Wedding of the waters, p.21
Wedding of the Waters, page 21
How could such an ebullient economy have emerged out of the disruptions and disturbances of the War of 1812 and the deflationary pressures of the early postwar years? In an ironic twist of history, the story of the boom begins at one of the darkest moments of American history, August 24, 1814, the day the British captured the capital and set Washington on fire, leaving the president’s mansion a blackened wreck.
President Madison had left the mansion on horseback early in the morning of that very hot August day, well aware the British were approaching Washington and also aiming for Baltimore. He headed first for the navy yard to assure himself about conditions at Chesapeake Bay, after which he planned to ride into Maryland to consult with the general in command of the nearby battlefield at Bladensburg, six miles beyond the navy yard. By the time Madison returned home about three o’clock in the afternoon, he had spent more than eight hours in the saddle, probably without anything to eat since early morning. But there was to be no rest for him.
During his absence, a small contingent of British had moved on Washington from the outskirts and set to work burning the city. In a performance whose elegance any professional terrorist might envy, the British restricted their arson to public buildings while sparing private property.* Rumors were soon circulating that such meticulous choice of targets must have been the work of a traitor who had identified the public buildings in advance to the British commander, General Robert Ross. Ross’s superior, Lord Bathurst, took a different view of this performance and warned Ross that at Baltimore, the next objective, he should “make its inhabitants feel a little more the effects of your visit than what has been experienced at Washington.”3
Madison found his home a shambles. Worse, no one could tell him where his wife, Dolley, had gone. She had escaped early on in her favorite carriage, but not before rolling up Gilbert Stuart’s full-length portrait of George Washington and entrusting it to the care of employees in the house. She spent the rest of the day and the night at the home of friends in Virginia, where she had as little idea of what had happened to the president as he knew of her fate. He ended up staying with a different set of Virginia friends. The president and the first lady did manage to reunite the following morning.
After assuring himself of Dolley’s safety, Madison set off once more to confer with his general on the road to the defense of Baltimore. Sixty-three years old, and in less than robust health, he would spend four more days and most of the nights in the saddle before returning to Washington, and then he had to struggle to restore a government out of the chaos the British had left behind.
Panic broke out everywhere as the terrible news spread across the nation over the days that followed. As so often happens in panics, few things can relieve high anxiety more effectively than hard cash. People rushed to the banks clutching the paper notes that constituted most of the money supply in those days, demanding specie—coins of silver or gold, or real money you could bite into—in place of their paper banknotes. Although the Constitution had given Congress the power to regulate the currency of the United States, there was no national currency, nor would there be one until the Civil War. The only money in the system was the lavishly printed paper notes issued by individual banks as the proceeds of loans or to redeem customers’ deposits, and a modest amount of minor coins that served as small change.
Anyone holding a banknote had the right to demand specie in exchange, but the limited supply of specie soon vanished as gathering hysteria in the wake of the disaster in Washington provoked more and more frightened citizens to rush to the bank to cash in their banknotes. Only the lucky few who managed to be at the head of the lines to the bank windows walked away with those precious coins in their pockets.
Under the circumstances, most banks had no choice but to suspend convertibility of their notes into specie.* The notable exception to this drastic response was in New England, where penny-pinching bankers had been characteristically zealous about limiting their note issue to what they could anticipate would be their customers’ needs for specie. Elsewhere, the new arrangements did not mean banknotes were no longer convertible into gold and silver, but they were no longer convertible on demand: the banks could refuse to provide specie unless they had sufficient gold and silver coins on hand to cover the withdrawals, which was hardly ever. Today’s world is much the same, only more so. Aside from coins for small change and a modest amount of paper currency, the virtual dollar of today consists of computer blips convertible into nothing at all except other nations’ equally virtual money, much less something shiny that you can bite into, and most people never give it a thought.
Despite the shock of suspending convertibility of notes into specie, the American economy did not disintegrate and go up in smoke in 1814. Just as the economy kept perking along after President Roosevelt made ownership of gold coins illegal in 1933, and again after President Nixon’s complete break with gold in 1971, people rapidly became accustomed to the new regime and proceeded to go on about their business. Like the money or not, there was no choice: money is infinitely easier and more efficient than barter for settling up transactions.
The suspension of convertibility was not about to interfere with the expansion of trade and commerce in 1814 America. The economy had been fundamentally transformed by the expansion in trade and commerce resulting from the War of 1812 and the trade embargoes that had preceded it. Production for sale was rapidly replacing production for home use. A growing volume of agricultural output was now moving to market while new factories equipped with laborsaving machinery were supplanting handicraft methods, especially in textiles.4* One of the most prominent innovations was Robert Fulton’s steam engine and iron-smelting plant in Jersey City, which was moved over to the East River after his death, building and repairing steam vessels for Hudson River and coastal traffic as well.
Thus, in a dramatic example of the law of unintended consequences, a robust American business boom emerged from the ashes of Washington, D.C., and the panic created by the fearsome aggressions of Lord Bathurst and General Ross in August 1814. The new monetary system may have developed out of tragedy, panic, and confusion, but by liberating the banks from the restraints of specie, it converted the traditionally scowling banker into a smiling gentleman only too happy to accommodate eager borrowers by printing as many banknotes as they required.
“The plenty of money…was so profuse,” reported a committee of the Pennsylvania legislature, “that the managers of the banks were fearful that they could not find a demand for all they could fabricate, and it was no infrequent occurrence to hear solicitations urged to individuals to become borrowers, under promises of indulgences most tempting.”5 According to Albert Gallatin, banknotes in circulation grew from $28 million in 1811 to $68 million in 1816, a compound growth rate of 19 percent a year.6 The number of banks in the United States jumped from 88 in 1811 to 208 four years later. Pennsylvania incorporated 41 banks just in the month of March 1814. By 1818, the nation would have 392 banks.7
But the flood of paper money evoked nightmares among conservative people who believed the only good money was scarce money. The gush of banknotes into circulation reminded them of the collapse of the currency from overissue during the Revolution, when the expression, “not worth a Continental” was about as abusive a statement as one could make in polite company. These concerns reached Congress, where Representative John C. Calhoun warned that banks could go on granting credits ad infinitum even if they did not have a single dollar in their vaults.
Congress responded by establishing the second Bank of the United States in 1816 and opening it up for business the following year—another milestone in that remarkable year 1817—thereby reinventing an institution rudely rejected from the system six years earlier. The first Bank of the United States, Alexander Hamilton’s brainchild, had been abolished in March 1811, its twentieth year of existence, in a wave of Jeffersonian antipathy to anything related to that four-letter word “bank.” “I have ever been the enemy of banks,” Jefferson had confided to John Adams.8 He considered banks an even greater threat to liberty than standing armies.
There was little difference between this bank and its predecessor, except that it was larger and its charter contained about three times as many words. But by reestablishing a Bank of the United States, which would correct the conditions of the currency by both influence and example, the authorities hoped to restore order out of a system running away with itself. One of its first rules would be to refuse the notes of any bank that did not pay in gold or silver.9
The Bank was to be the principal depository for the federal government, which meant that is where tax payments ended up. The Bank was authorized to issue its own notes, but not in excess of its capital of $35 million, and it had to hold specie equal to at least $7 million at all times. The Bank was also permitted to accept United States government bonds from buyers of its capital stock, a step designed to improve the market and respectability of federal government debts.
The first business of this new institution was to restore specie payments throughout the banking system. Agreements to this end were reached in a complex set of arrangements, but the actual result had more appearance than substance. The failure to reach a credible restoration of convertibility was just the first in a series of steps driving the new bank in a direction directly opposite to the hopeful expectations of its original supporters, including such wealthy and conservative citizens as Stephen Girard of Philadelphia and John Jacob Astor of New York.
Instead of putting on the brakes, the Bank’s first president, Captain William Jones, stepped on the accelerator. Jones was a man with strong political connections but a surprising choice nevertheless, as he had recently gone through personal bankruptcy. Prudence was not on his agenda. Right after taking over, Jones declared that he was “not at all disposed to take the late Bank of the United States as an examplar in practice; because I think its operations were circumscribed by a policy less enlarged, liberal, and useful than its powers and resources would have justified.”10
In this case at least, Jones was a man of his word. He presided over a large increase in lending as the Bank’s main office and branches in the South and west joined the rest of the banks across the country in a lending spree. By the beginning of 1818, the Bank had lent out a total of $41 million, had notes and deposits outstanding of $23 million—and a total of $2.5 million in specie in its vaults.* That was by no means all. The officers of the Baltimore branch later admitted to outright embezzlement.11
With the Bank of the United States setting the tune for the rest of the banking system to sing, the good times continued to spin out of control. Philadelphia State Senator Condy Raguet, an economist, wrote to the famous English economist David Ricardo, “The whole of our population is either stockholders of banks or in debt to them. It is not the interest of the first to press the banks [for specie] and the rest are afraid [to ask].…An independent man…who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.”12
All of this activity was great fun—while it lasted. The turning point came in the fall of 1818, when a very big chicken came home to roost. With the credit of the United States on the line, the Treasury called on the Bank of the United States to deliver $3 million in gold to the French as a payment toward the principal amount due on Jefferson’s Louisiana Purchase, in accordance with the 1803 agreements. At that moment, the total amount of specie on hand at the Bank of the United States was just about $2 million. The Bank had to turn to the credit markets in London for the money, but borrowing from Peter to pay Paul solves nothing.
The bubble was about to burst. The directors of the Bank replaced Captain Jones with Langdon Cheves, a distinguished attorney with a very different view of the world from his predecessor’s. Cheves was shocked at what he found. In his judgment, the Jones team had brought the Bank close to ruin without any misgivings over their irresponsible policies. He immediately decided enough was enough and cut new lending to the bone.*
Over the next two years, Cheves saw to it that the Bank’s notes and deposits outstanding shriveled from $23 million to only $10 million. He accomplished this feat at the same time the Bank called upon the other banks around the country to deliver specie in return for its holdings of their notes, most of which had come in as deposits of tax revenues. By 1821, the specie reserve would be up to $8 million. But the squeeze on the economy was intense. The Bank’s demand for hard cash only shifted the pressure to the commercial banks, which were now forced to press their own customers for repayments of loans. As borrowers were driven to liquidate assets in order to meet these payments, the whole process spread pain and disruption far and wide throughout the nation.13
“The Bank was saved, and the people were ruined,” was how one contemporary described the abrupt reversal in Bank policy.14 Seeing his worst fears coming true, Representative John Calhoun, in a letter to John Quincy Adams, depicted the “immense revolution of fortunes in every part of the Union; enormous numbers of persons utterly ruined; multitudes in deep distress; and a general mass of disaffection to the government.”15 Twelve years later, Senator Thomas Hart Benton, still fuming over what happened, described the Bank as “the jaws of the monster…. One gulp, one swallow, and all is gone!”16 After Andrew Jackson became president of the United States in 1829, he saw to it in short order that the Bank would be gone, resulting in a famous controversy with the Bank’s president, Nicholas Biddle.
Contemporary estimates of distress around the country reached as high as one-third of the population.17 In Batavia, the New York headquarters of the Holland Land Company, an observer reported on “the prospect of families naked—children freezing in the winter’s storm,” while others predicted that “there cannot be much ambition or hope; education will decay, and the decencies of social life be neglected.”18 Soup houses for the unemployed were established in New York as the New York Society for the Prevention of Pauperism estimated some 10 percent of the city’s population was on poor relief.19 The panic caused such devastation in the agricultural areas of Illinois, Tennessee, and Kentucky that the three legislatures created banks with the express purpose of relieving the distress of the community through low-interest loans to farmers and planters.20 Conditions were even worse in the South, where overexpansion of cotton planting in response to the War of 1812 led to a precipitous collapse of cotton prices, from 35¢ a pound in January 1818 to 13¢ a pound eighteen months later.21
Tragedy stalked the propertied classes as well: the value of real and personal property in New York State declined from $315 million in 1818 to $256 million two years later.22 Stock prices fell by 3 percent in 1818, and then by another 9 percent in 1819, a stunning reversal coming on the heels of a year when prices had climbed by 20 percent for a cumulative total of nearly 30 percent in the previous three years.23 As a reflection of the decline in the general level of economic activity, total imports shrank from $141 million in 1818 to $75 million in 1820; the only good news from that was the end of the specie drain as imports fell off more sharply than exports.24
Recrimination and finger-pointing flourished, most of it using hindsight to denounce the excessive generosity of the banks in financing foolish projects and inflating people’s hopes. The language was especially colorful on the subject of the “shavers and brokers” in the financial district, “who had fastened upon society like leeches, who eat out its substance and live upon its distress.”25 Tammany Hall described the nation as an “overgrown and pampered youth…vaulting and bounding to ruin.”26 There were those who saw all the wounds of speculation as self-inflicted and just deserts for the greedy. The cure was “to go back to the simplicity of our forefathers and exchanging…our dissipation for temperance and our vice for virtue.”27 A hundred and twenty years later, Russell Leffingwell of J. P. Morgan and Co. would offer the same prescription for how to get the economy out of the Great Depression of the 1930s: “The remedy is for people to stop watching the ticker, listening to the radio, drinking bootleg gin, and dancing to jazz…and return to the old economics and prosperity based upon saving and working.”28
In another familiar note, complaints were widespread about the national government’s failure to come to the aid of the people in distress. The spirit may have been willing, but the governmental purse was weak. In a time-honored response, John Quincy Adams pointed out that any step the government might take would only “transfer discontents [as it] propitiated one class…by disgusting another.”29
The hard numbers explain the passion of the words. Manufacturing employment in Philadelphia cascaded downward from 9700 in 1815 to 2100 in 1819.30 The price of wheat, a significant source of export earnings in New York State, plunged from $2.72 a bushel to 68¢ between 1817 and 1820, while prices of potash and hog’s lard fell approximately in half.31 Overall, prices fell 20 percent, putting enormous downward pressure on wages in the process. Although wages on the average dropped by about 25 percent, individual cases were much more severe.32 In Massachusetts, for example, agricultural wages toppled from $1.50 a day in 1818 to only 53¢ the following year.33
Interest rates followed in the downward path of prices and borrowing, although with a lag. In June 1821, Niles’ Weekly Register, a paper specializing in business and financial news, reported that an “immense capital [was] lying dead.”34 By that time, short-term interest rates were down by more than half from 1816, while long-term rates had fallen from over 6 percent to less than 5 percent.
