly Register
15 (December 5, 1818): 241.

⁵⁰
“Solon,” New York
Gazette
, December 9, 1818.

⁵¹
“H” in New York
Gazette
, December 10, 1818.

⁵²
These arguments were reminiscent of the ones used by the defenders of the East India trade in Britain in the seventeenth and eighteenth centuries.

⁵³
“A Virginian,” Washington (D.C.)
National Intelligencer
, January 16, 1819.

⁵⁴
“Piano E. Sano,”
City of Washington Gazette
, reprinted in the Boston
New England Palladium
, January 18, 1820.

⁵⁵
“Hamilton,” Philadelphia
United States Gazette
, December 9, 1818.

⁵⁶
Adam Smith,
An Inquiry into the Nature and Causes of the Wealth of Nations
(New York: Modern Library, 1937), p. 406.

⁵⁷
“Anti-Bullionist,”
Enquiry
, p. 41.

⁵⁸
“N.O.” in New York
Evening Post
, February 6, 1819.

⁵⁹
U.S. Congress,
American State Papers: Finance
, 3, no. 549 (January 25, 1819): 3939ff.

⁶⁰
Crawford to Representative Eppes. Finance Committee, December 29, 1818.
Annals of Congress
, 15th Congress, 2d Session, pp. 181–84.

⁶¹
Report of House Committee, U.S. Congress,
American State Papers: Finance
3, no. 614 (February 2, 1821): 660.

⁶²
U.S. Congress,
American State Papers: Finance
3, no. 591 (April 17, 1820): 530. Also see A. Barton Hepburn,
A History of Currency in the United States
(New York: Macmillan Co., 1915), pp. 46ff.

⁶³
“Senex,” New York Daily
Advertiser
, March 19, 1819.

Contrasting to proposals for expanding the money supply were suggestions for restricting bank credit such as placing curbs on the issue of bank notes or requiring banks to redeem in specie. They grew out of the grave problem of the defaulting and suspending banks, and of the widespread depreciation of their notes. The impetus came from both a belief that sounder banking would cure the panic by placing monetary and banking affairs on a firmer basis and the desire to prevent unsound bank credit expansion, and subsequent depression, in the future.

Secretary of Treasury Crawford, despite his toying with the idea of inconvertible paper, typified the opinion of those who wished to restrict banks and bank credit. In his Currency Report,
¹
he declared that in order to return to a specie convertible basis, superfluous banks must be eliminated. Banks should only exist in the principal commercial cities of each state. Small denomination note issues should be prohibited and banks should discount “nothing but transaction [commercial] paper payable at short date.”
²
The maximum amount of these discounts should equal the total of savings and deposit accounts and half the paid-in capital. Then the banks would always be able to maintain convertibility. The present system of banking,
Crawford declared, had banished specie by issuing paper in excess of the demand for transmitting funds and had fostered extravagance, idleness, and the spirit of gambling. Crawford stated that restraints on the banks were a responsibility of the state legislatures, although he conceded that the federal government had contributed to the spirit of speculation by granting credit on public land sales and through the extension of credit by the Bank of the United States.

Banks were largely state responsibilities. And so the problem of the banks was thrashed out largely on the state level. In Georgia, the legislature voted in late 1818 to penalize any incorporated bank refusing to pay specie on demand, and imposing a 2 percent per month interest penalty. This followed the defeat of a 3 percent per month interest penalty proviso in a bill to incorporate the new Bank of Darien. Another important measure passed in the same session—prohibition of the circulation of notes of unchartered private banks and of the issue of small denomination notes.
³
In 1820, Georgia passed an act requiring annual reports from the banks, but it proved ineffectual.
⁴

One of the methods of restraining bank credit expansion was to reject incorporations of new banks or to insert compulsory specie payment clauses in their charters. An indication of popular opinion was the presentment of a grand jury of Jasper County, a rural county southeast of Atlanta. The presentment asked for no further additions to bank charters.
⁵
The Georgia legislature turned down several applications for new banks. It rejected a charter of a proposed Agricultural Bank of the State of Georgia by a two-to-one vote. This bank would have had an authorized capitalization of $1 million. The bank was rejected even after the charter was amended to include an absolute specie paying clause.

The Georgia legislature also rejected by a similar majority a bill to authorize the Marine and Fire Insurance Company of Savannah to issue its own notes and discount promissory notes. On the other hand, it passed the charter of a new bank at Augusta, over opposition, and enacted a charter for the Bank of Darien without penalizing failure to pay in specie.
⁶

Virginia was a leading stronghold of hard-money opinion. Its leading statesmen, such as Thomas Jefferson, attacked any issue of bank paper beyond the supply of specie. As we have seen in the case of the Crawford Report, Thomas Ritchie, editor of the Richmond
Enquirer
, used sophisticated economic arguments to attack any suggestion of inconvertible paper schemes.
⁷
Typical of Virginia opinion was an
Enquirer
editorial laying the blame for the crisis squarely at the doors of the banks. The only remedy was for the parasitic banks to be eliminated, with industry and economy allowed to effect a cure.
⁸
Ritchie also urged that if bank paper be permitted to continue in existence, there at least be vigorous restrictions on all banks, whether state or national, private or incorporated. Small denomination notes must be prohibited and paper must always be convertible into specie. The least reluctance to do so should forfeit the bank’s charter.
⁹

A writer from Petersburg, in southeastern Virginia, blamed the current plight on paper money and cited the French economist, Destutt de Tracey (whose work was being translated under the supervision of Thomas Jefferson), to the effect that when a merchant could not pay his debts, the best he could do was liquidate and to become bankrupt quickly.
¹⁰

Another point of view was expressed by “A Virginian.” He suggested the abolition of all
incorporated
banking, instead placing reliance on private banks, the owners of which would be fully liable for their debts. Such banks, he declared, “cannot overtrade, that is, issue more paper than the market requires; their credit will not exceed its just limits.”
¹¹

Some writers, however, sounded a note of caution, stressing that bank note contraction should take place slowly, so as not to disrupt the economy unduly.
¹²

A unique monetary plan was offered by Spencer Roane, the great Chief Justice of the Virginia Court of Appeals and the leading foe, on behalf of states’ rights, of Justice John Marshall’s loose constructionist decisions.
¹³
Roane began by asserting that “banking is an evil of the first magnitude,” and in this sentiment he claimed the support of prevailing opinion throughout the United States. However, bank paper could not be eradicated and a return made to pure specie without causing “widespread ruin and distress.” How, then, to reform the banks? As long as they remained in existence, they must be controlled. The Bank of the United States was not the proper instrument for this control, for it possessed the nationwide power of increasing or diminishing the circulating medium at will. The United States Bank had a far greater potential for harm than did the state banks. On the other hand, the state banks needed a general central control, to produce uniformity of action and confidence in their issues and to see that they redeemed their notes. As a substitute for
the present unsatisfactory system, then, Roane proposed “Banks which shall be local as to the extent of their patronage and power, but national as to their responsibility.” Roane—champion of states’ rights—suggested a Constitutional Amendment to prohibit the states from creating any bank corporations and to authorize the federal government to establish an “independent bank” in every state, with the assent of that state. Of the capital stock of each such bank, one-fifth was to be subscribed by the United States government, one-fifth by the state, and the remainder by the citizens of the particular state. Each bank was to have fifteen directors, all citizens of the state—three to be appointed by the federal government, three by the state government, and the remainder by the other stockholders. “The objection to the United States Bank, as at present organized, would not apply to [these] bank[s]. . . . The patronage of the directory and its power over the circulating medium, would be confined to the state where it should be located.” The Bank of the United States had compelled some branches suddenly to curtail their note issue, because of the independent and lax management of other branches. “An independent bank would be enabled to pursue a course regulated only by its own business and the balance of trade for or against the state where it should be located.” On the other hand, the independent banks would be incorporated by the federal government and would therefore be uniform throughout the country, and all compelled to redeem in specie.

It cannot be doubted that institutions that are relied on to afford a national currency, should be under national control. It would be as unwise to depend on state institutions for a medium of exchange, in which to receive the national dues, as it would be to depend on state authorities for the payment of those dues [i.e., the system of the Articles of Confederation].

The Constitution, Roane asserted, gave Congress the authority to regulate the currency of the country and prohibit such regulation to the states. This should apply to paper currency as well as to specie.

Virginia’s hard money contingent, in its distrust of banks, recognized that the Bank of the United States had inflated proportionately
less than did the bulk of the state banks. However, like Roane, they feared the bank as having greater potentialities for evil. As Ritchie asked: state banks were certainly evil, but “what is there to control the power of the national bank?”
¹⁴

The most famous and one of the most thoroughgoing opponents of bank credit was Thomas Jefferson. Jefferson reacted to the panic of 1819 as a confirmation of his pessimistic views on banks.
¹⁵
He elaborated a remedial proposal for the depression in a “Plan for Reducing the Circulating Medium,” which he asked his friend William C. Rives to introduce in the Virginia legislature without disclosing authorship.
¹⁶
The goal of the plan was bluntly stated as “the eternal suppression of bank paper.” The method was to reduce the circulating medium gradually to that “standard level” which pure specie would find for itself equally in the several nations. For this purpose, the state government should compel the complete and utter withdrawal of bank notes in five years, one-fifth of the notes to be called and redeemed in specie each year. Further, the state should make it a high offense to pass or receive any other state’s bank notes. Those banks who balked at such a plan should have their charters forfeited or be forced to redeem their notes. In conclusion, Jefferson declared that no government, state or federal, should have the power of establishing a bank. He envisioned a circulation consisting solely of specie.
¹⁷

Governor Thomas Randolph, son-in-law and close friend of Jefferson, in his inaugural address in December, 1820, summed up the
predominant Virginia attitude toward banks.
¹⁸
Randolph stated that only specie, never paper, could be a measure of value. Specie, in universal demand, had a relatively stable value, while banks caused great fluctuations in the supply and value of money, with attendant distress. Randolph looked forward to the day when eventually the whole revenue of the government would be collected in specie only. He was willing to see the state print paper money, provided that it be absolutely convertible in specie and guaranteed to be equal in value to the specie owned by the state—in short, a 100 percent reserve program.