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thesis entitled

INTERNATIONAL CAPITAL FLOWS AND DOMESTIC
ECONOMIC FLUCTUATION: THE UNITED STATES
DURING THE 1830's

presented by

MILTON ESBITT

has been accepted towards fulfillment
of the requirements for

   
   

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Date November I 9 ,

 

ABSTRACT

INTERNATIONAL CAPITAL FLOWS AND DOMESTIC
ECONOMIC FLUCTUATION: THE UNITED STATES
DURING THE 1830's

BY

Milton Esbitt

This dissertation shows how important components
in the structure of the American economy and the economic
relationships between America and Great Britain enabled
economic disturbances on one side of the Atlantic to be
transmitted to the other.

In examining the structural elements of the Ameri-
can economy two questions arose the treatment of which in
previous works was found to be incomplete. What were the
effects of the fiscal and monetary policies of the Jackson-
Van Buren administrations on the economy? Secondly, what
was the relationship between changes in the supply of
specie and changes in the money supply, especially bank
money and what were the causes of these specie inflows in
the mid-1830's?

The dissertation is divided into four parts. The

first focused on the structural elements which made the

Milton Esbitt

American economy receptive to external disturbances. Attne-
tion was placed on the financing of the Anglo-American
trade. The second part examined the effects of the fiscal
and monetary policies of the federal government on the per-
formance of banks. The third part deals with the Panic of
1837, the immediate events that led to it and the recovery
process which followed. The final section covers the
deflation period of 1839-1844, its causes and the forces
which brought it to an end. A comparison of the 1839-1844
deflation with others of the ante-bellum period concludes
the dissertation.

Three hypotheses were tested. The first examined
the relationship between the British money market and
Anglo-American trade. The results were inconclusive pri-
marily because of a lack of sufficient data. The second
hypothesis examined the relationship between changes in
the supply of specie and changes in the supply of money.

It was shown that there was no support for the often assumed
relationship between these two variables. Regression analy-
ses using annual data and first differences were used in
testing these hypotheses. The final hypothesis dealt with
the question of whether Deposit banks performed differently
than other banks and the factors contributing to the dif-
ferences. Deposit banks in general did pursue a more
expansionary lending.policy than nonrdeposit banks and

nmwements in Treasury deposits were more important than

Milton Esbitt

movements in specie in explaining this difference. A series
of Chi square tests were used for this hypothesis.

A large number of aggregate and disaggregate series
dealing with both the American and British economies were
used. New series were developed for American foreign
exchange rates as well as domestic exchange rates. Esti-
mates were also developed for the condition of Deposit and
non-deposit banks in the various states and the major
cities.

The dissertation showed that given the structure
of the Anglo-American trade and particularly the relation-
ships between American and.British money and capital markets,
economic disturbances were transmitted from one country to
the other. The financial panic of 1837 was mainly due to
pressures eminating from Great Britain but aggravated by
internal factors in America. The collapse of the British
money and capital markets in 1839 and the cotton market
brought down the superstructure of Anglo—American trade.
This in turn led to the deflation in America which lasted

until 1844.

INTERNATIONAL CAPITAL FLOWS AND DOMESTIC
ECONOMIC FLUCTUATION: THE UNITED STATES

DURING THE 1830's

BY

Milton Esbitt

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Economics

1970

CD Copyright by
MILTON ESBITT

1971

LIST OF
LIST OF
Chapter

I.

II.

III.

IV.

TABLE OF CONTENTS

TABLES O O O O O I O O O O O O
APPENDICES . O O O O O O O O 0
INTRODUCTION . . . . . . . . . .
The Existing Analysis . . . .
The Anglo-American Economies and the
Transmission of Economid Disturbances .
BANKING AND ECONOMIC ACTIVITY DURING 1833

AND 1834 . . . . . . . . . . .

The Second Bank of the United States and
State Banks . . . .

the

Banking and Economic Activity During "Biddle' s

Contraction" . . . . . . . . .
CREDIT, MONEY AND SPECIE IN THE 1830's .
Domestic Trade and Credit . . . . .

Anglo-American Trade and Credit . . .
Specie Flows and the Money Supply . .

The Federal Government and the Supply of Money

and Credit 1834- 1835 . . . . . . .
Appendix to Chapter Three . . . . .

THE GROWTH OF AGGREGATE DEMAND IN THE MID-1830'S

Cotton and the American Economy in the
Mid- 1839' s . . . . .

Specialization, Urbanization and the Growth in

the Mid-West and East . . . . .
State Governments and the Growth of
Transportation Infrastructure . . . .

ii

Page
iv

viii

14

15
30
36
36
44
48

69
80

83

83
89
97

Chapter Page

V. THE END OF PROSPERITY . . . . . . . . . 110

Federal Fiscal and Monetary Policies in 1836 . 112
The New York Money Market in the Last Half
of 1836 . . . . . . 146

The British Money and Commodity Markets
During 1836 . . . . . . . . . . . . 152

VI. COTTON, SPECIE AND THE FINANCIAL CRISIS OF 1837 168

Grain, Cotton and the Anglo-American Money
Markets . . . . . . . . 169
Suspension of the New York City Banks . . . 186

VII. THE AFTERMATH OF THE PANIC: DISLOCATION AND
RECOVERY O O O O O O O O O O O O O 2 O 0

Dislocation and Its Economic Costs . . . 200
The Movement Towards Recovery in the United
States 0 O O O O I O O O O O O 212

Resumption and Recovery . . . . . . . . 227
VIII. THE BRITISH MARKETS AND THE PANIC OF 1839 . . 255

The British and Continental Markets: Grains

and Specie . . . . . . . . . . 256
The End of the Recovery: America in 1839 . . 265
The End of an Era: The Panic of 1839 . . . 276
IX. THE BECALMED YEARS: 1840-1843 . . . . . . 292
Reaching a Temporary Botton, 1840 . . . . 293
The Revival of Late 1840 and 1841 . . . . 299
The American Economy Reaches Botton: 1842—
1843 I O O I O O O O O O O O O 309
The Path to Recovery: 1843-1844 . . . . . 317
The 1839- 1843 Recession in Historical
PerSpective . . . . . . . . . . . . 328
X. CONCLUSIONS . . . . . . . . . . . . 345
Excess Demand and Economic Growth . . . . 345
A Summary of the 1833-1843 Period . . . . 347
Concluding Comments . . . . . . . . . 359
BIBLIOGRAPHY . . . . . . . . . . . . . . 363
APPENDICES . . . . . . . . . . . . . . . 381

iii

Table

2.1.

3.3.

4.1.

LIST OF TABLES

Comparison of the Second Bank of the United
States and the Safety Fund Banks of New

York State, Major Assets and Liabilities,
1831-1834 . . . . . . . . . . . .

Major Assets and Liabilities of the Second
Bank of the United States, Monthly August
1833-0Ct0ber 1834 o o o o o o o o 0

Major Assets and Liabilities, Banks of
Massachusetts, Pennsylvania, Rhode Island,
North Carolina, New York City, and the
Second Bank of the United States, 1833-

1834 . . . . . . . . . . . . . .

Per cent of the Variation in the Money Supply
and Bank Money Explained by Variations in the
Total Supply of Specie and Bank Specie

Holding, 1830-1845 . . . . . . . . .

Percentage Change in Major Assets and
Liabilities State Banks by Region,
1835-1837 . . . . . . . . . . . .

Percentage Change in Major Assets and
Liabilities of Banks in Selected States
and Cities, 1834-1837 . . . . . . . .

Per cent Distribution of State Debts Out-
standing in 1838 by Purposes for which
Incurred . . . . . . . . . . . .

Percentage Changes in Selected Economic Series,

1830-1836 . . . . . . . . . . . .

Capital Stock and United States Treasury
Deposits of Deposit Banks Around June 1,
1936 O O O O O O C O O O O O O O

The Relationship Between Changes in United

States Treasury Deposits and the Major Assets
and note Circulation of Deposit Banks, June-
December 1836 . . . . . . . . . . .

iv

Page

16

21

27

6O

66

67

99

104

113

115

Table

5.3.

8.1.

Interstate Transfer Drafts Issued and Payable
Between June 23, 1836 and December 15, 1836 .

The Relationship Between Net Interstate
Transfer Flows and Changes in the Major
Assets and Note Circulation of Deposit

Banks Between June-August, 1836 and

October 24-November 7, 1836 . . . . . .

The Relationship Between Net Interstate
Transfer Flows Necessitated by the Dis-
tribution Act and Changes in the Major
Assets and Note Circulation of Deposit

Banks Between October 24-November 7, 1836
and December 1836 . . . . . . . . .

Comparison of the Changes in Major Assets and
Liabilities of Deposit Banks in Land Sale and
Non-Land Sale States, July-October 1836 . .

Distribution of Specie in State Banks, By
Region, 1835-1836 . . . . . . . .

Major Assets and Liabilities of Deposit Banks
New York City July 1836-July 1837 . . . .

The Amount of Treasury Deposits in the Several
States During June and December, 1836, and the

Amounts Due and Received by the States Under
Sections 12 and 13 of the Deposit Act of June
23, 1836 O O O O O O O O O O O 0

Amount of Money Transferred From New York City

Deposit Banks for the First Three Payments of
the Distribution . . . . . . . . . .

Percentage Changes in Selected Price Series
1835—1838 . . . . . . . . . . . .

Percentage Changes in Bank Lending, Specie
Holdings and Current Demand Liabilities,
Selected Banks, April 1837-June 1838 . . .

Estimates of State Expenditures and Receipts,
per Capita and Aggregate for All States
1830-1845 . . . . . . . . . . . .

Average Annual Prices and Volume of Grain
Imports United Kingdom, 1830-1845 . . . .

Page

121

124

126

136

144

147

181

187

203

220

240

257

Table

8.2.

9.1.

B-S.

Percentage Changes in Selected United States
Price Series, Monthly 1839 . . . . . .

Major Assets and Liabilities of Selected Banks

1838-1840 . . . . . . . . . . . .

Ratios of Current Demand Liabilities and
Demand Deposits to Bank Specie Holdings
in Selected Banks 1839 . . . . . . . .

Prices of United States State of New York, and

New York City Bonds at New York City February
1842-MarCh 1843 o o o o o o o o o 0

Imports Into the Port of New York, 1833-1844
Comparison of Three Ante-Bellum Economic
Disturbances, 1818-1822, 1837-1843,

1857-1860 . . . . . . . . . . . .
United States Balance of Payments, 1830-1845

Federal Receipts, Expenditures, Annual and
Gross Deficits and Surpluses, 1830-1845 . .

Receipts From Public Land Sales by the United
States, Quarterly, 1830-1845 . . . . . .

United States Exports of Flour, Corn and Meal,

1830-1845 . . . . . . . . . . . .

Interstate Transfer Drafts Issued for the
Distribution of the Surplus Revenue . . .

Estimates of Major Assets, All United States
Banks, 1829, 1833-1845 . . . . . . . .

Estimates of Major Liabilities, All United
States Banks, 1829, 1833-1845 . . . . .

Selected Assets and Liabilities of Federal
Deposit Banks, 1834-1837 . . . . . . .

Comparison of Percentage Changes in Major
Assets and Liabilities of Selected Deposit
Banks and Banks of the States or Cities in
which they are Located, 1834-1847 . . . .

Monetary Conditions in the United Kingdom,
1830-1845 . . . . . . . . . . .

vi

Page

266

270

280

319

323

333

383

384

385

386

387

389

390

391

392

(1)
k0
43

Table

B- 6.
B- 7.
B- 8.
B- 9.
B-10.
B-11.
B-12.
B-13.
B-14.
B-15.
C- 1.
C- 2.
C- 3.
C- 4.
C- 5.

Estimates of the United States Money Supply,
1833-1845 . . . . . . . . . . . . .

Average Short-Term Interest Rates in London and
New York Money Markets and the Bank of England
Discount Rate, Monthly, January 1834-December

1844 O O O I O I O O O O O O O 0

Foreign Exchange Rates, Dollars and Pounds,
January 1834-December 1843 . . . . . . .

Value of the Pound Sterling in Dollars . . .

The Condition of the New York City Banks, July
1834-rday 1844 o o o o o o o o o o 0

Major Assets and Liabilities of the Leading New
York City Deposit Banks, February-July, 1837 .

Quarterly Indicators of Monetary Conditions in
the United Kingdom, 1833-1842 . . . . .

Major Liabilities of the New York City Banks,
January 1837-May 1838 . . . . . . . . .

The Condition of the New York Safety Fund
Banks, 1831-1837 . . . . . . . . . .

Prices of Domestic Exchange at New York,
January 1835-September, 1842 . . . . . .

Estimates of United States Cotton Prices,
1830—1845 0 o o o o o o o o o o o 0

United States Cotton Production and
Consumption, 1830-1845 . . . . . . .

Anglo-American Trade, 1830-1845 . . .
Cotton Consumption and Production, United
States and the United Kingdom, Percentage
Changes, 1830-1845 . . . . . . . . . .

Monthly Prices of Short-Staple Cotton, New
Orleans and England, January 1834-January
1845 O O O O O O O O O O O O O 0

vii

Page

395

396

399

402

403

404

405

406

407

408

412

413

414

415

416

 

4-

LIST OF APPENDICES

Appendix Page
Appendix A . . . . . . . . . . . . . . 382
Appendix B . . . . . . . . . . . . . . 388
Appendix C . . . . . . . . . . . . . . 411

viii

CHAPTER I

INTRODUCTION

The Existing Analysis

The third decade of the nineteenth century was one
of change, sometimes turbulent, for the American economy as
well as for American political life. Most of this decade
was passed under the warmth of good times.1 The last three
years and the first three of the next decade were times of
instability which, by 1839, developed into a depression,
supposedly second in magnitude to that of the "Great
Depression" of this century.2

Most of the works dealing with the economy during
the period focused on the conflict, in which Jackson and
Biddle were the star actors in a many plotted drama, pitting
the new money interests of Wall Street and the old of
Philadelphia, the supporters of banking which would aid
public and private groups in the construction of develop-
mental investments such as the transportation infrastruc-
ture, and those who believed that banks should continue
gmimarily as "commercial" banks.3 Finally, we had those
who supported a hard currency, one based on specie and
ébvoid of bank notes not completely redeemable in specie,

amithose who, for whatever reason, believed that banks

should have the privilege--some held the right to issue bank
notes.4
Besides the works dealing with the political-economic
conflict over banking, there have been but two which have
dealt with the depression with the use of economic analysis.5
In 1954, R.C.O. Matthews in his, "A Study in Trade Cycle
History," placed a large part of the blame for the depressed
economic conditions prevalent in the United Kingdom and the
United States during the last years of the 1830's and the
first of the 1840's on actions emanating from the United
States.6 As we shall see, he underestimates the crucial
role which the money and capital markets of the United
Kingdom--mainly centered in London--had in determining the
economic health of the Anglo-American economies. Walter B.
Smith, writing a year earlier had recognized this dependence.
Easy money in England in the early 1830's stimulated
the merchandise trade by making merchantile credits
available to American merchants, by facilitating a
period of prosperity in England which rebounded to the
benefit of American producers, and lastly by touching
off a wave of loans to American States and corpora-
tions which brought prosperity to the United States
and also assisted the process of paying for these
imports.7
Peter Temin in his recently published book, "The
Jacksonian Economy," has shown that much of the works dealing
with this period overstated the importance of the United
States Bank and the policies of the Jackson and Van Buren

'mhunistrations in the economic fluctuations of the 1830's.

Pmmfly because of his stress on the use of aggregate monetary

data, however, he moved to the opposite direction and, as
we shall see in Chapters three to six, underestimated the
effects of the fiscal and monetary policies of these admin-
istrations on the American economy during these years.

In his analysis Temin assumes that increases in the
amount of specie available to the banks led to an expansion
of the American money supply which in turn led to the growth
of economic activity. This approach, however, implies that
there was no problem as far as the demand for these lonable
funds were concerned. As we shall show in this work there
was an asymmetrical relationship between the availability
of credit facilities and economic activity, an expanding
supply was necessary for continued economic expansion, but
the existence of such facilities did not necessarily ensure
an expansion of economic activity.

The Anglo-American Economies and the Transmission
of Economic Disturbances

 

During the 1830's and 1840's, the American economy
was dependent on cotton exports for a majority of its foreign
exchange earnings, and on the London money and capital markets
for short-and-long-term international capital supplies.9
Moreover, these capital inflows were vital to the growth of
the domestic money supply and credit markets.

This work will examine how, given the structure of
nglo-American trade and particularly the relationships

Immween the American and British money and capital markets,

economic disturbances could be transmitted from one country
to the other. More specifically, by examining the relation-
ships between the American and British economies and the
mechanism which transmitted economic shocks from one country
to the other, we will attempt to show that: (l) the mone-
tary panic of 1837 was due mainly to pressures eminating
from Great Britain but with internal factors in America
aggravating the situation; (2) the collapse of the London
money and capital markets in 1839 brought down with it the
British cotton market and the superstructure of the Anglo-
American trade, which in turn brought on the depression in
America in late 1839. The severity and the length of the
depression indicates that the structure of the American
economy contained critical faults which enabled the shock
waves from Great Britain to have such drastic effects on

the American economy.

These statements are in conflict with the conclusions
of Matthews and in part those of Temin. This is primarily
due to the fact that one's VieWpoint and eventually the con-
clusions derived from a particular analytical study is shaped
not only by when, but also by where in the causal process one
enters.10

Matthews focused his attention on the British export
industries and the relative importance of fluctuations in
'UmaAmerican market on this important sector of the British

expnomy.ll But, as already noted, he overlooked the crucial

role which the London money and capital markets played in
financing British exports to the United States. An analysis
is incomplete which states that the sharp drop in British
exports to the United States was the primary cause of the
1839 downturn in Great Britain, when the decline in exports
was mainly due to monetary conditions in Great Britain.

Temin, as Matthews, does not fully taken into account
the importance of the British money and capital markets to
-the health of the British economy. It was the vitality of
the British economy, especially its cotton textile industry;
and on capital and money markets that permitted the continued
expansion of the American economy.

During the mid-1830's economic growth in the United
States was characterized by an excess demand, at full employ-
ment, for domestically produced goods. At the same time
there was an excess demand for money needed to finance the
growth in demand for goods. Both of these excess demands
were met by an excess supply, in terms of the ability of
the American market to absorb them, of securities which
flowed across the Atlantic in ever increasing amounts during
the mid-and late-1830's. The excess demand for goods grew
out of the expanding cotton market, the willingness and
ability of state and local governments to undertake vast
internal improvement projects and the increasing specializa-

12

tion of the American economy. The British economy, its

cxmton, its money and capital markets, and its manufacturing

industries stood in the middle, purchasing American cotton
and supplying the goods, and short-and-long-term credits

needed by the expanding American economy.

The Transmitting Mechanisms

 

Disturbances could be transferred from one country
to the other because of the relation between their respec-
tive money supplies and capital markets. The American and
British money supplies consisted mainly of Specie, bank
notes, and demand deposits, the latter two supposedly con-
vertible on demand into specie (gold and silver coins).
Though the existing monetary systems in both countries
resembled the gold standard in their adjustments to specie
flows, there were differences of varying importance.
The United States was legally on a bi-metallic
standard though the Coinage Acts of 1834 and 1837 by over-
valuing gold, soon resulted in the country's being on a
defacto gold standard.
The American mint ratio of 15 to l clashed with
a ratio of about 15 1/2 to l prevailing on world
markets so little gold came to it for coinage, and
the United States was in effect on a silver standard.
The Coinage Acts of 1834 and 1837 reversed this dis-
parity by setting a new mint ratio of very nearly 16
to 1. Since the United States was now valuing silver
less highly relative to gold than was the world market,
little silver was offered for coinage, and the United
States was in effect on a gold standard.13

An examination of specie imports and coinage both

‘before and after these acts casts doubt on this assertion

Itmnzdoes indicate that silver did become relatively less

important than it had been before 1834.14 The importance of

these acts lies in the fact that they, for all practical
purposes tied the American and British money supplies to-
gether through what has been called the specie-flow mecha-
nism.

The two most common types of gold standard systems--
perhaps specie standard would be a more accurate term--are
the 100% reserve system and the fractional reserve system.15
In the former there is a one to one relationship between the
issuance of bank demand liabilities--banknote and demand
deposits--and the supply of specie. In the latter, bank
demand liabilities are issued in some multiple of the specie
supply. During the period under study both the United
States and the United Kingdom had fractional reserve sys-
tems, but as there was no single note issuing body in the
United States or legally specified ration, there was no
one particular ratio which applied.16

Under a fractional reserve system fluctuations in
specie would cause fluctuations in the amount of bank notes
in circulation though it is important to realize that these
movements of reserves and bank notes do not necessarily
have to follow one upon the other. Willett shows that
variations in bank specie holdings did not cause a con-
comitant immediate change in the banks current demand
liabilities.l7

Normally with a specie standard, a country with a

deficit in its balance on current account tended to lose

specie. The United States, however, between fiscal years
1832 and 1837 inclusively, incurred a deficit on current
account every year while at the same time importing specie
each year as we see from Appendix Table A-1. The United
States was able to do this because of its ability to borrow
both short-and-long-term capital in the London and to a
lesser degree Continental markets.

As long as the United States continued to have
access to these credit markets the balance of payments
could be balanced through short-and-long-term capital
imports. Avoided therefore, were massive specie outflows
and an economic contraction which would have been the alter-
native if it had not been for the capital inflows.

These capital flows were crucial, as we shall see,
to the economic stability of the United States during this
period.

In the spring of 1837, American and British firms
in the Anglo-American trade were unable to obtain new short-
term credits, or to refinance credits due for payment. The
resulting scramble for liquidity, combined with the exporta-
tjrni of specie arising from the exchange rates being forced
“no the specie export point, due to a lack of cotton bills,
proved too much for the Eastern banks. The New York City
banks were under the greatest pressure, not only losing
specie tnIEngland but also losing specie because of the
distribution of the Federal surplus. The end result was

the nmnuetary panic and the bank suspensions of 1837.

By the middle of 1839, the flow of specie from Great
Britain to the Continent, to pay for grain imports necessi-
tated by poor harvests, produced a contraction in the London
money markets which was more severe than that of the winter

18 This monetary stringency contributed

and spring of 1837.
in large part to the collapse of the British cotton market.
The resulting collapse of the structure which supported the
Anglo-American trade, especially the drying up of the long-
term capital inflows to the United States, goes a long way
towards explaining the causes of the depression which over-
whelmed the United States in late 1839.

In the next nine chapters we will examine those
events and processes on both sides of the Atlantic which
brought about the expansion of the American economy in the
mid-1830's; the financial panics of 1837 and 1839, and the
deflation which overtook the American economy in 1839 and
lasted until 1844.

Chapters II through IV will cover the period
between 1833 and 1836; the so-called "Biddle's Panic," and
the boom of 1834-1836. Attention will be focused on the
structural elements which made the American economy so
receptive to external disturbances eminating from the
Eastern side of the Atlantic. In Chapter V"w ‘will see
what effects the fiscal and monetary policies of the Jackson

administration had on the American economy during these

years and especially the events of 1836.

10

The Panic of 1837 and the factors bringing it about
will be examined in Chapter VI. Chapters VII and VIII
will examine the recovery period of 1838 and 1839 as well
as the events leading to the panic of the latter year.

The deflation period of 1838-1843 and the possible
causes of the upturn in late 1843 and 1844 will be the
subject of Chapter IXH In Chapter X we conclude by
reexamining the ground we have covered and the conclusions
we have drawn from this work showing the nature and causes
of the economic fluctuation experienced by the American
economy during these years.

Throughout this work we will use not only informa-
tion dealing with the economy as a whole such as wholesale
commodity prices series, foreign trade statistics, land
sales and estimates of the money supply; but also data
dealing with one particular sector or section of the economy
such as canal traffic, price series for particular cities
and the condition of banks in various cities and states.

We use both types of data not only because they provide a
check on each others reliability but also, and more impor-
tantly, because the latter type of information enables us
to examine significant develOpments in the economic history
of this period which cannot be seen by using just the esti-

mates of over-all economic activity.

FOOTNOTES

CHAPTER I

1Recent research has shown that the down-turn of 1833-

1834 was of less real magnitude than originally thought. See
Jacob P. Meerman, "The Climax of the Bank War: Biddle's
Contraction, 1833-34," Journal of Political Economy, Vol. 71
(August, 1962): Pp. 378-388.

 

2Milton Friedman and Anna J. Schwartz, The Great
Contraction (Princeton: Princeton University Press, 1965),
p. 3. We shall examine the magnitude of the "depression"
in Chapter IX.

3For the politics of the period see Glyndon G. Van
Deusen, The Jacksonian Era, 1828-1848 (New York: Harper
and Brothers, 1957), and Arthur M. Schlesinger, Jr., The
Age of Jackson (Boston: Little Brown and Company, 19457:
For the Bank War and the general economic conditions of
the period see Walter B. Smith, Economic Aspects of the
Second Bank of the United States (Cambridge: Harvard Uni-
versity Press, 1953), and Frank Otto Gatell, The Jacksonian
and the Money Powers, 1829-1840 (The Berkeley Series in
American History, Chicago: Rand McNally and Company, 1967).

4For the monetary theories and banking practices
prevalent before the Civil War see Harry E. Miller, Banking
Theories in the United States Before 1860 (Cambridge:
Harvard University Press, 1927); Joseph Dorfman, The Eco-
nomic Mind in American Civilization (2 Vols., London:
George G. Harrap and Company, Ltd., 1947), II, Chap. 23.
Dorfman notes that William Gouz, one of the leading monetary
writers of the period believed that there should be no bank
notes at all, just Specie, p. 608. Fritz Redlich, The
Molding of American Banking (2 Vols., New York: Hafner
Publishing Co., 1947, 1953). Arthur M. Schlesinger, Jr.,
The Age of Jackson, Chap. 10.

5Ira Ryner, "On the Crisis of 1837, 1847, and 1857,
in.England, France, and the United States," University of
Eggaska Studies, Vol. V #27 (1905). Reginald C. McGrane,
TflggPafiIc of 1837: Some Financial Problems of the Jacksonian
251(Chicago: The University of Chicago Press, 1924).

 

 

 

 

 

 

 

 

 

 

 

 

11

12

Samuel Rezneck, "The Social History of an American Depres-
sion, 1837-1843," American Historical Review, Vol. XL, No.
4 (July, 1935), pp. 662-687. Note that all these works do
not differentiate between 1837 and 1839.

6R.C.O. Matthews, A Study in Trade Cycle History
(Cambridge: Cambridge Press, 1954).

 

7Smith, p. 87.

8Peter Temin, The Jacksonian Economy (New York:
W. W. Norton and Company, Inc., 1969). It must be noted
in passing that the accuracy of the aggregate series used
are never seriously questioned.

 

9We will not examine directly the question of what
role cotton played in fostering economic growth in the
United States during the period through the process of
export based growth. For earlier "strong" statement and
a later modified View of this position by its leading
proponent see Douglass C. North, The Economic Growth of
the United States: 1790-1860 (New York: W. W. Norton and
Company, Inc., 1966), pp. 68-74, and Douglass C. North,
Growth and Welfare in the American Past (Englewood Cliffs,
New Jersey, Prentice-Hall, Inc., 1966): p. 84.

10It would be difficult to convince most historians
that World War I would not have occurred if there had been
no assassination at Sarajevo.

11See the criticism of Matthews' conclusions in
Jeffrey G. Williamson, American Growth and the Balance of
Payments: 1820-1913 (Chapel Hill: The University of North
Carolina Press, 1964), pp. 204-205.

12Williamson, pp. 185-186; Thomas D. Willett, "Inter-
national Specie Flows and American Monetary Stability, 1834-
1860," The Journal of Economic History, Vol. 8 (March,
1968), pp. 28-50, especially pp. 32-34.

‘13Leland B. Yeager, International Monetarijelations
(New York: Harper and Row, 1966), p. 252.

14See George R. Taylor, The Transportation Revolu-
tion: 1815-1860 (New York: Holt, Rinehart, Winston and Co.,
1951), pp. 328-329. For information on specie imports and
cxfinage, see Hunt's Merghants' Magazine, March, 1844, p.
249; April, 1844, p. 376. '

15

 

 

 

 

 

 

 

 

 

See Yeager, Ch. 4.

13

16Between 1830, to 1833, the ratio of specie to
current demand liabilities, bank notes and demand deposits,
for the Second Bank of the United States varied between a
low of 17 per cent and a high of 32 per cent. Between 1834
and 1839, it varied from 17 per cent to 54 per cent. For
Boston banks the comparable figures are nine per cent to
21 per cent and 10 per cent to 23 per cent. Smith, p. 47.
For an interesting attempt to explain why these ratios varied
see Thomas D. Willett, "International Specie Flows and
American Monetary Stability, 1834-1860," The Journal of
Economic History, Vol. 28 (March, 1968), pp. 28-50. We will
see in Chapter III, that reserve ratios as now understood,
did not apply to most banks in the United States during
this period.

17

 

Willett, Journal of Economic History, Vol. 28, pp.
39-40 0

18During the last half of 1839, the average market
rate of discount in London and the Bank of England discount
rate reached the highest levels for the fifteen years between
1830 and 1845. Matthews, pp. 199, 201; and Thomas Tooke,
History of Prices, and of the State of the Circulation,
From 1839 to 1847 (London: Longman, Brown, Green, and
Longmans, 1848), pp. 440-442.

 

CHAPTER II

BANKING AND ECONOMIC ACTIVITY DURING

1833 AND 1834

Except for the slight recession of late 1833 and
1834, the period between 1833 and 1837 was one of economic
growth and prosperity. This was the result of economic
and noneconomic factors, both domestic and foreign, which
interacted to bring about a rapid growth in America's
demand for goods and services. This growth in demand was
for both consumption and investment purposes. But only
part of it could be met from domestic sources.

Generating the demand and providing at least some
of the output needed to supply it was the increasing eco-
nomic specialization of the American economy. The two most
visible signs of this specialization in the 1830's were the
expanding cotton market and the boom in the construction of
canals and later, railroads. The changing and growing
money and credit structure in America combined with massive
specie imports to finance the growth in aggregate demand
and supply.

In this and the two chapters that follow we will

mmmine the 1834-1837 boom period and analyze the factors,

bOUIreal and monetary which brought it about. This chapter

14

15

will examine the "Bank War," in which the Second Bank of
the United States lost its role as the fiscal agent for

the federal government. Our attention will center on the
effects which this had on the economy during 1833 and early
.1834. We will also look at the probable effects of the
"Bank War" on the structure and performance of the banking
' system. Chapter III will explore how the credit and bank-
ing system of the United States and its relationship with
that of Great Britain supported the growing volume of trade
in these years. Finally, in Chapter IV we will conclude
our analysis of the boom by seeing how increasing economic
specialization supplied the impetus for the economic pros-
perity of the mid-1830's.

The Second Bank of the United States
and the State Banks

 

 

The Second Bank of the United States and the
Supply of Bank Moneprrior to 1833

 

 

The Second Bank'bf the United States was able, by
virtue not-only of its size but more importantly because
of its position as the fiscal agency of the United States
Treasury, to control the quantity of notes issued by the
state chartered banks; In Table 2.1 we have a comparison
of the size of the Bank in relation to that of all the
Safety Fund Banks.of New York State., (See page 16.)
Commercial banks when extending loans or discounting
cmmmrcial paper issued bank notes or created demand deposits.

These current demand liabilities could come into the

16

TABLE 2.1.--Comparison of the Second Bank of the United States and the

Safety Fund Banks of New York State, Major Assets and

Liabilities,
(Millions of Dollars)

1831-1834.a

 

Current Bank Ex-
Bank and Loans and Circu- Depositsb Demand Specie pansion
Date Discounts lation Liabili- Multi-
ties plierC
(2 + 3)
1831
SBUS $44.1 $16.2 $6.8 $23 $10.8 2.1
NYS 11.2 5.9 1.6 7.5 .4 18.7
SBYS/NYS 394% 274% 425% 307% 2700% 11%
1832
SBUS $66.3 $21.3 $2.6 $23.9 $ 7.0 3.4
NYS 32.8 12.0 5.8 17.8 1.7 10.5
SBUS/NYS 202% 177% 45% 134% 412% 32%
1833
SBUS $61.7 $17.5 $2.3 $19.8 $ 8.9 2.2
NYS 35.6 12.2 7.9 20.1 1.8 11.2
SBUS/NYS 173% 143% 29% 98% 494% 20%
1834
SBUS $54.9 $19.2 $5.1 $24.3 $10.0 2.4
NYS 43.7 15.4 8.4 23.8 2.2 10.8
SBUS/NYS 126% 125% 61% 102% 454% 22%

 

aJanuary l of each year.

b

Private deposits.

CRatio of Current Demand Liabilities divided by the amount of

specie.

Sources:

The reciprocal of this is known as the reserve ratio.

SBUS: The Statistical Historyppf the United States From

 

Colonial Times to the Present

 

Publishers,
New York Safety Fund:

Inc.,

1965),

p. 623.

(Stamford, Conn.:
Series X
Robert C. Chaddock, The Safety Fund

Fairfield
6, 12,

15.

 

Banking System in New York, 1829-1866, U.S. National Monetary

 

Commission 6lst Congress,
pp. 296-297.

2nd Session,

Document NO .

581! 1910:

17

possession of the S.B.U.S. in one of two ways. First, the
S.B.U.S. acquired these current demand liabilities through
the normal course of its banking operations, expecially in
'the domestic and foreign exchange markets, in both of which
it was dominant.1 Second, being the fiscal agency of the
Treasury, its holdings of state bank notes and checks
increased as a result of the inflow of government deposits,
at its various branches, arising out of the payment of
import duties and land sales revenue.

As long as the Bank maintained its position as a
net creditor of the state banks it was able to control the
money issues of the latter by presenting for redemption in
specie or specie funds, to the issuing banks the bank notes
or checks which the bank held.2 The loss of these reserves
by the state banks, given the nature of a fractional reserve
banking system, could cause an indirect but greater con—
traction of the money Supply. The bank, on the other hand,
could find itself a net debtor to the state banks during
periods of government debt retirement when in its role as
fiscal agent for the treasury it redeemed these debts. It
was also in such a position when it extended its own loans
and discounts more than the state banks did. Walter B.
Smith believed that the Bank was normally a creditor until

the middle of 1834.3

Gallatin, on the other hand, wrote
tmflzthe bank had lost its ability to control the money

SnIPply earlier, during 1832-1833,

18

_ When its discounts and other investments were
increased from fifty-five to sixty-five millions. It
is obvious that it is only by keeping its discounts
at a lower rate--in relation to capita1--than those
of the state banks that these can be its debtors, and
that it is only by enforcing the payment of the bal-
ances that it can keep them within bounds and thus
regulate the currency.4

How effective was the Bank in controlling the money
issues of state banks? Furthermore, how important was its
portfolio transactions to the health of the money markets?
It should not be forgotten that the Bank by varying the
size and composition of its portfolio,5 could and did
influence the condition of the money markets in the United
States. Though the answers to these questions--if they
are obtainable--are interesting in and of themselves, they
are necessary to an understanding of the importance of the
Bank to the monetary systems and especially the relation-
ship between the elimination of the Bank as a regulator
of the monetary system and the monetary eXpansion of the
mid-1830's.

The simplest way of measuring the effectiveness of
the S.B.U.S. in regulating the money supply is to compare
the rates of monetary growth before and after 1834. Assum-
ing for the moment that we have sufficient information for
this task, this procedure means that if the annual rate of
monetary expansion was X per cent in the years between,
KW'1830 and 1833, and it increased to X + N per cent in

tmaperiod 1834 to 1837, the increase was due to the removal

OEthe S.B.U.S. as the regulator of the state banks.

19

This procedure, however, first assumes that the only
significant changes in the monetary system of the United
States as well as the economy in general centered around
the changing role of the S.B.U.S. As we will see in this
and the next chapter, this assumption is incorrect. This
line of reasoning furthermore assumes--and this point is
often overlooked--that even if the S.B.U.S.‘s role was not
altered, it Would not have changed its banking policies in
response to changing economic conditions, especially the
cotton boom and the large inflow of specie and British
capital. We can, on the other hand, reject these assump-
tions and assume that the monetary expansion of the mid-
1830's would have been of the observed magnitude regardless
of whether the bank was rechartered or not.

What then do we do with this N per cent difference?
Probably the best eXpedient is to accept the fact that we
cannot realisticayly estimate what the monetary expansion
would have been if the S.B.U.S. had been rechartered. It
should be noted however, that without one bank acting as
the fiscal agency for the Treasury, there was no nation-

wide, centralized control over the issuance of bank money.

The Bank War and Biddle's Contraction
On July 10, 1832, President Jackson vetoed the bill
for rechartering the Bank.6 It was not, however, until the

and of the following summer, after the reelection of Jackson

20

that "Biddle's Contraction," the S.B.U.S.‘S response to the
governments actions, started.

Toward the end of July, 1833, rumors were circulat-
ing in Washington about the plans being made to remove
government deposits from the bank. On September 20th, the
semi-official Washington Globe printed the following:

We are authorized to state that the deposits of
the public money will be changed from the Bank of the
United States to the state banks, as soon as necessary
arrangements can be made for that purpose, and that
'it is believed, they can be completed in Baltimore,
Philadelphia, New York, and Boston in time to make
the change by the first of October, and perhaps sooner,
if circumstances Should render an earlier action nec-
essary on the part of the government. It is contem-
plated, we understand, not to remove, at once, the
whole of the public money, now on deposit in the Bank
of the United States, but . . . it shall be gradually
withdrawn by the usual operations of the government.

Action soon followed rumor for on September 26, an
order was issued telling the collectors of the revenue not

to deposit government funds in the S.B.U.S.8

During the
month of October, public deposits including those of state
and local governments at the S.B.U.S. fell by seventeen
per cent.

During the late summer of 1833, prior to the official
actions of the Treasury department, the S.B.U.S. began to
prepare for such actions. In August 1833, the bank placed
a lid on further discounting on notes, limited bills of
exchange to ninety days and permitted its western offices

tp purchase only short-term domestic bills drawn on Atlantic

coast cities. This last action increased the bank's claims

21

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22

on Eastern banks. These were needed when the government
deposits were drawn.down making the Bank a debtor of (state)
banks receiving government deposits. On September 24th, the
ordergiven to the Western branches was extended to certain
Eastern and Southern branches.9
Though its holdings of domestic bills of exchange
continued to fall, no action was taken on discounts until
,October 8th, when the bank's board of directors ordered a
reduction of $5.8 million in diScounts. This was followed
on January 23, 1834 by another directive to cut discounts
by an additional $3.3 million. Between August 1833, when
the S.B.U.S. first started its curtailment policies and
July 1834, when the S.B.U.S. ended this policy, its loans
and discounts fell by $13.2 million.10
With the vetoing of its charter renewal by Jackson,
the Second Bank of the United States, to prepare itself for
the transfer of the Treasury deposits to the state banks,
curtailed its lending activities. During this period of
contraction which lasted from August 1833 to July 1834,
the bank's loans and discounts fell by about twenty-one
per cent. In the next section we will see how the banking
system.and the economy in general fared during this period.
Our task is made more difficult, however, by the near record

specie imports of 1834, which went mostly into expanded bank

23
IBanking‘andEconomic Activity During
”Biddle's Contraction"

The effects of the actions of the S.B.U.S. on the
banking system were of two types: first the response of
the other banks to the curtailed leading activities of the
S.B.U.S.; and secondly the possible effects which the
transfer of the Treasury deposits had on the lending activi-
ties of the state banks, both those that received these
deposits and those which did not. It is the sum total of
what did happen in the banking system, taken together with
developments outside of it which produced the economic
difficulties of late 1833 and 1834 which has been called
"Biddle's Contraction."

It is difficult to obtain a clear picture of how
the banking system responded to the actions of the S.B.U.S.
The first problem we face is the lack of sufficient data on
aggregate bank lending during this period. The second and
more important difficulty is the massive specie inflows
during fiscal 1834 which minimized the contractionary ef-
fects of the actions of the S.B.U.S.

The available aggregate estimates of bank lending
go only as far back as 1834 and these are not very complete.
The data given includes estimates which had to be made for
approximetely one-quarter of the state banks because they
<fid.not submit returns. Though January 1, 1834 is given

as the reporting date, many state banks filed reports with

24

their state governments months before this date and some-
times a few months after.11

The second problem arises out of the massive specie
inflows which took place during this period. This perhaps
can be more clearly seen if we first attempt to hypothesize
what would happen to the banking system in response to the
curtailment policy of the S.B.U.S. assuming that there were
no changes in the United States supply of specie.

Assuming that the state banks did not alter their
leading policies and that there was no significant change
in the supply of specie in the United States, the curtail-
ment of the S.B.U.S.‘s leading activities meant a contrac-
tion in the supply of money. The extent of this contraction
depends on and in what proportion loan repayments were made
with the demand liabilities of the S.B.U.S. and the state
banks.

If the loans were repaid with checks drawn on the
S.B.U.S., or its own bank notes, the contraction in the
money supply consisted of a reduction in the current demand
liabilities of the S.B.U.S. Repayments made with checks or
bank notes of state banks, had the same direct effect on
the money supply. Indirectly, however, there was a dif-
ference. If loan repayment increased the net creditor
position of the S.B.U.S. vis a vis the state banks, it
12

could redeem their current demand liabilities for specie.

The reduction in specie reserves if not offset by fresh

25

inflows, could cause a multiple contraction in the current
demand liabilities of the state banks.

During the same period in which the S.B.U.S. cut back
its loans and discounts by $13.2 million, its specie hold-
'ings increased by $2.8 million. If we assume that this
increase was at the expenSe of the state banks or the non-
banking sector of the economy without any compensating
specie importation, the money supply must have contracted.
The amount of the contractipn depended on the origin of
the specie inflow to the S.B.U.S.

If the specie came from the non-banking sector of
the economy, the contraction of the money supply was equal
to the amount of the specie transfer. If it came from the
state banks either directly through redemption of current
demand liabilities or indirectly through the public, there
may have been a multiple contraction in the money supply.
This occurred if banks reacted to specie losses by curtail-
ing their own lending activities.

Fortunately for the S.B.U.S. and the state banks
there were massive specie imports during this time. In
fiscal 1834, the United States had net specie imports of
about $15.8 million compared to inflows of about $4.4
nullion in the previous fiscal year. Since the S.B.U.S.
increased its specie holdings by $4.9 million during fiscal
1834, it is obvious that the increase in its holdings was

not at the expense of the state banks in general.

26

What happened to the supply of money and credit
during the period of the S.B.U.S.‘s contraction, given these
specie inflows? Lacking aggregate data on bank lending for
1833 we are forced to use what fragmentary information is
(available. This information is given in Table 2.3.

While the S.B.U.S.‘s contraction may have induced
a parallel move by the other Pennsylvania banks, those of
New York City and Massachusetts expanded their lending
activities but the absolute size of the S.B.U.S.‘s and
Pennsylvania's contractions more than offset the expansion
of theSe banks. The net effect was a decrease in the
amount of credit available in the Eastern money markets.
Interest rates on Short-term commercial paper in New York
and BoSton which had averaged between five and one-half
per cent and seven per cent during 1831-1832 and the first
half of 1833, rose to 15 per cent by the end of the year
and by the end of January 1834 they were at 24 per cent
per annum. For the next ten months we find no rates listed
but rather the following comments, "business unsettled,
rates high and variable." By the end of 1834 the short-
term interest rate had fallen to eight per cent.

The money supply grew during 1834 and the means by
which it grew indicate that state banks took up the slack
left by the contractionary policies of the S.B.U.S. The
wgney supply is estimated to have increased by $4.4 million

during the year. This increase appears to have been entirely

£27

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28

in the form of bank current demand liabilities. The aggre-
gate supply of specie increased by $16 million during the
year yet the banks were estimated to have increased their
specie holdings by $17 million.13 The increase in the
money supply was thus mainly in the form of bank money.
Since the S.B.U.S. current demand liabilities fell by about
$7.8 million during this period, the increase in the amount
of bank money eminating from the state banks must have been
on the order of about $13 million.14

The expansion in the current demand liabilities of
the state banks meant that there must have been an expansion
.in bank lending activities. We have already seen one possi-
ble explanation for this, the massive specie flows into the
banking system during 1834.- There is another possible
explanation for this expansion, the shifting of Treasury
-deposits from the S.B.U.S. to the state banks chosen as
deposit'banks.

The transfer of Treasury deposits could have affected
thesupply of money and credit in the following ways:

1. the shifting of deposits could have entailed a
shifting of specie to banks with lower reserve ratios.

2. without its role as the fiscal agency for the
Treasury» it was more difficult for the S.B.U.S. to main-
IxflJ1:its creditor position vis a vis state banks. Thus it
was more difficult for it to control the money issues of

the state banks, assuming it still wanted to.

29

3. the Treasury department may have given the
deposit banks incentives to expand their lending activities.
We will see in Chapter V that the shifting of

Treasury deposits usually entailed a Shifting of specie.
In late 1833 and 1834 this meant a shifting of specie from
the S.B.U.S. to state deposit banks. We can see from
Table 2.3 the state banks did have lower reserve ratios
and thus potentially higher expansion multipliers than

the S.B.U.S.15 Excessive reliance should not be made for
this explanation. We will see in Chapters III and VIII
that bank expansion ratiOs were not important determinants
of increased banking activities.

Without Treasury deposits the S.B.U.S. lost an
important means of maintaining its creditor position vis a
vis the state banks. In Table 2.2 we saw the gradual
deterioration in the S.B.U.S. creditor position during
1834.16 But the shifting of Treasury deposits meant more
than a diminishing in the ability of the S.B.U.S. to control
the bank money issues of the state banks. In Chapter three
will see that the Treasury department gave official bless-
ing tuo the deposit banks to use the new Treasury deposits
as the basis for expanded lending activities.

During the summer of 1833 the Treasury department
begarl to transfer its funds from the S.B.U.S. to selected
state banks. The S.B.U.S. responded to this and other

actions of the Treasury and the Jackson administration by

30

curtailing its lending activities. This contraction was
felt in the Eastern money markets but because of massive
specie flows into the banking system from abroad the supply
of money actually grew. The shifting of Treasury deposits
to the state banks, even without any substantial change in
the supply of Specie, apparently moderated the effects of
-the S.B.U.S. contraction. The conditions in the money
markets indicate, however, that without the Specie imports
the Situation could have been much more serious than it
actually was. We will now turn our attention to the con-

dition of the American economy during this period.

Economic Activity During "Biddle's Contraction"

‘ The economy experienced some difficulty during the
last half of 1833 and especially during the winter and spring
of 1834. ,How much of this entailed a downturn in economic
activity is difficult to say. Niles National Register
carried articles about the difficulty of obtaining money,
falling pricesand wages and layoffs.

A large reduction of wages must be submitted to
Iby the working people, generally, or dismission from
employment ensue. The reduced money-value of all

sorts of products, and the difficulty of obtaining
-rm3ney are such, that one or the other must take

place.17
A month after this was printed, Niles carried a report of
widespread layoffs in the textile industry and those sup-

plying'tit in the Providence region. McMaster in his work

on the [halted States wrote about similar problems in

31

Philadelphia and the pressure which a lack of money applied

to wages.18

We must remember, however, that the political strug-
gles of the Jacksonian period, of which the conflict over
the rechartering of the S.B.U.S. was a facet, were reflected
in the press. The papers supporting the S.B.U.S. blamed
the government for the economic disturbances and in the
process exaggerated what happened. The anti-bank papers

reciprocated. Smith placed the events in perspective when

he wrote:

The embarassmments of 1833-1834 were undoubtedly
exaggerated by the press, by the Bank, and by the
government. A crisis was even then dear to the jour-
nalists, and they made the most of this one. When
looked at in the light of the production figures, the
credit stringency of 1833-1834 does not appear cata-
strOphic. Commodity exports continued to mount,
imports increased, and internal commerce expanded.
About the worst that seemed to happen in this period
was a slackening in the rate of economic growth.19

So far it seems that the struggle between the S.B.U.S.

and the federal government was mainly to blame for what

20

happened.to the economy in this period. But this gives

an incomplete picture of what happened. The New York

Evening Post--a pro-Jackson paper--is quoted by Van Deusen

as having

Admitted that the decline in cotton prices abroad,
'the exaction of cash duties on imported goods and the
:Eailure of the sugar crOpS in the South were in part

to blame . 21

Because of the Tariff of 1832, there was a shift in

the thning for the payment of duties. Prior to this law,

32

importers paid at about the same time as they received pay-
ment from their customers. With the new law, importers
paid the duties before they had been paid by their custom-
- ers.22 Thus, quite independently of the conflict between
therank and the government, there was an increased demand
for money.

The increased demand for money was perhaps most
seriously felt in New York. Imports into the port of New
York rose by 31 per cent during fiscal 1834 while that for
the nation as a whole rose by about seven and one-half per
cent.23 New York City was the center of security trading
in the United States. Large amounts of stock had been
purchased, mostly from the Southern states of Louisiana,
Alabama and Mississippi, with the expectation of resale in
the London and continental capital markets. The struggle
over the S.B.U.S. made the London market wary of American
securities. Individuals and firms, dealing in these securi-
ties found themselves "locked'in," that is, unable to sell
them without incurring losses. Niles National Register
recognized the effect of this on the money market when it
reported that:

They may indeed have been enabled to borrow to a
(monsiderable extent on the credit of these stocks,
Ifilt it cannot be doubted that a large amount remains
(n1 hand, and has absorbed a corresponding portion of
the capital or credit of this city.24

The worst of this appears to have ended by the spring

cuflik34. Stock prices began to turn up in the United States

33

and securities again flowed across the Atlantic contributing
to the large specie imports of 1834.

In the late summer of 1833 the United States Treasury
began to shift its deposits from the Second Bank of the
United States to a group of selected chartered state banks.
The reaction of the S.B.U.S. to this and other actions of
‘the Jackson administration was the so-called "Biddle's Con-
traction." The curtailment of bank's lending policies were

“felt throughout the money and credit markets of the East.
Adding to the pressures on these markets were the increased
credit demands arising from the Tariff of 1832 and falling
security prices in London and in the New York and Boston
markets. The severity of the curtailment was reduced by
the inflows of specie and the apparent expansion of banking
activity on the part of the state banks.

The economic effects of the contraction appear to
have been slight, causing most likely a Slowing down in
the growth of output. The longer-run effects of the strug-
gle ower the S.B.U.S. depended on what the deposit banks
and state banks in general were to do given the Treasury
deposits and the weakened ability of the S.B.U.S. to exer-
cise some control over their money creation activities. We
will see in later chapters that an additional result of the
confljxct between the Bank and the government was a change
in the portfolio policies of the S.B.U.S. which was to have

serious consequences for it and for the economy in 1837,

1839 and finally in 1841.

FOOTNOTES

CHAPTER II

lSee Smith, p. 234.

2Specie funds were deposits and notes held by one
bank at another bank, which were payable in specie and held
as a substitute for specie.

3Smith, p. 53.
4Quoted in Hammond, p. 438-439.

5A bank's portfolio consists of its holdings of
income and non-income earning assets.

6For a discussion of the political moves surrounding

the bill for rechartering the Bank, the Presidential veto
and subsequent Congressional action, see, besides Hammond,
Thomas Payne Govan, Nicholas Biddle, Nationalist and Public

Banker, 1786-1844 (Chicago: University of Chicago Press,
1959). Jean A. Wilburn, Biddle's Bank (New York: Columbia
University Press, 1967). For contemporary sources, see
Frank Otto Gatell, The Jacksonians and the Money Power

1829-1840.

7Washington Globe, September 20, 1833, reprinted in

Niles National Register, Vol. 45, September 21, 1833, p.
51. See also, Smith, p. 160 and Frank Otto Gatell, "Secre-

taryrfraney and the Baltimore Pets:’ A Study in Banking and
Poliizics," Business History Review, Vol. 39 (1965), pp.

208-209.
8Smith, p. 160. For a discussion of the use of

Treasury drafts by ,_ the state deposit banks see Gatell,
Business History Review.

9The branches were at Burlington, Utica, Buffalo,
Pittstn1rgh, Natchez, and New Orleans. The discussion is
based.<1n.Smith, p. 160. Bills of exchange drawn by importers
or jobbers on retailers often were for 120 day maturity.

‘IOSee Table 2.2, and Smith pp. 160, 172.

34

35

11As examples of the nonuniformity of bank reporting
dates, the banks of Rhode Island filed reports in October
1833 while those of Massachusetts and Pennsylvania filed in
November. See The Financial Register, Vol. 1, pp. 346-347.
This problem is found when using all the available aggre-
gate annual monetary series which involve bank assets or

liabilities.

, 12See Table 2.2 for the S.B.U.S.‘s net creditor-
debtor position vis a vis the state banks.

l3Source cited in Appendix Table B-7.

14Temin, pp. 71, 186.
15As we will explore in more detail in Chapter III,

this analysis assumes that bankers, given increased reserves
were willing, and able to expand their lending activities

and thus the supply of bank money.

16According to Smith, the S.B.U.S. was a net debtor
to state banks almost continuously between August 1834 and
August 1835. Smith, p. 173.

l7Niles National Register, March 1, 1834, p. 5.
Note how this description parallels the classic analysis
of falling prices due to a contracting money supply.

18Niles National Register, April 5, 1834, p. 84.
John B. McMaster, A History of the People of the United
States, Vol. VI (New York: D. Appleton and Company, 1906),

p. 220.

19Smith, pp. 171-172. Meerman considered the period
to have been one of a mild recession. Meerman, Journal of
Political Economy, Vol. 71, p. 386.

20Temin in his discussion of "Biddle's Contraction,"
deals; only with the effects of the actions of the S.B.U.S.

Temin, pp. 59-64 .

21Van Deusen, p. 84, quoting the New York Evening
Post” .January 14, 21, 25, and February 4, 1834. Schlesinger,

p. 529 lists the paper as pro-Jackson.

22Smith, p. 166; Niles National Register, March 29,
1834, pa 74.

23Appendix Table A-1 and Table 9.2.

24Niles National Register, March 29, 1834, p. 74;
Smith, E3- 171.

CHAPTER III

CREDIT, MONEY AND SPECIE IN THE 1830's

By the end of 1834, the American economy had recovered
(from the disturbances of the winter and spring and was in-

‘ volved in a boom, common to both sides of the Atlantic, which
lasted until early 1837. The focus of this chapter is on

the monetary side of the American economy, on the growth of
the banking and credit system which facilitated the growth

in demand and production during the mid-1830's. Though this
chapter concentrates on the role of money and credit, we will
see that real factors cannot be divorced from monetary
factors.

In the first part of this chapter we Shall see how
the merchantile credit system in America and Great Britain
Isupported the expanding volume of production and trade.
tflue.second part of the chapter will focus on the massive
I American Specie inflows during these years, their causes

t and their relationship to the supply of money and credit.

Domestic Trade and Credit
Credit provided the lifeblood for the entire stream
of commerce. Starting from the manufacturer, be he domes-

tic or foreign, to the final consumer and from the supplier

36

37

of raw materials to the manufacturer. The credit instru-
ments used were normally of two types, open book credits
and drafts. The former consist of,

. . . Entries in the account books of businesses,
appearlng as an account receivable on the books of
the seller and as an account payable on the books of
the buyer.1

Sometimes these were converted into promissory notes,
I.O.U.'s.2

A draft is a written order to pay, drawn by the
seller--the drawer--requiring the party on whom it is drawn,
the buyer of the goods--the drawee--to pay on demand, this
being a sight bill. If payable at a stipulated time in the
future, it was a time draft, drawn at the place where the
drawee received the goods, requiring him to pay a definite
sum of money to the order of a specified person or to the
bearer.3 Normally time drafts ranged from one to three
months in the cotton trade, up to nine months in the retail
trade. When endorsed by the drawee or his agent the time
draft became an acceptance which made it a more marketable
instrument.

The draft was normally discounted at a local bank.

The drawer thus receiving his funds less the discount rate
Gwaged by the bank without having to wait until the draft
rammed. Sometimes a merchant arranged a line of credit--

mxpmmodation--at a bank so that he was ensured of being

aflkato discount a specified amount of bills at the bank.4

38

Let us assume that a merchant in Cincinnati purchased
goods from a jobber in New York City. The jobber must likely
Obtained these goods on credit from importers or the selling
agencies of domestic manufacturers, often with drafts
maturing in six to eight months.5 The jobber in New York
City drew a draft on the Cincinnati buyer. After being
accepted by the latter or his agent, the jobber discounted
it at his bank. The draft normally had a maturity of from
six to nine months.

The merchant in Cincinnati then extended credit,
either by the use of book credit or by drawing a draft, to
a country storekeeper. vIt appears that book credit was
used unless the Cincinnati merchant could discount the
draft it drew on the storekeeper. This later procedure
seems unlikely unless the draft was endorsed by the Cincin-
nati merchant and discounted at a bank which was extending
him a line of credit, or the country storekeeper had made
arrangements for credit with some merchant in Cincinnati.
Finally the country storekeeper normally extended book
credit often for Six months or longer, to his customers.
IhIthe South the pattern was similar. Inland factors

dmflt.with country storekeepers and the larger planters
wMJe the storekeepers in turn dealt with the smaller
Nanters and farmers.6

When the bill drawn on the Cincinnati merchant

Dunne payable he obtained a check from a Cincinnati bank

39

or a draft drawn on a New York City firm. The Cincinnati
bank obtained balances in a New York City bank when it
purchased drafts, also called bills of exchange, drawn on
New York City firms or banks when the latter purchased
western products or securities.

The accepted method was (for Western or Southern
banks) to buy up claims payable in the East and send
them to New York for collection, leaving the proceeds
there on deposit. By this means, balances were built
up in New York to be drawn against in payment for
purchases made in the East.7

Drafts were also used in the place of bank money to make

payments. Used in this manner, drafts, by enabling each

dollar of bank money and specie to support more transac-

tions, increased the velocity of circulation of the money
supply.8

Throughout this entire chain of commerce, banks

performed the vital functions of discounting drafts and
providing the means of making payment on maturing drafts.
This was accomplished either by buying drafts which the
banks then sold to their customers or used to build up

balances in the distant trading centers where their cus-

tomers most frequently traded.

fire Cotton Trade and Credit

In the Anglo-American trade of the ante-bellum
Pmfiod, cotton played a crucial role. It was the base,
dit'ectly or indirectly, on which a large amount of domes-

Ifictfiils of exchange was generated- Furthermore, it was

 

40

the main source of foreign exchange earnings for the United
States prior to the Civil War.9
The cotton industry, from the growing of cotton to
the sale of textiles, depended on credit facilities provided
by banks and the major money markets of the United States
and Great Britain as well as those of the continent. With-
out the monetary expansion which took place in the United
States and Great Britain during the mid-1830's it is doubt-
ful that the cotton trade would have grown as much as it
did. On the other hand, the fluctuations in inventories
and prices of both raw and manufactured cotton would have
probably been less if credit was not so easily obtainable.
To obtain the land, slaves, and other factors of
production needed for the growing of cotton, planters bor—
rowed from cotton factors and bankers. The cotton factors
supplied the working capital needed by the planters to
carry them from the planting to the harvesting seasons
and sometimes through a bad crop. Normally it was in the
form of a line of credit extended by the factor or by the
use of promissory notes drawn on the planter which the

10 The banks, besides

factor discounted at a local bank.
mmmlying credit indirectly through the cotton factors,
zflmasupplied funds directly, expecially the money needed

fm:capital purchases such as land and slaves.

The new settlers in the western country took up
large tracts of land, which together with their negroes,

 

41
they mortgaged to the new banks for loans with which
to carry on their planting industry.11

By 1835 and 1836, some of the states in the South-
west were setting up banks which had as their main function
the supplying of long-term, and, later on, short-term credit
to the cotton planters and dealers. In Mississippi, Mis-
souri, and Arkansas, the entire debts outstanding in 1838
were contracted for banking purposes. Ninety-seven per
cent of the state debt of Louisiana and 72 per cent of the
state debt of Alabama were similarly contracted.

When harvested the cotton was shipped from the
interior to the Southern cotton ports and from there to
Boston to supply the growing textile industry of New England
or to the cotton markets of England and the Continent,
mainly Liverpool and Harve. For the latter markets it was
normally sent directly but sometimes transhipped via New
York City.12

In the South, the cotton was usually purchased by
local factors or agents of Northern houses. The factor
sometimes purchased the cotton for his own account, but
usually he was operating as an agent for a Northern or
Brfljsh house. The agent of the Northern house on the

Oder hand, purchased cotton for the account of the house
orCNIconsignment for some foreign house. It appears that
Bfiiish firms had little direct dealings in the Southern

mmmet, preferring rather to Operate through American firms

 

 

42

or their own branches Iocated in the North which operated
as an ordinary American house in the cotton market.13
The factor or agent, when purchasing cotton for a
Northern or foreign house, drew a bill on it and discounted
it at a local bank. These bills were normally drawn for
dollars as there was little demand in the South, perhaps
excepting New Orleans, for sterling bills, which were the
type of bills drawn on British houses. Bruchey notes,
however, that Alexander Brown and Company had its agents
in the South first draw sterling bills and then buy back
the bills from the cotton sellers. The sterling bills were
then sent North to the foreign exchange markets.14 Drafts
drawn on Northern firms were discounted at a local bank.
They were then sold to someone needing exchange on the
North or shipped North by banks to build up their working
balances in Northern banks. The Northern house, as soon
as it received notice that the cotton had been shipped to
Europe or to the North, drew a bill on the foreign firm
which it represented or its own agent in Europe. The
sterling bill was then sold in the foreign exchange market
cm New York or other Eastern import centers.15
Regardless of how the sterling bills were drawn,
th were paid with the proceeds of cotton sales by the
Lhmmpool firms on which the bills were usually drawn.

Smmnimes the bills were paid by bankers for these firms.

Thishowe'ver‘was not the end in the chain of credit

43

transactions extending from the cotton fields of the South
to the mills of England.

It was customary in Great Britain for the cotton to
be sold not directly to the spinners but rather to a cotton
broker who in turn sold it to the manufacturers. In these
transactions the cotton importers drew bills on the brokers
and after being accepted discounted them at the banks which
considered such bills as first class paper.l6 Most likely
short-term credit was also used to facilitate the purchases
Of the cotton from the broker.

By the mid-1830's, "an increasingly great propor-
tion of all cotton shipped to Liverpool," was done so on

17 The credit markets of Great Britain,

British account.
and to a lesser extent those of America were vital to the
cotton trade. This was true not only short-term credit,
but as we have seen for longer-term credit which was used
to finance the purchasing of the land and slave labor
needed to grow the cotton. So far we have seen the use
of credit to finance the growing and marketing of the raw
cotton, but credit was also needed to finance the sale of
the finished and semi-finished textiles. More generally
U;waS'vital to the flow of consumer and capital goods
bameen the United States and Great Britain, and it is

'W'UKEIOIG of credit in the American import and British

emet trades that we now turn our attention.

44

The Anglo-American Trade and Credit

By the mid-1830's the financing of the American
import trade from Great Britain was based on credit extended
by seven British merchant banking houses, the so-called
Anglo-American houses. Six of these were located in London
and the seventh in Liverpool. Except in times of serious
financial difficulty, these firms had sufficient resources
so that they did not need to discount bills with the Bank
Of England or with bill brokers. We shall see in the first
half of Chapter V that when these houses needed aid in 1837,
it was not forthcoming in sufficient amounts to maintain
the solvency of some of them. For the moment we shall
concentrate on how they furnished credit for the American
trade as well as for America's trade with South America
and Asia.

The Anglo-American houses established branches or
agencies in America. When an American importer wanted to
buy goods in Great Britain he obtained a letter of credit
from one of these branches or agencies. This letter of
credit enabled him or his agent in Britain to draw bills,
usually for four months, on the London office of the Anglo-
Imerican house. These bills were then used to purchase
mmds in Great Britain.18

At first the documents of a transaction, such as
hwoices,‘were sent directly to the agents of the Anglo-

NMuican houses in America. The American importer could

45

not obtain title to the goods until he or his bank paid
for the Shipment. But gradually it became more common for
the documents to be sent directly to the importers. The
Anglo-American houses also began to extend lines of credit,
called "Open credits." Sometimes large American merchants
were able to obtain Open credits with several Anglo-American
houses, and use the credit obtained from one house to pay
Off bills due at another.19
British exporting merchants were also dependent on
the availability of credit. They purchased goods for sale
in America or elsewhere either on their own account or as
agents for others. Bills of exchange were drawn on them
with maturities ranging from four to six months. After
being accepted, they were discounted by the drawer at bill
brokers or banking houses. AS an indication of the expan-
sion of credit in Great Britain, the total value of bills
of exchange created in the United Kingdom rose from B 198.2
million in 1830 to 5229.5 million in 1835 and £280 million
in 1836.20
The credit markets of Great Britain were important
Imm.only to the trade of that country with America, but
iflso for America's trade with South America and Asia. Bills
dfexchange drawn on the Anglo-American houses were used in
kam of American specie to pay for goods American merchants

Pmnflmsed in these regions. The Second Bank of the United

Stastduring the last half of the 1820's began to use its

46

own bills instead of sterling bills. But the Bank was able
to do this only as long as it could obtain credit in Great
Britain. As a result of this substitution of British credit,
directly and indirectly, for American specie, America's
Specie losses to Asia were drastically reduced by the end
of fiscal 1327.21
Credit was the lifeblood in the chain of manufac-
turing and trade which stretched from the factories of
England and New England to the farmers, planters and workers
in America and from the grain fields of the mid-West and the
cotton fields of the South to the cities of the North and
those across the Atlantic. By the mid-1830's,

. . . the machinery had been established whereby
Liverpool and London--especia11y London--should become
the essential pivots in the financing of the American
import as well as export trade.22

In the appendix to this chapter we have the results

of a series of regression equations dealing with the rela-
tionship between the British money market and the Anglo-
American trade. The variables used were, the value of
inland bills of exchange created in England and Wales,
United States imports from Great Britain, United States
cotton exports to Great Britain, and British exports of
cotton textiles. These equations and the analysis behind
it attempted to provide quantitative support to the quali-
tative statements we have just seen on the importance of

British credit to the Anglo-American trade. Unfortunately,

the data does not furnish such support.

47

Why is this so? It may be that the qualitative
estimates of the importance of the British credit market
were wrong. But we will see in later chapters other infor-
mation, both quantitative and qualitative which also indi-
cate the importance of British credit. One other possible
explanation centers on the variable used for conditions in
the British credit market.

Two series were available as indicators for the
British credit market, the value of inland bills of exchange
created in the United Kingdom and the market rate of dis-
count in London. The former gave better results in terms
of R2 than the latter and it was therefore used.

Unfortunately, the value of bills of exchange cre-
ated was very large relative to that of the other series
used. Exports of British Textile manufactures were, at the
most, about 10 per cent of the value of the bills created.
United States imports from Great Britain were about six per
cent while the value of total United States Cotton exports
were of the same order of magnitude. We will also see in
Chapter V that except in times of financial difficulty, the
major Anglo-American houses did not discount bills with bill
brokers or the Bank of England. Finally, there is also the
question of whether inland bills excluded those drawn by

British sellers on export merchants as well as those drawn

on the Anglo-American houses by American cotton sellers.

48

Taking into account all these factors, the lack of
statistical confirmation of the hypothesis of the importance
of British credit to the Anglo-American trade cannot be con-
sidered as proof of the lack of such a relationship. It
does indicate that unless new quantitative data on the
financing of the Anglo-American trade and the British export
trade can be developed we may never have acceptable proof as
to the validity of this hypothesis.

The credit structure which supported trade, both
domestically and internationally, was being built on a
shifting foundation. As long as prices continued to rise,
expectations would be fulfilled and commitments could be
met. But the potential always existed for the collapse of
trade if prices fell or credit facilities dried up.

Crucial to the expansion of trade was the ability
of the banking systems on both sides of the Atlantic to
meet the demands placed on them for money and credit. In
Chapter V we will look at the growth of the joint-stock
banks in Great Britain. In the remaining section of this
chapter we will examine the relationship between the mas-
sive specie imports into the United States during the mid-

1830's and the growth in the supply of money and credit.

Specie Flows and the Money Supply
Prior to fiscal 1834 American net Specie flows
fluctuated between a net export of $2.6 million in fiscal

1825 and a net import of $4.5 million in fiscal 1833.23

49

Starting with the near record imports of fiscal 1834, there
were large net imports which lasted through fiscal 1838.
Our attention will center on the sources of these inflows
and the relationship between changes in these flows and
changes in the money supply.

Enough has been written in recent years on the
relationship between the money supply and economic activity
to make one wary of attempting to demonstrate such causal
relationships during the 1830's. However, an analysis of
the American economy during these years is structured by
hypotheses implicitly dealing with these relationships.

Temin assumes that it was changes in the money supply
which led to changes in prices. Increases in the money
supply resulted in individuals holding excess money bal-
ances which they spent on goods and services. As domestic
production could not keep pace with the growth of demand,
prices rose.24 Our position is that there is an asym-
metrical relationship between money and economic activity.
While the growth of aggregate demand can be dampened by an
insufficient supply of money and credit, the availability
of these funds does not mean that there is a demand for
these funds. Banks can have their reserves increased, but
this does not automatically mean that they will expand
their loans nor that these loans lead to a growth in aggre-
gate demand. The money supply increased because there was

a demand for more money to buy goods, capital and consumption,

 

50

and services, and the banks Were able to accommodate the
demand.

The monetary data available for this period is in
annual form. This does not permit the statistical analyses
needed to demonstrate causal relationships between the money
supply and economic activity.25 However, in conjunction
with banking statistics for particular groups of banks,
this data will enable us to draw some conclusions on the
relationship between specie flows and the money supply,
expecially bank money.

We shall first look at the sources and causes of
these specie flows. This will entail an examination of
Specie export and import points. Then we will attempt to
determine the relationship between these specie flows and

the money supply.

Sources of Specie Imports in the Mid-1830's

 

The two main sources of specie inflows for the
United States during the 1830's were Mexico and the Conti-
nent, England and France. Silver was exported by Mexico
as a commodity just as the United States was exporting
Cotton. The movement of short and long-term capital between
the Continent and the United States, or its absence, primari-
ly determined the flow of specie across the Atlantic.

Temin wrote that,

Most of it (specie) came from Mexico, with imports

from various Latin American countries adding to the
flows. In the 1820's the inflow of silver from Mexico

51

and Latin America was offset by an outflow to Asia.

This balance was destroyed in the 1830's by a small

rise in the imports from Mexico and a larger fall in

the specie exports to China.25

The drop in specie exports to China resulted from
the previously mentioned substitution of British sterling
bills and later those of the S.B.U.S. for silver in the
China trade. Temin's own data, however, casts serious
doubts on the validity of these assertions. Specie losses
to Asia fell sharply in fiscal 1828 and from that year
through fiscal 1833 the United States lost approximately
70 per cent more specie to the Continent than to Asia.27
Mexico was the largest single source of specie

during the 1830's but the Continent was not far behind.
More significantly, the United States shifted from a net
exporter of specie to the Continent in the first years of
the 1830's to a net importer during the mid-1830's. Between
fiscal 1830 and 1833 inclusively, the United States lost
$6 million in specie to the Continent. During the 1834-1836
period the United States imported $15 million in specie from
the Continent, this being equal to about 79 per cent of the

28 The American specie supply in the

imports from Mexico.
mid-1830's increased not primarily because of the shifting
in the financing of the China trade and a slight rise in
Mexican exports, but because of the shift in the direction
of specie flows from the Continent. To better understand
these latter specie movements we will examine the factors

determining specie flow points and the conditions where

they would be operative.

52

Prior to the Coinage Act of 1834, an American ten
dollar gold piece the Eagle, contained when minted, 247.5
grains of pure gold, while the British Sovereign, a one
pound gold coin, contained 113.001 grains of pure gold.
Thus the gold par, the exchange rate between British and

American gold coins, was $4.565 to 51.29

The price of silver
in terms of gold was 15.1 at the United States mint while
in London the price was a little lower, ranging between
15.5 and 15.7 to 1. Silver was thus overvalued at the
United States mint and it flowed into the United States
even when the exchange rate was at the gold par.
Equilibrium was the rate at which the flow of

silver--not the less profitable flow of gold--would

not be profitable. This rate was five per cent

above the gold par in fiscal 1834.30

Exchange rates were quoted either in dollars and

cents per pound or as a percentage premium or discount from
the nominal par of $4.44. Prior to the Coinage Act of 1834
the gold par of $4.565 was equal to about two and three-
quarters per cent premium while the silver par was $4.79
or about seven and seven-eighths per cent above nominal
par.31 After the Coinage Act of 1834 the mint ratio was
brought more in line with the market price ratio, but gold
became Slightly overvalued at the mint. The gold exchange
ratio became $4.871 or about nine and three-quarters per
cent premium. In January, 1837 the mint ratio was again

slightly altered. The exchange rate became $4.866 or

about nine and one-half per cent premium.

53

The Specie export point is the exchange rate at which
it becomes cheaper to ship specie to London than purchase
sterling bills of exchange. The specie import point is the
exchange rate at which it becomes cheaper to ship specie to
America than purchase dollar bills of exchange. To deter-
mine these points we add or subtract, as the case may be,
the cost of shipping specie to the mint ratio. In the
1830's this cost was estimated at two to three per cent of

32 After the Coinage Act of

the value of shipping specie.
1834 this meant that the specie export point was about 12
per cent premium while the specie import point was about
six and three-quarter per cent premium above nominal par.

The exchange rate fluctuated between these export
and import points, the actual market rate determined by the
demand and supply for pounds. The demand and supply for
foreign exchange is derived from the autonomous transac-
tions in America's balance of payments. Debit transactions
'with the sterling area giving rise to a demand for sterling
and credit transactions giving rise to a supply of sterling.33
Long-term and short-term capital inflows kept the dollar-
pound.exchange rate below the specie export point even with
tflue recurring trade deficits of the mid-1830's.

Short-term capital inflows resulted primarily because
ofIdifferences between interest-rates in America and Great

Britairu As an example of this assume that short-term

interest rates in New York exceed those in London by four

54

per cent per annum. British investors could borrow money
in London and lend it in New York at the higher interest
rate.

How were these funds transferred to New York? We
find noimention of dollar bills drawn on New York firms or
other American firms. British investors might have pur-
chased American securities that were about to mature and
return them to America for redemption in dollars. But more
and more American securities were being sold in London pay-
able in sterling. The main means of transferring funds
appears to have been the shipment of specie. As it was
estimated to cost between two and three per cent in value
to ship specie across the Atlantic, the interest rate dif—
ferential of four per cent was sufficient to justify such
shipments being made. When the short-term interest rate
in New York exceeded that in London by more than the cost
of shipping specie, British investors transferred specie
to New York. According to Temin, this accounted for the
massive imports of specie from the Continent during 1834.34

The sale of American securities in Great Britain
and the Continent also led to the importation of specie.
Just as with short-term investments, foreign investors had
few means for transferring funds. to America. Securities
were purchased, say by British investors either from agents
of tflu3.American seller or from a firm such as the Barings'

actjjmg as investment bankers for American borrowers. The

55

former means of sale, direct placement, normally resulted
in the shipment of specie. The Baring's purchased the
securities from the issuing body, perhaps with the proceeds
from the sale of sterling bills in the New York and other
American foreign exchange markets. They then sold these
securities in London- Such transactions did not necessarily
result in specie imports unless the sale of sterling bills
drove the exchange rate below the specie import point.
America was fortunate in that foreign capital markets
were receptive to these securities. The repayment of the
federal debt made American securities attractive to British
investors who had been hurt by the defaulting of South
American securities during the mid-1820's. Part of this
attraction was based on a misconception as to the legal
responsibility of the federal government for the debts of
the state and local governments. Since the federal govern-
ment had at the start of the new nation assumed state debts
it was assumed that it still could. Easy money conditions
in London and the boom in the British and Continental
economies increased the ability of foreign capital markets

to absorb these securities.35

From below the border and across the Atlantic specie
flowed into the United States during the mid-1830's. Unlike
the 1820's when most of the Mexican specie went to Asia and
UmIC0ntinent, during the mid-1830's most of this specie was

reunhed and specie flows to the Continent were reversed.

56

This was due to a change in the financing of the China

trade and specie imports from Great Britain and France.

Easy money conditions in Great Britain contributed to these
changes. But what was the relationship between the specie
inflows and the growth in the supply of money and credit in
America? It is to this question that we now turn our atten-

tion.

Specie and Money

The money supply consisted of gold and silver coins,
and bank money, bank notes and demand deposits. Specie
imports increased the money supply in two ways:

1. Directly as gold and silver coins and perhaps
bullion which was minted into coins entered into circula-
tion;

2. Indirectly as specie increased the reserves on
which the banking system based its expansion of bank money.

We Shall first look at these channels through which
specie flows changed the money supply and then determine
the importance of these channels.

Using Temin's monetary estimates we find that between
1830 and 1836 inclusively, changes in the public's holdings
cfi’specie accounted for 12.9 per cent of net changes in the
money supply. In the 1834-1836 period it accounted for

19.5 per cent of the net changes.36

In 1835 and 1836, how-
emmy the public was able to expand its holdings of specie

atthe expense of the banks. The increase in the public's

57

specie holdings exceeded specie imports and domestic produc-
tion. If specie inflows were important in determining
changes in the money supply its chief role lay in its rela-
tion to bank money.

During most of the 1830's the relationship between
bank specie holdings and bank money was determined by bank
charters and existing concepts of prudent bank management.
Generally, bank charters contained restrictions, not reserve
requirements, on the amount of bank notes and what we now
call derivative deposits which a bank could have outstand-

ing.37 These restrictions were some multiple, usually

three to five times, a bank's paid in capital.38
Usually exempted from these restrictions were pri-
mary deposits made in specie. A problem with this was that,
Men continued to think of deposits as simply
something deposited, regardless of the fact that in
actual practice bookkeepers in banks were making
deposits include what had been borrowed at the bank
and left there to be checked out.39
All deposits, primary and derivative, tended to be exempt
from charter restrictions.
Legal restrictions in practice usually applied only

to note circulation.40

If a bank had issued notes up to the
limit set by its charter, increases in specie could not
emable it to issue more bank notes. Even if the bank had
muzissued notes up to its charter limit, it did not need

amfitional specie to do so since legislatures, businessmen

EMIbankers assumed that paid in capital was synonymous with

58

specie.41 As far as demand deposits were concerned their

was little relation, if any, between specie holdings and
the amount outstanding. In general, there was little legal
or practical relationship between increases in bank specie
holdings and increases in the supply of bank money. As far
as the ratio between specie and bank notes was concerned,

"bankers themselves declared that no one general ratio

existed."42

It was not until the last few years of the decade
that charter restrictions were changed to reserve require-
ments, and then only haltingly. The Virginia Banking Law
of 1837 and the New York Free Banking Act of 1838 contained
legal reserve requirements instead of restrictions tied to
bank capital, however, these applied only to bank notes.
The Louisiana Banking Act of 1842 included demand deposits
in the bank liabilities which had to be fractionally backed
by specie. But it was not until the National Banking Act
of 1863 that uniform reserve requirements existed for some
body of banks.43

The relationship between the supply of money,
especially bank money, and the supply of specie was tenuous
at best, but Temin asserts that the money supply, particu-
larly bank money, changes in response to changes in the
supply of specie .

The factor leading to an expansion of the monetary
stock . . . was the rise in the stock of specie. . . .

59

In a monetary system based on specie reserves, an
increase in these reserves . . . can have no other
effect.44

Temin was led to this conclusion because he assumed that
banks during the 1830's operated with reserve requirements
as banks do today.

When we look at Temin's data on the money supply
and its components we find that they do not justify the
assertion of any simple relationship between specie changes
and changes in the money supply. In Table 3.1 we have the
results of a series of regression equations using the aggre-
gate money supply (Ms) and bank money (Mb) as dependent
variables and total specie (St) and bank specie holdings
(Sb) as the independent variables. Temin's data is used
in both annual and first difference form. An examination
of the results obtained from the annual data suggest that
auto correlation exists and thus overstating the observed
relationship between the dependent and independent variables.

The problem of auto correlation arises because both
variables grew over time. This is a Situation Often found
when using time series for regression analysis. One ele-
mentary way of eliminating or at least minimizing this
problem is by using first differences of the variables.
Zumual data take the form of Mst, where indicated the

t

year. ‘With first differences, instead of Ms Ms - M

t’ t St—l
haused, thus we use changes rather than the annual data

45

tMmmelves. When first differences are used the

'60

TABLE 3.1.--Per cent of the Variation in the Money Supply and
Bank Money Explained by Variations in the Total Supply of
Specie and Bank Specie Holding, 1830-1845.

 

Total Money Supply and Total Supply of Speciea
2

 

Annual Data R = .37*
DW = .74**
First Differences R2 = .03**
DW = 1.84*
Bank Money and Bank Specie Holdingsb
Annual Data R2 = .209**
DW = .846**
First Differences R2 = .034**
DW = 2.23*
aRegression Equations:
Annual Data 2
Ms = 121.9 + 1.05 St R = .37
(.37) DW = .74
First Differences 2
Ms = 5.42 + .77 St R = .03
(1.18) DW = 1.84
bRegression Equations
Annual Data 2
Mb = 89.97 + 2.01 Sb R = .209
(1.04) DW = .846
First Differences 2
Mb = 15.84 - .62 Sb R = .034
(.88) DW = 2.23

 

*
Statistically significant at the .05 level.

**
Not statistically significant at the .05 level.

The concept of significance refers to the probability
of a test procedure's rejecting true hypotheses, in this case
that the variables are not related. If we employ a 95 per
cent'procedure, then in the long run the chances are that we
lel reject true hypotheses only five per cent of the time.
(Emerved results whose probability of occurrence given the
tnuh.of the null hypothesis, the variables are related, is
lemsthan five per cent are called "significant." Edward J.
Kama Economic Statistics and Econometrics (New York: Harper

and Row, 1968), p. 210.

Smnmez Peter Temin, The Jacksonian Economy (New York: W.W.
Norton and Co., Inc., 1969), pp. 71, 159.

 

 

61

coefficients of determination are drastically reduced
indicating that time dependency between the variables was
present to°a significant extent.

If Temin's assumption about the relationship between
changes in specie and the money supply is correct, we should
find large coefficients of determination between the monetary
and specie variables, but we do not.46 Using annual data,
variations in the total specie supply explained only 37 per
cent of the variation in the total money supply. The rela-
tionship is even lower when we look at bank specie and bank
money, 20.9 per cent. When we minimize the effect of time
dependency by using first differences the specie variables
explain only about three per cent of the variations in the
suppIy of money and bank money. Obviously it was not
factors on the supply side, i.e., specie flows, that were
the main determinants of the growth in the American money
supply during the 1830's. V

Why were bankers so concerned about specie losses
if increases in specie were not that crucial in determining
the level of bank money? There were two reasons for this
concern. The first arose out of the nature of a fraction-
ally backed money system. The second arose from legal
restrictions placed by the federal government on the con-
vertibility of bank notes it would accept.

With a fractionally backed money system, bankers

amltheir customers knew that a bank could not meet all

62

the specie demands which could be placed on it. But con-
vertibility was important if bank notes were to circulate
at par and if depositors were to have confidence in the
bank. How could bankers avoid a run on their Specie hold-
ings? Only if a bank had enough specie could it avoid such
a run. We have already seen, however, that there was no
uniformly accepted concept of enough specie, that is, the
ratio between specie and bank notes.

What was sufficient specie in practice appears to
have depended on:

1. the general economic situation, especially the
foreign exchange market;

2. the confidence which the bank's main customers
have in it;

3. the actions of other banks in the city and in
the major commercial centers of the nation;

4. and the bankers' confidence in the ability of
his customers to meet their obligations to the bank.

If specie was leaving the country because of balance
of payments problems, it would be very difficult for banks
in the Eastern commercial centers to continue paying out
specie. It was just such a problem which contributed to
the suspension of New York City banks in 1837.

If a bank lost substantial amounts of specie its
main depositors might decide to withdraw specie while it

wmsstill possible. Even if a bank was not losing specie,

63

any indication of potential specie losses could start a
depositor's run on a bank and then spread to other banks.
This was one of the factors contributing to the suspension
of the United States Bank of Pennsylvania in 1839.

The actions or inactions of other banks were also
important in determining the ability of a bank or a group
of banks to not suspend. In 1837, a depositors run started
in New York City when two banks ran into serious trouble.
Soon there was a run on the other city banks. With the
suspension of the New York banks, other banks suspended
in order to retain what specie they had. In 1839 the United
States Bank of Pennsylvania tried to force the banks of New
York to suspend but it was not successful. The reverse
happened again in 1841 when the United States Bank was
forced to suspend.47

Finally much depended on the confidence which the
bank had in its customers. Would they withdraw their
deposits at the first sign of trouble? If so, a banker
might decide to suspend before this happened. In New
England and New York City the business and banking community
believed that it was the obligation of banks to maintain
convertibility even if this meant a contraction in the
supply of money and credit. This we will see may help to
explain the pattern of bank suspension in 1838 and 1841.

The second factor causing bankers and the business

mmmmnity to be concerned over the specie holdings of the

64

banks were the Treasury regulations passed in 1835 and 1836.
These required convertibility for all bank notes used in
transactions with the Treasury. Regulations governing the
deposit banks also contained specie requirements and as we
will see in Chapter V, set up reserve ratios between specie
and bank note issues.

The banking system operated under asymmetrical
pressures, increases in specie holdings did not necessarily
mean that they could or would expand their demand liabili-
ties. Losses of specie, on the other hand, brought into
question the ability of a bank to maintain convertibility.
This meant that the notes of the bank might not circulate
at par and more importantly that large depositors might
withdraw their funds from the bank. If specie was not
that vital in determining the supply of bank money, what

other factors might have been important?

Economic Activity and the Money Supply

As we have seen bank money was the major component
Of the money supply yet its relationship with bank Specie
holdings was very tenuous. Perhaps bankers expanded their
lending activities and thus the supply of bank money mainly
in response to the demands of their customers and their own
expectations on the profitability of making such loans. If
this is true we should expect to find a differential pattern
cfi bank performance. Banks in sections of the country which

wemagrowing rapidly should have expanded their activities

65

more than banks in regions which were less intimately con-
nected with the boom of the mid-1830's. Deposit banks
which were urged by the Treasury to expand their activi-
ties might have expanded more than non-deposit banks.

The more extensive the economic boom, be it based
on cotton, lumber, construction, speculation in grain lands
or the merchandising trade, the more extensive the expan-
sion of banking activity. The regions which were experienc-
ing the most rapid economic expansion, namely the West and
Southwest--the cotton states of the Gulf Coast and lower
Mississippi Valley--were those in which the growth of bank-
ing activity were the greatest. This is shown in Table 3.2.
Within regions, certain states which were more directly
involved in the economic boom than others of the region,
showed the same differential pattern of bank growth. See
Tables 3.2 and 3.3 for a comparison of this pattern.

In New England, loans and discounts increased by
25 per cent, total demand liabilities by 22 per cent. In
Maine where there was a land boom based on lumber, the
comparable figures were 77 per cent and 53 per cent. The
same pattern will be found in comparing New York City with
New York State and the mid-Atlantic region as a whole.
Georgia banks expanded their activities more than the banks
of the south-Atlantic region taken as a whole. In the
south-West New Orleans banks lagged behind the banks in the

nrfion taken as a whole. This should be expected as the

66

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67

TABLE 3.3.--Percentage Change in Major Assets and Liabilities
of Banks in Selected States and Cities 1834-1837.

Circula-

Location Loans and Specie Circu- Deposits tion and
& Period Discounts lation DepOSltS

%

do

% % %

 

Maine

 

Jan. 1835
Jan. 1837 77 177 36 113 53

Rhode Island

Oct.

1834

March 1837 40 -48 49 -7 13

New York Statea
Jan. 1835
Jan. 1837 48 58 52 57 54

Pennsylvaniab
Nov. 1834
May 1837 64 -30 36 2 17

Virginia

Jan. 1835
Jan. 1837 59 3O 56 71 65

Georgia
Oct.

1834

April 1837 117 61 117 190 132

Ohio

Jan. 1835
Jan. 1837 86 88 60 382 118

New York City
Jan. 1835
Jan. 1837 51 7 94 28 48

New Orleans
June 1835'
Jan. 1837 58 10 55 62 59

 

aExcludes New York City banks.

bExcludes Second Bank of the United States.

Sources:

Penn., Georgia, Maine, Virginia, R.I.: U.S.
Congress, House, 26th Cong., 2nd Session, H.D. 111.
New York State: U.S., Congress, House, Blst Cong.,
lst Session, H.E.D. 68, p. 372-3. Ohio: Berry,

p. 588. New York City: N.Y.S. Assembly, Report
Of Bank Commissioners, 58th Sess., Doc. 74, 60th
Sess., Doc. 78. New Orleans: Hunt's Merchants'
Magazine, Oct. 1842, p. 361.

 

68

New Orleans banks were managed conservatively in comparison
with the state financed land banks of the region.48

There is also a difference between the performance

of state banks in general and those which held government
deposits. Within a few days of the announcement of the
government's policy to use state banks as depositories for
government funds, these banks were urged to use the newly
gained funds to support an expansionary lending policy.

A circular letter of the Treasury Department to
the deposit banks on September 26, 1833, said, 'The
deposits of public money will enable you to afford
increased facilities to commerce and to extend your
accommodations to individuals.‘ It also recommended,
'merchants engaged in foreign trade,‘ as the most
deserving recipients of extended credit.49

The available data, found in Appendix Table B-4,

support the hypothesis that deposit banks did expand their
lending activities more than banks in general. Between
January 1835 and November 1836, the loans and discounts

of deposit banks increased by 143 per cent while note cir-
culation rose by 168 per cent; in comparison, the average
for all banks were 48 and 44 per cent respectively. In
Chapter V we will examine the performance of deposit banks
in more detail.

The Federal government had an influence on the

supply of money and credit that was more encompassing than

its relations with the deposit banks. We shall conclude

this chapter by looking more closely at how the monetary

69

and fiscal policies of the government influenced the supply

of money and credit during the boom period of the mid-1830's.

The Federal Government and the Supply of
Money and Credit 1834-1835

 

 

At the same time the Federal government was encour-
aging the expansion of the money supply, it was also attempt-
ing to replace the existing paper money with hard money,
specie and large denomination bank notes convertible into
specie. The first major attempt to substitute specie for
the existing money supply was the Coinage Act of 1834. The
Act contributed to the massive specie inflows of 1834 but
because the new mint ratio overvalued gold at the mint,

It became impossible for the administration to

substitute specie for notes of small denomination,

for silver coins L . . were worth more in the bul-

lion market than at the mint.50
In the next two years Congress and the Treasury department
attempted to eliminate small denomination bank notes from
the money supply and make the remaining bank notes completely
convertible into specie. The executive and legislative
branches of the Federal government followed the practices
of the period and ignored the growing importance of demand
deposits in the money supply.

During 1835 and 1836, the Treasury department sent

directives to the Treasury officials responsible for col-

lecting and disbursing government funds, as well as to the

70

deposit banks. These directives were designed to remove
smaller denomination bank notes from circulation and to
make those notes which would thereafter circulate, converti-
ble on demand into specie. On April 6, 1835, a Treasury
circular informed all collecting and receiving officials
that: (1) they could not receive bank notes in denomina-
tion of less than five dollars starting after September 30,
1835, and that public Officials could not pay out such notes
after May 1, 1836; (2) after July 4, 1836, the government
would not accept or pay out notes of less than ten dollars;
(3) the deposit banks were ordered to make one-fifth of
every payment which did not exceed $500 in gold, if so
required by the creditor; and (4) they were requested to
cease issuing notes below the denomination of five dollars
by July 4, 1836 and below ten dollars by March 3, 1837.51
On April 14, 1836, Congress passed an Act prohibit-
ing the government from paying out notes of less than ten
dollars and after March 1837, no notes of less than twenty
dollars would be paid out. (Note that the previous Treasury
circular of 1835 should have prevented this, starting in
July.) It also sought to insure the complete converti—
bility of all currency used by the government by ordering
"that the United States government should not pay out any
banknote of any denomination unless the same were payable
on demand in gold or silver coin at the place where issued."52

Several states had already passed laws prohibiting the

. I O 53
lssuance of notes of small denominatlons.

71

These laws, at both the state and federal level
affected bank specie holdings, but not the supply of bank
money. The banking system lost approximately six billion
dollars in specie during 1835 and 1836. This loss of specie
at a time when the United States was a net importer of
specie and the high levels of coinage at the mind indicates
that the public increased its demand for Specie. While the
banks were losing specie to the public the supply of bank
money rose by $76 million, again demonstrating the tenuous
relationship between bank specie and bank money.54

The fiscal policy of the Federal government during
these years had an important effect on the supply of money
and the long-term capital markets, both domestic and foreign.
Federal fiscal policies during this period centered on the
problem of what to do with the mounting Federal surplus.
This question occupied more and more of the attention of
the executive and legislative branches when for all practi-
cal purposes the national debt was eliminated by the end of
1834.

The Federal government found itself running budgetary

55 The surpluses

surpluses every year from 1830 to 1836.
were the result of the economic prosperity of the period
which led to rising imports and increasing custom's receipts.
The Compromise Tariff Of 1833 lowered duties and receipts

but land sales expanded tremendously in 1835 and 1836

resulting in the largest Federal surpluses prior to 1866.

72

Whether the surpluses would be inflationary or deflationary
depended on what the government did with them.

At first the surpluses were used to retire the
Federal debt. The outstanding debt of the United States
government at the end of 1830 was approximately $39 mil-
lion. Between the end of that year and the end of 1832,
the debt had been reduced by approximately $32 million,
and by the end of 1834 it was less than $50,000.

Repayment of the national debt affected not only
the money supply but the supply of long-term credit as well.
As the debt was reduced the supply of income earning assets
available to investors decreased. This "closed an important
field of conservative investment and returned funds to
investors who then had to find other uses for them."56
Investors found these alternative sources of income earn-
ing assets in state and private securities for internal
improvements and banks, and in urban and rural real estate.

The redemption of the national debt also built up
the credit standing of American securities in England and
on the Continent. Foreign investors believed that the
Federal government would be ultimately responsible for the
repayment of state debts as it did after the Revolutionary
War. With the Federal debt eliminated it seemed to the
foreign investors that the Federal government was in a
better position to assume state debts if that eventuality

arose. Finally the mere fact that a government had repaid

73

its debts impressed British investors who had been singed
in the mid-1820's by South American bond issues.

The net effect of debt retirement on the money
supply appears to have been minimal. Repayment of domes-
tically held debt involved a transfer of funds from those
paying duties and purchasing bonds to those owning govern-
ment securities.

Repayment of the foreign held debt--approximately
$13 million in 1830--entailed either the generation of an
export surplus or refinancing with other types of debt
instruments.58 If both of these did not supply the neces-
sary foreign exchange earnings, the only remaining alterna-
tive was the exportation of specie. From Appendix Table
A-1, we see that there was a deficit in the balance of
payments on current account for every year between 1831
and 1837. Only in 1831, however, was there a net specie
out-flow, and Smith attributes this to the policies of the
Second Bank of the United States and not to debt repayment.59

In 1832, when the national debt was reduced by $17
million, the London capital market eased. This enabled
American state and local governments as well as some private
corporations to float issues in London, thus supplying the
foreign exchange needed to finance the repayment of the
foreign held national debt as well as the deficit on cur-
rent account.60 The repayment of the foreign held national
debt was generally accomplished by refinancing with other

securities.

74

After the Federal debt had been largely paid off,
the continuing Federal surpluses were deposited in various
selected state banks. We have already seen that these
deposit banks did pursue a more expansionary lending policy
than banks in general. In Chapter V we will more closely
examine the relationship between the Federal surpluses in
1835 and 1836 and the growth of the money supply.

The expansion of bank money, the major component of
the money supply, was due not primarily to specie flows but
the response Of banks to the credit needs of a growing
economy. The Federal government contributed to this expan-
sion by shifting deposits from the S.B.U.S. to deposit banks.
It also, however, increased uncertainty about the stability
Of the money supply by not rechartering the S.B.U.S. and by
its actions concerning the type of notes which it would

accept.

FOOTNOTES

CHAPTER III

lEli Shapiro, Ezra Solomon and William L. White,
Money and Banking, Fifth Edition (New York: Holt, Rinehart
and Winston, Inc., 1968), p. 52.

2Stuart Bruchey, Cotton and the Growth of the
American Economy: 1790-1860 (New York: Harcourt, Brace
and World, Inc., 1967), pp. 225, 231.

 

3Shapiro, Solomon and White, p. 53.

4Bruchey, p. 246.

5Norman Buck, The Develgpment of the Organization
of Anglo-American Trade, 1800-1850 (New Haven: Yale Uni-
versity Press, 1925), p. 160. Paul F. McGouldrick, New
England Textiles in the Nineteenth Century (Cambridg5?—
Harvard University Press, 1968), p. 42.

6Bruchey, p. 224.

7Joseph E. Hedges, Commercial Banking and the Stock
Market Before 1863 (The John Hopkins University Studies in
Historical and Political Science Series, Vol LVI, No. 1,
.Baltimore: The John Hopkins University Press, 1938), p. 65.

8Buck, p. 82. An examination of the Bostwick
papers excerpted in Bruchey shows that for interstate
transactions, Bostwick made payment with checks. For
intrastate settlements, Bostwick also used drafts. Bruchey,
IHP- 247-249, 252, 254, 255, 258, 263.

9North, Economic Growth, Table A-VIII, p. 233.

10See Stuart Bruchey, pp. 222-225.

11Matthew B. Hammond, "The Cotton Industry" American
Ekxnumnic Association Publication, New Series #1 (New York:
McMillijuh 1897), p. 71. For a discussion of the relation-
ship between state banking in Louisiana and the cotton
industry see Stephen A. Caldwell, A Banking History of
Louisiana (Baton Rouge: Louisiana State University Press,

1935) . p~ 54-
75

76

12Bruchey, pp. 222, 227.

l3Buck, pp. 82, 86.

l4Bruchey, p. 229.

15Buck, p. 87.

16Buck, p. 55.

17Buck, p. 87.

18Buck, pp. 154-155.

19Buck, p. 157. Arthur H. Cole, "Evolution of the
Foreign Exchange Market of the United States," Journal of
Economic and Business History, Vol. 1, No. 3 (May, 1929),
p. 402.

 

 

20See Appendix Table B-5.

ZlBuck, p. 158; Smith, pp. 89, 142.

22Cole, Journal of Economic and Business History,
Vol. L, p. 399.

23

 

See Appendix Table A-1.

24Temin, pp. 82-83.

25Lead-lag relationships between changes in the
money supply and changes in aggregate indices such as GNP
or the C.P.I. are not sufficient to determine causal rela-
tionships. See comment of James Tobin in Controllipg
Monetary Aggregates (Federal Reserve Bank of Boston,
September, 1969), p. 22.

26

 

 

Temin, p. 80.

27Losses to the Continent were $12 million, those
to Asia $7 million. See Temin, p. 81.

28Temin, p. 81.

29Temin erroneously listed $4.65 as the gold par.
Temin, p. 65.

30Temin, p. 66. A five per cent premium on silver
meant a London price ratio of 15.7:1.

77

31According to the Financial Register, the silver
par was eight per cent while a House report listed it as
ranging between seven and eight per cent. See Financial
Register, Vol. 1, p. 79, and source cited for Appendix
Table B-lO, p. 656.

32Margaret G. Myers, The New York Mongy Market,
Vol. 1 (New York: Columbia University Press, 1939), p. 74.

33Paul T. Ellsworth, and J. Clark Leith, The Inter-
national Economy, Fourth Edition (New York: The Macmillan
CO., 1969), pp. 343-344. Autonomous transactions are those
undertaken for their own account and not to settle payment
imbalances.

34

 

 

 

 

Temin, p. 64.

35Smith, pp. 30, 175.

36These estimates are derived by subtracting estimated
bank specie holdings from the estimated total specie supply.
The specie series used are those of the Comptroller. Using
an alternative series constructed by Temin the comparable
figures are 15.2 per cent and 21.2 per cent. See Temin, pp.
184, 189-190 for a discussion of these two specie series.

37A deposit resulting from the lodgement Of currency
or its equivalent is called a primary deposit. A deposit
arising from the exchange of a bank debt for the debt of
others is called a derivative deposit. Eli Shapiro, Ezra
Solomon and William L. White, Money and Banking, Fifth
Edition (New York: Holt, Rinehart and Winston, Inc., 1968),
pp. 124-125.

38

 

Hammond, pp. 188, 558.

39Hammond, p. 688.

40Hammond, pp. 188-189, 688, 690.

41Hammond, pp. 131-137, 696-697.

42Hammond, p. 695.

43We will see in Chapter V that Section 8 of the
Deposit Act gave the Secretary of the Treasury the power
to fix what amounted to reserve ratios for the deposit banks.

44Temin, pp. 77-78.

78

45Kane, pp. 44, 46, 359-360; and Robert Ferber and
P. J. Verdoorn, Research Methods in Economics and Business
(New York: The Macmillan Company, 1962), pp. 336-337,
384-386.

46R2, the coefficient of determination, shows the
percentage of variation in the dependent variables (that on
the left-hand side of the regression equation), which is
explained by variations in the independent variable (those
on the right-hand side of the equation). The number in
brackets under the regression coefficient is the Standard
Error of the Estimate. This is a means of estimating the
probability that a particular regression coefficient was
produced from a population where the observed relationship
is nonexistent. If we used, as in these two equations,
annual data for 16 years, and if the regression coefficient
is at least 2.145 times its standard error of the estimate,
then the regression coefficient would be expected to occur
five times out of 100 purely as a result of chance. D.W.
is the Durbin-Watson statistic which measures the possible
existence of auto-correlation, that is the extent to which
a variable has been omitted or that there is a correlation
of the various time series with themselves; i.e., the dif-
ferent values of the variable are related over time. Where
the D.W. statistic is given, this indicates that the hypo-
thesis of the existence of autocorrelation has been rejected
at the five per cent significance level. In economics, the
existence of auto correlation means that we accept more
frequently than we should the statistical significance of
the regression coefficient. Kane, pp. 360-361, 368; Ferber
and Verdoorn, pp. 87, 95-97.

47

 

See Smith, PP. 226-227.

48We will see in the next Chapter that most of the
outstanding debts incurred by the states in this region
were for the formation of banks set up to facilitate the
growing and sale of cotton.

49David Kinley, The Independent Treasury of the
United States and Its Relations to the Banking of the
Country (Washington: National Monetary Commission, 1910),
p. 29. Also see Harry N. Scheiber, "The Pet Banks in
Jacksonian Politics and Finance, 1833-1841," Journal of
Economic History, Vol. 23, No. 2 (June, 1963): P. 199.

50Paul Studenski and Herman E. Krooss, Financial
History of the United States, Second Edition (New York:
McGraw-Hill Book Co., Inc., 1963), p. 109. See also
Schlesinger, pp. 126-127.

 

 

 

 

79

51Kinley, p. 31; Niles, April 11, 1835, p. 92; and
March 5, 1836, p. 11.

52Dewey, p. 228.

53Schlesinger, p. 128.

54Appendix Table, B-2, B-7.

55See Appendix Table A-2.

56Hammond, p. 454. Also see Albert Gallatin,
Suggestions on the Banks and Currency of the Several States
(New York: Wiley and Putnam, 1841), pp. 32-33.

57Edward G. Bourne, The History of the Surplus
Revenue of 1837 (New York: G. P. Putnam's, 1885), p. 14.

58Paul B. Trescott, "The United States Government
and National Income, 1790-1860," Trands in the American
Economy in the Nineteenth Century, Studies in Income and
Wealth, Vol. 24 (Princeton: Princeton University Press for
the National Bureau of Economic Research, 1960): p. 352.

59

 

Smith, p. 92.

60See Appendix Table A-2 and Smith, p. 158.

APPENDIX TO CHAPTER III

The following regression equations represent an
attempt to use the available information to determine the
importance of British credit to the Anglo-American trade.
As already mentioned in Chapter III, the value of inland
bills of exchange was used to indicate conditions in the
British credit market. Both the original data and first
differences were used. It should be noted that although
an R2 of .67 was obtained for the relationship between
exports of United Kingdom textiles and inland bills of
exchange, the use of first differences reduced the R2 to
.259.

Equations were run in the form of Y = f (X) and
X = f (Y). The coefficient of determination, R2 is the
same for both, but by looking at the regression coeffi-
cients we may obtain more insight into the causal relation-
ships.1
I. United Kingdom Export of Cotton Textiles (Y1) and Inland

Bills of Exchange, (X1).

First differences are Y2 and X2 respectively.

Y1 = 62.8 + .64 x1 R2 = .67*
(.120) DW = 1.108**

Y2 = 2.12 + .425 x2 R2 = .259*
(.20) DW = 2.405*

1Kane, pp. 242-244.

80

81

x1 = 15.1 + 1.05 Y1 R = .67**
(.195) DW = 1.05

x2 = 2.906 + .609 Y2 R2 = .259*
(.286) 0w = 1.69

II. United States Imports From Great Britain (Y3 ) and Inland
Bills of Exchange.

First Differences and Y and X

4 2'
Y3 = — .043 + .1716 X1 R2 = .175**
(.099) DW = 1.509*
Y4 = - 4.2 + .306 x2 R2 = .139**
(.212) DW = 1.694*
x1 = 203.6 + 1.02 Y3 R2 = .175**
(.59) DW = .3122**
x2 = 6.78 + .453 Y4 R2 = .139**
(.313) DW = 1.493*

III. United States Cotton Exports to the United Kingdon (YS )
and Inland Bills of Exchange.

First Differences are Y and X

6 2'
Y5 = -97.21 + 1.86 x1 R2 = .27*
(.816) DW = .855**
y6 = 32.14 - .777 x2 R2 = .045**
(.992) DW = 3.216**
x1 = 194.4 + .145 Y5 R2 = .27*
(.064) DW = .816**
x2 = 7.28 - .058 Y6 R2 = .045**
(.074) 0w = 1.538*

Sources: United Kingdom Exports of Cotton Textiles and
United States Cotton Exports to the United Kingdon:
Appendix Table C-3.

United Kingdom Bills of Exchange: Appendix Table
B~50

82

United States Imports From Great Britain: The
Statistical History of the United States, Series
U. 142, p. 553.

 

CHAPTER IV

THE GROWTH OF AGGREGATE DEMAND

IN THE MID-1830's

The banking system was willing and it appeared able
to meet the growing demands placed on it during the mid-
1830's for money and credit. In this chapter we will examine
those factors which generated this demand.

Aggregate demand in the United States grew as a
result of the process of expanding economic specialization
which meant a widening of the market nexus thus further
increasing the demand for money and credit. Economic
specialization and its concommitant, increasing economic
efficiency was stimulated primarily by four forces during
this period:

1. expanding cotton production in the South;

2. the settlement of new grain lands and cities
in the mid-west;

3. the growth of manufacturing and urban centers
in New England and the mid-Atlantic states;

4. the expanding network of roads, canals and
railroads, often financed by state and local governments,

which connected the growing sections of the nation.

83

84

Which of these were of paramount importance is dif-
ficult to say. Before proceeding to examine these factors
we will look at one hypothesis dealing with this question.
D.C. North in his "Economic Growth of the United States,"

wrote that,

Cotton was strategic because it was the major
independent variable in the interdependent structure
of internal and international trade. The demand for
western foodstuffs and northeastern services and
manufactures were basically dependent upon the income
received from the cotton trade. . . . The cotton trade
was the immediate impetus for . . . regional speciali-
zation, and the growth of cotton incomes in the 1830's
was the most important proximate influence upon the
spurt of manufacturing growth of that decade.

In a more recent work, "Growth and Welfare in the
American Past," North appears to have modified his hypo—
thesis. In answering the question of what factors brought
about the growth of the American economy during the ante-

bellum period he concluded that,

We must first observe that industrialization in
the northeast, though important, cannot claim full
credit. . . . It is clear that all three major
regions contributed. In both the West and the South,
incomes rose with more efficient agriculture and with
migration into new and richer lands. . . . It was
the whole American economy that was responsible for
the accelerated growth.2

This does not mean that North still does not believe that
cotton was important, for a few pages prior to the above

statement he wrote that,

Cotton made the big difference in the economy
after 1815, ruling as king in the South and exerting
an important influence in the national pattern of
development.3

 

 

 

85

From these two comments we might conclude that cotton was
important, that without the growth in the cotton market in
the mid-1830's the growth of the American economy might
have been less than it was.4

Cotton and the American Economy
in the Mid-1830's

 

Our interest in the cotton market lies in its rela-
tion to the boom of the mid—1830's and the panics and
deflation of the late 1830's and early 1840's. In this
chapter we will concentrate on the former period, later
chapters will cover the latter.

What factors contributed to the rise in cotton
prices during 1834-1836? What effect did the growth of
the cotton market have on the American economy in general?
These are the questions which will concern us in the next
few pages.

The main purchaser of American cotton was Great
Britain and it was the economic health of that country that
determined the course of the American cotton industry.5
The grain harvests in Great Britain were crucial in this
respect. During the mid-1830's the British grain crops
were good and this stimulated the demand for American
cotton.

Good harvests by lowering grain prices increased
the real income of British consumers and thus increased

the demand for British textiles.

 

 

86

The primary cause of the rise in the price of
cotton in the years prior to 1836 was the rise in
demand in Britain deriving from a series of good har—
vests. Not all British cotton goods were consumed at
home, and there were presumably other factors influ-
encing the demand for cotton, but the rise in the
home demand was the most systematic inflationary
factor.6

Indirectly, good grain harvests, through their
effect on the money markets of Great Britain increased the
demand for British textiles and thus for raw cotton. Good
harvests meant that little specie had to be exported to
purchase grains. This facilitated the easy money policies
pursued by the Bank of England during these years. It was
easier for British textile exporters to obtain credit just
as it was easier for the manufacturers to obtain credit to
purchase raw cotton.

The health of the American cotton industry depended
on conditiOns in the grain fields and money markets of
Great Britain. In 1837 and 1839 we will see the vital
:hmportance of these factors to the American cotton industry
and.the American economy in general.

The importance of cotton to the American economy,
ausiNorth indicated, lay in the income its production and
salxa generated for the American economy as a whole. Cotton
ale“) contributed to the growth of the American economy
thrtNJgh its role as the main source of foreign exchange
earTuings during these years. Finally, there is also the

liklihood that rising cotton prices contributed to the inflow

of British capital, especially to the Southern states.

87

Cotton gave the planters the purchasing power to
buy domestic and imported manufactured goods and foodstuffs
from the mid-Western states. Northern merchants, concen-
trated in New York supplied the South with much of the
manufactured goods it purchased. This demand for manu-
factured goods stimulated production and income in the East
thus contributing to the East's increasing specialization
and urbanization. They also supplied the shipping and
ancillary services needed to ship the raw cotton from the
South to the textile mills of New England and Europe as
well as the reverse trade in manufactured goods.

Though much has been written in recent years to
cast doubts on the assumption that the mid-West was an
important supplier of foodstuffs to the South, little in
these works had dealt specifically with the New South.8
Yet it was in the New South, those states bordering on the
Gulf Coast and the Mississippi river, that we had the most
:napid growth in population during the 1830's. Moreover,

Soy 1833 this region supplied about 52 per cent of the total
cxrtton produced in the United States and the average for
‘the 1834-1837 period was about 59 per cent.9

The New South might have been a food deficit region
of some magnitude given its population growth. Where could
thij; food have come from? One cannot simply assume that
time food came from the surplus regions of the Old South.

11:1may have been more expensive to ship food from the

88

interior of the Old South lying east of the Alleghenies

than to ship it down the Ohio and Mississippi river system

or across the Erie Canal and down the coast. We do not know

how much of the produce of the mid-West shipped down the
Ohio-Mississippi system never reached New Orleans, but was

consumed by plantations along the river valley. Finally

we do not know how much of what was shipped from New Orleans

went to ports along the Gulf Coast.10 Until much more is

known about the production of foodstuffs, and the coastal
and inland trade of the New South, we cannot reject the
hypothesis that it was an important market for the produce
of the mid—West during the 1830's.

Besides generating incomes outside the South as
well as within it, cotton was important because it was the
main source of exchange earnings for the United States in
these years. Exports of cotton accounted for about 36 per
cent of total United States exports in 1833; in the next
three years it accounted for 49 per cent, 65 per cent and
71 per cent, respectively, of total United States exports.
Tflue bills of exchange arising from the export of cotton
lualped to pay for expanding United States imports as well
an; to meet some of the needs for repaying short—term debts
auui the interest on the long-term debt. We will see in
laixar chapters that fluctuations in cotton export earnings
had serious consequences for the foreign exchange markets

and the Eastern banks in 1837 and 1839.

ll

89

The booming cotton market also helped the sale of
American securities in Great Britain and the Continent.
Rising cotton prices and the continuing flow of cotton
bills increased the confidence of foreign investors to
American securities. This was especially true for the
securities issued by the states of the New South. The
proceeds of the securities sold by these latter states
were mainly used to set up banks to finance the expansion
of cotton growing and marketing.12 By purchasing these
securities British investors might have been conscious of
the aid they were giving to their textile industry, but
we have no information to indicate that this was so.

Cotton was important to the boom of the mid-1830's.
It provided the main source of foreign exchange earnings
during the period and contributed to the climate which
induced foreign investment in the United States. As we
Inated in the beginning of this chapter, cotton was impor-
tant.in stimulating regional specialization, but we do
ruyt know how important. Finally we do not know when the
pnnocess of regional specialization and increasing economic

effiiciency became independent of cotton, if it did, during

the 1830 ' s.

Specialization, Urbanization and Growth
in the Mid—West and East

The Mid-West
During the 1830's the mid-West was the most rapidly

growing region in the nation. Except for the New South,

90

its population growth of 108 per cent was more than twice
that of any other region of the United States.13 The growth
of the mid-West was facilitated by an expanding transporta—
tion system which aided the flow of settlers into the region
and the outflow of its produce.

The demand for the produce of the mid-West grew
rapidly during this period. Expanding pOpulation, both in
farm areas and urban centers provided a growing intraregional
demand which was increased by interregional demand. With
expanding markets there was expanding specialization which
meant in turn more urban centers to meet the needs of the
farmers.

It was during the 1830's that cities such as Chicago,
Cleveland and Detroit grew from towns of less than 2,500
inhabitants to small cities of 4,500, 6,100, and 9,100
respectively. A vital factor contributing to the growth
of urban centers was access to river, lake or canal trans—
;mortation. The population of Lexington, Kentucky grew by
cnily'l7 per cent during the decade while that of Louisville,

cums hundred miles to the West on the Ohio River grew by 106

per cent. 14

How much of the growth in pOpulation in both agri—
culinaral and more urban regions of the mid-West, took place
durdJng the early and mid-1830's is unknown. The population

figures are for census years and we have to rely on more

9l

indirect information if we are to shed some light on the
time pattern of this growth.

We do have some information on Chicago which indicates
that most of the growth took place prior to the last years
of the decade, but we have no basis to generalize from this
information. We have previously seen that the population
of Chicago grew from less than 2,500 in 1830 to 4,470 in
1840. According to the Report of the City Controller of
Chicago for 1887, the pOpulation of that city was 4,170 in
1837.15 Thus between 1830 and 1837, most of the decade
increase in Chicago's population took place. F. Cyril
James, in his history of banking in Chicago wrote that,

The total value, at the prices then current, of

the land in the present city limits of Chicago had
reached a figure of $10,500,000, an amount 60 times
as great as its total value in 1830.16

Public land sales in the mid-West reached an ante-
bellum peak in 1836, having increased by 685 per cent
between 1833 and 1837.17 How much of this increase re-
flected increased population is unknown. Moreover, public
land sales in the 1837-1839 period were above the levels
of 1830-1833 so that there may have been significant popula-
tion increases during these latter years as well.

The population of the mid-West grew rapidly during

the 1830's, and it is possible that much of this increase

'took place during the early and mid-1830's. Most likely

92

the rate of population increase declined in the last three
years of the 1830's.

The problem of insufficient data confronts us again
when we look at the growth of agricultural output in the
mid-West during the 1830's. Much of the regions output
never reached the market place in that it was consumed by
the producers. Another substantial portion was consumed
by the inhabitants of the growing towns and cities of the
mid-West. What information we do have, deals with inter-
regional flows and perhaps reflects only a small portion
of the growth in output that did take place.

Interregional shipping data show a rapid expansion
of trade but one must be careful in their use. Receipts
on all Ohio canals, for example, rose by 330 per cent be-
tween 1830 and 1836, but we do not know how much of this
increase was due to the opening of new canals or the exten-
sion of existing ones. Between 1834 and 1836, the increase
was 40 per cent, perhaps this is a more accurate indicator
of the growth in output.18 Of course we still do not know
what proportion of these receipts arose from the shipments
of goods from the East.

From fiscal 1830 through fiscal 1836, the value of
receipts of produce from the interior at New Orleans rose
by 77 per cent, but we do not know the origins or composi—
tion of the shipments. Furthermore, we do not know how

Inuch of the shipments down the Ohio—Mississippi system was

l
l

 

93

purchased before reaching New Orleans. The tonnage of
vessels employed on the western rivers increased by slightly
over 142 per cent between 1830 and 1836.19
Information on East-West trade is even scanter.
Estimates of Eastbound shipments via the Erie Canal did
not commence until 1836. The tonnage of vessels registered
at all ports on the Great Lakes and the Saint Lawrence
River increased by almost 329 per cent between 1830 and
1836 with 69 per cent of the increase taking place in the
1833-1836 period. In comparison, only 28 per cent of the
increase of tonnage on Western rivers took place during

the same period.20

The volume of trade between the mid-West and other
sections of the nation increased greatly during the early
and mid-1830's. This reflected increasing production and
income. In turn this meant an expanding market for eastern

manufacturers and merchants.

Expansion in the East

Growth in the mid-Atlantic states and New England
in the early and mid-1830's arose from increasing special-
ization of trade and manufacturing and from increasing
‘urbanization. The demand factors giving rise to this came
from the expanding markets of the South and mid-West as

(Hell as from the growing commercial and manufacturing

centers of the East itself.

94

Industrial output grew during the early and mid—
1830's, but not enough to match the growth in demand. The
estimated output of the New England textile industry rose
by 200 per cent between 1830 and 1836. Surprisingly, how-
ever, only 40 per cent of this increase came during the
boom years of 1834-1836.21 Iron production increased by
65 per cent during the 1830-1836 period with half of this
coming in the 1834-1836 period.22 Total anthracite coal
production increased by 290 per cent during the 1830-1836
period, but again only about 38 per cent of this increase
coming in the 1834-1836 period.23 The pattern of growth
in industrial output during the boom years is one of the
reasons for the rapid rise in prices and increasing imports
during this period. Domestic production could not keep
pace with the growth in demand.

Mercantile trade expanded greatly during these
years. More and more goods flowed through the Eastern ports
destined for the markets of the interior and the South.
This trade generated income and employment in the Eastern
seaports as well as the interior distribution centers which
were part of the channel of trade from the factories of
Great Britain and New England to the farmers and planters
of America.

Paramount among the mercantile centers was New York.

It was the entreport for the cotton trade and the growing

markets of the interior which was opened up to the city by

95

the Erie Canal. While total United States imports rose 75
per cent during the 1833-1836 period, imports into the port
of New York rose by 110 per cent. New York's share of total
imports rose from 54 per cent to 65 per cent during the same
period.24
The increase in trade was reflected in the burgeon-
ing population and wealth of New York City.
New York, thanks in considerable degree to the
rapid expansion of its suburb, Brooklyn, the increase
in trade following the completion of the Erie Canal,
and its growing dominance of the import trade, grew
most rapidly of the Four Great Eastern Seaports and
contributed the largest share, especially in the
1830's, to the country's urbanization.25
The city's population increased by 62 per cent during the
decade while that of Boston, Philadelphia, and Baltimore
rose by 38 per cent, 37 per cent, and 26 per cent respec-
tively.26
The wealth of the city also grew rapidly but there
is a problem in using this information. A great fire in
the city in December 1835 led to a large increase in the
number of buildings constructed in 1836 at the then higher
prices. The number of buildings erected in New York City
rose from 877 in 1834 to 1,259 in 1835 and to 1,826 in

27

1836. The assessed value of real property in the city

rose by 140 per cent in the 1830-1836 period with 88 per
cent of this increase in the 1834-1836 period. The asses-
sed value of personal property rose by 81 per cent, with

28

69 per cent of this being in the 1834-1836 period. The

96

growth of New York City reflected the importance of urbaniza-
tion to the growth of the American economy during the 1830's.
Urbanization in the East depended on the expanding
market economy and access to the growing transportation
system. In New York State, the Erie Canal was a major
agent of urbanization, and not just for New York City.
During the first ten years of the canal's operation, house-
hold textile manufactures in New York State fell by about
47 per cent, on a per capita basis it was 55 per cent.29
As one travels westward along the canal, the rate of urban-
ization of cities along the canal increased. During the
1830's, the population of Albany increased by 39 per cent
while that of Troy, Schenectady, Utica, Rochester and
Buffalo increased by 66 per cent, 58 per cent, 54 per cent
119 per cent and 109 per cent respectively. For New York
State as a whole, population increased by 27 per cent.30
In New England, mill towns were also growing. The
pOpulation of Fall River, Lowell and Lynn increased by 60
per cent, 220 per cent, and 54 per cent respectively while
that of Massachusetts rose by 21 per cent during the decade.
In Maine, the boom in lumber, deriving from expanded urban
construction and shipbuilding, was reflected in the growth
of cities such as Augusta on the Kennebec River and Bangor
on the Penobscot. Both cities grew from less than 2,500
in 1830 to 5,300 and 8,600 respectively by the end of the

decade.31

97

Urbanization was a two—sided process. The expansion
of the cotton industry in the South and the settlement of
new grain lands and the beginning of new urban centers in
the mid-West stimulated the growth of urban centers in the
East. Urbanization itself further increased the need for
economic specialization not only in the growing mercantile
and manufacturing centers in the East but also in the
regions which supplied these centers with raw materials
and foodstuffs.

A common thread throughout our discussion of the
economies of the South, mid-West and East was the increased
economic specialization. Demand factors, especially in the
South and mid-West were important in bringing about this
specialization but the everwidening transportation net
furnished the underpinning for it. The expansion of this
infrastructure continued throughout the decade with the
peak in both canal and railroad construction being reached
in the last years of the decade and the first of the next.
It now remains for us to determine the extent of this con-
struction during the mid-1830's and the role of the state
governments in financing it.

State Governments and the Growth of
Transportation Infrastructure

 

 

State governments played an important role in the
financing of internal improvements during this decade. Aid

was extended in the form of bond issues to finance public

98

or semi-public projects, land grants, tax remissions,
granting of banking privileges and the purchase of pri-
vately issued bonds.32 In Table 4.1 we have the percentage
distribution of state debts by purposes for which they were
originally contracted. Canals, railroads and turnpikes
accounted for 68 per cent ($109.7 million) of the debts
outstanding in 1838. Note that in every state outside
of the New South, excluding Maine, the majority of the
debt incurred was for internal improvements. In the New
South banking was the main purpose for which state debts
were incurred.
There is little information available on the extent
of canal and railroad mileage built during the 1830's.
According to Taylor, about 2,000 miles of new canals were
constructed in the 1830's, the total mileage increased by
165 per cent during the decade. Estimates of railroad
construction vary greatly and are believed not to be relia-
ble for measuring annual changes. There are two estimates
of railroad mileage during the 1830's, those of Poor and
Shuman, the former showing an increase of 2,279 miles
while the latter estimates the increase as being 2,225
during the 1830's.33
The internal improvements of the 1830's depended
on the availability of long-term credit, especially British,

and on domestic banking facilities.34 We will see in later

chapters that the monetary panic of 1837 did not seriously

99

TABLE 4.l.--Per Cent Distribution of State Debts Outstanding
In 1838 By Purposes For Which Incurred.a

 

 

State Banking Canals Railroads Turnpikes Misc.
Alabama 72 0 28
Arkansas 100 0 0 0
Illinois 26 08 64 0 02
Indiana 12 57 22 10 0
Kentucky 27 35 35 05 32
Louisiana 97 002 02 0 01
Maine 0 0 0 0 100
Maryland 0 49 48 0 2
Massachusetts 0 0 100 0 0
Michigan 0 47 49 0 04
Mississippi 100 0 0
Missouri 100 0 0
New York 0* 73 21 0 06
Ohio 0 100 0 0 0
Pennsylvania 0 61 18 09 11
So. Carolina 0 27 35 0 38
Tennessee 42 004 52 02 0
Virginia 0 57 32 05 05
TOTAL 31 35 25 05 05

 

aWill not necessarily equal 100% because of rounding.

Source: United States, Bureau of the Census, Tenth Census
of the United States, 1880, Report on Valuation,
Taxation, and Public Indebtedness in the United
States, Vol. 7, pp. 526-554.

 

 

100

disturb the inflow of long-term capital, thus states and
private corporations were able to continue these projects.
The collapse of the Anglo-American trade structure in 1839
signaled an end to these capital imports. The disorgan-
ization of domestic banking with its widespread suspensions
and failures made it difficult for these projects to
utilize the funds they had in banks. When the funds
already in the pipelines were used up, the projects gener-
ally ground to a halt. The decline in construction coming
at a time when other sectors of the economy were already
facing falling demand conditions contributed to the severi-
ty of the deflation which lasted until 1844. The existance
of many unfinished projects and defaulted bond issues made
recovery that much more difficult. Access to foreign
capital markets and dependence on domestic banks perhaps
led to excess construction in the 1830's and to the in-
ability to revive construction, especially in the west,
during the 1840's.

Various policies were implemented by states to
induce banks to work with their internal improvement pro-
jects.

When extensive new canal construction was under-
taken in Ohio in 1836, the Commercial Bank (of Lake
Erie) was named as a disbursing agent . . . the state
Treasurer c00perated by receiving the bank's own
notes in receipt to takes, agreeing to 'give them
such direction in small lots as would prevent their
early return' for redemption.35

After the monetary panic of 1837, some banks found themselves

required to underwrite bond issues and sometimes they became

lOl

lenders of last resort to the state. These practices also
occurred before 1837, the most notable example being the
chartering of the United States Bank of Pennsylvania in
1836.36

State financing of internal improvements tended to
be inflationary. At the full-employment situation existing
in the mid-1830's, debt financing could only be non-
inflationary if:

1. It resulted in no new money creation or any
increase in the velocity of circulation of money, and if,

2. Bond purchasers curtailed their consumption by
the amount of the bonds and the resources so released were
transferred to the issuers of the bonds.

These non-inflationary conditions were not fulfilled.
The sale of bonds to banks and foreigners normally meant an
increase in the money supply. Furthermore, it is highly
unlikely that non-bank bond purchasers in the United States
curtailed their consumption by a parallel amount. We saw
that the retirement of the federal debt released funds which
flowed into alternative investments such as state bonds
issued to finance canals and railroads. Such purchases
were done not out of current income but from an alteration
in individuals wealth. Debt financing of canals and rail-
roads were inflationary in the 1830's. They resulted in
increases in the supply of money without any significant

transfer of resources.

102

Let us look a bit more closely at the inflationary
effects of investments in internal improvements. First we
must look at the composition of this investment. In the
1830's the emphasis in internal improvements shifted from
canals to railroads. Perhaps most of the routes suitable
for canals were already developed or in the process of so
being. During the boom years of the mid-1830's there was
a slight decline in canal investment while that on rail-
roads rose significantly. For the decade as a whole, rail-
road investment rose by 1,000 per cent while that for canals
rose by 91 per cent. By the end of the decade investments
in railroads exceeded those on canals whereas in 1830 they
were only about 21 per cent of canal investment.37

Investment in internal improvement projects generated
income in the areas where the construction was taking place
and in the domestic capital goods industries supplying equip-
ment for the construction of the project and its rolling stock.
If we assume that a dollar Spent on capital goods had a
greater multiplier-accelerator effect on the economy than a
dollar spent on construction labor, then the shifting of funds
from canals to railroads might have intensified the inflationary
pressures during the mid-1830's. The shift to railroad con-
struction also intensified the balance of payments problem as
almost all of the iron imports during the 1830's consisted of

38

rolled iron used as rails. Finally, if workers were

attracted away from agriculture into the construction of these

103

projects this might have led to a less rapid growth of agri-
cultural output increasing the prices of foodstuffs.

So far we have examined the magnitude and possible
inflationary effects of internal improvement investments
during the 1830's. Countering these inflationary pressures
were the increased economic specialization and economic
efficiency resulting from reduced transportation costs and
widening markets. It appears though, that the net effect
of these investments was to intensify the inflationary
pressures in the early and mid-1830's.

Aggregate demand expanded in the mid-1830's pri-
marily because of the growing demand for Southern cotton
and the settlement of the mid—West. This induced growth
in the East as mercantile trade and manufacturing indus-
tries responded to the demand eminating from the interior
and the South. Urbanization in the East as well as in the
mid-West also contributed to the process of specialization
and growth. The building of the transportation infra-
structure quickened specialization and urbanization while
contributing to the growth in demand.

The picture of the American economy we have examined
in this chapter is one of prosperity, as can be seen in
Table 4.2. Yet as early as the spring of 1835 we begin to
find some uneasiness in the press. In May, 1835 Niles'
National Register carried the following editorial statement,

“We shall offer a selection of articles as to what is going

104

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105

on in the way of speculation. Verily, the people are mad!"39

The pro-Jackson New York Evening Post, blaming the banks,
warned the New York business community about the eventual
outcome of the speculation taking place.

We believe that the community intoxicated with
the favors of the banks, as with a cup of a modern
Circe, have lost sight of providence, and are blindly
rushing into a state of things from which they will
not be easily retrived. A crisis is approaching,
and it is near at hand, to which the panic and pres-

sure of last year (1834) will be a trifling in com-
parison.

In the last four months of the year a much more
ominous development took place. The Baring Brothers, one
of the leading firms in the Anglo-American trade, began
to curtail their Operations. "The basic assumption was
that prices of merchandise and securities were so high
that reaction was inevitable."41

The growth of the Southern cotton industry, the
construction of canals and railroads and the trade in im-
ported goods depended on the health of two foreign markets,
the British cotton and money markets. It would be in these

Imarkets that the difficulties of the late 1830's and early

£1840's had their roots.

FOOTNOTES

CHAPTER IV

lNorth, Economic Growth of the United States, pp.
67, 167.

2North, Growth and Welfare in the American Past,
p. 84.

3North, p. 76.

4For a discussion on the effects of cotton and
slavery on American economic development and growth see
Alfred H. Conrad, et. al., "Slavery as an Obstacle to
Economic Growth in the United States: A Panel Discus-
sion." The Journal of Economic History, Vol. 27, No. 4
(December 1967). The readers attention is also called to
footnote eight of this chapter.

5Peter Temin, "The Causes of Cotton-Price Fluctua-
tions in the 1830's," Review of Economics and Statistics,

Vol. XLIX (November, 1967).

6Temin, Review of Economics and Statistics, Vol.
XLIX, p. 470.

7Stuart Bruchey, Cotton and the Growth of the
.American Economy: 1790-1860 (New York: Harcourt, Brace
auni World, Inc., 1967), p. 226. For a discussion of some
(If the Southern attempts to bypass the Northern merchants
.and shippers see Herbert Wender, "Southern Commercial Con-
\nmntions, 1837-1859," John Hopkins University Studies in
Histcmical and Political Science, Series XLVIII, No. 4,

1930.

8For an example of the difficulties involved in
measniring the trade of the mid—West with the South see
Allxart Fishlow, "Ante-bellum Interregional Trade Recon-
sitkared," Postscript on Antebellum Interregional Trade,"
and Robert W. Fogel, "A Provisional View of the 'New
Ecommnnic History,'" "American Interregional Trade in the
l9tJIICentury," in Ralph Andreano, ed., New Views on American
Exmuumnic Development (Cambridge: Schenkman Publishing Co.,

Inc., 1965).

107

9The population of the New South rose from 727,000
in 1830 to 1,471,000 by 1840, a 102 per cent increase.. The
comparable figures for the entire South are 3,774,405 in
1830 and 4,749,875 in 1840, a 26 per cent increase. See
North, Economic Growth of the United States, p. 257, and
Statistical History of the United States, p. 13, Series
A-123-180. Cotton production data from The Commercial
Review of the South and West, Vol. 4, No. 1, September 1847,
p. 86.

 

10The population of Natchez rose from less than
2,500 to 4,200 during the 1830's. Mobile's pOpulation rose
from 3,194 to 12,672 in the same period. George R. Taylor,
"American Urban Growth Preceding the Railway Age," The
Journal of Economic History, Vol. 27, No.-3 (SeptembEE,
1967). p. 315.

11North, Economic Growth of the United States, p.

233.

12North, p. 195.

13Statistical History of the United States, p. 13,
Series A-123-180.

14Taylor, The Journal of Economic History, Vol. 27,
pp. 315, 338.

15Richard T. Ely, Taxation in American States and
Cities (New York: 1888), p. 488.

16F. Cyril James, The Growth of Chicago Banks: The
.Formative Years, 1816-1896, 2 Vol. (New York: Harper and
Brothers, 1938), I, p. 103.

17North, Economic Growth of the United States, p.

256.

18North, p. 250.

19North. pp. 250—252.

2oNorth, p. 250.

21Lance E. Davis and Louis H. Stettler III, "The
NemriEngland Textile Industry, 1825-1860: Trends and
leurtuations," Output, Employment and Productivity in
the:t1nited States After 1800 (New York: National Bureau
of Economic Research Studies in Income and Wealth, Vol.
30, Imational Bureau of Economic Research, 1966), p. 221.

108

2Taussig, Quarterly Journal of Economics, Vol. 11,

 

 

 

p. 379.
23Hunt's Merchants Magazine, Vol. 8, December, 1842,
p. 458. .
24Appendix Table A—1 and Table 9.2.
336 25Taylor, The Journal of Economic History, Vol. 27,
p. .

26Taylor, p. 311.

27Niles' National Register, May 11, 1840, p. 164.

28Niles' National Register, August 19, 1843, p. 388.

29George R. Taylor, The Transportation Revolution
(New York: Rinehart and Company, Inc., 1951), p. 213.

30Taylor, The Journal of Economic History, Vol. 27,
pp. 313-314 and Statistical History of the United States,
p. 13, Series A-123-180.

31Ibid.

32See Carter Goodrich, Government Promotion of
American Canals and Railroads, 1800-1890 (New York: Columbia

University Press, 1960), and George R. Taylor, The Trans-
portation Revolution, 1815-1860, Chs. 2, 3, 5.

33For canal estimates see Taylor, Transportation
Revolution, p. 52. Railroad estimates and the difficulties
involved in their use are found in E. R. Wicker, "Railroad
Investment Before the Civil War," Trends in the American
Economy in the Nineteenth Century, pp. 505, 506.

 

34Because of the importance of the London market,
Imire and more states and private promoters denominated
their bonds in sterling with interest and principle payable
iJlILondon. See Alfred D. Chandler, Jr., "Patterns of
Amuzrican Railroad Finance, 1830-1850," Business History
Review, 28 (September, 1954), p. 250.

35Harry N. Scheiber, "The Commercial Bank of Lake
Erdra, 1831-1834," Business Historpreview (Spring, 1966),

p. 57.

36Smith, pp. 178-179; F. Cyril James, p. 147.

109

37Canal investment reached a peak in 1840 while

railroad investment peaked in 1839. The former rose from
$7.5 million to $14.3 million, the latter from $1.6 million
to $17.7 million. See H. Jerome Cranmer, "Canal Invest-
ment, 1815-1860," Trends in the American Economy in the
Nineteenth Century, Studies in Income and Wealth, Vol. 24
(Princeton: Princeton University Press for the National
Bureau of Economic Research, 1960), pp. 555-556; Albert
Fishlow, American Railroads and the Transformation of the
Antebellum Economy (Cambridge: Harvard University Press,

1965). pp. 385-399.

38Frank W. Taussig, The Tariff History of the United
States, Eighth Edition (New York: Capricorn Books, 1964),
p. 126. ,

39Niles' National Register, May 9, 1835, pp. 167-
168.

4OIbid.

41Hidy, p. 203.

CHAPTER V

THE END OF PROSPERITY

Strains in the American economy began to appear
during the first half of 1836. Continuing speculation and
uncertainty over the disposition of the Federal surplus
fed the uneasiness developing in many quarters over the
future course of the economy. The New York State Bank
Commissioners in their report of January, 1836, warned
about the excessive speculation then going on.l' In April,
Niles' was warning about a forthcoming crisis arising from
the Federal surplus and its depositing in the deposit
banks.2 The Washington Globe, a semi-official spokesman
of the Jackson administration warned the deposit banks to
be more conservative in their practices.

The present state of the currency imposes upon

the leading deposit banks the obligation of lessening
their loans, calling upon other banks for regular
settlements and payments of balances in specie, and
thus giving check to their too extended Operations,
to the raging mania for wild speculations and over-
trading, and thus restore a more wholesome state in
the currency of the country.3

The uncertainty and tightness in the Northern money
markets, compounded by the strains placed on the New York

City banks after the disastrous fire of December 1835, was

gradually intensified by events in the South.4

110

 

 

111

The war in Texas curtailed Mexican specie exports
to New Orleans. In 1835 these amounted to about $8.3 mil-
lion, in 1836 they fell by 46 per cent to $4.5 million.5
Further aggravating the Specie position of the New Orleans

banks, was the poor sugar crop of 1836.6

Fortunately for
the South and the American economy in general, the cotton
market remained buyont throughout most of the year, though
prices were below their 1835 highs.

In this chapter we will examine the domestic and
foreign factors which brought the boom of the mid-1830's
to its peak and prepared the ground for the panic of 1837.
The money markets in America and Great Britain were to
bear the brunt of the difficulties during the year. The
American banking system was dealt a series of destabilizing
blows by the fiscal and monetary policies of the Federal
government. Adding to these problems, especially for the
Eastern banks, was the worsening situation in the British
financial community. Poor grain harvests and difficulties
with some joint-stock banks led to a tightening of credit
by the summer of 1837. It was only a matter of time before
this was transmitted to the American money markets and
eventually the commodity markets on both sides of the
Atlantic. In the first half of this chapter we will exam-
ine the effects of the Deposit Act and the Specie Circular
on the banks during the year. In the second half we will

hxm.at the situation in Great Britain.

 

112

Federal Fiscal and Monetary Policies
‘ ' in 1836

 

On June 23, 1836, President Jackson signed the "Act
to Regulate the Deposits of the Public Money." Less than a
month later, on July 11, 1836, the Secretary of the Treasury,
Levi Woodbury, sent a notice, the "Specie Circular" to all
receivers of public funds and to the deposit banks. Of
the two actions, the first was to be far more important in
it's effects on the banking system and the economy during
the year that followed. In a later section of this chapter
we will examine the relationship between the Specie Circular
and banking activity in the last half of 1837. It is to
the Deposit Act that we now direct our attention.

The Deposit Act and the Deposit
Banks During 1836

 

 

The Deposit Act consisted of two parts. The first,
contained in sections one through twelve of the Act, dealt
with the selection and regulation of deposit banks. The
second, sections thirteen and fourteen, set forth the con—
ditions governing the distribution of the Federal surplus

70:?

which was scheduled to commence on January 1, 1837.
the twelve sections that comprised the first part of the
act, sections one, four, five, eight and eleven were the
most important.

Section one provided that a bank could hold govern-

ment deposits only up to three-fourth's of the bank's paid

fhxcapital. In Table 5.1 we have a listing of deposit banks

113

TABLE 5.1.--Capital Stock and United States Treasury Deposits of Deposit
Banks Around June 1, 1836.

 

 

($000)
Maximum Treasury
Bank Capital U.S. Treasury Deposits Allowed
Stock Deposits Under the
Deposit Acta

Maine Bank 305 185 228
Commercial B. Portsmouth 102 143 76.5
Commonwealth B. Boston 500 1085 375
Merchants' Bank Boston 1125 1098 844
Bank of Burlington, Vt. 150 54 112.5
Farmers and Mechanics

Bank, Hartford 447 47 335
Mechanics' Bank New Haven 473 35 355
Arcade Bank, Providence 300 . 113 225
Mechanics and Farmers'

Bank, Albany 442 185 332
Bank of America, N.Y.C. 1001 3781 1501
Manhattan Co., N.Y.C. 2050 4727 1538
Mechanics' Bank, N.Y.C. 1000 4186 1500
Girard Bank, Philadelphia 2992 2604 2244
Moyoamensing Bank, Phila. 186 400 140
Union Bank of Mary, Balti. 1846 996 1385
Franklin Bank, Baltimore 555 353 416
Bank of the MetrOpolis,

Washington 500 137 375
Bank of Virginia and

Branches 3240 335 2430
Bank of the State of N.C. 1206 80 905
Planters and Mechanics'

Bank of South Carolina 1000 409 750
Planters Bank of the

State of Georgia 535 248 401
Bank of Augusta, Georgia 900 163 675
Branch Bank of Alabama,

Mobile 2255 1717 1691
Commercial Bank of New

Orleans 2987 1121 2240
Union Bank of Louisiana

at New Orleans 7151 1890 5363
Merchants and Manufacturers'

Bank, Pittsburgh 600 93 450
Franklin Bank, Cincinnati 1000 594 750
Commercial Bank, Cincinnati 1000 478 750
Clinton Bank, Columbus, Ohio 289 441 217
Savings Institute, Louisville,

Kentucky 97 476 73
Union Bank of Tennessee 2107 676 1580
State Bank of Indiana 1280 1196 960
Agency of Com. Bank of

Cincinnati at St. Louis 2388
Planters' Bank of Mississippi 4149 2432 3112
Bank of Michigan, Detroit 448 1378 335
Farmers and Mechanics Bank,

Detroit 200 1036 150

 

aSeventy-five per cent of paid in capital. We are assuming that
the entire capital stock of each bank was paid in, this was not always
true.

Source: U.S. Congress, Senate, 24th Congress, lst Session, Senate
Doc., No. 423.

114

around June 1, 1836, their capital stock and the amount of
government deposits which each held. All of the deposit
banks in the East coast financial centers, Boston, New York
and Philadelphia, held excess treasury deposits. In the
interior and the South the single deposit banks in the
states of Kentucky, Indiana and Alabama held excess deposits
as did the two deposit banks at Detroit Michigan. As a
result of this and other requirements of the Deposit Act,
the number of deposit banks more than doubled during 1836
and,

The Treasury had to order the transfer of $18.3
million out of a total of $34 million on deposit in
June, 1836.8

The shifting of Treasury deposits could cause these

banks losing deposits to contract their lending, and perhaps
their customers might not be able to renew loans or obtain
their accustomed lines of credit. The loss of Treasury
deposits might also entail a loss in specie, though not
necessarily in a one to one ratio. Deposit banks might

have adjusted to these specie losses by curtailing their
lending activities and their note circulation. The infor-
mation given in Table 5.2 substantiates these conclusions.

The loss of Treasury deposits apparently was a

more contractionary factor, insofar as bank lending was
concerned, than the loss of specie. A majority, 53 per
cent, of the banks which lost such deposits decreased their

lending while only 32 per cent of the banks which lost

115

TABLE 5.2.--The Relationship Between Changes in United States Treasury
Deposits and the Major Assets and Note Circulation of
Deposit Banks, June-December 1836.

 

A. Treasury Deposits and Bank Lending

Loans and Discounts
Number of

 

 

 

 

 

 

 

Banks
Treasury Deposits + 44+ (76)a 14' (24) 58
- 9 (47) 10 (53) 19
Number of Banks 53 24 [ 77 2 *
X = 4.82
B. Treasury Deposits and Specie Holdings
Specie Holdings
Number of
Banks
Treasury Deposits + 40+ (69) 18- (31) 58
- 6 (32) 13 (68) 19
Number of Banks 46 31 [ 77 2 *
' X = 10.61
C. Treasury Deposits and Note Circulation
Note Circulation
Number of
Banks
Treasury Deposits + 25+ (44) 32_ (56) 57
- 2 (12) 15 (88) 17
Number of Banks 27 47 I 74 2 *
X = 5.315

 

D. Specie and Bank Lending

 

Loans and Discounts
Number of

 

Banks
Bank Specie + 32* (70) 14 (30) 46
— 21 (68) 10 (32) 31
Number of Banks 53 24 T 77
Not significant
at p = .05

 

aPer cent of total banks in given row.

bThree banks had no note circulation.

*
Statistically significant at 5% level.

Chi Square (X2) is a statistic that can be applied to estimate the pro-
bability that the observed relationship between rows and columns is not
due solely to sampling variations (chance), but actually exists. At a
probability level of 5%, the X2 with one df is 3.841. If the calculated
X exceeds this, we can reject the null hypothesis and accept the
alternative hypothesis that there is a statistically significant rela-
tionship between the columns and rows. For a discussion of chi-square
analysis see Robert Ferber and P. J. Verdoorn, Research Methods in

Economics and Business (New York: The Macmillan Company, 1962), pp.
73-77.

 

Sources: United States, Congress, Senate, 24th Congress, 2nd Session,
Senate Document No. 21.

 

116

specie contracted their lending activities. Increases in
Treasury deposits also had the same relative effect. We
will later see that section eleven might account for part
of the relative importance of Treasury deposits.9

Part two of the second section of the Deposit Act

required that all deposits to the credit of the United
States be counted as specie deposits. If desired by the
drawer, all claims against government accounts at the
deposit banks had to be paid in specie. This provision,
part of the administration's attempt to have a hard cur-
rency, was reinforced by section five which provided that
a bank could not be selected nor remain as a deposit bank
unless it redeemed its notes in specie. The section also
provided that no bank shall:

Be selected or continued . . . which shall after
the fourth of July . . . issue or pay out any note or
bill of a less denomination than five dollars . . . ;
nor shall the notes or bills of any bank be received
in payment of any debt to the United.States which
shall, after the said fourth day of July . . . issue

any note or bill of a less denomination than five
dollars.10

These requirements should have had some affect on
the bank note circulation of the deposit banks. It did,
but in a way not readily apparent. The deposit banks
shifted the composition of their demand liabilities away
from bank notes and into demand deposits. An examination
of Appendix Table B-3 shows this shift in the composition
cfiidemand liabilities. In the firschalf of the year note

cinnflation rose only slightly more than demand deposits

117

in per cent change. In the last half of the year, with
the rapid growth in the number of deposit banks and the
expansion in lending, demand deposits grew more rapidly
than note circulation. Between June and November the ratio
of demand deposits to note circulation rose from 58 per
cent to 64 per cent. In Table 5.2 we see this shift in a
different light. A majority of all deposit banks cur-
tailed their note circulation. Even those banks that had
increased Treasury deposits, 56 per cent also decreased
their note circulation between June and the end of the
year.

The effects of sections two and five of the Deposit
Act were to increase the demand for specie on the part of
the banking system, especially the deposit banks. The
prohibitions against small bank notes also increased the
public's demand for specie. Further adding to the specie
needs of the deposit banks was section eight which gave
the Secretary of the Treasury the power to require the
deposit banks to keep in their vaults an amount of specie

which he deemed necessary in order to protect government

deposits.11

What was the pattern of deposit bank specie holdings
during 1836 and did it differ from that of the other state
banks? The specie holdings of deposit banks taken as a
whole increased during 1836 but so did that of state banks

‘hxgeneral. The United States Bank of Pennsylvania, on the

118

other hand lost over $5 million in specie during the year.
Using the Treasury estimates of bank specie holdings we
find that bank specie increased by $2.9 million or nine per
cent during the year, an alternative estimate of such
holdings registers a $8.8 million increase, or 28 per cent.

Deposit banks increased their specie holdings by $5.3 mil-

lion, or 53 per cent.13

We can tentatively conclude, given the conflicting
estimates of aggregate bank specie holdings, that deposit
banks increased their specie holdings to a greater extent
than non-deposit banks. Since the aggregate of net specie
imports and specie losses incurred by the United States
Bank of Pennsylvania exceeds any estimate of increased
bank specie holdings, we can also conclude that the public
did increase its specie holdings during 1836.

Up to this point, the sections of the Deposit Act
focused on the current demand liabilities and specie hold-

ings of the deposit banks. Section eleven however, con-

tained a provision which could induce banks to expand their

loans cm'at least alter the composition of their income
earnixm; assets so as to increase their net returns. When-
ever :3 bank held, during any quarter, government deposits
exceeding one-quarter of its paid-in capital, it had to
pay tine government interest at the rate of two per cent

per annum on these excess deposits.

we seertfluat all the banks as of June 1, were affected by

12

Referring to Table 5.1

119

this regulation. As we previously noted, this provision
could have been one factor contributing to the strong rela-
tionship between Treasury deposits and bank lending.

The first eleven sections of the Deposit Act dealt
with the regulation of banks which held Treasury deposits.
By themselves, the regulations were sufficient to dis-
arrange the banking system, at least for the time needed

to select new deposit banks and shift Treasury deposits,

and perhaps even longer. It was section thirteen, however,

together with the Specie Circular, which bore the contem-

porary blame for many of the problems which befell the

American economy in early 1837.

The Deposit Act: The Distribution of
the Federal Surplus

Section thirteen provided that:

The money which shall be in the Treasury of the
United States on the first day of January, eighteen
hundred and thirty-seven, reserving the sum of five
millions of dollars, shall be deposited with the
several states, in proportion to their respective
representation in the senate and the house of repre-

sentatives.l4

The effect of this distribution on the banking system de-
pended on the magnitude of the interstate and intrastate
transfers which were required under the act and the means
of trtuisfer. If the deposit banks of each state held
goverrument deposits equal to the amount of funds that were
to be transferred to the state, or if the pattern of gov-

ernment expenditures and receipts were such that the

120

deposit banks could obtain the necessary funds for the
transfer, then the payment of the distribution would not
necessitate interstate transfer of funds. Even if no
interstate transfers were required, the deposit banks still
faces the potential loss of specie reserves if the state
depository banks differed from the Federal.15

Our task will be to determine the magnitude and
purposes of the transfers undertaken between the passage
of the Act and the end of December and to determine what
effects they had on the banking system. We will postpone
until the next chapter an analysis of the role which the
Act had, or supposedly had, in the monetary panic of early
1837.

The Secretary of the Treasury on December 26, 1836
submitted a report to the Senate which dealt with the trans-
fers ordered since June 23.16 Between the passage of the
Act and this report, $38,039,385 in transfer drafts were
issued, of which $25,129,385 were payable by the end of
December.17 Of the latter amount, 68 per cent or approxi-
mately $17.1 million were drawn for interstate transfers,
as shown in Table 5.3. It is incorrect to assume that most
cnreall of these transfers were undertaken solely because of
the provisions of Section thirteen. The Secretary estimated
that.<x1mpliance with Section one necessitated $18.3 million

in trtnnsfers. Furthermore, between the passage of the Act

and December, the government received about $22.5 million

TABLE 5.3.--Interstate Transfer Drafts Issued and Payable Between

121.

 

 

June 23, 1836 and December 15, 1836.1

Inflow Outflow

Mass. N.Y. Pa. Md. Mich. Ohio Ind. Miss. La. Total
Me. 215 227.5 442.5
N.H. 285 190.0 475.0
Vt. 35 130.0 165.0
Mass. 50.0 550 600.0
R.I. 290.0 290.0
Conn. d660.0 160 820.0
N.Y. p670 1300 970.0
N.J. 3572.0 46 ' 618.0
Pa. a500.0f 500 i700 m200 1900.0
Del. ‘ 80.0‘ “ 80.0
D.C. 50 1410.0 645 465 20 100 2690.0
Md. 90.0 90.0
Va. g2300.0 2300.0
N.C. m 650.0 650.0
S.C. 1 780.0 780.0
Ga. ‘ 700.0 700.0
Tenn. 200.0 200 100 500.0
Ky. k490 880 1370.0
Ohio 260 300 560.0
Ind. 300 300.0
La. 800 800.0
Total 585 98829.5 691 465 2160 2390 1180 200 600 17100.5

 

lIncludes drafts payable on demand and drafts payable in 1836 but
extended to 1837.

Mint.

$220,000 to upstate New York banks.

$400,000
$450,000
All from
$100,000
es 50,000
f$100,000
g$700,000
hs 50,000
i$100,000
j$100,000
k$390,000
1$100,000 but
m$100,000 but

United States Congress,
Senate Document No. 29,

was sent to the
to New York City,
New York City

due but
but
but
but
but
but
but
but

QaOO‘QJ

in 1836.
1836.
1836.
1836.
1836.
1836.
1836.
1836.
1836.
1836.

Senate, 24th Congress,
pp. 8-20.

not paid

due not paid in

due not paid in

due not paid in

due not paid in

due not paid in

due not paid in

due not paid in

due not paid in

due not paid in

Sources: 2nd Session,

122

in new revenue, "most of which, being at first paid into

has also
18

the banks where an excess already existed . . .

been . . . placed under transfer to some other banks."

It was also estimated that $12 million of the transfers

drawn were required to meet the normal expenses of the

Federal government.19 It seems clear that little in the

way of specific transfers were undertaken to prepare for

the distribution. In his report, the Secretary of the

Treasury commented that:

The other and last process of transfers for the
apportionment of the deposits among the States in the
prescribed proportions, so as to be gradually and
seasonably ready for payments to each State next month,
and quarterly thereafter during the year has made but

little progress since June.
In examining the actions of the deposit banks during
the last half of 1836, it may be best to divide the last six

months into two sub-periods. The first, from July to No-

vember, covers the period when the banks did not know the
amount, nor to whom they would lose deposits because of the

distribution. It might be expected that banks in states

which were experiencing net transfer outflows, primarily,
because of Section one of the Deposit Act and the financing

of government expenditures, pursued a less expansionary

policmr than those in net inflow states. It has already

been shown in Table 5.2 that deposit banks losing Treasury
deposits did generally pursue a less expansionary policy.

JDuring the second period, November and December,

the deposit banks knew about the drafts which were to be

 

 

 

123

drawn on them and could prepare themselves accordingly. On
the first of November they were informed as to amount of
drafts which were to be drawn on them in 1837 as well as
the states which would present the drafts.21 No mention
was made of the specific banks which were to receive the
deposits.

What could banks do to prepare themselves for those
drafts? Their general course of action could entail a
rearrangement of the assets so as to increase their liqui-
dity. Furthermore, banks might attempt to get exchange
on firms or banks in the states which would be presenting
the drafts. They could also curtail their lending to those
firms which were doing business in the states presenting
the drafts. In summary, they could increase their liqui-
dity as well as try to increase their creditor, or decrease
their debtor, position vis a vis banks in the states which
would be drawing on them, come January.

We shall first look at the period extending from
the end of June to October 24-November 7, the latter dates
being chosen so as to minimize the effects of banks pre-
paring themselves for the distribution. This information
will be found in Table 5.4. There were 46 banks in those
states which had net transfer inflows during the last half
of 1836; of these banks, 39, or 85 per cent increased their
lendirug, in comparison, 19, or 58 per cent of the banks in

the outflow states increased their lending. Changes in

124

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125

Treasury deposits due to transfer drafts thus affected bank
lending. Since there is little difference in specie
holdings, this might reflect the attempts of all deposit
banks to increase their specie holdings. We have previ-
ously seen that the deposit banks taken as a whole increased
their specie holdings to a greater extent than non-deposit
banks. As might be expected banks in most of the outflow
states curtailed their note circulation as notes then
entailed a greater danger of redemption into specie than
demand deposits, given the requirements of the Deposit Act.

When we look at the last two months of the year we
find that the behavior of the deposit banks is more dif-
ficult to predict. There is no sharp distinction between
the behavior of banks in states that were to gain funds
and states that were to lose funds. None of the results
in Table 5.5 are statistically significant. It should be
noted, however, that deposit banks in general pursued a
much less expansionary lending policy than in the June to
November period. In the last two months of the year,
slightly less than half, 48 per cent of the banks increased
their lending whereas in the first period 73 per cent of
the banks increased their loans. Even a majority of the
banks that lost Treasury deposits due to transfer drafts
expanded their lending in the June-November period.

We have seen that banks holding government deposits

did behave differently than state banks in general. Their

126

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127

lending and specie holdings grew more rapidly than other
banks. Movements in Treasury deposits, however, had a
greater influence on lending than did movements in specie
holdings. In the June to November period transfer drafts
did appear to affect the lending and note creation policies
of the banks. When we came to the last two months of the
year when banks could prepare for the distribution, we saw
that their lending policies became less expansionary. It
is not possible to say with any degree of certainty that
it was only the preparations for the distribution that
altered bank policies in the last two months of 1836.
Other factors were already at play by this time. Perhaps
more importantly we do not have comparative information
for non-deposit banks during this period. But it is again
clear that the Deposit Act did influence the behavior of
banks governed by it.

Whether the Deposit Act fed the fires of inflation
is a question which cannot be definitively answered. The
evidence, fragmentary as it is, is affirmative. We have
just seen that movements in Treasury deposits did influence
bank behavior. Between January 1835 and November 1836, the
loans and discounts of deposit banks increased by 143 per
cent and note circulation by 168 per cent. In comparison,
the national figures for all banks was 48 per cent and 44
per cent.22 As the relative size of the assets and liabili-

ties of the deposit banks did not vary greatly during these

128

years, it means that the rate of growth for all banks is
overstated.

If we accept the tentative conclusion that the
Deposit Act did feed the inflationary pressures of the
mid-1830's, can we then determine by how much it did? One
can perform the Operations of counterfactural history and
attempt to determine what the growth rate of banking ac-
tivity would have been if there had been no Deposit Act.
But the data is too fragmentary and the assumptions too
uncertain. There are many assumptions that might be needed
but perhaps more important than facile economic assumptions
is a political one. Can we assume away the political
realities of the time that produced the Deposit Bank?

This seems impossible.

Our conclusions on the effects of the Deposit Act
during the last half of 1836 are somewhat at variance with
those of Peter Temin's in his "The Jacksonian Economy."

The main reason for this is that Temin, along with Tember-
lake, focus primary attention On the relationship between
the distribution segment of the Deposit Act and the events

of early 1837.23

When Temin does briefly look at the pos-
sible effects of the Act during the last half of 1836, he
approaches the problem in an unusual and eventually er-
roneous way.

The first and basic assumption made by Temin is

that if the Distribution had any effect on banks, it was

129

through the shifting of specie brought about by the transfer
of the Treasury deposits. We have already seen in this
chapter that the available information does not support this
assumption. Temin then implicitly assumes that the first
part of the Deposit Act had no effect on bank behavior.
Rather, he concentrates on the movement of specie during

the last half of 1836. Finally when he does look at the
effects of the Treasury transfers he assumes that as they
did not cause a breakdown in the banking system in 1836,
they did not cause the panic in 1837.

Temin notes that there exists in the literature an
argument that,

The Secretary of the Treasury, Levi Woodbury,

shifted the public deposits between regions in late
1836 to avoid a large demand for specie at the actual
distribution and that this shift placed intolerable
strains on the banking system.

One might suppose that Temin then attempted to
determine the magnitude and purpose of interstate transfers
during the last half of the year and the effects which this
may have had on the banks involved. He did not. He first
looked at the total amount of transfers made in the last
half of the year and then at the net changes in Treasury
deposits during that time.

In concluding fur; analysis, Temin first notes that,

Only five states lost public deposits between

June 20 and December 19, 1836. Of these losses, only
two exceeded a quarter of a million dollars, and the
losses from all states totaled just under $1.5 million.
It is clear that the net effect of the Treasury's

actions was not to reallocate the government deposits
among the different regions of the country.

130

This conclusion is not surprising. We have already
seen that Secretary Woodbury estimated that less than $2
million was transferred for this purpose in 1836. This sum
amounted to less than 13 per cent of the interstate trans-

26 What is

fer drafts drawn and paid during the period.
surprising is that the data cited by Temin cannot be used
to support his conclusion. Changes in Treasury deposits
reflect not only transfer drafts but also expenditures and
receipts of Treasury revenue. Thus Temin should have at
least measured net transfer flows, not net deposit changes.
Whereas only five states lost Treasury deposits in
the last half of 1836, six states had net transfer outflows
as we saw in Table 5.4. Of these six, New York State alone
had a deficit of $6.86 million, all of the outflow coming
from New York City. Michigan had a net outflow of $2.16
million, Ohio lost $1.34 million and Indiana lost $880,000

27 Transfer drafts

because of interstate transfer drafts.
did not reallocate government deposits among regions as
much as they did among different states and as we have
already shown this did influence bank behavior.

Finally, Temin remarks that while the distribution
did not cause the suspension of 1837 it was a hardship on
individual banks. He then cites as examples the states
of New York and Michigan which lost $570,000 and $430,000
.in Treasury deposits respectively, between June and Decem-

loer.28 Even looking just at changes in Treasury deposits

131

the figures cited by Temin do not tell the entire story.
Though New York State deposit banks lost $570,000 in Treas-
ury deposits, those in New York City lost at least four
times that amount during the June to December period.29 In
the next chapter we will see that the distribution contri-
buted to the suspension of the New York City banks in 1837
though it did not cause it in any unicausal fashion.

With the enactment of the Deposit Act, the banks
involved found themselves under increasing pressure. The
administrative rules of the first part of the act, especially
section one, caused large transfers of government deposits.
After November, the banks had to prepare themselves for the
distribution, but they had to do it almost alone. The
government did not provide any large scale aid to prepare
the banks for the distribution. But this was not to be
the end of Federal policies which affected the banking

system, not just the deposit banks, in the last half of
1836.

The Specie Circular and the Banking System

Within a month of the passage of the Deposit Act,
the Jackson administration supposedly dealt another blow
to the banking system, this time in the form of the "Specie
Circular." The Specie Circular supposedly had two effects
on the American economy. It dampened land sales and it
caused specie to move from Eastern to mid-Western and South-

Vkstern banks. We will concentrate our attention on the

132

relationship between the Circular and land sales during
the last half of the year. In so doing we will briefly
examine the argument that the Circular caused specie to
be shifted from the East to the banks in the land-sale
states.

On July 11, 1836, a circular was sent to receivers
of Public Funds and the deposit banks instructing them
specifically not to accept in payment for public lands
after August 15,

. . . nothing, except what is directed by the
existing laws, namely, gold and silver, and, in the
proper cases, Virginia land script; provided, that
until the 15th of December next (1836), the same
indulgences heretofore extended as to the kind of
money received, may be continued for any quantity of
land not exceeding three hundred and twenty acres to
each purchaser who is an actual settler, or bana fide
resident in the states where the sales are made.30

The stated purpose of the Circular was to curtail
further speculation in public land sales as well as to
safeguard the currency. This latter purpose being a con-
tinuation of the Jacksonian policy of substituting specie

31
for paper currency.

Though it was announced on July 11, the Specie
Circular did not become partially effective until August
16 and fully effective until mid-December. Thus for approxi-
mately one-half of the third quarter it was not effective
against large purchases, those supposedly made by land

speculators. Yet as we see in Appendix Table A-6, public

land sales fell sharply during the third quarter. It should

133

be noted that sales during the second quarter were the
highest for any quarter during the ante-bellum period.
Land sales in the last half of 1836 were 25 per cent below
the levels of the first half. This might not seem that
significant a decrease in sales given the record sales of
the second quarter, but prior to 1836 second half sales
were less than first half sales only in 1819, 1820, and
1825.32 The first two years, 1819-1820, were during the

post-Napoleonic depression and 1825 was a year of financial

difficulty.33

Can we attribute the decrease in land sales to the
Specie Circular or were there other factors at work which
in combination with the Circular depressed land sales in
the last half of 1836? It may be helpful for analytical
purposes to divide the demand for land into two parts, a
speculative and a factor demand for land.

Today when an individual buys common stock which
yields little or no current dividend income, we assume it
is because of the expectation of future capital apprecia-
tion“ This depends on the future earnings of the company.
Tfiua same principle applies to land, among other forms of
speKNJlation. Speculators purchased land with the belief
thal: they could resell it at a price which would yield
thenlea profit sufficient to warrant the risks undertaken.34

The speculative demand depends first on the amount

and.1nerns on which credit could be obtained, and secondly,

134

on the resale market, the latter in turn also depending on
the credit market. Credit facilities were thus central to
the speculative demand, and the Specie Circular allegedly

dried up the credit streams which fed the land speculators.

Western banks stopped discounting and sold all

Eastern funds for specie in the expectation that they
would need it for land purchases and as a defense
against the Treasury.

In the short-run, when the supply of land is rela-
tively fixed and the ability to shift land from one use to
another is limited, the speculative demand for land is
important in determining the level of demand. In the long-
run, the usefulness or productivity of land, be it in
cotton, grain or urban real estate, and the demand for
the good or service produced with the land becomes the
main determinants of the level of demand.36

The close proximity of the Specie Circular to the
Deposit Act makes it difficult to separate out the effects
of these two events on the banking system, assuming that
they were the only factors influencing the banking system
during the last half of 1836. However, we shall see that
these were not the only factors at work during this time
and therefore, our conclusions on the effects of the Specie
Circular, just as those on the Deposit Act, cannot be
acceptable as absolute.

Ideally, a comparison should be made between banks

in land sale states and those in other states between July

and.the beginning of October. The latter date reflects the

135

fact that land sales fell sharply during the third quarter.
The use of data for November and December might also entail
the danger of including the effects of banks preparing for
the distribution. Information of this type is available
only for deposit banks. It would be simpler if we could
assume that non-deposit banks behaved in the same manner
as deposit banks, but we have already seen that they did
not.

The information on deposit banks is given in Table
5.6. Since the results are not statistically significant,
we cannot assume that the decline in bank lending was
related solely to the location of banks in land sale areas.
What if the results had been significant, could we then
infer that the Specie Circular led to a decline in bank
lending for land speculation purposes? It is unlikely that
we could. All we know is that aggregate bank lending
declined in deposit banks in land sale states. What per
cent of this was due to a curtailment in land loans is not
known. Furthermore, we cannot assume that only banks in
the West were involved in supplying funds for land specula-
tion.37

Rising interest rates in the East might have con-
tributed to the drying up of funds available for land
speculation. First of all, the high interest rates may
have made investment in commercial paper more attractive.

Secondly, the high rates were due to a tightening credit

136

TABLE 5.6.--Comparison of the Changes in Major Assets and Liabilities of
Deposit Banks in Land Sale and Non—land Sale States,
July—October, 1836.a

 

 

A. United
Loans and Specie Circu— States
Discounts lationC Treasury
Deposits
Land Sale Statesb 6+ 10 9+ 7‘ 2+ 13‘ 6+ 8’
Non-Land Sale States 24 ll 21 l4 19 15 24 10

 

B. Land Sales and Bank Lending

 

 

Loans and Discounts Total Banks
Land Sales 6+ (37) 10‘ (63) 16
Non-Land Sales 24 (69) ll (31) 35 Not significant
Total Banks 30 21 51 at p = .05

 

 

C. Land Sales and Specie Holdings

 

Specie Total Banks
Land Sales 9+ (56) 7’ (44) I 16
Non-Land Sales 21 (60) 14 (40) 35 Not significant

 

Total Banks 30 21 I 51 at p = .05

 

D. Land Sales and Note Circulation

 

 

Note Circulation Total Banks
Land Sales 2+ (13) 13‘ (87) 15
Non-Land Sales 19 (56) 15 (44) 34 Not significant
Total Banks 21 28 [ 49 at p = .05

 

aFirst reporting data in October not later than October 15. Only
Banks submitting reports for both dates are included.

bLand Sales States: Ohio, Illinois, Indiana, Michigan, Missouri,
Alabama, Mississippi, and Louisiana.

CTwo banks had no treasury deposits during this period.

Source: Table 5.2.

137

situation further lessening the flow of funds to the West

for land speculation. Thus in the Eastern money markets

a smaller supply of loanable funds might have been shifted
into the commercial paper market to a greater extent than

previously, to the detriment of the land market.

The decline in land sales during the second half
of 1836 does indicate that the Specie Circular had some
effect on the market for public lands. As we have just
seen the information available is insufficient to deter-
mine if the effects of the Circular worked mainly through
the supply of credit available to speculators and their
potential customers.

Our discussion so far has assumed that the Specie
Circular brought about a decline in land sales through its
effects on the supply of credit, but what about the demand
for land? What other factors might have contributed to a
decline in the demand for land, both its speculative and
factor components? It is possible that the Specie Circular
made speculators more wary about buying land. They may
have believed that the boom was coming to an end and that
it was better to try to sell land already held and not
jpurchase additional land.38

The factor demand for land may have also contributed
‘to a decline in land sales. Directly, farmers and planters
Inight have decided it was not the time to buy land from the
ZFederal government. Indirectly, speculators might have

:found it more difficult to sell land to farmers and planters.

 

 

138

The demand for agricultural land is a derived
demand, depending on the profitability of the products
grown on it. In the New South this meant cotton, in the
North-Central states it meant grain.

Cotton prices in 1836 were below their 1835 highs
and were falling throughout the latter part of 1836 al-
though total receipts reached a decade peak in this year.
Given the period of time needed between the preparation of
new cotton lands and the harvesting of the first crop, a
short-run decline in cotton prices might not be that sig-
nificant.39

Falling prices or at least prices below their 1835
peak could have combined with rising costs of production
to produce a squeeze on profits. According to the estimates
of Conrad and Meyer, the average price per dollar invested

40 A profit squeeze is not the best

in slaves declined.
inducement for further commitment in cotton lands. The
decline in land sales might have been due to these factors.
It might have also been due in part to the Specie Circular
and perhaps the political insecurity arising out of the
Texas rebellion.

In the North-Central states wheat and corn prices
rose during 1836, but this was mainly due to poor harvests.
‘What effect this had on the demand for land is difficult to

judge. Farmers might not have been willing to add on to

their existing holdings. On the other hand, the high prices

139

might have induced farmers to expand their holdings or go
further West. But as we do not know how quickly farmers
did respond to the poor harvests of the period we cannot
say what actually happened. Land sales in the North-
Central states rose in 1836. Since we have only annual
data we do not know when or even if land sales declined
during the last half of the year.

In both the South and the North-Central region,
the agricultural outlook was not propitious towards the
end of the year. But what effect this had on the demand
for land we do not know. We do know however that land
sales fell in the third and fourth quarters of the year.

The Specie Circular was announced in July and though it
did not legally effect land sales to any extent until mid-
August, it is difficult to say that it did not contribute
to the decline in land sales.

It has sometimes been thought that land sales during
1834-1836 acted as a safety valve decreasing the infla-
tionary pressures of the times by drawing money away from
the market for goods and services which supposedly had less
supply elasticity than public land. A corollary of this
line of reasoning is that the Specie Circular fed the infla-
tionary fires by reducing this leakage.41

What is left unanswered by this line of reasoning

is the specification of the alternative sources of demand

for bank funds. It is further assumed that the banks were

 

 

140

willing to supply these demands. Given that banks in the
land-sale states during the last half of 1836 had loanable
funds which they did not want to lend for land purchases,
what were the alternative demands for these funds? Bankers
discounted bills for local merchants and cotton factors.
The credit needs of these individuals depended on the
demand of farmers, cotton planters and other consumers
for manufactured goods. The argument that the demand of
merchants and factors for credit could have absorbed the
loanable funds released by the decline in land sales sup-
poses that the demand for manufactured goods increased.
But this was a time when the economic climate in the agri-
cultural regions differed greatly from that of 1835.
Bankers did not have to loan out the funds previ-
ously lent for land purchases. They could have done nothing,
and by so doing decrease their demand liabilities and per-
haps put themselves in better shape if they were deposit
banks, for the forthcoming distribution. Non-deposit banks
Inight have decided that this was not the time to extend
their activities given the Specie Circular, the forthcoming
distribution and the problems in the agricultural regions.
Finally bankers could have purchased securities as an alter-
native investment outlet. Thus the funds released by the
Specie Circular did not automatically have to go into loans
that increased aggregate demand and further stimulated the

inflationary pressures.

 

,3
"1
ii
.'

141

Temin believed that the Specie Circular most likely
did rechannel purchasing power and thus increased infla-
tionary pressures in the last half of the year. He points
out that, "prices continued to rise in late 1836 while land

sales fell."42

But as we have already seen, the deposit
banks in the land-sale states decreased their lending in
the last half of 1836. Even if the non-deposit banks ex-
panded their lending so that the total amount of loans
increased, this still did not mean any large increase in
aggregate demand. Only if we further assumed that all
funds were lent for purposes which directly and immediately
increased aggregate demand could there be some justifica-
tion for Temin's argument.

Land sales in the last half of 1836 were less than
$4 million below the levels of the first half of the year.
Given that Temin uses an estimate of $1.5 million for United
States gross national product in 1839, it is very hard to
see how four million dollars could have been that crucial
in maintaining inflationary pressures.43

While we cannot find any justification to support
the hypothesis that the Specie Circular increased infla-
tionary pressures, what about the more general hypothesis
about the effect of land sales on the price level? Accord-
ing to Temin,

The sale of land acted as a 'sink' for the extra

money supply of the mid-1830's because unlimited
quantities could be bought without raising the price.

142

If these funds were directed elsewhere, they would
cause prices to rise and the inflation to continue.

44

We have already seen the assumptions about alterna-
tive sources of demand for bank credit that this argument
entails. But let us look at this hypothesis from a slightly
different point of View.

This hypothesis implicitly assumes that loans for
land speculation decreased by an equal amount the supply of
loanable funds available for activities that directly in-
creased aggregate demand. Given the performance of banks
during the boom period it is hard to imagine such an interest-
inelastic supply of bank credit.

Suppose that the supply was inelastic, this still
might have contributed to the inflationary pressures. Mer-
chants who discounted bills at a bank might have been will-
ing to pay higher interest rates if they could pass the
costs on to the consumers. There is no reason to believe
that this did not occur in the inflationary climate of the
mid-1830's. Finally by drawing funds, especially Eastern
funds, into land speculation, less funds were available for
the purchase of capital equipment thus slowing down the
rate of growth of aggregate supply. There is no evidence
of either a quantitative or qualitative nature to support
the hypothesis that land speculation was counter-inflation-
ary.

The Specie Circular appears to have had some effect

cum land sales but did it also cause a shifting of specie

143

from Eastern banks to those in the West and South-West?
There are three annual series available showing bank specie
holdings by region. These are given in Table 5.7. Taking
into account the differences in the estimates it appears
that banks in the East did not lose any significant amount
of specie to those in the land-sale states.45

But these are annual estimates and we do not know
much about bank specie holdings during the last half of
1836. What information we do have indicates that banks,
at least in New York City and Pennsylvania did not lose
specie until the start of the fourth quarter of 1836. By
this time banks in the land-sales states did not need that
much specie as land sales had already fallen sharply. The
specie holdings of the New York City Safety Fund banks
were 22 per cent higher in September 1836 than the holdings
of July. New York City deposit bank specie holdings rose
every month from July through September while the specie
holding of Pennsylvania banks, excluding the United States
Bank, in November were 12 per cent above the June levels.46
The Specie Circular apparently did not cause a noticeable
shifting of specie from banks in the East to those in the
South-West and the mid-West.

The Circular apparently contributed to a decline
in the public's confidence in bank notes. Imagine the

situation around July 1836. The Jackson administration

had been attempting for more than a year to eliminate small

144

 

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145

bank notes from circulation. A bill passed in 1835 would
become effective on July 4, prohibiting the government from
accepting or using bank notes smaller than $10. Section
five of the Deposit Act all but eliminated the use of a
bank note, if the section was enforced. Then, on July 11,
the Specie Circular was announced. No wonder some people
might become wary of bank notes. In a letter to the Baring's
written in April, 1837, Biddle remarked that,
The crusade against banks and the discrimination
at the Land Offices between specie and bank paper has
not been without its effect on the less intelligent

part of our population, whom it has inclined to hoard
specie.

As far as we can determine from the existing infor-
mation, the Specie Circular contributed to the decline in
land sales during the last half of 1836. Its effects on
banks were minimal in terms of specie movements between
banks. It might have, however, weakened public confidence
in bank notes and thus banks. In this latter instance,
the Specie Circular was one of several factors which de-
stabilized the banking system in the latter part of 1836
and early 1837.

Up to now we have looked at the Deposit Act and the
Specie Circular and the effects which they had on the bank-
ing system and the economy. We will now turn to the situa—
tion in the New York Money market to see if the events of
the last half of the year weakened the city banks so that

they could not withstand the pressures of 1837.

146
The New York Money Market in the
Last Half of 1836
By the 1830's the financial and commercial center

48 During the last

of the United States was New York City.
half of 1836, the New York money market began to evidence
signs of strain. Short-term interest rates began to rise
in April and in July, the same month that the Bank of Eng-
land raised its discount rate, the increase became more
rapid. Domestic exchange rates on other East-coast centers
and the South, which were stable throughout 1835 also began
to move. What happened to the city banks during these
months and what effects did the Deposit Act and the Specie
Circular have on the banks of New York City?

Information is not available on a monthly basis for
all banks in New York City. However, we do have data for
the Safety Fund banks for the first month of each quarter

49

in 1836. We also have fairly complete information, as

given in Table 5.8, on the deposit banks between July and
September and it becomes complete for the months of October
until December. This is due to the Treasury department's
adding of new deposit banks until October. To improve our
understanding of the actions of the deposit banks we will
also look at the behavior of the three leading deposit banks
[during the same time period. This latter information is
«given in Appendix Table B-12.

Between July and September, the Safety Fund banks

(expanded their lending activities, although it was a small

147

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148

increase, amounting to only approximately three per cent.
Recalling our previous discussion on the lending activities
of deposit banks in general it comes as no surprise that
during the same period, city deposit banks expanded their
loans by almost 37 per cent. By January, 1837 loans and
discounts were less than $1 million below their September,
1836 level. As we will soon see there is other information
which indicates that there was some decrease in lending
during part of the fourth quarter. Contrary to contem-
porary and later writers who believed that the Specie Cir-
cular drew specie away from the East, the Safety Fund Banks
increased their specie holdings by approximately 20 per
cent during the third quarter.50
The actions of the city deposit banks can perhaps
give us more information as to what happened during the
last half of the year. The deposit banks as we have just
noted increased their lending during the third quarter.
But the three leading deposit banks in the city, the Bank
Of America, Bank of the Manhattan Company, and the Mechanics
Bank, decreased their loans and discounts by $1.2 million
during these months.51 This occurred at a time when their
Specie holdings increased by 26 per cent. From what we
have previously seen it appears that the actions of these

three deposit banks differed from those of city banks in

general.

 

149

One possible explanation for this lies in the move-
ment of Treasury deposits. In August the three banks lost
$1.8 million in such deposits while the total losses for
all city deposit banks was $1.1 million. This indicates
that perhaps only these banks lost deposits, and most of
these went to banks outside the city. An examination of
Treasury deposits in the city banks confirms this. No
other city deposit bank lost Treasury deposits during this
period.

In September, however, the other city deposit banks
began to curtail their lending activities, as they too,

52 The banks responded to

were losing Treasury deposits.
these losses by contracting their lending, this taking
place during September, October and the early part of
November. Deposit bank lending fell by Slightly over 14
per cent during the months of September to November. The
Shifting lending policies of the city banks were reflected
in the movement of Short-term interest rates in New York
during the last half of the year. Interest rates rose
from 12 per cent at the end of June to 36 per cent at the
end of October. For the remainder of the year they fluctu-
ated between 24 per cent and 30 per cent.

The loss of Treasury deposits was possibly more
serious than the monthly data indicates. These figures

are for net changes and thus do not reflect the total turn-

tjver of Treasury deposits during a month. The turnover of

150

deposits posed serious problems for the banks involved
because of the regulations in the Deposit Act requiring
Specie payment on Treasury deposits when demanded. Sup-
pose a bank lost a net of $500,000 in Treasury deposits
during the month, this might have entailed a concommitant
loss os specie. During the same month, however, the turn-
over in the Treasury deposits could have been some multiple
of the net change. Thus, the bank, while only losing a
half million in Treasury deposits might lose more than
that in Specie.

Unlike the transfers which would be authorized
for the Distribution banks did not have much forewarning
about drafts which were drawn to meet the Section One
requirements of the Deposit Act or normal expenditures
of the government. We have previously seen in Table 5.3
that approximately $8.8 million in interstate transfer
drafts were drawn, and payable, on city banks between the
end of June and the middle of December. Other deposit
banks outside the city were also experiencing similar
shifts in Treasury deposits. It would have been helpful
to have information on bankers' balances in the city during
this period to see if they underwent any Significant
changes, but unfortunately, this information was not
available for 1836. We can obtain another indication of
the changing Situation in the New York money market by

looking at the domestic exchange rates.

151

Just as Foreign exchange rates reflect the trading
conditions between countries as well as the climate of the
money and capital markets, so domestic exchange rates can
also be used to give one an indication of the conditions
of trade between different cities and regions of a country.
In Appendix Table B-lS, we have the discount or premium on
domestic exchange--sight bills-—in New York City, the bills
being drawn on some of the important commercial centers of
the country. An increase in the discount rate, which is
the same as a fall in the price of the bill, results from
either an increase in the supply of bills--assuming demand
remains constant--; a decrease in the demand--assuming the
supply as constant--; or some combination of demand and
supply Shifts causing the new market price to be below the
old price. The opposite holds for a decrease in the dis-
count rate or a rise in the premium.

Throughout 1835 and during the first half of 1836,
the prices of domestic exchange remained stable. In June,
changes started to occur, the price Of bills on Boston
fell, while the discount on Southern bills, Signifying a
falling price of bills, doubled, perhaps, due to the de-
clining price of cotton. In July, exchange on Philadelphia
and Baltimore rose slightly in price, rising grain prices
and the loss of Specie holdings in New York banks might
have contributed to this increase, Since the city banks

could try to get exchange on these cities with the hope

 

152

of obtaining Specie. Whatever the causes of these changes,
the most Significant fact was the changes themselves,
especially in the South, coming after more than a year

and a half of price stability.

By the end of 1836, the New York City banks had
temporarily eased their contractionary policies. Some
might have thought that the difficulties were over, but
the reverse was true. The banks during the last two months
continued to lose specie, and facing them in 1837 was the
Distribution. Meanwhile, across the Atlantic, events were
unfolding that were to have the most serious effects on
New York City banks and the other banks of America during
1837.

The British Money and Commodity Markets
During 1836

 

 

The English financial community showed increasing
signs of distress towards the end of 1836. Nowhere was
this more evident than in the Anglo-American trade and the
condition of the Bank of England. Although earnings from
cotton exports reached a peak in 1836, the declining price
of cotton posed serious problems for the firms engaged in
the cotton trade. To see why this was so, let us look for
a moment at the cotton operations of the firm of Alexander
Brown and Sons of Baltimore, one of the leading houses in
the Anglo-American trade.

Utilizing the services of coastal factors resident
in the cotton ports--and also to some extent those of

153

inland factors . . . the Browns offered in normal times
to advance apparently the full value of cotton ship-
ments consigned to the Liverpool branch. The advance
was made in the form of bills drawn by the exporter on
the Liverpool House and endorsed by the Brown agent.

However, 1836 did not represent "normal times;"
even in January, Brown Brothers limited advances to three-
quarters or four-fifths of the present value of the cotton
shipment.54 Advances were made on the present value, and
it was here that the danger existed. What would happen to
the Liverpool house of the Browns or of other Anglo-American
firms if bills were drawn on them with the expectation of
cotton selling in the range of nine to eleven pence per
pound, but the cotton could only be sold for eight or nine
pence? Some losses would be incurred, or if the firms were
lucky, only their profit margins would be out. By the end
of 1836, prices had fallen to a range of seven and one-half
to eleven and one-quarter pence, while they had been as
high aS nine to twelve pence during the months of March to
June.

If credit facilities were available, some houses
might decide to hold the cotton off the market in the hOpe
of selling at higher prices, but the London money market
was having difficulties. These difficulties in London
meant additional problems for the houses dealing in cotton.
The eXport of finished cotton goods, just as much as the

importation and production of cotton, depended on the

availability of credit.

 

154

Rising interest rates in London, placed the Anglo-
American houses in a two-way squeeze. The demand for raw
cotton fell as producers found it more expensive to obtain
credit. The cotton houses also saw their costs increasing
as they had to discount bills in London or with Joint-Stock
banks at a higher rate of discount. Any trade which was
dependent on easy money and rising prices, as was the
cotton trade, was vulnerable when the monetary conditions
changed and prices began to fall. By mid-1836 the Bank
of England had begun to pursue a more restrictive monetary
policy.

At least until May the monetary situation in London
showed none of the signs of tightness which was then being
experienced in the United States.56 The ready availability
of credit in London was attributed to the rapid growth of
joint-stock banks and the policies of the Bank of England.
Between 1826, when they were first allowed to form and
July, 1833 34 such banks were established; by the end of

57

1835, there were 60. For a discussion of the inflationary

policies of the Bank of England, Clapham is still a very
good source.58

Throughout the last quarter of 1835, the Short-term
market rate of interest in London was 3.75 per cent per
annum, it fell to three and one-half per cent by March of
1836, and it reached its low point of three and one-quarter

59

per cent in April and May. The Bank of England's dis-

cpunt rate was four per cent during this period. The

155

situation changed rapidly during late spring and early
summer. By June, the market rate had risen three-quarters
of one per cent, and by the end of the year, it was two
and one-half points above the April-May low, a 77 per cent
increase. An index of stock market Share prices which
stood at 113.6 in May, fell to 94.1 in November before

60 The causes of this

recovering slightly in December.
dramatic reversal are to be found in the attempts of the
Bank of England to curtail its Specie losses at a time

when the poor grain harvests were increasing domestic grain
prices and specie exports.

During the last quarter of 1835 and the first of

1836 the Bank of England increased its specie holdings. By
the second quarter, the accumulation came to a halt. For
the rest of the year, the Bank lost Specie. It has some-
times been inferred that this loss was induced, at least
partially, by the economic difficulties then occurring in
the United States, and especially, the Specie Circular.

The crisis in the United States, under way even
before the appearance of the Specie Circular, became
more severe with its issue. Monetary pressure com-
municated itself to Britain through the commercial
and financial connexions which had grown up in the
previous few years. American traders liquidated
much of their available holdings in London and cut
down their imports. American securities were dumped
in the British market and the cash (specie) remitted
to America.6

Why just blame it on the Specie Circular, which we

have previously seen was not that powerful an influence on

the banks of America, why not also blame the specie losses

156

incurred by the Bank of England on the Deposit Act? The
answer is simple, the facts do not support such statements.
According to W. B. Smith, the United States imported approxi-
mately £506,000 or $2.462 million, in Specie from England
between October 1, 1835 and September 30, 1836, but the Bank
of England lost approximately 52.6 million between April
and September, 1836.62
Palmer, the Governor of the Bank of England attri-
buted 2.3 million pounds of this loss to eXportation to

America.63

Part of this Specie loss could have gone in-
directly to the United States by way of France as a result
of the French indemnity payment, but Palmer estimated that
the Bank lost £100,000 in specie to France between April

and December.64

Palmer's estimates are grossly inaccurate.
Even if we assume that the entire American specie inflow
from England during fiscal 1836 took place between April
and September, it still amounted to Slightly less than 20
per cent of the specie lost by the Bank of England and only
23 per cent of the amount which Palmer claims was sent to
the United States.

The Bank of England was losing specie during the
last half of 1836. We have seen that contrary to the
claims of the Governor of the Bank, Palmer, most of the
Specie did not go to the United States. Now we will see

where the Specie did go. It was these losses and the

rmlicies that the Bank of England pursued in an attempt

157

to stem them that brought about the monetary stringency in
London which seriously weakened the financial underpinnings
of the Anglo-American trade.

The directors of the Bank of England believed that
the losses could be attributed to the lending policies of
the joint-stock banks and those of the Anglo-American
houses. In the latter instance they followed the lead of
Palmer. The major Anglo-American houses were Baring Brothers
and Company; W. and J. Brown and Company; F. de Lizardi and
Company; Morrison, Cryden and Company; T. Wiggin and Company;
T. Wilson and Company; and George Wildes and Company.65 The
joint-stock banks began to encounter difficulties in November
and T. Wiggin and Company asked the other Anglo-American
houses for aid in December.66

The first joint-stock bank to fail was the Agri-
cultural and Commercial Bank of Ireland.. A run on the other
Irish banks was prevented when the Bank of England sup-
plied £2,000,000 in bullion to these banks.67 On November
28, the manager of the Northern and Central Bank of
Manchester--this bank had 39 branches--for some unknown
reason left £108,000 in a cab. This helped to start a
run on the bank, which was halted when the Bank of England
again came to the rescue. It eventually provided £1,370,000
in aid.68

The aid provided by the Bank of England as well as

the attempts of other banks, mainly joint-stock banks, in

158

Ireland and England to build up their Specie reserves most
likely accounted for a great portion of the Bank of Eng-
land's Specie losses. Adding to this internal drain was

an external drain. This was necessitated by the large
grain imports from the continent because of poor harvest.
The United States also had a poor harvest and this probably
helped to further increase world grain prices. British
imports of wheat, barley, oats and flour in 1836 were 110
per cent of their 1835 levels. Wheat prices averaged 23
per cent, barley 10 per cent, and oats prices five per cent
above their 1835 levels.69

The Bank responded to the losses of Specie by raising
its discount rate and applying selective credit restraints.
The discount rate was raised first to four and one-half per
cent on July 21, 1836. This was the first change in the
discount rate Since July 1827. On September 1, the discount
rate was again raised by one-half per cent. Thus in about
two months the rate was raised by 25 per cent above its pre-
July level.

The Bank of England also attempted to apply selec-
tive credit controls by limiting the types of bills it
accepted for discounting. It refused to discount, or
accept as security for loans, bills drawn on Anglo-American
merchant houses. This action affected not only these houses
but many joint-stock banks which discounted the bills of
these houses and then sold them in the London discount

market.70

159

In normal times the selective credit restraints of
the Bank of England did not seriously hamper the major
houses, who, because of their size, did not usually redis-
count with bill brokers or the Bank of England.71 But
these were unusual times, the smaller houses had been using
the facilities of the joint-stock banks. Three of the
larger Anglo-American houses, Wiggins, Wilson, and Wilde--
the "3 W's"--had approximately £885,000 in acceptances held
by the Bank of England at the end of July.'72

It appears that these actions on the part of the
Bank were not sufficient to limit the activities of the
Anglo-American houses. In October Palmer, the Governor
of the Bank, applied what we now call "moral suasion," to
the Anglo-American houses. He told representatives from
most of these houses that,

. . . excessive facilities given to foreign bankers,

'either as Open-credits or in anticipation of the sale
of States' Securities in this country' were objec-
tionable to him and the Company as note issuers.73

They were asked to limit such practices. We do not
know the factors causing T. Wiggin and Company to ask the
other houses for aid in December but the restrictive
policies of the Bank could have contributed to that house's
problems.

Some of the results of the Bank of England's policies
can be seen in Appendix Table B-14. The short-term interest

.rate in the London money market rose by almost 52 per cent

loetween the second and last quarters of the year. But the

160

value of bills discounted only started to fall in the last
quarter. Meanwhile the Bank of England continued to lose
Specie.

The stringency in the short-term credit market did
not seriously affect the long-term credit market, and this
was fortunate for the United States, for by the middle of
1836, long-term American debt instruments were being more
and more used to refinance Short-term debts as they became
payable. American firms faced with the task of covering
bills coming due could, instead of remitting foreign exchange
or notes drawn on other houses--open credit accounts--remit
state and local securities instead.74 The securities were
then resold to individual investors. Some Anglo-American
houses were also engaged in stock jobbing, that is, the
purchasing of blocks of American securities for resale, in
smaller units, to individual investors. Short-term credit
was important to this operation as it enabled the jobbers
to hold the securities until they could be sold, it was
hoped, at remunerative prices. The problem in the short-
term.credit market probably added to the difficulties which
theseehouses faced and were to face in early 1837.

The situation on both sides of the Atlantic was
omirumls as 1837 dawned. So far, the problems were basically
nmnuatary in nature, with some help provided by nature. On
the lumerican side, increasing monetary stringency primarily

due tx> the fiscal and monetary policies of the Federal

161

government, but aggravated by the difficulties in Texas
which cut the inflow of specie from Mexico, were being felt
in the monetary centers of New York and Philadelphia.75
Although cotton prices were declining at the end of the
year, total revenue was increasing, but it was doubtful

how long this could continue.

In the United Kingdom, the Bank of England was
placing a lid, albeit a bit late in the day, on monetary
expansion, and by so doing, tightened the screws on the
Anglo-American houses which already faced falling cotton
prices. The poor harvests were having their customary ef-
fects on the specie supply in England. The future remained
uncertain for both countries. The American banking system

still had to face the Distribution, while the British were

beginning to have difficulties with the joint-stock banks.

FOOTNOTES

CHAPTER V

1Chaddock, p. 281.

2Niles' National Register, April 23, 1836, p. 126.

 

3Quoted in Niles' National Register, May 14, 1836,
p. 185. Also see Scheiber, Business History Review, Spring,
1966, p. 55.

 

 

4The New York City Safety Fund banks were allowed
by the state legislature to increase their capital stock
through the sale of securities in foreign capital markets.
See Henry W. Domett, A History of the Bank of New York,
1784-1884 (New York: 1884), P. 85.

5

 

Niles' National Register, July 27, 1844, p. 342.

 

6Stephen A. Caldwell, A Banking History of Louisiana
(Baton Rouge: Louisiana State University Press, 1935), p.
54.

 

7The Financial Register, August 2, 1837, pp. 33-36
reprints the Act in its entirety.

 

8Scheiber, Journal of Economic History, Vol. 23,
p. 2. Gatell, American Historical Review, Vol. LXX, p.
36 lists the increase in the number of deposit banks as
from 35 to 96. According to Kinley, p. 82, there were 44
deposit banks as of December 31, 1835 and 91 as of December
31, 1836.

9Even though the relationship between Treasury
deposits and bank lending is statistically significant it
does not mean that other factors which influence bank
portfolio policies were also not important. In line with
our conclusions of chapter three it Should be noted that
there was no statistically significant relationship between
changes in bank Specie holdings and bank lending.

10The Financial Register, August 2, 1837, p. 34.
Apparently the government was having difficulty with bank
notes of less than five dollars because the Treasury

 

 

 

162

163
notice of April 6, 1835 supposedly banned their use in

government transactions by May, 1836.

llIbid. Scheiber, Journal of Economic History,
Vol. 23, No. 2, p. 206, notes that the deposit banks had
to maintain a 25 per cent ratio of specie to note circula-

tion.

 

12See Table 5.8. It should be noted that our Table

5.8 is based on Temin's "Table 4.2." A closer examination
of this table and the Appendix Table on which it was based
Shows that the aggregate figures are inconsistent with each
other. The major factor causing this is the exclusion of
the specie holdings of the United States Bank of Pennsylvania
prior to 1836. This does not, however, explain all the
discrepancies. Note that Temin, in his Appendix Tables A-1
and A-2 lists the Treasury estimate of bank specie holdings
as $35 million at the end of 1837, whereas in his Table 4.2
he gives the figure as $31.3 million. Finally, there is

no agreement between the Van Fenstermaker estimates given
in Table 4.2 and those given in Appendix Table A-1. See
Temin, pp. 122, 184, 185, and our Appendix Table B-1.

13See Appendix Table B-3.

14The Financial Register, p. 35.

 

15Timberlake assumes that intrastate transfers
involved no Specie movements but offers no proof. Timber-
lake, The Journal of Political Economy, Vol. LXVIII, No. 2.

16United States Senate, Report of the Secretary of
the Treasugy, December 26, 24th Congress, 2nd Session, 1836,
Senate Document No. 29.

17Senate, Report of the Secretary of the Treasury,
1836, pp. 1, 2.

18

 

 

 

 

Ibid., p. 3.

19Ibid., p. 4.

zorprd., p. 5. It was estimated that less than $2
million had been transferred for this purpose. See p. 6.

21Ibid., p. 22.

22See Appendix Tables B-1, 3. Deposit banks increased
their Specie holdings by 122 per cent while all state banks
increased their's by 67 per cent but we should not forget
that changes in Treasury deposits were paralleled by changes

164

in specie flows for a majority of deposit banks in the last

half of 1836. Moreover, as we saw in Table 5.2 specie flows
were not related to bank lending activity in any significant
way.

23Temin, pp. 128-136. Richard H. Timberlake Jr.,
"The Specie Circular and Distribution of the Surplus,"
The Journal of Political Economy, Vol. LXVIII (April, 1960).

24

 

Temin, p. 133.

25Temin, p. 134.

26See Table 5.3. Out of the $17.1 million in trans-
fer drafts drawn for interstate payment in the last half of
1839, $15.36 was actually paid.

27These figures are for payments actually made.

28Temin, p. 136.

29See Table 5.8.

30As reported in the Financial Register, Vol. 1,

 

p. 14.

31Dewey, Financial History of the United States, p.
228, and Van Deusen, The Jacksonian Era, 1828-1848, pp.
104-105. According to Timberlake the Specie Circular was
also intended to reduce the size of the Federal surplus and
thus minimize the amount of the distribution. See Timberlake,
The Journal of Economic History, Vol. LXXIII (April, 1960),
p. 110.

32Arthur H. Cole, "Variations in the Sale of Public
Lands, 1816-60," Review of Economics and Statistics, Vol.
IX, 1927, p. 51.

33Smith, pp. 75-76.

34In using the term "Speculator," we are excluding
the settlers who purchased land, sometimes by first being
squatters, improved it with the expectation of selling it
for a higher price in a few years.

35Berry. p. 441.

36In the long-run, the migration from the East to
the West also was an important factor.

37Benjamin H. Hibbard, A History of Public Land
Policies (Madison: University of Wisconsin Press, 1965),
p. 216.

 

165

38This is the View taken by Temin. See Temin, p.

125.

39Mississippi was the only cotton state where land
sales fell during 1836. Cole, Review of Economics and
Statistics, Vol. IX, p. 52.

40Alfred H. Conrad and John R. Meyer, "The Economics
of Slavery in the Ante-Bellum South," The Journal of Politi-
cal Economy, Vol. LXVI, No. 2 (April, 1958).

41Timberlake, The Journal of Political Economy,
Vol. LXVIII, No. 2, p. 111, and Temin, pp. 125-126.

42

 

 

 

 

 

Temin, p. 126.

43Ihid., p. 135.

44Ibid., p. 126.

45The United States Bank of Pennsylvania lost about
$5.8 million in specie during 1836 but we do not know how
much of this went to banks in the land sale states. See
Smith, p. 188.

46See Tables 5.8, Appendix Table B-11, and United
States Congress, House, 26th Congress, 2nd Session, House
Document No. 111.

47Hammond, p. 461.

48The United States Bank of Pennsylvania was still
the lending dealer in foreign exchange followed by Alexander
Brown and Sons of Baltimore and Prime, Ward and King of
New York. See Smith, p. 46.

491n January, 1836, Safety Fund Banks accounted for
77 per cent of all bank lending in the city and 79 per cent
of such lending as of January 1, 1837. See Table B-ll,
B-l4 in our Appendix.

50See Table B-14. For contemporary and more recent
statements supporting the View that specie was withdrawn
from city banks, see: Publius (James DePeyster Ogden),
Remarks on the Currency of the United States (New York:
Wiley and Putnam, 1840), p. 22; Horace Greeley, Recollec-
tions of a Buserife (New York: J. B. Ford and Co., 1868),
p. 122; Matthews, A Study in Trade Cycle History, p. 16.

51

 

 

See Appendix Table B-ll.

166

52These losses cannot be attributed to specie
exports. Exchange rates on London did not go to the specie
export point until 1837.

53Stuart Bruchey, Cotton and the Growth of the
American Economy: 1790-1860 (New York: Harcourt, Brace
and World, Inc., 1967), p. 229.

54

 

Ibid., p. 237.

55Smith, Second Bank of the United States, p. 190.

 

56For reports on monetary pressures in Philadelphia
and New York during April and May see Niles' April 16, 1836,
p. 114, and May 14, 1836, p. 185.

57Ellis T. Powell, The Evolution of the Money
Market, 1385-1915 (New York: August M. Kelley, 1966), p.
310. See also William G. Sumner, A History of American
Currency (New York: Henry Holt and Co., 1884), p. 120.

58Clapham, The Bank of England, Vol. 2, p. 150 and
Report of the Chamber of Commerce, Manchester, England,
December 12, 1839, pp. 304.

59See Appendix Table B-7. Note that interest rates
in New York were rising in April and May.

60Arthur D. Gayer, W. W. Rostow, and Ann J. Schwartz,
The Growth and Fluctuations of the British Economy, 1790-1850,
Vol. 1 (Oxford: Clarendeon Press, 1953), p. 369. It is
interesting to note that in both countries, there was some
easing of the monetary pressures during the last month or
two in 1836. When movements in Short-term interest rates
in London were compared with those in New York City, the
latter being the dependent variable, the largest R2 obtained
was .218. This was when New York interest rates were lagged

two months behind those of London.
Ibid., p. 272; See also Ryner, University Studies,

 

 

 

 

61
Vol. 5, No. 2, p. 26.
62Smith, Second Bank of the United States, p. 187.
£ = $4.871.
63

 

 

Financial Register, Vol. 1, p. 105.

 

64Smith, Second Bank of the United States, p. 184,
and Financial Register, Vol. 1, p. 103.

167

65Ralph Hidy, The House of Baring in American Trade
and Finance (Cambridge: Harvard University Press, 1949),
p. 205, and Smith, Second Bank of the United States, pp.
186-187.

66

 

 

Hidy, p. 208.

67McGrane, Foreign Bondholders and American State
Debt, p. 14.

68

 

Powell, The Evolution of the Moneerarket, p.

 

338.

69Thomas Tooke, A History of Prices and the State
of the Circulation in 1838 and 1839 (London: Longman, Orme,
Brown, Green and Longmans, 1840), p. 292; B. R. Mitchell,
and Phyllis Deane, Abstract of British Historical Statistics
(Cambridge: The Cambridge University Press, 1962), p. 488;
also see Table 8.1.

70Dealers in the London bill market had been using
these bills as collateral for loans from the Bank of Eng-
land. See Hidy, p. 205. For Palmer's discussion of the
relationship between the Anglo-American houses and the
joint-stock banks see W. T. C. King, History of the London
Discount Market (London: George Routledge and Sons, Ltd.,
1936), p. 945.

71

 

 

 

Buck, p. 157.

72Clapham, Vol. 2, p. 152.

73Clapham, Vol. 2, p. 154. Also see Hidy, p. 208.

74Myers, p. 202.

75Between August, 1836 and January, 1837, New Orleans
banks lost $1.5 million in specie, a decrease of approxi-
mately 33 per cent. Hunt's (October, 1842), p. 361. The
Two deposit banks in that city gained $208,000 between
August and the end of December. United States Congress,
Senate, 24th Congress, 2nd Session, Senate Document No.
21: pp. 19, 20.

CHAPTER VI

COTTON, SPECIE AND THE FINANCIAL

CRISIS OF 1837

The bankers of New York City were at the end of their
rope, not to say their specie, by the beginning of May, 1837.
During the first nine days of that month, they had to come
to the aid of two banks, the Mechanics and the Dry Dock, to
prevent them from failing. Facing continued large withdrawals
by individual depositors, they decided at a meeting held in
the evening of May 9 to suspend the payment of Specie on all
their current demand liabilities.

This decision was announced on May 10, and by the end
Of that day, its effects were being felt in Philadelphia.
The bankers of that city, reacting to the action of the New
York banks, and fearful of losing specie to the latter if they
continued Specie payment, decided to suspend as of May 11.
Boston banks followed suit on the twelfth and within a week
of the New York suspension, most banks in the United States
had suspended.l

When we look at the developments which directly led
to the panic and suspension, the deterioration of the cotton

market and the monetary policies of the Bank of England seem

to have been the most important. Both of these were

168

169

interrelated and as we shall see, were in turn, related to
such exogenous events as poor grain harvests and the fiscal
policies of the American government.

Grain, Cotton and the Anglo-American
Money Markets

 

 

The Cotton Market

 

DevelOpments in the cotton market occupied the
center stage throughout most of the first five months of
1837. Between January and May of 1837, cotton prices in
New Orleans fell by approximately 18 per cent while English
prices fell by almost 30 per cent.2 The effects of this
were felt not only by those who were directly involved in
the cotton trade, but also, by those who were dependent on
the cotton growers and shippers, and those who depended on
the British textile industry.

Suppose instead of the price of cotton fixing
itself at a permanently high rate, after a long period
of advance, it suddenly and unexpectedly began to
decline, and finally sinks, perhaps to half or one-
third its former value: we do not see, at once, a
cause for widespread ruin, and an immense destruction
of private and public credit? You have . . . thrown
down the Atlas that upheld the superstructure.3

Through backward and forward linkages, a large segment of
the Anglo-American commercial community were to feel the
effects of the failing cotton market.

The cotton factor was the first to feel the effects
of falling cotton prices and it was through him and his

position in the cotton trade that shock waves were sent out

through the entire commercial world. He purchased or

170

obtained on consignment, cotton which was sold or in turn,
consigned to representatives of Northern or Anglo-American
houses. Besides his role in the marketing of the main
product of the South, the cotton factor also purchased
imported and domestic goods from Northern, mainly New York
City, merchants, which he then sold to the planters and
storekeepers in his region. The factor normally received
credit from the New York merchant on terms ranging from six
to nine months; in turn, he extended credit, often for
longer periods to the planters and storekeepers with whom
he dealt.

The decline in cotton prices meant that the bills
of exchange--cotton bills--which the factor drew when he
shipped cotton might be dishonored if the proceeds of the
cotton sales could not furnish sufficient funds to pay the
bills.4 Without these bills, the cotton factor had no
:means of meeting his commitments with the New York merchants
nor could the planters receive enough to pay their bills
‘with the factor or local storekeepers. Obviously, local
banks would no longer discount notes drawn on the local
planters for the factors.

In the North, the New York merchants could not
(flotain funds to meet their bills due Northern manufacturers
(Ir British exporters, who in many cases were the Anglo-
ZUmerican houses. The contraction in the flow of remittances

fromlthe South not only hurt the Northern merchants, but

171

also, their bankers. The latter found it difficult to get
payment on loans and might be asked for extensions of exist-
ing loans or undertake new loans to enable the city merchants
to meet their commitments.

The New York city banks might not, therefore, have
been receiving their accustomed inflow of Specie from the
South, especially because of the events in Texas. Since
Southern banks did not keep large working balances in New
York City banks, the latter did not have to fear any signi-
ficant loss of Specie to these southern banks. As we shall
soon see, the city banks were in a position to lose specie
to the banks in the mid-Atlantic states and the mid-West
when these banks drew down on their balances in New York.

More damaging to the New York city banks than the
internal drain caused by the crisis in the cotton market
was the external drain caused by the reduction in the
supply of cotton bills which were the major source of foreign
exchange. Normally, during the last month or two of the
year and the first quarter of the next, cotton was being
shipped in its greatest volume and the inflow of sterling
drafts were concommitantly at their highest levels. This
kept exchange rates at their seasonally low levels.5 But
the winter of 1836 and the spring of 1837 were not normal
for the exchange market.

In the first three months of the year (exchange)

rates stood at the specie export point and in April
they were well above it. Between eight and ten millions

172

of dollars worth of (cotton) bills returned to the
United States under protest.6

The foreign exchange needs were met by specie drawn
from the banks. It seems that as far as the New York City
banks were concerned, this foreign drain appears to have
been more important than the internal drain resulting from
the disintegrating cotton market.7 So far we have been
looking at the consequences of the decline in cotton prices
on the banks of New York, but it is important to see what
caused the decline in prices as these causes were also to
influence the specie position of the city banks.

Poor grain harvests in England contributed to a
decline in the British demand for raw cotton in two ways.
First of all, it led to a decrease in the domestic demand
for manufactured cotton goods as more of the income of the
working classes had to go for breadstuffs which were higher
in price. That is, the increase in the price of bread—
stuffs decreased the real income of the British working
classes and thereby, decreased the demand for textiles.
Secondly, the poor harvests necessitated specie exports to
pay for grain imports, these specie outflows leading in
part to the tight money policies pursued by the Bank of
England.

Decline in British demand for raw cotton in combina-
tion with an increase in American production produced the
sharp break in prices. We can see this in Appendix Table

C-4 where American production increased by approximately

173

6.3 per cent during the 1837 crOp year while total British
exports of finished cotton goods fell by 13 per cent during
the calendar year 1837. Temin has shown in a recent article
that the main cause of the price decline, or the reason why
it was so severe, lay in conditions on the demand side of
the market.8 The failure of some of the leading merchants
in Canton China indicates perhaps, that the decline in the
demand for textiles was due to more fundamental factors than
our information discloses.9 On the other hand, the tight
money market in London might have influenced the situation
in China, just as it did the Anglo—American trade.

The British Money_Markets in the Winter
and Spring of 1837

 

 

Throughout the last half of 1836 and the first half
of 1837, the Bank of England was trying to halt the outflow
of specie from its vaults.10 As we saw in the last chapter
these losses were mainly due to aid given the joint-stock
banks and to pay for grain imports. Grain imports in 1837
were about 51.5 million, this being the largest import since
1831.11

When a central bank of a country which is on the gold
standard or some variant thereof, experiences sustained
specie losses, it was expected to pursue a deflationary
policy characterized by a decrease in the money supply and

an increase in the short-term interest rate structure. In

the last chapter, we saw that the Bank adopted policies

174

along these lines, although the selective restrictions
against the Anglo-American houses and the joint-stock banks
were unusual in terms of the adjustment policies supposedly
used under the gold standard.12 The short-term market rate
of interest stood at five and one-half per cent between
November 1836 and April 1837, the bank rate at this time
being five per cent.

It was only during the second quarter of 1837 that
the pressure was strongly felt in the financial markets.
Total bank note circulation fell slightly during the second
quarter of 1837, but it was only approximately three per
cent below its high of the second quarter of 1836.13 More
significant as a sign of stringency was the decline in the
value of bills of exchange created in England and Wales.
This decline amounted to 11.5 million pounds, or a fall of
about 15 per cent during the second quarter.14

The British economy soon felt these pressures,

Outside the financial mart occurrences reflected

and intensified the stress within. Manufacturing in
Manchester and Glasgow almost ceased. Unemployment
mounted. The volume of bankruptcies moved to its
highest figure since the second quarter of 1826 .
Particularly Liverpool firms, both importing and
exporting, fell by the wayside.15

Bankruptcy fiats recorded in the Annual Register rose from

283 in the last quarter of 1836 to 453 in the first and

520 in the second quarter of 1837.16

Like a giant seesaw, pressure on one side of the

Atlantic was to increase the strain on the other side.

175

Because of declining cotton prices and increasing monetary
stringency in America, British manufacturers found their
American markets drying up. The declining demand for British
manufactured goods, especially textiles, both at home and
overseas, led to a further decline in the demand for cotton.
At the fulcrum of this seesaw were the Anglo-American houses,
and they were gradually cracking under the strain. Over-
committed in cotton, unable to make payment on cotton bills,
they were also unable to pay the firms which sold them the
goods for export to America.

The situation of the weakest of these firms, the
firms known as the 3W's, became generally known to the com-
mercial and banking world of England during the last week
of February, 1837. As long as they received discountable
bills from America, however, they could keep their heads
above water.17

Packet arrival dates were days of extreme tension

and anxiety; if the ships arrived, it was wondered if
any bills were on board; if the remittances came,
there still remained the question of acceptance and
payment; at once the names on the paper were scanned
to ascertain whether or not they were reputable enough
for the bills to be acceptable to the Bank of England
for discount. Naturally enough, as reports of the
mounting tension in the United States came to hand,

the directors of the Bank and other men in the money

market became still more dubious of bill remittances.l8

The New York Money Market
The United States also experienced poor grain har-
vests and as in England, they adversely affected the banks

as well as the commercial community of the mid-West and New

176

York City. The poor American grain harvests of 1836-1847,
"lessened the purchasing power of the farmers and crippled

the merchants."19

Just as in the cotton growing regions,
growers in the mid-West and Eastern grain regions faced
declining incomes and as a result, could not pay off their
debts to the local merchants. Most likely they could not
buy anything more than the essentials needed to carry them
through the next growing season, if they were fortunate
enough to obtain credit.

The inability of the farmers to pay their debts
meant that the country storekeeper could not pay his bills
owed to the merchants of the larger interior cities such
as Buffalo, Cincinnati, or Pittsburgh. Thus, merchants
and their bankers all along the chain of commerce and
credit, extending from New York into the interior of the
Ohio River Valley found themselves with unpaid bills,
defaulted loans, and unsold merchandise in warehouses.20

The banks in New York City were in an especially
serious bind. Difficulties eXperienced by interior banks,
especially those in the mid-West and New England were trans-
mitted to the city banks because of the existence of large

21 Bankers' balances

bankers' balances in the city banks.

are deposits held in one bank by another for the purposes

of financing transactions of the latter or its clients.
The growth of this type of deposit in the banks

of New York rested upon the basic fact that the volume
of goods flowing out of New York towards the interior

177
necessitated an almost constant flow of funds into New
York from the interior.22

A bank in Springfield, Ohio might keep balances with
a bank in Cincinnati as it knew that its clients dealt with
firms in that city and it normally accepted bills or had
checks drawn on it which were payable to Cincinnati firms.
It might have also kept balances in Cincinnati so that its
notes were not returned to it for specie redemption. The
Cincinnati bank in turn might have deposits in New York
banks for the same reasons. If the volume of trade warranted
it, the Springfield bank might directly hold deposits in
New York banks.

Suppose the Springfield bank needed specie, exchange
on New York or city bank notes. It drew on its deposits
with the Cincinnati bank which in turn drew on its deposits
with New York banks. The drawing down of these bankers'
balances in New York could force the city banks to curtail
their lending. If this drawing down of bankers' balances
was not an isolated event, but part of a general movement,
interest rates rose as the supply of funds available to the
New York money market decreased. Stock and bond prices
could fall as banks asked for payment on call loans--loans
payable on demand, normally secured by stocks and or bonds.

Since the original deposit might have been loaned

by one bank to another and by it in turn to a broker
to carry his customer, it is apparent that the demand

set in motion by the country banker might have consider—
able effect upon the money market.23

 

 

178

It was through such a process that a disturbance,
a first, affecting banks in the interior, could be trans-
mitted to the New York banks. Conversely, the inability of
the city banks to meet their demand liabilities, such as
occurred when they suspended specie payment in May of 1837,
could immediately affect all banks which held such balances
in the city.
Normally, bankers' balances in the city were drawn
down during the fall:
It was only during the crop-moving period in the
autumn that the direction of the flow was reversed,
for country bankers at that time drew against the
balances which had been building up during the spring
and summer.
Deposits of the large import houses of the city increased
at this time of the year, as goods were shipped to the
interior, thus, to some extent, neutralizing the drain on
city banks. In 1836, the New York banks faced more than
the normal autumnal problems.25
The import merchants now found it difficult to obtain
payment on outstanding debts owed by the interior merchants.
The drain on the city banks were thus intensified with the
decrease in the inflow of offsetting deposits.. Adding to
this was the abnormal withdrawals of bankers' balances as
the interior banks attempted to build up their specie hold-
ings as well as to meet the demand for exchange on New York
required by their customers. Total balances due banks and

other corporations, i.e., bankers' balances, fell from $14.3

Inillion in January 1837 to $8.3 million by June.26

179

The New York City banks were losing specie. We
previously saw that the reduced supply of cotton bills led
to specie exports. The city banks also lost some specie
to the interior banks as the latter drew down their balances
in the former. Besides these specie losses the city banks,
like those in the interior, found themselves with defaulted
loans and requests for extensions. These problems were
reflected in the movement of short-term interest rates.
After easing in January, they rose again in February and
continued to rise until the end of April. During this same
period Smith and Cole's index of Bank and Insurance stock
prices fell from 113 to 97. In Philadelphia the price of
Pennsylvania five per cent bonds fell from 101.5 to 97.5.27

So far, all of the difficulties faced by the New
York city banks, and to a lesser degree, other banks in
the nation were due to the response of the economy to events
in the market place. However, the fiscal and monetary poli-
cies of the Federal government aggrevated the position of
the banks, especially their specie holdings. This came when
they could least afford to lose additional specie. It is
fruitless to try to blame the suspension of the banks on
the Distribution. It is problematical whether any one
cause, by itself, could have caused the panic and suspen—
sion, but taken together, the economic and non-economic
events of late 1836 and early 1837 did have these effects.

What we will attempt to do next is estimate the magnitude

180

of the Treasury deposit shifting, necessitated by the
Distribution, and if possible, their effect on the specie
holdings of the New York Banks.

The Distribution and Its Effects on the
New York City Banks

 

From Table 6.1 we see that assuming no net revenue
inflows during 1837, seventeen out of the twenty-six states
had to receive transfers from other states for the distri-
bution. The destabilizing effects of these, as well as all
interstate, transfers depended not only on their magnitudes,
but also on their direction in relation to the normal pat-
tern of interstate and interregional payments.

Suppose that drafts are drawn on New York City
banks, with payment made to banks in Massachusetts. If,
at the time that the drafts are payable, New York City banks
were net creditors, of Massachusetts banks, the transfers
could be made by the use of bankers' balances or bills of
exchange, without necessarily causing specie flows. On the
other hand, if New York City banks were debtors of the
Massachusetts banks, the possibility of specie flows in-
creased. It should be recalled that drafts drawn on New
York City accounted for slightly more than half of all
interstate transfers.

While there have been some works which attempted to
deal with the effects of the distribution on the banks,

most of these are characterized by conceptual and arithmetic

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182

errors which make them less useful for our purposes. Bourne's
analysis makes use of data which shown gross changes in
Treasury deposits and not those due solely to the Distribu-

tion.28

Timberlake's analysis contains significant numerical
errors besides the implicit assumption that the loss of
Treasury deposits involved a sufficient concommitant loss
of specie to necessitate a contraction of bank lending
activity. As we shall see below, there was no simple rela-
tionship between losses of Treasury deposits and specie
deposits, at least, insofar as the New York City banks were
concerned.

Returning to the first mentioned problem with
Timberlake's analysis: A total of $2.347 million was drawn
on New York City banks for interstate transfer during the
Distribution. Of this sum, $300,000 in transfers were
dishonored, leaving a net interstate transfer authorized

29 Timberlake, on

under the Distribution of $2.047 million.
the other hand, estimates the interstate transfers as $1.431
million, the difference, $716,000, amounting to approxi-
mately 50 per cent of his original estimate.30
The important point is not the accuracy of our data
on Treasury deposits and transfer drafts so much as the
validity of the assumption that there is a significant posi—
tive relationship between changes in Treasury deposits due

to the Distribution and changes in the specie holdings of

deposit banks. Furthermore, as we do not have information

183

on the cause of each change in a bank's specie holdings,
how do we determine what portion of the change in specie
holdings resulting from changes in Treasury deposits was
due to the Distribution? As far as this question is con-
cerned, there is no solution. We cannot allocate different
specie changes to different causes.

In Table 5.5 of the last chapter we saw that there
was no statistically significant relationship between trans-
fer flows necessitated by the first payment of the distribu—
tion and changes in bank specie holdings. Yet, on the other
hand, we saw in Table 5.2 that a significant relationship
did exist between all changes in Treasury deposits and changes
in deposit bank specie holdings. What this implies is that
changes in Treasury deposits resulting from the Distribution
may not have had a major effect on bank specie holdings.

The data we have on the Distribution supports the
contention of Temin that little specie was transferred as

31 Most of the

an immediate result of the Distribution.
transfers were made with bank deposit credit or bank notes.
But we do not know what then happened with these bank

32 As so much attention in the literature

deposits or notes.
was focused on the effects of the Distribution on the New
York city banks we shall spend some time on these banks.

The total amount of money transferred from New York
city banks for the first installment of the Distribution was

$1.73 million, of which $497,000 was for interstate purposes.33

184

For the second installment which was payable on April 1,
transfer drafts were drawn on New York City banks amounting
to $1.95 million, of which $770,000 were interstate drafts.
Thus, the total transfer drafts drawn on the city banks
because of the Distribution, prior to the suspension amounted
to $3.68 million, of which interstate drafts, which sup—
posedly entailed the greatest danger of specie losses, amount
to $1.267 million.

When we look at the New York city banks we find little
evidence of large interstate specie flows arising directly
from the Distribution. Of the nine states which received
payment on transfer drafts--those for South Carolina for the
third installment of the Distribution were not paid--we have
information on the means used to make payment to five of the
states. Three of the states, Connecticut, Delaware and North
Carolina received all their distribution payments in bank
drafts. Vermont received all but $5,000 in bank notes while
Tennessee received $80,000 in specie.34 How much of the
specie received by Tennessee came from New York city banks
we do not know. It seems then that little of the $2.1
million in specie which the city deposit banks lost between
December and May was due directly to the Distribution.

We have been talking about specie losses directly
attributable to the Distribution, for we do not know about
the indirect losses. Distribution payments made with bank

drafts increased the amount of deposits due to banks outside

185

New York city. Bank notes sent to banks outside the city
could increase the debtor position of the city bank vis a
vis other banks or decrease its creditor position just as
bank drafts did. We have already seen that there was a
decline in bankers' balances during this period. We do
not know how much of this was due to the exchange of bank
drafts arising out of the Distribution for specie. Nor do
we know how many bank notes were similarly redeemed. Thus
we can never completely know the amount of specie shifting
resulting from the Distribution.

But should we be so concerned about specie losses
arising from the Distribution? We saw in Table 5.2 that
the shifting of Treasury deposits had a greater effect on
bank lending than did changes in specie holdings. If we
are concerned about the effects of Treasury policies on
the banks and the money market as well, we must also look
at the changes in Treasury deposits.

Between December and the beginning of May, the net
change in Treasury deposits at city banks was $6.685 million.
The Distribution accounted for approximately 55 per cent of
total deposit losses. We use net changes as we do not know
the intra-monthly changes in Treasury deposits. To what
can we attribute the approximately $3 million loss in Treas-
ury deposits which were not due to the Distribution? Part
of the loss might have been due to the shifting of Treasury

deposits necessitated by Section One of the Deposit Act; as

186

of March 1, 1837, the Manhattan Company and the Mechanics
Bank had $1.2 million in excess Treasury deposits.35 The
payment of the ordinary expenses of the government, espe-
cially given the rapid decline in revenue from land sales,
probably accounted for some portion of the loss.

From what we have just seen it is incorrect to con-
clude that the Distribution caused the New York City banks
to suspend. All we can say is that the massive shifting
of Treasury deposits, of which the Distribution accounted
for approximately one-half, weakened the New York City banks.
In this position they were not able to meet the demands
placed on them in the early weeks of May. Our attention
will now turn to the events--which can be characterized as

a liquidity crisis--that immediately led to the suspension

of the city banks and then the other banks in America.

The Suspension of the New York City Banks

 

During the winter and spring of 1837 cotton prices
continued to fall and with it went many firms on both sides
of the Atlantic which dealt in cotton. The first signifi-
cant cotton factor to fail was Herman, Briggs and Company
of New Orleans on March 4, 1837; they failed because "they
were unable to realize enough from the sale of their cotton
to pay the obligations they had incurred in purchasing it."36
The news of the failure reached New York City around March

16, and the New York correspondents of the Southern house,

J.L. and S. Josephs and Company, failed as did some of the

187

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188

other houses having relations with New Orleans cotton fac-
tors. According to Sumner, ninety-eight failures, involving
$60.5 million in liabilities took place in New York City
between March and the end of the first week of April; in
New Orleans, only four or five major cotton factors had
been, so far, able to survive.37
On March 23, nineteen days after the first failure
of an important cotton house in New Orleans, and most likely
before the news spread to Great Britain, the 3 W's applied
for and received aid from the Bank of England. The Bank
probably granted this aid in order to prevent the failure
of many smaller firms in London, Liverpool, and Manchester;
not to have granted the aid would have also increased the

flow of protested bills to America.38

The news from England
as to the conditions of the Anglo-American houses and the
attempts of Baring to limit remittances further added to the
gloom in New York.39
The failure of the cotton market led to attempts to
find some substitute for the discredited cotton bills in
the foreign exchange market. .
Baring Brothers and Company proposed to the Bank
of England that it should open through the Barings
a credit of 52,ooo,ooo.40
It was hoped that such aid would ease the pressure in America

and facilitate the repayment of the American short-term

foreign debt.

189

The United States Bank of Pennsylvania was still
the dominent American firm in the foreign exchange market
and it was through it that the Bank of England hOped to
sustain the western pillar of the Anglo-American trade.

On March 22, 1837 the Bank of England sent a letter to
Biddle setting forth the terms under which aid would be
extended to American merchants and bankers needing foreign
exchange.

The Bank of England was willing to accept bills
drawn on the United States Bank for up to 52,000,000; one
half of the bills so drawn to be simultaneously covered
by the shipment of bullion to the Bank of England, (it was
still losing specie); the other half to be covered by
acceptable securities including State securities and bills
of exchange. The former were to be redeemed within six
months from the maturity of the drafts, the latter would
hear five per cent interest per annum payable within a
year.

At about the same time this letter was being sent
to Biddle, he was formulating his own plans which were very
different than those envisaged by the Bank of England and
Barings.41 Biddle's proposals centered on the use of post-
notes--interest bearing notes, payable to the bearer, matur-
ing in normally twelve months--which were to be used to
obtain exchange on England.42

Basically, Biddle's plan was for the United States

Bank of Pennsylvania to issue $5,000,000 in post notes,

190

payable in London or in Paris or Amsterdam. Other important
banks in the mid-Atlantic states were also to issue post
notes, these banks being the Bank of America, The Manhattan
Company, The Morris Canal and Banking Company, and the
Girard Bank. As with the United States Bank, the notes

were payable in London. The total amount of notes so

issued was not fully certain, but estimates ranged between

$10,500,000 and $12,000,000.43

Supposedly, these notes
were to be supported in the British market by the shipment
of £1,000,000 in specie to London, but we have no evidence
of such shipments taking place.44
The plan worked, but not for long enough. The post
notes, to the chagrin of the Bank of England, were readily
accepted by British investors who purchased them from,
”merchant bankers in London who had accepted them as cover

45 Unfortu-

for credit to their American correspondent."
nately, these notes were not enough to fill the void left
by the cotton bills. On April 1, Prime, Ward, and King
wrote to the Barings about the condition of the New York
City banks:

Specie generally is so scarce in the several banks
that it can hardly be procurred, indeed individuals
cannot well demand it, in our present excited state.46

French banks stopped supplying credit to American firms by
the 10th of April and on the 16th, the United States Bank

had issued the last of its post notes.47

191

The New York State government also tried to come
to the aid of the city banks, but by the time aid arrived,
it was too late. The State planned to supply the city banks
with $3.5 million in state bonds which the banks could issue.
The proceeds of this issue would not be immediately demanded
by the state.
The loan was on the expressed condition that the
Stock of the State, which were then above par in
England, should be used as remittances, and to that
extent lessen the demand for specie.4
As fate would have it, the enabling legislation was passed
on May 9. The commissioners of the Canals also seems to
have tried to aid the banks as we know that they offered
the Bank of New York on May 4, a loan of $100,000 at five
per cent interest to be paid by July, 1837.49
All this aid was not enough. The immediate cause
of the suspension was the difficulties with the Mechanics
and the Dry Dock banks. On May 4, the city banks went to
the aid of the former bank; within a day or two, similar
action was taken to support the latter bank. According to
a letter written by Gallatin on May 31, 1837, the run by
depositors was caused by disclosures of fraud committed
on the Mechanics Bank and the Dry Dock Bank. The sudden
death of the president of the Mechanics Bank did not help

50 The rest we know, the city

the confidence of depositors.
banks suspended and others quickly followed.
Unlike the bank suspensions of the twentieth century,

suspension during this period meant that banks did not close,

192

rather they did not redeem their current demand liabilities
for specie.51 In most of the major cities, committees were
set up to regulate the banks until they resumed specie pay-
ments.52

Domestically, suspension eased not only the plight
of the banker but also of those who borrowed from banks.
Bankers were now under less pressure to call in loans and
might be more willing to renew loans.. Internationally,
suspension meant that the gold exchange standard was also
suspended. Individuals and firms no longer could obtain
gold from American banks to pay foreign debts.

Contemporary writers tended to attribute the panic
and subsequent suspension to "excessive speculation" although
what the term actually meant was never made clear enough.
The biases, or shall we say philosophical beliefs of the
individual commentator determined in large part, the sources
of the excessive speculation. The supporters of the Jackson
and Van Buren administrations, in general, blamed the specu—
lation on the actions of bankers, land speculators, and
merchants. The Whigs, on the other hand, held that the
causes lay in the monetary and fiscal policies of the
Jacksonians, starting with the "Bank War" and culminating
with the Specie Circular and the Deposit Act.

In a period where there were strong feelings about
tariffs, it is not surprising that some blamed the specula-
tion and inflation of 1835-1836 on reductions in the tariff

or on the tariff itself. Taussig notes that Calhoun,

193

. . . ascribed the crisis of 1837 to the fact that
duties under the Act of 1833 remained too high. The
high duties brought in large revenues and caused a
surplus in the Treasury; the deposit and distribution
of this brought inflation and eventually a crisis.53

When we look at contemporary opinion on the immediate events
leading to the suspension, opinion was surprisingly uniform.
The blame was apportioned between the failure of the cotton
market, the monetary policies of the Bank of England and
the pressure placed on the New York City banks due to the
Distribution.

The opinion of the Bank Commissioners of New York
State fairly well summed up what happened.

The immediate causes . . . are well known. The
simultaneous withdrawing of the large public deposits,
and of excessive foreign credits, combined with the
great and unexpected fall in the price of the principal
articles of our exports with an import of corn and
breadstuffs such as had never before occurred, and with
the consequent inability of the country, particularly
of the southwestern states, to make the usual and
expected remittances, did at one and the same time,
fall principally and necessarily on the greatest com-
mercial emporium of the union.5

Even though we can be fairly certain about what

brought on the panic and suspension, are we that clear as

to what started the boom in the American economy? It has

already been shown that there was no simple causual sequence

which brought about the boom. Rather, there was a chain of
o

developments where the importance of each link cannot be

judged independently of the other link.

The boom in the Anglo-American cotton market, as

Temin shows, was primarily due to rising demand conditions

194

in England, fostered in part by good grain harvests during

55 The absence of any need to pay specie for

1833-1836.
imports of grain, enabled the Bank of England to pursue an
expansionary monetary policy until the middle of 1836. At
about the same time, the monetary policies of the Jackson
administration, the Coinage Act of 1834, the removal of the
Second Bank of the United States as a "quasi—central bank,"
and the depositing of Federal funds in state banks, led to

a monetary expansion on the western side of the Atlantic.

The easy money conditions in London not only enabled the
American expansion to continue, even with large balance of
trade deficits, but permitted massive inflows of specie

into the United States as State and Local governments were
able to sell long-term securities in the London and Conti-
nental markets. The sale of these securities facilitated a
boom in the construction of canals and railroads. A booming
Southern economy an expanding mid-Western economy and
increasing specialization in the latter and the East provided
the demand for goods and services which the banking system
‘was eager to finance.

With the collapse of the cotton market and worsening
conditions in the London money market, the flow of specie
.and credit was reversed. Internal strains added to these
(external strains and the American banks led by those in New
‘Yomk City, were forced to suspend. The American economy

Ivas in the grip of a liquidity crisis. It was not until

195

late 1839 that a renewed liquidity crisis was also to affect
the economy in a more fundamental manner.

In the next chapter we will attempt to measure the
economic consequences of the Panic of 1837, the attempts
made on both sides of the Atlantic to revive the Anglo-

American trade, and the eventual failure of these efforts

in 1839.

FOOTNOTES

CHAPTER VI

lFritz Redlich, The Molding of American Banking,
Part II (New York: Hafner Publishing Co., 1953), p. 259,
and the Financial Register, Vol. 2, p. 201, quoting the
"United States Gazette" of May 12, 1837.

 

 

2See Appendix Table C-5.

3Thomas R. Dew, The Great Question of the Day
(Washington: 1840, Thomas Allen), pp. 7-8. See also John
C. Brown, A Hundred Years of Merchant Banking (New York:
1909), p. 79.

4Smith, p. 190. If bills were redrawn for lesser
amounts, this meant smaller profits or even losses to the
cotton factor. Obviously this was preferable to dishonored
bills.

 

5Myers, The New York Money Market, p. 75, and Smith
and Cole, Fluctuations in America Business, 1790-1860, p.
78. .

 

 

6Smith, Second Bank of the United States, p. 187.

 

7New York State, Assembly, 6lst Session, Assembly
Document No. 71, pp. 4-5.

8Peter Temin, "The Causes of the Cotton Price
Fluctuation in the 1830's," Review of Economics and Sta—
tistics, Vol. XLIX (November,*1967), p. 469, and Van Deusen,
The Jacksonian Era, pp. 116-117.

9

 

 

Hidy, p. 221.

10Hidy, pp. 183-184. Also see "Causes of the Present
Crisis: Seven Articles," Charleston South Carolina Patriot,
1837.

 

11B. R. Mitchell and P. Deane, Abstract of British
Historical Statistics (Cambridge: University Press, 1962),
p. 291. The average price of wheat in England rose from 36

 

 

196

197

shillings per quarter in January 1836 to 59 shillings 6
pence per quarter by January 1837. See Niles National
Register, October 7, 1843, p. 84.

12

 

Tilden, Speech of Samuel J. Tilden, p. 3.

13Appendix Table B—12.

14Ibid.

15Hidy, House of Barings, p. 221.

16Norman J. Silberling, "British Prices and Business
Cycles, 1779-1850," The Review of Economic Statistics, Vol.
V (October, 1923), Supp. 2, p. 252.

17The Barings did everything but publish the names
of these houses in an attempt to halt the remittances of
bills to these firms as well as to another A.A. house,
Lizardi. See Hidy, House of Baring, p. 225.

18Hidy, pp. 220-221.

19Dewey, p. 230.

20Scheiber, Business History Review, Spring, 1966,

21Myers, The New York Money Market, Vol. 1, p. 111.

221bid., p. 103.
23
Myers, Vol. 1, p. 136.
24Ibid.
25

For a discussion of the autumnal pressures on the
British money market, see W. Stanley Jevons, "On the Frequent
.Autumnal Pressure in the Money Market, and the Action of the
.Bank of England," Journal of the Statistical Society of
1London, Vol. 29 (June, 1866), pp. 235-253.

26See Appendix Table B-13. These figures included
jbalances due other city banks. In June we know that about
61 per cent of the total was due to banks and corporations
outside the city.

27Walter B. Smith and A. H. Cole, Fluctuations in
lunerican Business, 1790-1860 (Cambridge: Harvard University
ZPress, 1935), p. 174. Hazard's United States Commercial and
Eitatistical Register, Vol} 4 (March, 1841), p. 192.

198

28
pp. 80-81.

29United States Congress, House, 25th Congress, lst
Session, House Document No. 30, p. 71.

30

Bourne, The History of the Surplus Revenue of 1837,

Timberlake, The Journal of Political Economy, p.
116.

31Temin, p. 132.

32Information on the means by which the Distribution
was actually shifted can be found in United States Senate,
26th Congress, lst Session, Senate Document, 14.

33United States Congress, House, 25th Congress, lst
Session, House Document No. 30, p. 74.

34See source cited in footnote 32, and Appendix Table

A-5.

35See Table 6.2 and source cited for column 7.

36Hammond, p. 459, and William G. Sumner, A History
of Banking in All The Leading Nations, Vol. 1 (New York:
The Journal of Commerce and Commercial Bulletin, 1896), p.

267.

37Sumner, A History of Banking, p. 267, and the
"National Gazette,“TApril 22, 1837 cited in the Financial

Register, Vol. 1 (October 25, 1837), p. 129.

 

38Hidy, pp. 220-221 and Clapham, Vol. 2, p. 157.

39Hidy, p. 219. This news most likely reached New
“York City during the second or third week of April.

40Hidy, pp. 217-218.

41Hammond, pp. 459-460, and Hidy, pp. 217-218.

42Leland H. Jenks, The Migration of British Capital
txa 1875 (New York: 1927), p. 90, and Davis H. Dewey, State
Iianking Before the Civil War (Washington: 1910), p. 104.

43Fritz Redlich, "Bank Money in the United States
Iering the First Half of the Nineteenth Century," Southern
Economic Journal, Vol. 10, No. 3 (January, 1944), pp. 216-
217, and Hammond, p. 463.

44Hammond, p. 463. No information can be found to
sfnaw that any specie shipment took place and in fact, Smith

199

and Redlich make no mention of planned shipments. Temin,
p. 133 mistakenly assumed that it was only New York City
banks that planned to ship specie.

45Ibid.

46Hidy, p. 220.

47Hidy, p. 220.

48Albert Gallatin, Suggestions on the Banks and
Currency of the Several United States (New York: Wiley
and Putnam, 1841), p. 35.

49H. W. Domett, A History of the Bank of New York,
1784-1884 (New York: 1884), P. 86.

50United States Congress, Senate, 25th Congress,
2nd Session, Senate Document, No. 365, p. 20.

51

 

 

 

 

Hammond, p. 478.

52Redlich, Part II, pp. 259-261, details the opera-.
tions of committees in several cities.

53Frank W. Taussig, "The Tariff, 1830-1860," The
Quarterly Journal of Economics, Vol. 2 (April, 1888): p. 320,
and Patriot, Charleston, South Carolina, p. 2.

54Caldwell, A Banking History of Louisiana, p. 60.
See also, "The Constitutional Currency, No. II," National
Gazette, April 8, 1837, reprinted in the Financial Register,
Vol. 1, September 13, 1837, pp. 84-85, and Publius, Remarks
on the Currency of the United States, p. 19.

55

 

 

Temin, Review of Economic and Statistics, pp. 463-
470.

CHAPTER VII

THE AFTERMATH OF THE PANIC: DISLOCATION

AND RECOVERY

Even as the news of the suspension of the East Coast
banks spread into the interior and eastward across the
Atlantic, moves were already afoot to revive the prostrated
cotton market and financial community. Though there would
be heated controversy over the methods used-~the necessity
and timing of resumption, the role of the United States Bank
and others in cotton speculation-~there was little doubt
that something would be done. With a revitalized banking
and mercantile credit system and a stabilized cotton market,
many believed that the boom times of the mid-1830's would
return. In this chapter we shall first attempt to deter-
mine the economic damage resulting from the deflation and
financial panic of 1837 and then see how the economy was

able to recover almost entirely by the end of 1838.

Dislocation and its Economic Costs
If we divided the economy into three sectors, agri-
culture, commerce, and construction, we find that of the
latter two (excluding urgan construction which was to drop
sharply in 1837 and the following years) commercial activity
showed the most signs of being adversely affected by the

panic.

200

201

As we saw in the last chapter agriculture was gener-
ally depressed in the latter half of 1836 and throughout
1837. In the South this was due to conditions mainly on
the demand side of the cotton market while in the grain
growing areas, poor crops depressed farm incomes. Without
any information on the number of farm foreclosures or the
rate of farm tenancy we cannot determine the extent of
dislocation in the agricultural sector.

A problem common to all three sectors of the economy
was the lack of money and credit. In more modern terms this
is called a lack of liquidity. This not only inhibited trade
and production but also made it more difficult for farmers,
merchants and manufacturers to pay maturing obligations.

Many manufacturing companies throughout New England
and the Central States failed not entirely because their
business was unprofitable, but because they could not,
in default of currency, realize upon their assets to
meet immediate obligations.l '

Merchants might have had warehouses filled with domestic and
imported goods. They would be wary of selling them to Western
and Southern merchants who could offer only bank notes and
bills of exchange which were often totally unaccepted or ac-
cepted only at large discounts. During the last half of 1837
bank notes on Southern and Western banks either were not
.accepted or discounted at rates ranging from five to fifteen
jper cent, while discounts on domestic bills of exchange were

<often twice their 1836 levels.2

202

The money supply was estimated to have fallen by
$44 million even though there was a net specie inflow of
approximately $4.5 million in fiscal 1837. Aggregate bank
lending fell by about $39.5 million while gross current
demand liabilities fell by approximately $75.8 million.

It is fairly obvious that the public, prior to suspension,
was withdrawing specie from banks and not shifting deposits
from what they considered less safe to more safe banks.
These annual figures tend to understate the losses of specie
incurred by banks, for while it is estimated that all banks
lost about $2.7 million in 1837, we know, for example, that
New York City banks lost approximately three million in

3 We saw in the

specie between January and July of 1837.
last chapter some of the estimates of the mercantile losses
resulting from the panic.

Prices, as shown in Table 7.1, fell along a broad
front prior to the suspension of the banks. With suspension,
price declines moderated except for industrial and cotton
prices. In a later section we will examine the factors
which contributed to the revival of cotton prices. Indus—
trial prices fell in response to declining markets and con-
tracting credit supplies. Perhaps contributing to the con-
tinuing decline in industrial prices was the accumulation

of inventories during the flush times of 1836 which now

had to be worked off before new orders could be placed.

.203

TABLE 7.1.--Percentage Changes in Selected Price Series, 1835-1838.

 

 

Series May 1836- December 1836 1835-1837 High May 1837-
May 1837 -May 1837 1837-1838 Low 1838 Low

Agricultural
Pricesa -13 -24 -28 + 1
Industrial Pricesa -ll -12 -27 -14
General Commodity
Pricesa -16 -20 -25 - 2
Wholesale Prices
New York City — 4 -10 -17 — 3
Wholesale Prices
Philadelphia - 5 -12 -22 - 5
Wholesale Prices
Charleston -20 -25 -26 - 1
Wholesale Prices
New Orleans —28 —23 ~34 - 2
Wholesale Prices
Cincinnati -16 -18 -26 - 7
Railroad Stock
Price Index -40 -18 -55 -12
Bank & Insurance
Stock Price Index —25 -25 —28 +14
Cotton Prices
New Orleansb -26 -20 -56 -29

 

aWholesale prices.
bNo New Orleans prices given for June and July of 1837. London
prices reached low in June. See Appendix Table C-S.

Sources: Agricultural, Industrial, Commodity, Railroad, Bank and Insur-
ance. Walter B. Smith and Arthur H. Cole, Fluctuations in
American Business, 1790-1860 (Cambridge: Harvard University
Press, 1935), pp. 158, 159, 174, 179. Wholesale Prices: New
York City, Philadelphia, Charleston, New Orleans, Conn.:
Arthur H. Cole, Wholesale Commodity Prices in the United
States, 1700-1861 (Cambridge:' Harvard University Press,
1938), pp. 135, 142, 157, 179, 185. Cotton: Source cited
Appendix Table C-5, Price Series A.

 

 

 

 

204
Manufacturing Industries and the Extent
of Economic Dislocation

In terms of value added, the major manufacturing

industries in the United States at this time were the cot-
ton textile and leather and shoe industries in that order.4
There were some dislocation in both industries during 1837
and 1838. It is difficult to determine, however, the effects
of this on the economies of the regions in which they were
located. Greely, Rezneck, Ware, and Hazard dealt usually
in general terms and did not distinguish with sufficient
care the events of the last half of 1837 and those of the
last months of 1839.5
What information we do have tends to indicate that
the leather and shoe industry went through more dislocation
than the textile industry. In the latter,

After the peak of the third quarter of 1836, output
stagnated at a lower level for a year. In the last half
of 1837, sales fell sharply, output less rapidly and
inventories accumulated. The severity of the contrac-
tion was limited to the 3rd and 4th quarters of 1837.
Recovery was immediate and continued sporadically
through 1838 and 1839.6

Caroline Ware noted that only some small mills failed and

that the cotton mills were the first to recover after the

. 7

panic.
We have no quantitative information for the shoe

industry but the qualitative information indicates a more

serious situation. According to Blanche Hazard's study,

the industry could be characterized in present-day terms

as being one of monpolistic competition. During the

205

liquidity crisis of 1837, most of these small manufacturers

8 Unfortu-

failed. Hazard gives a 90 per cent failure rate.
nately we do not know how many of these firms were reorgan—-
ized or merged into larger units and how many workers were
made unemployed. Both Hazard and V.S. Clark noted that the
panic was an important dividing line for the structure of
the shoe industry. Prior to 1837 the market structure was
characterized by a merchant-employer.type of organization
which, due to the widespread failures of the panic, changed
into a structure dominated by the factory system.9

Industry was generally stagnant during 1837 espe-
cially because of the drying up of lines of commerce due to
a lack of credit facilities and perhaps also to excess I
inventories.

Urban and Infrastructure Investment During
the Suspension Period

 

In contrast to the stagnation of industry and com-
merce, the construction of canals and railroads continued
to increase and in the process probably reduced the unemploy-
ment effects of the panic. Railroad construction expenses
increased in 1837 over its 1836 level by 25 per cent--approxi-
mately $2.8 million--though the rate of growth fell from the

10

50 per cent increase recorded in 1836-. Investment in

canal construction almost doubled from $4.4 million in 1836
to $8.2 million in 1837, the increase being more than the

total amount invested in 1835.11

206

Urban constraction was not that fortunate, Rigglemans
index of building in the United States fell from 52 in 1836
to 25 in 1837 and continued to decline, except for a slight
upturn in 1841, until a low was reached in 1843. The build-
ing cycle in Boston reached a peak in 1836 and then fell,
excluding 1839, until 1844. The number of buildings erected
in New York City fell from 1,826 in 1836 to 840 in 1837 this
being 37 below the level of 1834. It must be remembered
that the fire in New York City in late 1835 most likely
accounted for many of the buildings put up in 1836.12

There seem to be two possible explanations for the
decline in urban construction at a time when that of internal
improvements increased. The first is that these two types
of long-term investment tapped different capital markets.
The second is that the demand for such facilities fell.

Railroads and canals, especially when they could di-
rectly, or indirectly use the credit of state and local govern-
ments were able, until the middle of 1839, to borrow funds in
the London and continental capital markets. We will see in a
later chapter that because of expected differences in inter-
est rates, British investors in 1843 sent funds to New York
City to invest in mortgages. Because no studies have been
made of the financing of urban construction during this
period, we have no means of determining the relative impor-
tance or magnitude of such inflows prior to 1843.13

Urban construction was financed mainly by domestic

sources. Such construction.was financed either by the

207

builders using their own funds, by construction loans, or
funds obtained through the use of some kind of mortgage
instrument. These mortgages were sold to individuals, in-
cluding as we have just seen foreign lenders, banks or
insurance companies. The state of the money and credit
markets in the United States in 1837 leads one to guess
that such funds were hard to obtain.

A second possible explanation for the decline in
urban construction deals with the demand side of the market,
and asks the question whether there was overbuilding during
the mid-1830's? We have no quantitative information which
enables us to answer this question. It seems likely that
if the reports of business failures were even partially
true, there must have been an increase in vacancies as well
as a decrease in demand for new construction on the part of
the mercantile and manufacturing sectors in the stagnant
condition of 1837.

Immigration, a source of demand for housing in gen-
eral, even though it may not have generated any significant
demand for new housing, reached a peak in.1837 and fell to-

a low point in 1838.14

It is possible that immigration might
have started to decline in the second half of 1837, but only
if there were no lags between the inflow of immigrants and
new construction could this explain some of the fall in con-
struction. The absence of such a lag seems unlikely. The)

decline in immigration may have contributed to the continuing

fall in urban construction in 1838.

208

Internal improvement projects were able to continue
during 1837 and 1838 because of their ability to tap foreign
capital markets. Urban construction, on the other hand was-
greatly dependent on domestic funds. It thus felt the
force of the monetary panic and financial disorganization

of 1837 and 1838.

The General Economic Situation After the Panic

 

We have been concentrating our attention mainly on
the effects of the panic on commerce and manufacturing. That
there was economic dislocation seems fairly clear. Because
of the nature of agriculture we would expect that dislocation
in this sector was less severe than in the cities. On the
first page of this chapter we noted that there were no hints
in the works covering this period of any widespread economic
damage in the farm regions. On the other hand we do have
some quantitative as well as qualitative information indi-
cating that there were problems in the cities.

The slowing of commerce and of manufacturing produc-
tion would have led to some unemployment, even if wages and
other prices had some flexibility since inventories accum-
ulated. This was due, if for no other reason than to the
lack of money and credit. At the end of 1837, there were
about 51,000 people listed on relief in the state of New
York. This was a 35 per cent increase in the number listed
in 1836; by the end of 1838 the number rose to 105,000.

Most of this increase was concentrated in New York City as

209

the city's share rose from 59 per cent in 1837 to 76 per cent
in 1838. Rezneck painted a vivid picture of the distress in
New York City during 1837 while Caroline Ware wrote that the
wholesale manufacturing of clothing which had begun in New
York in 1835 failed in the panic.15

Importers were one of the most hard pressed of those
in commerce. Their markets were drying up while they had to
scramble to find means of paying off their British creditors.
It might have been possible to continue trade without any
adjustment of outstanding debts. If this could not be
arranged then the debts had to be refinanced, if not at
full value, then at some value which could enable the re-
sumption of trade.

The straits importers were reflected in the sharp
rise in the value of duty bonds not paid. Between January 1
and May 10, 1837 about $162,000 in duty bonds were defaulted,
the importers thereby giving up claim to the goods. Between
May 10 and June 30, slightly over $2.3 million in additional
duty bonds were defaulted. New York importers were not alone
in defaulting duty bonds, in fact importers to the South of
the city may have been in worse difficulty. New York City's
share of defaulted duty bonds fell from 73 per cent of the
total in the first period to 63 per cent in the second. The
ports to the South of New York had the largest per cent
increase in such defaults.16

But this does not mean that the situation in New

York was not serious. The asseSsed value of real property

210

in the city fell 16 per cent in 1837 and personal property
fell 11 per cent. The total decline in real and personal
property amounted to approximately $45.7 million, in both
absolute and percentage terms this exceeded the declines 9
recorded during the entire 1839-1843 period.17

.The general effects then of the economic disorganiza-
tion caused by the panic was mainly concentrated in the
cities and appears to have been more in pecuniary terms than
in real terms. However, this can only be a tentative con—
clusion as too little is still known about the output of
various industries during this period as well as what
actually took place in the agricultural regions of the
North and South during 1837 and early 1838.
The Situation on the Eastern Side
Of the‘Atlantic

In Great Britain the Bank of England by the middle
of the year, in part at the expense of the American banks,
stemmed its bullion losses and slowly began to fill its
coffers. The London money market gave the surface appear-
ance of a gradual easing as the short-term interest rates
fell from 5.5 per cent in the first quarter to 3.4 per cent
by the end of the last quarter of 1837. The supply of money
and credit, on the other hand, contracted, the former by
only about one per cent between the first and fourth quarters

of 1837 while the latter decreased by 22 per cent.18

211

The Anglo-American houses were in serious trouble as
the directors of the Bank of England decided on June 1 not
to extend any more aid to the.3 W's and they suspended the
next day. Barings estimated that the suspension of those
three houses as well as four smaller ones would result in
the return to the United States of at least L845, 000 in
unpaid bills of exchange.19 One can imagine what happened
to those American firms which has purchased these bills to
pay their British creditors. With the situation-in the
American market and the decline in credit at home, British
exports fell by 20 per cent. Prices and output fell in
response to a declining market for British manufactured
goods at home and abroad, the domestic price index falling
by 10 per cent and Hoffman's index of industrial production,
excluding building, fell by five per cent during the year.20

The economic problems experienced by the United
States and Great Britain was also being felt on the Conti-
nent. In.France, the papers carried reports of reductions
in production and unemployment in the French manufacturing
districts.' In Sweden the economic difficulties in the
United States and falling prices in Great Britain were
being blamed as the source of the suspension in the Swedish
iron trade. The clock industry in Switzerland was claimed
to be suffering from a decline in trade that had not been
experienced in 23 years. The Swiss cotton textile industry

was also hard pressed, not only from.the general economic

 

212

downturn which seemed to cover the Eastern as well as the
Western side of the Atlantic, but also from new and expand-
ing competition from Alsace and Southern Germany.21 It
appears then that the United States was not alone in its
problems. When the leading industrial country of the
world, Great Britain, ran into difficulty, its problems
found their way not only to America but to the other indus-
trializing countries of the world.

The Movement Towards Recovery in the
United States

 

 

Would the merchants, farmers, workers, bankers and
politicians wait while the classical remedy of deflation
had run it's course or would action be taken by the private
or public sectors to bring an end to the deflation and to
start a recovery? The action of the American banks in
suspending was itself a positive step which reduced some
of the deflationary impact of the period by not forcing a
further contraction of an already contracting money and
credit supply. There were those however, who wanted the
inflation to run its course.

The advisers closest to Van Buren looked upon the
financial crisis as a healthful deflation that would
rid the country of speculators and gamblers and restore
the economy to stable levels. This wou1d take place
naturally, without any intervention by the national
administration.

In the remainder of this chapter we will examine the major

steps taken to revive the economy. Our attention will center

on the cotton market, the attempts of the northern banks—-led

213

and pushed by those of New York City--to resume specie
payment, and finally the monetary and fiscal actions of

the federal and state governments.

The Revival of the Cotton Market

 

The first order of business in the South and for
all those directly or indirectly dependent on the trade of
the South and its main.stap1e, cotton, was to stop the
decline in cotton prices. With this accomplished and the
market stabilized attention could then be turned to the
task of paying off the debts accumulated during 1836 and
early 1837. The United States Bank of Pennsylvania, later
followed by some other Southern banks and cotton firms
attempted to halt the decline in cotton prices.

They planned to do this by buying cotton and holding
it off the British markets expecting that the British spin-
ners would eventually deplete their raw cotton inventories
and begin to buy new cotton driving up its price. If this
attempt at supply restriction was to work, demand conditions
for British textiles had to improve and sufficient credit
had to be available to the cotton speculators to enable them
to keep cotton off the market until prices rose. The need
for credit was especially vital if the new crops were large.
Unfortunately, by the beginning of 1839 demand for British
textiles had not revived and credit was again scarce.

The actions of the United States Bank were motivated

in part by the desire of Biddle to help revive the economy

214

and partially by the need to obtain foreign exchange to pay
off the bank's maturing obligations in Great Britain, and
Europe. He also wanted to protect the bank from further
losses in cotton bills and its other short-term and long-
term investments in the South. Much has been written about
Biddle's attempts to corner the cotton markets in the 1838-
1839 period.. Our attention will center on the means used
to finance these operations, and what did happen to the
cotton market.23
The United States Bank set up two organizations in
England to facilitate its cotton Operations and to handle
its financial transactions on the Eastern side of the
Atlantic. Humphreys and Biddle were set up in Liverpool
to receive cotton shipments consigned to it by agents of
the Bank in the Southern United States. In London, Samuel
Jaudon, cashier of the Bank, established an agency which
represented the Bank in its British and Continental dealings
and furnished aid to Humphreys and Biddle when they needed
funds to keep cotton off the market. .These two tasks
assigned to Jaudon could, and did conflict, causing serious
problems for all concerned in late 1839 and 1840.24
Samuel Jaudon arrived in London during the first
week of November, announced the creation of his agency
of the bank, Opened a drawing account at the Bank of
England, almost immediately began to accept drafts
issued on him by the Philadelphia bank, and raised
funds to meet his obligations by discounting bill
remittances, by issuing post notes, and by selling
bonds of various States and corporations. At the

same time the firm of Humphreys and Biddle was set
up in Liverpool to receive cotton‘. . . . If and when

215

Humphreys and Biddle needed funds in order to hold
cotton for higher rices, it was able to draw on
Jaudon in London.2§'

Soon other Southern banks, as well as some Anglo-
American houses including the Baring's followed the lead of
the United States Bank.26 In November 1838, the Union Bank
of Mississippi—-which was to lose its charter in July 1840--
distributed a circular to the planters declaring the bank's
willingness to advance $60 a bale on good cotton weighing
400 pounds, payable in 12 months. This was 15 cents a
pound, a price reached in the 1830's only in the peak of
the cotton boom and a price not seen for almost two years.27

It was fortunate for the cotton speculators that
monetary conditions in Great Britain eased in 1838. The
1838 cotton crop was abnormally large and the cotton spinners
were trying to buy as little cotton as possible to force
down prices. The estimated stock of raw cotton held at the
mills and by speculators as of the end of December, 1838
was the highest for the entire 1830's.28

Cotton prices were stabilized in early 1838 but
during the first three quarters of the year they did not
reach nine and one—half cents a pound. This meant problems
for some speculators and planters. The Financial Register
carried the following excerpt from a letter supposedly
describing conditions in Mississippi in the spring of 1838.

The times are truly alarming here. Many planta-

tions are entirely stripped of negroes and horses by
the marshall or sheriff, and to add to our other

216

difficulties, our bank paper is getting worse and worse

every day.
Not until late October and November did cotton prices rise
significantly. The average price of cotton in New Orleans
rose by 18 per cent in October, this being the first time
in a year that the price had risen to over ten cents a
poind. British prices began to increase in the following
month.

How successful was the action of the speculators in
maintaining cotton prices? The end to the decline in cotton
prices in 1838, in the face of the largest crop of the
1830's indicates that they had some success. The rise in
cotton prices in the last quarter of 1838 and the early
months of 1839 probably was due in part to the actions of
the speculators, but they were aided by a crop which was 23
per cent smaller than that of 1838. Speculatorshelped to
stabilize the price in 1838.

Only as long as the speculators could obtain credit
with which to refinance cotton bills could they hope to
keep cotton off the market in sufficient volume to maintain
prices. In 1839 the credits again dried‘up, and with it
the hopes of the United States Bank and many Southern banks,
cotton factors and planters. The collapse.of the London
credit market meant a sharp drop in prices as cotton was
thrown on the market to obtain funds to pay the maturing

cotton bills. Speculation, backed by ample credit could

217

be stabilizing, but without the credit, it could be and was

destabilizing.

The Resumption of Specie Payments
By the Banks

 

While the struggle over cotton was taken place in
the South and in Liverpool and Manchester, another struggle,
which was also important to the American economy was taking
place in the North. The bankers of the major east coast
cities were divided over the question of when to resume
specie payments. The New York bankers were almost alone
in their insistence on a speedy resumption. Most of the
other bankers along the East coast and throughout the West
and South, eventually led by the United States Bank pressed
for resumption when American trade, expecially cotton and
its all important cotton bills, would be in a better shape
to sustain a resumption. The most frequently discussed
date for resumption being around January 1839, when the new
cotton crop would start to go to market.30

The policies of individual bankers as well as those
brought together in the banking groups formed in various
cities to handle inter-bank relations during the suspension
were most likely determined after weighing the often con-
flicting needs of solvency and those of the bank's major
customers. The more loans a bank made to mercantile and
agricultural sources--these being the major loan customers--

the greater the danger of insolvency if prices were to

218

decline further. On the other hand, without these loans,
there was the possibility of widespread failures which also
threatened the bank's solvency.

Bankers also had to take into account various
Federal and state regulations and actions which delimited
the alternatives Open to the banker. It was not until May
31, 1838 that the Specie Circular was repealed. Even
though the banks suspended in May, the fourth installment
of the Distribution was not postponed until October. State
regulations dealing with resumption posed the most serious
problems for the banks and nowhere was this more so than
in New York and Pennsylvania.

Most of the banks in New York were incorporated
under the Safety Fund Act of 1829 which contained a clause
requiring the forfeiture of a bank's charter if it suspended.
Enforcement of this clause was postponed for a year so that
the banks had until May 10, 1838 to resume specie payment
or lose their charters. In Pennsylvania, the governor
declared August 13, 1838 as the date by which banks had to
resume specie payments.31 The story of the struggle for
resumption is found in Hammond and W.B. Smith as well as
in the various issues of the Financial Register. Our task
is to see how the New York City banks prepared themselves
for resumption, the aid given to them by the Bank of England
and finally, the short-run effects of resumption on the

economy.

219

To prepare for resumption the New York City bankers
knew that they had to reduce all potential and actual claims
on their specie holdings while at the same time building up
these holdings. The banks reduced their lending activities
which resulted in some reduction in their current demand
liabilities. The reduction in loans was greater than the
latter as loans were paid off not only with notes and
checks of New York city banks but also those of other
cities and perhaps in specie. Some of the reduction in the
loans of New York City banks as well as the others listed
in Table 7.2 may have resulted from the writing off of bad
debts but we do not know whether or not this was actually
done.

The New York City banks were not alone in contracting
their lending activities nor in having the majority of this
contraction taking place before the end of 1837, when there
was still uncertainty as to when they would resume. In
Table 7.2 we have eleven observations covering the period
between the suSpension of the New York Banks and their
resumption. Eight out of eleven Observations shows a con-
traction of lending activities and of these eight, six had
their greatest contraction prior to the end of 1837.33
Only in New Orleans, Mississippi, and Illinois was there
an expansion of bank lending activities during this period
and the former two most likely was due to speculation in

cotton. There is no readily apparent explanation for the

220

TABLE 7.2.--Percentage Changes in Bank Lending, Specie
Holdings and Current Demand Liabilities, Selected Banks,
April 1837-June 1838.

 

 

 

 

 

 

 

 

 

Loans Current
Banks and Datesa and Specie Demand
Discounts Liabilities
New York City_ ' *
June-Dec. 1837 -19 + 39 + 2
Dec. 1837-May 1838 - 9 +177 - 6
June 1837-May 1838 -27 +284 - 5
Bostonb
May-Dec. 1837 n.g. + 17 +45
Dec. 1837-May 1838 n.g. + 29 - 9
May 1837-May 1838 n.g. + 52 +32
PhiladelphiaC
Jan.-May 1838 - 2 + 2 +18
United States Bank
of Pennsylvania
May—Dec. 1837 -34 +125 -15
Dec. 1837-April 1838 +11 + 17 +20
May 1837-April 1838 —26 +162 + 2
New Orleans
May—Dec. 1837 + 9 + 17 -10
Dec. 1837-Mar. 1838 - 6 + 9 -15
May 1837-Mar. 1838 + 2 + 28 ~24
Rhode Island
May-Dec. 1837 + 4 + 47 + 5
Dec. 1837-May 1838 - 3 + 23 n.g.
May 1837-May 1838 - l + 80 n.g.
New Hampshire
May 1837-Feb. 1838 -13 n.g. -44
Feb.-May 1838 - 2 + 3 - 8
May 1837-May 1838 -15 n.g. -48
Maine
June 1837-Jan. 1838 - 5 - l9 - 6
Jan.-June 1838 -13 + 10 -31
June 1837-June 1838 -17 - 11 -35
Virginia
April 1837-Jan. 1838 -13 - 13 -25
Kentucky
May-Dec. 1837 - 4 + 1 - 9
Dec. 1837-May 1838 - 1 + 11 + 2
May 1837-May 1838 - 5 + 13 - 7

221

TABLE 7.2.--Continued.

 

 

 

 

Loans Current
Banks and Datesa and Specie Demand
Discounts Liabilities
Geor ia
April-Oct. 1837 - 5 - 13 -'35
Oct. 1837-April 1838 - l + 7 +-44
April 1837-April 1838 - 6 - 7 -- 7
Mississippi
May 1837-Jan 1838 + 2 0 +‘40
Jan.-June 1838 +44 - 2 +-46
May 1837-June 1838 +47 - 2 +104
Illinois
June 1837-Jan. 1838 + 9 - 4 - 6
Jan.-May 1838 + 4 + 12 + 20
June 1837-May 1838 +14 + 8 + 12
Ohio
May-Dec. 1837 -12 + 16 - 28
Dec. 1837-June 1838 - 8 + 12 + 3
May 1837-June 1838 -19 +

30 - 25

 

aDates for May 1837 are after May 10, 1837.

bAssociated Banks of Boston, excluding Massachusetts,
Franklin, and Lafayette Banks. No information is available
as to the importance of the excluded banks though the
Franklin was a deposit bank and its loans and discounts as
of Feb. 1837 were less than $300,000 making it the smallest
deposit bank in Massachusetts. See Table 3.3, source cited
for Col. 2.

CExcluding the United States Bank of Pennsylvania.

dGross figures, including interbank holdings.
n.g. = not given.

Sources: New York City; Appendix Table B-lO. Associated
Banks of Boston: Financial Register, Vols. 1 and
2. Philadelphia Banks: United States Congress,
House 26th Congress 2nd Session, House Document
111. United States Congress, House, 29th Congress,
lst Session, House ex. Document 226. New Orleans:
Merchant's Magazine, Vol. 7 (Oct. 1842), p. 361.
United States Bank of Pennsylvania: Financial
Register, Vol. 1, pp. 378, 380, 381. State Banks:
United States Congress, House, 26th Congress, 2nd
Session, House Document 111.

 

222

actions of the State Bank of Illinois which was almost a
monopoly in the state, except if it was forced to extend its
loans to support state activities. We will see that this
bank would fail in the aftermath of the panic of 1839.

There appears to have been no simple relationship
between the actions of the banks and the movement of prices
although contemporary and later writers believed that pre-
paring for resumption entailed further deflation and eco—
nomic dislocation.34 During the same time period in which
New York City banks contracted their current demand liabili-
ties by five per cent and lending by 27 per cent, prices
fell by .09 per cent. In Philadelphia on the other hand,
bank lending fell by two per cent and gross current demand
liabilities rose by 18 per cent but prices fell by four per
cent. Finally, in Cincinnati, prices rose by six per cent
even though the banks of Ohio contracted the lending and
gross current demand liabilities by 19 and 25 per cent
respectively.35

While the banks curtailed their lending activities,
their specie holdings increased to such an extent that by
the end of 1838, banks held more specie than at any time
during the 1830's and early 1840's. How were the American
banks, especially those of New York City, able to increase
their specie holdings? In general, banks could obtain

specie from either domestic or foreign sources.

 

 

223

Dishoarding by the private sector as well as by
governments, when specie from these sources were not kept
in banks, and mining constituted the sources of the net
increases in specie held by banks that did take place from
domestic sources. Domestic production did not become sig-
nificant as a source of specie until the discoveries in
California, the estimated value of gold and silver produc-‘

tion in 1838 being slightly less than $500,000.36

According
to Berry, specie flowed from the interior to the Eastern
seaboard in 1838 as domestic rates of exchange rose above
interregional specie export points.37 We do not know the
original source of this specie flow, that is whether it
came from dishoarding as banks called in loans--this in-
creased the size of bank specie holdings--or whether it
represented merely a transfer of specie from Western and
Southern banks to those on the East coast. Unless dis-
hoarding was large, which seems unlikely, domestic sources
Of specie appear to have played a relatively small role in
the growth of aggregate bank specie holdings during 1838.

In fiscal 1838, that is from October 1, 1837 to
September 30, 1838 the United States imported an estimated
$17.75 million in specie of which approximately 50 per cent
came from England and about 13 per cent from France. Exports
of specie totaled about $3.5 million, leaving a net specie
inflow of approximately $14.24 million which was the third

largest in the period from 1830 to 1845.38

224

What caused this massive inflow of specie? The
price deflation in the United States combined with the
temporary drying up of British credits and the decline in
the money supply led to a sharp drop in American imports.
Exports fell only slightly, the net result was a balance

39

of trade surplus of a little more than $6 million. State

and local governments continued to borrow in the London and

maimnx- -W

Continental capital markets throughout this period. The
combination of a surplus on the balance of trade account
and long-term capital inflows in combination with two
unusual transactions, resulted in the exchange rate falling
below the specie import point between May and August of
1838.40

The two non-recurring transactions were: (1) the
continuing payment of the French indemnity resulting from
the Napoleonic wars, the so-called French Spoliation Claims;
(2) the loan granted by the Bank 0 England to aid the Ameri-
can banks, especially those in New York City to resume
specie payments.

The French Spoliation Claims pose a problem in that
we have conflicting information as to the total amount paid
to the United States and to the amount received by the
United States-~that is its citizens--in 1838. According
to Redlich, these payments totaled 25 million francs while

Smith placed the figure as 18.5 million francs.. As a franc

was equal to approximately 19 cents, these were $4.75 and

225

$3.5 million respectively, but the historical statistics
of the United States has these payments equalling $5 mil-
lion.41

We are interested not so much in the total amount
of these payments, as the amount paid in 1838. There is
fairly close agreement on this point between Smith and the
H.S.U.S., the former estimating $900,000 while the latter
$1 million. These indemnity payments, if they were made
entirely in specie, and this is what Smith implies, account-
ed for 40 or 50 per cent of the specie imports from France
in 1838.42

More important than these French payments was the
loan from the Bank of England. This loan not only accounted
for slightly more than 50 per cent of United States specie
imports from Great Britain, but it also had positive psycho-
logical effects On the New York banking community. According
to Redlich,

The gold loan had little if any influence on actual
business conditions, but it contributed to the atmos-
phere of confidence which prevailed that summer. What
it did was to stiffen the neck of the New York banking
fraternity and make it insist on a policy of early
resumption.

On March 15, 1838, the Bank of England using the
services of Baring's and its agents in New York City, Prime,
Ward and King, shipped the first installment of a £1 million
($4.875 million) loan in gold to the United States. Accord-
ing to Clapham, £680,000 was shipped by the end of March

while Hidy estimates that £700,000 was shipped by June 15.

Mun-‘1-
,1 .
I

226

There seems to be confusion as to the amount shipped
and its final distribution. Clapham writes that,
. . . the sovereigns were to be 'disposed of' by
Prime Ward and King, the purchasers bills to be remitted
to the Bank. This com leted a transaction about which
little more is known.4
Hidy, writing about five years later, gives a partial break-
down of the distribution of the loan but this does not solve
the problem. He lists the New York City banks as purchasing
approximately £103,000, with a Boston Bank buying about
£20,000 and the United States Bank about £300,000, or a
total of £423,000. But Hidy then remarked that, "only about
£330,000 remained in the hands of Prime, Ward and King on

May 25."45

If we add this £330,000 to the £423,000 pur-
chased by the American banks we have a total of £753,000,
which exceeded by £53,000 the amount of specie which Hidy
said was shipped by June 15.

The actual distribution of the loan still seems
Open to question, but the New York City banks seemed to
have received, directly or indirectly, a substantial por-
tion of the loan for by the first week of May, 1838 they
had almost $6.6 million in specie. This was an increase
of about $3.2 million, or slightly less than £670,000
increase during the month of April.46 Whatever the source,
a balance of trade surplus or long-and short-term capital

inflows, by the spring of 1838 most American banks increased

their specie holdings to decade highs.

227

Resumption and Recovery

 

The New York banks resumed specie payments on May
10, 1838, but it was not until August 13 that the banks of
Philadelphia, Boston and other cities along the East coast
resumed; by January most other banks in the United States
appear to have followed suit.47 With resumption most banks

in the country, or at least all those shown in Table 7.2,

 

excluding Massachusetts, expanded their lending activities.
The American economy reached the low point of the 1837-1838
deflation during the spring of 1838 and the recovery picked
up steam in the early fall of the year, the resumption of

the banks may have been a contributing factor to the recovery
and in the next few pages we will attempt to see if it was
so.

In the South, wholesale prices at New Orleans and
Charleston started to rise during the spring, at about the
same time that cotton prices reached their 1837—1838 lows
and the banks of New York were to resume specie payment.

Cotton prices remained relatively stable until
September, and though New Orleans prices reached their low
in March, English prices of Georgia upland cotton did not
reach bottom until August. The discrepancy in low points
may be due to different classifications of cotton or per-
haps to the actions of cotton speculators on the western
side of the Atlantic. New Orleans cotton prices rose by

7/10 of a cent in April (nine per cent), and an additional

228

one-half cent in May to 9.3 cents a pound but it then fell
between July and September as is shown in Appendix Table
C-5.

When we look at the pattern of general price move-
ments we find that wholesale prices at New Orleans reached
bottom in March and April and the largest absolute and
percentage increases of 1838 came in May, the month the
New York banks resumed. The second largest percentage in-
crease came in September with the second largest absolute
increase coming the next month, when cotton prices also
rose sharply.

At Charleston, prices reached their low point in
April, the largest absolute and percentage price increases
taking place in October. The second largest percentage
increase came in May. This was basically the reverse of
the pattern of price movements in New Orleans.48

Resumption, by leading to an expansion of the supply
of money and credit could facilitate or induce an eXpansion
of economic activity. We can look at the movement in the
discount rate on bills drawn on these two Southern ports
and sold in New York City as an indicator of the monetary
ease transmitted to them because of the resumption in New
York. The largest absolute decline in the discount on New
Orleans bills took place between May 12 and June 2, with
the largest percentage decline occurring in October. In

Charleston the pattern was similar except that the largest

229

49 Though this

percentage decline took place a month later.
information tends to indicate that resumption in New York
eased credit conditions with these two main Southern ports,
we should expect that it took some time for this to be

felt throughout the Southern economy as a whole.

We should not overestimate the effects on the
Southern economy of the easing of credit in New York. We a
saw in a previous chapter that Southern banks did not main-
tain any substantial working balances in New York Banks at
this time. More importantly, according to Smith, the easy
credit policies pursued by Philadelphia merchants and
bankers during the suspension period as contrasted to the
tight money policy in New York caused a large part of the
New York City mercantile trade to shift to Philadelphia.50

Contemporary sources indicate that it was the
resumption of the late summer which had, along with the
large rise in cotton prices in October, the greatest effect
on the Southern economy. The New York Gazette on August 1
wrote that as a result of the decision of the Philadelphia
banks and others to resume on August 13,

. . . a large number of merchants from Virginia

and other Southern states have made their appearance
in our market, who had not been this way on business
before since the suspension in 1837.51

The Mobile Examiner on October 9, two months after the late

summer resumptions, reported that,

. . . already has the restoration of confidence in
our banks and merchants been displayed by the rapid

 

230
decline of exchange on northern cities and the course
now pursued by northern creditors.52

It appears that the recovery of economic activity in
the South paralleled the movement of cotton prices. The
resumptions especially those of late summer, facilitated
this recovery and could have in part induced some of it if
it enabled cotton prices to rise by supplying the funds
needed by speculators. As the Mobile paper indicates, per-
haps the most important outgrowth of the resumption of
Southern banks as contrasted to those in the North, was
the renewed confidence in the money and credit instruments
of the South.

When we turn our attention to the West, we find a
similar pattern of price movements, that is, two signifi-
cant rises, the first in the spring, and the second in
early fall. As with our discussion of the South, it is
difficult to distinguish between the effects of resumption
and those of the revival in the grain trade- According to
Berry, the West was less affected by the suspension and
deflation than the East and South. He noted, for example,
that Western prices stayed above seaboard prices throughout
1838, whereas this was not true in the 1839-1843 defla-
tion.53 Cincinnati prices reached their 1838 low in April
and then started to increase with the largest absolute and
percentage increases coming in September during the fall
harvest and a month after the resumption of many banks out-

side New York; the second largest price increase coming in

231

June. Looking at bills of exchange drawn on Cincinnati
and sold in New York City, we find the greatest absolute
decrease in their discount occurring during May with the
largest percentage decrease in September.54
Resumption of the New York banks had some effect on
economic activity in Cincinnati, and perhaps other points
in the West. Contemporary sources tend to support this
hypothesis. The Genessee Farmer reported that,
. . . the resumption of the New York banks early
in the season and the promising appearance of the
wheat crop soon changed the face of things, and as
the season advanced, the gloom and shadows which had
hung over the farmer and the financial matters of
the country gradually cleared away.55
Scheiber writes that further west, the large grain crOps
and general signs of economic recovery (he did not elaborate
on this), and the availability of credit from the New York
banks enabled Cleveland banks, specifically the Commercial
Bank of Lake Erie, to expand its lending activities.56
As in the South, it was the combination of an in-
creased supply of money and credit coming after the resump-
tions of spring and late summer and a good agricultural
market, in this case, wheat, that together led to the
recovery of mid and late 1838 and early 1839.
So far we have looked at the possible causes of
recovery in the South and mid-West. We will now examine
what happened in the East. Our attention will first con-

centrate on the general pattern of recovery in the East.

The possible relationship between the actions of the

232

Federal and state governments and the recovery process will
then be looked at. Finally we will turn to developments in
Great Britain. What happened in that country obviously
influenced not only the resumption of the American banks
but also the temporary recovery in the cotton trade and the
Anglo-American trade in general.

We saw in the preceding section a quote from the
New York Gazette indicating the importance of the late
summer resumption to the commerce of New York. When we
look at the wholesale price indexes for New York and Phila-
delphia we find that the largest price increases came after
the summer resumption and the beginning of the fall harvest

57 At New York City, the

season in the West and the South.
largest absolute and relative price increases came in
October with the second largest occurring in the preceding
month; in Philadelphia the largest increases came in Septem-
ber with the second largest in the following month.

New York prices fell in June and remained stable
until September indicating that there was no immediate
affect on prices arising from the resumption of the New
York banks. If there was some degree of unemployed re-
sources there could have been an increase in output without
any concommitant price increase. We should also take into
account the time lag between an expansion of the money and

credit supply and movements in prices, though the time lag

in the fall appears to have been very short.

233

There does seem to be another reason for the stabili-
ty of prices in New York during June-August. The banks may
have been willing to lend and did lend but most of this
might have been for financial transactions as contrasted to
spending for consumption or investment. According to
Keynesian analysis, if the supply of money is increased
when people hold the amount of money they desire to hold,
the excess money will be used to purchase bonds, driving
their prices up and lowering the rate of interest until
all the excess money has been used. Lower interest rates
were assumed to cause an increase in investment thereby
increasing aggregate demand.

According to the simple classical transaction demand
explanation, the increase in the supply of money at full
employment income leads to rising prices. The assumption
is that these new money balances are spent, thus the in-
crease in prices.

One can also imagine a combination of these two
approaches. The increased supply of money is first used
for financial transactions, but eventually the newly created
Inoney comes into the hands of those who use it to buy goods
and services. This can explain part of the lag between
.increases in the supply of money and credit and increases
.in economic activity, especially as measured by changes in
aggregate price indexes. It should also be remembered that

the greater the extent of unemployed resources, the longer

234

the possible lag between changes in economic activity and
changes in prices.

When we look at the indexes of security prices, we
find the largest increases of 1838 between the months of
May and July. This tends to support our hypothesis that
the financial markets and then only later the real markets
were affected by the increase in the supply of money and
credit. The index of railroad share prices rose fourteen
points in May and June, this accounted for 78 per cent of
the total rise which took place during the 1838-1839 recovery.
Bank and insurance company share prices rose only nine points
in 1838, but six of these nine points came during the months
of May through July, this was 67 per cent of the total in-
crease. While this was taking place-in the security markets,
the interest-rate on short-term paper in New York and Boston
money markets fell from 10 per cent at the beginning of May

58 The expansion

to seven per cent by the end of the month.
of bank lending and the increases in the money supply
resulting from this and the specie inflows appears then

to have gone mainly into the financial markets until the
resumptions of late summer and the marketing of the cotton
and grain crOps in the fall stimulated aggregate demand in
general.

The Role of Federal and State Governments

in the Recovery

The Federal government, more by necessity than by

choice, did not remain inactive during the suspension period.

235

Its importance lay not in the magnitudes of its expenditures
and receipts, for these were but a small part of total
demand, but rather in its policies which influenced the
decisions taken by bankers, merchants and consumers.

Robert Gallman has estimated that the total output of the
American economy in 1839 was between $1.019 and $1.037
billion in current prices. Using the estimate of govern-
ment expenditures found in Appendix Table A-2, we see that
these expenditures were between 2.8 per cent and 2.9 per
cent of total output.59

Recognizing that these are the most tenuous of
estimates it seems clear that the government expenditure
multiplier, taking into account changes in the money supply,
would have had to be exceptionally large for even a 10 per
cent change in government expenditures to have brought
about a change of more than one or two per cent in total
output.60 On the other hand, we will see that one estimate
of the ratio between state government expenditures and
total output is 16 per cent, though when we look at the
derivation of this estimate we will see that it appears
to be a bit excessive.

Congress met in special session in September, 1837.
President Van Buren in his message to that body said that
they were called primarily to solve the problems of the.
government and that the difficulties of various groups was

not the concern of the government. Van Buren justified

this on the basis of his belief that,

236

. . . such measures are not within the constitu-
tional province of the general government and that
their adoption would not promote the real and perma-
nent welfare of those they might be designed to aid.61

Because he was a politician he did not permit this

belief to stand in the way of actions taken to aid the
politically powerful import merchants of New York and other
East coast ports. Even prior to the suspension of the New
York banks in May, 1837, he authorized the postponement of
the payment of duty bonds, and among othermeasures sent
to Congress, he proposed an extension.of this'aid.62 Van
Buren was not successful in getting legislation for an
Independent Treasury nor for a Federal bankruptcy act for
the suspended banks. Congress, however, did pass several
acts which were to aid the banks, import merchants, and
ease the financial plight of the government.

These acts were embodied in Public Laws 1, 2, 6, 8,

9, signed into law by Van Buren during the first two weeks

of October, 1837.63

Public Law One authorized the post-
ponement of the payment of the fourth installment of the
Distribution until January 1, 1839, by then it became clear
that this payment would never be made.

Public Law Two provided for the issuance of Treasury
Notes in an amount not to exceed $10,000,000 and in denomina-
tions of not less than fifty dollars, and to bear interest
charges not exceeding six per cent per annum. These notes

were used to pay creditors of the United States, and were

transferrable and also receivable by the Treasury for

237

payments due the United States Government. Their issuance
generally increased the supply of money. The administra-_
tion had some apprehension that these notes might not be
accepted by the government's creditors and therefore author-
ized the Treasury department to sell these notes for the,
"legal currency of the United States," and use the proceeds
to pay these creditors.64

Section three of Public Law Six, a general appro-
priations bill, authorized the Secretary of the Treasury to
accept in payment of debts due the government, transfer
drafts drawn for the Distribution but not honored by the
banks on which they were drawn.

Public Law Nine provided that the Secretary of the
Treasury continue to withdraw funds from the deposit banks,
in a manner as gradual and convenient to the insti-

tution as should be consistent with the pecuniary

wants of the government and the safety of the funds

thus to be drawn.65
If a bank refused or could not honor one of these drafts it
could avoid a Treasury suit by providing the Secretary with
approved--no definition of this was given in the act--
securities covering the amount of the drafts with the
stipulation that the amount would be paid to the Treasury
in three semi-annual installments beginning on July 1, 1838.

Public Laws Six and Nine, eased pressure on deposit

banks. They did not have to call in loans or in other ways

endanger their solvency to meet the demands of the Treasury.

From the point of View of the Treasury, a suspended bank was

238

still preferable to a bankrupt one. A further postponement
of duty bonds, helping the import merchants and those banks
which supplied them with credit, was provided for by Public
Law Eight.

All of these legislative actions, directly or in-
directly, eased the pressure on the banks which were govern-
ment depositories and perhaps moderated the dislocation in
the money and credit markets during the suspension period.
With the repeal of the Specie Circular on May 13, 1838, the
two major government acts which contributed in some measure
to the financial panic of 1837, the Distribution and Specie
Circular, were removed from the books.

If we looked at Federal monetary policy, such as
the acts we have just seen, the overall effect was to ease
the problems of the banks. The fiscal policies of the
government was generally eXpansionary in that deficits were
incurred during fiscal 1837 and 1838, and.they were financed
with Treasury notes. But because of the relatively small
size of government expenditures in relation to total output,
these deficits had little effect on the economy in general.
Fiscal Policies of State Governments During
the Suspension Period

Since the beginning of World War II, Federal expendi-
tures have consistently exceeded those of state and local
governments. We have become so accustomed to this disparity

that the importance of State and loCal government expenditures

239

to aggregate demand levels and movements in the nineteenth
century have been overlooked usually.

Lance Davis and John Legler in an 1966 article calcu-
lated per capita estimates, on a regional basis, of the
receipts and expenditures of the state government. These
estimates on a national basis are given in per capita and
aggregate figures in Table 7.3. As we previously noted--
using Gallman's upper estimate of gross domestic product in
l839--state expenditures were equal to about 16 per cent of
G.D.P. This seems a bit high, however, as Martin's estimate
of total, not just state, governmental expenditures as a
per cent of National Income in the l869-l879‘period was
only about 4.4 per cent.66

From the information given in Table 7.3 we can con-
clude that state expenditures and receipts may have been
procyclical, that is they may have intensified the defla—
tion in 1837 when there was an aggregate budgetary surplus
and counter-cyclical in 1838 when there was a deficit.

The data for 1837 seems a bit surprising. Even
though 1837 was a year of financial panic and deflation,
aggregate receipts increased by 89 per cent while expendi-
tures rose by 85 per cent. Where did this increase in
revenue come from? In both absolute and percentage terms,
the largest increases in receipts during 1837 were in the
states of the "Old" and "New" south, 69 per cent of the

total increase. But it was in these states, which were so

24()

TABLE 7.3.--Estimates of State Expenditures and Receipts, Per Capita

and Aggregate for all States, 1830-1845.

 

Per Capita ($) Aggregatea ($)

 

 

($000)

 

Deficit Deficit

Year Receipts Expendi- (-) or Receipts Expendi- or
tures Surplus (+) tures Surplus
1830 5.36 6.40 -1.04 69,150' 82,566 -13,416
1831 5.38 5.71 - .33 71,667 76,063 - 4,396
1832 5.72 6.44 - .72 78,604 88,498 - 9,894
1833 5.89 6.17 - .28 83,414 87,380 - 3,966
1834 5.87 6.28 - .41 85,596 91,575 - 5,979
1835 5.85 8.32 -2.47 87,768 124,825 -37,057
1836 6.99 6.26 + .73 107,807 96,548 +ll,259
1837 13.23 11.62 +1.61 209,603 184,096 +25,507
1838 9.19 10.57 -l.38 149,466 171,910 -22,444
1839 8.24 10.28 -2.04 137,476 171,512 —34,036
1840 6.96 10.50 —3.54 119,155 179,760 -60,605
1841 7.11 8.43 -1.32 126,082 149,489 -23,407
1842 7.02 7.31 - .29 128,782 134,102 - 5,320
1843 7.02 6.71 + .31 133,078 127,201 + 5,877
1844 7.16 6.15 +1.01 140,114 120,349 +19,765
1845 7.14 6.50 + .54 144,099 131,183 +12,916

 

aPer capita estimates multiplied by population estimates, the

latter being based on linear interpolation between decennial census
years, this being the method used by Davis & Legler.

Sources:

Per Capita Estimates: Lance E. Davis and John Legler, "The
Government in the American Economy, 1815-1902: A Quantita-
tive Survey," The Journal of Economic History, Vol. 26, No.
4 (December 1966), pp. 532-533. Population Estimates: The
Statistical History of the United States from Colonial T1555

 

 

EOIthe Present (Conn.: Fairfield Publishers, Inc., 1965),
p. 7, Series A-2.

 

241

dependent on the cotton crOp, that the collapse of the
cotton market and the financial markets would have been
most seriously felt.

To attribute the rise in receipts to increasing
revenues implied that tax rates increased more rapidly than

67 It was not until

the apparent decrease in the tax base.
1839-1840 that we find widespread contemporary comments
about state governments arising tax rates.

A possible explanation is that the total receipts
included not only tax revenues but also funds received
through the Distribution and from bond sales. Estimated
aggregate state receipts rose by $101.8 million in 1837
and if we assume that the states spent in that year all
of the Distribution funds which they received, $28.1 mil-
lion, this would have accounted for only about 27 per cent
of the total increase. According to Bourne, however, the
time distribution of such expenditures exceeded one year,
thus we must look for other possible sources.68

Another source of revenue was the proceeds of the
sale of state securities. We saw in the first part of this
chapter that the increase in internal improvement construc-
tion during 1837 and 1838.was in large measure due to these
bond sales. According to.Ra1ph Hidy, the London bond mar-
ket, buoyed by the loosening of the Bank of England's
monetary restraints, readily absorbed the inflow of American

securities until at least the middle of 1838.69

242

We do not know the magnitude of these bond sales in
1837 and can only estimate them in a very loose fashion.
The 10th Census estimated that during the 1835-1838 period,
states increased their debts by approximately $107.8 mil—
lion and that by the end of 1838, total state debts out-
standing amounted to $174.3 million. On the other hand,
Hidy estimated that between the end of 1837 and the end of
1839, total state debts rose from $123.8 to $175.5 million.70_

If in the four year period 1835-1838 state bond
sales rose by $107.8 this gives us an annual average of
$26.7 million. Using the estimates for the 1838-1839 period
given by Hidy, we obtain an average of $25.8 million a year.
W. B. Smith noted that as of November.l838, about $22.7
million of state securities were "in current negotiations,"
in England. It seems fairly safe to assume that a bond
sale of $25 million in 1837 and perhaps slightly more in
1838 were upper estimates to the sales that actually took

71 Obviously bond sales in 1836 were at a higher

place.
level than those of 1837 and any simple averaging procedure
understates the sales of 1836 and perhaps 1838 while over-
stating those of 1837.

To use a more complex estimating procedure entails
the adding on of assumptions to a structure already top-
heavy with unconfirmable assumptions. We so not know, for

example, the rate of discount, if any, at which these

securities were sold nor the procedure by which the states

243

received the proceeds of the bond sales. Mississippi and
Florida based their repudiations of part or all of their
state debts on the fact that the bonds were not sold at

par value. We saw in the last chapter that when New York
state attempted to aid the city banks prior to resumption
it gave them state bonds to sell in order to obtain specie
in London and elsewhere, and the state agreed not to demand
immediate payment of the proceeds of the bond sales. This
may have also occurred in 1837 and 1838 but we have no
information either way on this.

Our estimate that bond revenues did not exceed $25
million in 1837 seems reasonable as an upper limit estimate.
If this was so, receipts from the sale of state securities
accounted for approximately 25 per cent of the total increase
in state receipts that year. At the most then, proceeds
from the Distribution and bond sales accounted for 52 per
cent of the estimated 1837 increase in state receipts, still
leaving us in doubt as to the sources of the remaining
increase.

Taking into account these questions as to the
accuracy of estimated state expenditures and receipts it
still seems clear that state governments were relatively
more important as a component of aggregatehdemand than the
Federal government and that the.deficits of 1838 and 1839
helped in their small way to sustain the levels of aggre-

gate demand. This assumes that the deficits were financed

244

in ways which did not lead to a parallel decline in the
aggregate demand of the private sector. If the aggregate
state surplusses of 1837 were the result primarily of
transfers from the Federal government to the state govern-
ments and from capital imports, and if these funds were
not obtained at the expense of private sector demand, then
they might not have been as deflationary as it first ap—
peared, especially as expenditures did rise so much in 1837.
The Bank of England and the British
Economy: 1837-1838

Recovery in the American economy, like deflation,
did not take place in a vacuum. The British economy, espe-
cially the cotton and capital markets was an important, if
not crucial factor, in determining the health of the Ameri-
can economy. The London money market was a key source of
funds which enabled the United States Bank and others to
build a floor under cotton prices. It also supplied the
foreign exchange which enabled the banks of New York and
later those in other sections of the country to succeed in
their resumption efforts for as long as they did. It is
highly doubtful that the New York City banks could have
resumed when they did without the aid given by the Bank of
England.

By the time the New York City banks had suspended,
‘the Bank of England had stemmed its specie losses and slowly

loegan to refill its depleated bullion vaults. Only when the

245

Bank felt itself with sufficient specie did it ease up its
pressure on the London money market and eSpecially the Anglo-
American trade. From a low of £4 million in the quarter
ending in March 1837, the Bank built up its specie holdings
to a level of £10.1 million by the same time in 1838. It
felt sufficiently confident of its position by early 1838
that it lowered its discount rate from five per cent to

four per cent in February.

The money market and the economy in general reflected
the effects of the easing conditions. Short-term interest
rates fell to their 1834-1841 lows during the second quarter
of 1838. The amount of bills of exchange issued continued
to expand throughout most of the year, easing the task of
those involved in the cotton speculations. Another sign of
the improving business health in Great Britain was the fact
that bankruptcy fiats during the second half of 1838 were
at the lowest level for any half year for the entire 1830—
1850 period.72

1838 was clearly a year of general revival. Both

the American and Continental markets revived, and,

due to the arrangements made by Nicholas Biddle, there
was a further import in Britain of American securi-
ties.

By the middle of 1838 the American economy had sub-
stantially recovered from the monetary panic and subsequent
deflation of 1837-1838. The term deflation and not depresé

sion is used because as we saw in the first part of this

chapter there is little evidence of widespread unemployment

246

or decline in the level of output resulting from other than
real causes such as crop failures. The evidence indicates
rather that the period was characterized by rapidly falling
prices until May 1837 and then a levelling off which lasted
until the first half of 1838. The fall up to May was much
larger than that during the remainder of the deflation
period. The movement of prices during this period was what
one would have expected to occur in an economy where the
classical assumptions about output and prices were opera-
tive.

The recovery, as we saw in the second part of this
chapter, was due not just to the movement of the cotton
trade or the resumption of the banks, but also to the
return of confidence which these developments engendered.
The actions of the cotton speculators helped to sustain
cotton prices until the small crop of 1838-1839 brought
about higher prices.

The rise in cotton prices stimulated the Southern
economy and all those who were dependent on the cotton trade.
The flow of cotton bills especially those eminating from the
actions of the United States Bank and the other speculators
enabled Southern merchants and planters to pay off at least
part of their accumulating debts. This facilitated the
expansion of trade once cotton prices did turn up. Cotton
bills were also important in keeping the foreign exchange

rates below the gold export points after the banks had

247

resumed and the fall revival in trade increased imports.
Finally, the resumption of the banks, the New York in the
spring and most others in late summer and fall, led to an
increased supply of credit which was readily demanded once
trade revived.

Sustaining the level of aggregate demand during the
latter half of 1837 and early 1838 was the continuing
expenditures on internal improvements financed in large
part by the sale of state securities and funds obtained
from the Distribution. But all of this, the cotton market,
continuing resumption, bond sales to support canals and
railroads, depended on the health of the British economy.
Fortunately the Bank of England was able to loosen the
credit reins in early 1838, at a time when the American
economy was at its low point. This entire process of
deflation and recovery demonstrated that the United States
was unable to isolate itself from economic conditions in
Great Britain and on the Continent. Suspension might
loosen the economic ties binding both.sides of the Atlantic,
but it could not prevent the international transmission of
economic fluctuations from Great Britain to the United

States as the record of 1839-1843 amply demonstrated.

FOOTNOTES

CHAPTER VII

lVictor S. Clark, History of Manufactures in the
United States, 1607-1860 (Washington D.C.: Carnegie Institu-
tion of Washington, 1916), p. 380.

 

 

2See Appendix Table B-5, W. B. Smith, Second Bank of
the United States, p. 193. United States Congress, Senate,
25th Congress, 2nd Session, Senate Document No. 457, pp.
108-109.

 

 

3See Appendix Tables A-l, B-6, and B-10. Obviously
suspension did not mean that banks stOpped completely the
paying out of specie. This was most likely done to settle
interbank balances both intra and inter-city and perhaps
to aid the banks main customers.

4Robert E. Gallman, "Commodity output, 1839-1899,"
Trends in the American Economy in the Nineteenth Century,
ed. William N. Parker (New York: National Bureau of Eco-
nomic Research Studies in Income and Wealth Vol. 24, National
Bureau of Economic Research, 1960), P. 59.

 

5Horace Greeley, Recollections of a Busy Life (New
York: J. B. Ford and Co., 1868); S. Rezneck, "The Social
History of an American Depression, 1837-1843," American
Historical Review, LX (1935).

 

 

 

6Lance E. Davis and Louis H. Stettler III, "The New
England Textile Industry, 1825-1860; Trends and Fluctua-
tions," Output, Employment and Productivity in the United
States After 1800 (New York: National Bureau of Economic
Research Studies in Income and Wealth Vol. 30, National
Bureau of Economic Research, 1966), p. 224. According to
Paul F. McGouldrick output rose in 1837 but fell slightly
in 1838 while sales and profits fell in both years. During
1837 and 1838 investments fell by approximately $140,000
which was 51 per cent of the 1836 investment level. Paul
F. McGouldrick, New England Textiles in the Nineteenth
Centur (Cambridge: Harvard University Press: 196877 pp.
1 2, 159, 245. Fiscal years ended in May of the year
cited. Fiscal 1839 ended in May, 1839, p. 5.

 

 

 

248

249

7Caroline F. Ware, The Early New England Cotton
Manufacture (New York: Russell and Russell, 1966), pp. 88,
143.

 

 

8Blanche E. Hazard, "The Organization of the Boot
and Shoe in Massachusetts Before 1875," The Quarterly
Journal of Economics, Vol. 27 (February, 1913). P. 252.

9

 

V. S. Clark, p. 381; Hazard, p. 252.

10Albert Fishlow, American Railroads and the Trans—
formation of the Ante-Bellum Economy (Cambridge: Harvard
University Press, 1965), p. 385.

. llH. Jerome Cranmer, "Canal Investment, 1815-1860,"
Trends in the American Economy in the Nineteenth Century,
p. 555, and comments by Harvey H. Segal, p. 565.

12Jeffrey G. Williamson, American Growth and the
Balance of Payments, 1820-1913 (Chapel Hill: The University
of North Carolina Press, 19647) p. 271; Charles P. Huse,
The Financial History of Boston (Cambridge: Harvard Uni-
versity Press, 1916), p. 13; Niles National Register, May
1840, p. 164.

13

 

 

 

 

 

 

Niles National Register, July 8, 1843, p. 309.

 

14Thomas S. Berry, Western Prices Before 1861 (Cam-
bridge: Harvard University Press, 1943), p. 471.

15David M. Schneider, The History of Public Welfare
in the State of New York, 1609-1866 (Chicago: University
of Chicago Press, 1938), pp. 263-264; S. Rezneck, American
Historical Review, LX, pp. 664-665; Caroline F. Ware, p. 48.

16United States Congress, House, 25th Congress, lst
Session, House Document No. 28, p. 2.

l7Niles National Register, August 19, 1843, p. 388,
and October 7, 1843, p. 86.

18

 

 

 

 

 

 

See Appendix Tables B-7 and B-12.

19Ralph Hidy, The House of Baring in American Trade
and Finance (Cambridge: Harvard University Press, 1949),
p. 222. Other Anglo—American houses such as Brown's were
given aid and survived. The Bank of England also decided
that it would thereafter only accept bills drawn on merch-
andise shipments, real bills, but we do not know how long
this policy lasted, if indeed it was enforceable. See Sir
John Clapham, The Bank of England (New York: The Macmillan

 

 

 

 

 

250

Company), II, p. 159, and John C- Brown, A Hundred Years
of Merchant Banking (New York: 1909), p. 90.

20Jeffrey G. Williamson, p. 285; Arthur D. Gayer,
W. W. Rostow, and Ann J. Schwartz, The Growth and Fluctua-
tions of the British Economy, 1790—1850 (Oxford: Clarendon
Press, 1953), I, p. 469; B. R. Mitchell and P. Deane,
Abstract of British Historical Statistics (Cambridge:
University Press, 1962), p. 271.

21Reports published in the Financial Register, I,
August 30, 1837. V. S. Clark, p. 381 notes that it was
during this period that the use of brass clocks began in
the United States.

22Glydon G. Van Deusen, The Jacksonian Era, 1829-
1848 (New York: Harper and Brothers, 1959), p. 119.

23Hammond and Jenks stressed Biddle's desire to aid
the economy while Smith and McGrane pointed out the Bank's
liquidity and solvency needs. Bray Hammond, Banks and
Politics in America (Princeton: Princeton University Press,
1957), pp. 467-468; Leland H. Jenks, The Migration of
British Capital to 1875 (New York: Alfred A. Knopf, 1927),
p. 89; Reginald C. McGrane, Foreign Bondholders and Ameri-
can State Debts (New York: The Macmillan Co., 1935): P.
16; Smith, p. 196.

24

 

 

 

 

 

 

 

 

 

 

 

 

 

On this point see Smith, pp. 224-225.

25Hidy, pp. 240-241. During 1838 and 1839 Humphreys
and Biddle were often the largest recipients of American
cotton in Liverpool. See Smith, p. 197 and Vincent Nolte,
-Fifty Years in Both Hemispheres (New York: Redfield, 1854),
p. 427.

 

26Hidy, pp. 255, 157.

27Niles National Register, December 8, 1838, p. 289.

 

28A correspondent of the New York Herald reported
from Liverpool in July 1838 that the spinners were persuing
such a policy. Financial Register, I, p. 139. Estimates
of raw cotton held by speculators and mills in Great Britain
are to be found in Thomas Ellison, The Cotton Trade of Great
Britain (New York: A. M. Kelley, 1968), Table I.

29Financial Register, II, July 18, 1838. Mississippi
bank notes were at a 15-35 per cent discount at Philadelphia
and a 12-40 per cent discount at New York during 1838. In
April, Natchez banknotes at Natchez were at a 45 per cent

 

 

 

251

discount and those of other Mississippi banks at a 50-60
per cent discount. Senate Document No. 457, pp. 124, 125,
130, 131.

30For differing explanations as to why the United
States Bank first came out for rapid resumption and then
tried to delay it for as long as possible see Fritz Redlich,
The Molding of American Banking (New York: Hafner Publish-
ing Co., 1953), II, p. 267; Hammond, pp. 479-483; and Smith,
p. 207.

 

 

 

31Hammond, p. 479; Smith, p. 207.

32See sources cited in footnotes 29 and 30.

33An analysis of variance procedure along the lines
of those done in chapter five showed no statistically sig-
nificant relationship between changes in bank lending and
specie holdings; bank lending and current demand liabilities
and between current demand liabilities and specie holdings.

34Hammond, pp. 478-479.

35Table 7.1 and Arthur H. Cole, Wholesale Commodity
Prices in the United States, 1700-1861 (Cambridge: Harvard
UnIVersity Press, 1938), p. 185.

36The Statistical History of the United States From
Colonial Times to the Present (Stamford: Fairfield Pub—
lishers, Inc., 1965), pp. 346-371.

 

 

 

 

37Berry, pp. 448-450. The United States Gazette of
May 12, 1838 reported that the United States Bank of Pennsyl-
vania received about $1 million in specie from the West.
Financial Register, I, p. 382.

38

 

Smith, p. 187, and Appendix Table A—1.

39Appendix Table A-1. Warren and Pearson's index
of wholesale prices fell four per cent while the price of
imports fell 13 per cent according to North's index, thus
indicating that imports would have been relatively cheaper
than existing import substitutes. George F. Warren and
Frank A. Pearson, Prices (New York: John Wiley and Sons,
Inc., 1933), p. 12. Douglass C. North, The Economic Growth
of the United States, 1790-1860 (New York: W. W. Norton
and Company, Inc., 1966), p. 280.

4pSmith, p. 203. According to Berry, western bond
sales reached a peak in 1838. Berry, p. 450. As we shall
see later we do not know how much of these sales were at

 

 

 

252

par value and how much funds the states would receive in
1838 from these sales.

41Red1ich, II, p. 167; Smith, p. 184, Statistical
History of the United States, p. 559. A five franc piece
contained 347.27 grains of pure silver, while a dollar
contained 371.25 grains, therefore five francs equalled
approximately 94 cents and one franc equalled about 19
cents. See source cited in Appendix Table B-9.

42

 

Smith, p. 87.

43Redlich, II, p. 67, see Also Hammond, p. 480.

44Clapham, II, pp. 164-165.

45Hidy, pp. 244-245.

46See Appendix Table B—lO.

47The available information does not permit a com-
plete listing of which banks had not resumed by January 1,
1839. For a listing of banks which resumed or announced
plans to resume by this date see Niles National Register,
July 28, 1838, p. 337. Financial Register, II, pp. 28, 127,
143; Redlich, II, p. 269.

48

 

 

Appendix Table C-5, and Cole, p. 157.

49United States Congress, House, 25th Congress, 3rd
Session, House Document No. 227, p. 650. Hazard's United
States Commercial and Statistical Register, IV, March 1841,
pp. 154-155.

50

 

Smith, p. 214.

51Quoted in Niles National Register, August 4, 1838,
p. 353. Similar statements were also reported from Baltimore
and Philadelphia.

52Financial Register, II, p. 288. The largest
decline in the discount on Alabama bank notes came during
the period between May 12 and June 2, the second largest
during September. House Document No. 227, p. 654.

53Berry, pp. 454, 455, 459.

 

 

54Cole, p. 185, and sources cited in footnote 52.

55No date or place of location was given, but we
assume that it was an upper New York State paper, quoted

 

 

 

253

in The Journal of the American Institute, IV, No. 1, April,
1839, p. 362.

56We saw in chapter three that mid—western banks
tended to keep working balances in New York City banks.
Harry N. Scheiber, "The Commercial Bank of Lake Erie, 1831-
1843," Business Histornyeview (Spring, 1966), p. 60.

57Seesources cited in Table 7.1.

58Appendix Table B-7, and sources cited in Table 7.1.

59Robert Gallman, pp. 24-26, 43.

60The structure of the American economy in the ante-
bellum period, the relative importance of agriculture and
the more pronounced regionalization would appear to indicate
that a government expenditure multiplier would be of small
magnitude in relation to that of the present day economy.
Various estimates of government expenditure multipliers in
post World War II America range from a low of 1.1 to a high
of 4. Even if we assumed a government expenditure multi-
plier of 5, a $3 million increase in government expendi-
tures financed by an increase in the supply of money so that
interest rates did not change would lead to a $15 million
increase in aggregate demand which still amounted to only
about 1.5 per cent of estimated 1839 output; the $3 million
increase in government expenditures being about a 10 per
cent increase in expenditures. For estimates of these
multipliers see Michael K. Evans, Macroeconomic Activity:
Theory, Forecasting, and Control (New York: Harper and

Row, 1969), p. 583.

61Message of President Van Buren to the first session
of the 25th Congress, September 4, 1837 reprinted in the
Financial Register, I, p. 341.

62Financial Register, I, p. 321; Glyndon G. Van
Deusen, p. 121.

63The following discussion is based on Financial
Register, I, pp. 167—170.

64About $12.72 million of such notes were issued in
fiscal 1838, this representing about 37 per cent of total
government expenditures in that year. See Appendix Table
.Am2, Col. 2; Jonathan Elliott, The Funding System of the
‘United.States and of Great Britain (New York: A. M. Kelley,
1968), p. 1017; Niles National Register, January 9, 1839,

p. 322.

65Financial Register, I, p. 170.

 

V

 

 

 

254

66Lance E. Davis and John Legler, "The Government
in the American Economy, 1815-1902; a-Quantitative Survey,"
The Journal of Economic History, XXVI, No. 4 (December,
1966): PP. 532-533; History of the United States, p. 140.
For a critique of Martin's estimates see William N. Parker
and Franklee Whartenby, "The Growth of Output Before 1840,"
Trends in the American Economy in the Nineteenth Century.

67We do not know the types of taxes and other
sources of revenue for state governments. Property taxes
and excise taxes were probably the major sources of revenue;
other sources included income from state owned internal
improvements and corporations such as banks, and perhaps
fees revolving around the chartering of banks and other
corporations. Ohio canal revenue rose in 1837 while that
of the New York State system fell. North, p. 253; Robert G.
Albion, The Rise of the New York Port (New York: Charles
SchribnefTs and Sons, 1939): P. 411.

 

 

 

68Appendix Table A-5, and Edward G. Bourne, pp.
122-123.
69 .
Hidy, p. 237; Jenks, pp. 93-94.
70

Hidy, p. 237; Table 4.1. On the other hand Guy
S. Callender estimated that state debts amounted to $232
million in 1839 and a Congressional investigation of public
debts in 1843 listed total state debts, including those of
Mississippi and Florida, as $231 million in 1843. Using
these estimates would increase the estimated state revenue
from bond sales in 1837, but by how much, we do not know.
North, pp. 624-625.

71
footnote.
72

"British Prices and Business Cycles, 1779-1850," The Review
of Economic Statistics, V, Supp. 2 (October, 1923): p. 252.

73

Smith, p. 208. Also see comments in preceding

 

 

Gayer, Rostow, and Schwartz, I, p. 244.

Appendix Tables B-8, B914 and Norman J. Silberling,

 

3‘

‘7“
'1‘: u. . -"‘.
E
t

 

CHAPTER VIII

THE BRITISH MARKETS AND THE

PANIC OF 1839

A correspondent of the New York Herald writing from
Liverpool on July 10, 1838 emphasized the dependence of the
American export trade on the internal trade of Great Britain,
which in turn was, he believed, entirely dependent on the
grain crops. As far as he could determine from his trips
through England and Scotland, the 1838-1839 crops would be
average or above average and therefore he expected that the
market for American cotton would turn up sharply.l He could
not have been more mistaken. By the same time in August,
the first clouds had appeared over the British economy.

They would build in intensity and eventually, in a little
more than a years time, the final remnants of the Anglo-
American boom of the mid-1830's would blow away.

In this chapter we will first examine the events
taking place in Great Britain and on the Continent which,
through the British money and commodity markets, was to
transmit economic difficulties from the Eastern to the
Western side of the Atlantic. The second part of the
chapter will show how the American economy reacted to the

events on the Eastern side of the Atlantic.

255

256

The British and Continental Markets:
Grains and Specie

 

 

The grain crOps of Great Britain had been poor since
1836, but during July and August of 1838 heavy rains seri-
ously damaged those of 1838-1839. As early as August 11,
1838, London papers were already reporting about the damaged
crops. Only when the harvests were completed was the magni-
tude of the disaster fully known; it would be the poorest
crop since 1816. As we see in Table 8.1, all grain prices
in the United Kingdom reached their 1830-1845 peaks in
1839.2

The specie exports resulting from the record grain
imports led the Bank of England, as it had done in the
latter half of 1836, to tighten the monetary reins. We
have already seen that such policies not only affected
the British import trade, especially cotton, but also the
domestic and foreign sales of British manufactured goods
which were already beginning to face.fa11ing demand as the
rise in food prices decreased the real income of the British

working class. On the Continent and elsewhere the economic

picture was also bleak.

Problems on the Continent

During the last months of 1838, monetary difficulties
on the Continent came to a head, for just as in America and
Great Britain there had been an economic boom paralleled by

a rapid expansion of banking facilities along with a general

257

TABLE 8.1.-—Average Annual Prices and Volume of Grain Imports,
United Kingdom, 1830-1845.

 

Imports of Wheat and

Annual Average Prices Wheat Flour Corn

 

 

 

Per Imperial Quart: (000 Quarters) Importsa
Year Wheat Barley Oats Net“ From (£000)
5 s s d Ireland
1830 6403 3207 2405 16760 530 3280
1831 6604 3800 2504 23104 557 4726
1832 5808 3301 2005 4641 790 899
1833 5211 2706 1805 3222 844 654
1834 4602 2900 2011 2020 780 619
1835 3904 2911 2200 890 662 334
1836 4806 3210 2301 2624 599 746
1837 5510 3004 2301 5750 534 1501
1838 6470 3105 2205 13818 543 2388
1839 7008 3960 2511 28524 258 6060
1840 6604 3605 2508 23522 178 5156
1841 6404 3201 2205 26814 219 5238
1842 5703 2706 1903 29406 202 5511
1843 5001 2906 1804 10301 2049
1844 5103 3308 2007 13396 3631
1845 5010 3108 2206 11107 2799
aCorn term used to cover all grain imports.
Sources: Columns 1-3, 5, 6, B. R. Mitchell and P. Deane,

Abstract of British Historical Statistics (Cam-
bridge: Cambridge University Press, 1962), pp.
95, 488, 291. Column 4, A. D. Gayer, W. W.

Rostow and A. J. Schwartz, The Growth and Fluctua-
tions of The British Economy, 1790-1850, Vol. I,
(Oxford: Clarendon Press, 1953), p. 314.

 

 

 

258

growth in the formation of companies. Just as in the United
States there was and would continue to be a struggle between
the new and Old banking interests and methods. In the Ameri-
can case it was between the United States Bank of Pennsyl-
vania, formerly the Second Bank of the United States, and

the banks of New York City; though it was often hard to say
who represented the old and who the new bankers.

In Belgium a struggle took place between a newtype
of banking concern, an industrial bank, the Belgium Societe
Generale and the Bank of Belgium--Banque de Belqique--the
latter was forced to suspend in December 1838. The monetary
problems engendered by the struggle spread to Paris where
there was a run on the Lafitte banking house. Specie left
the Bank of England.and was shipped to Brussels and Paris.
The damage appeared to have already been done for the
resulting financial stringency in Belgium, France and
Switzerland brought with it a wave of bankruptcies through-
out the Continent.3 During 1835-1836 there had been a boom
in the construction of textile mills on the Continent, but
the financial problems of Belgium and.Paris.helped to bring
the new textile industries of Belgium, Prussia and Saxony
to what Jenks described as "a crisis in their development
which curtailed their demand for English yarn."4 Further
adding to the problems of Great Britain was the Russian plan
to convert to a silver ruble in July 1839, this meant addi-

tional specie exports.5

259

The Bank of England was losing specie to the Conti-
nent not only to pay for grain imports but also because
British exports to the Continent were falling. The balance
of trade was being pressed on both sides. Added to this
was the monetary difficulties of Western Europe, which in
part engendered the fall in European demand, and the cur-
rency conversion in Eastern Europe further intensifying the
specie drains from Great Britain.

The Bank of England: Inaction
and Reaction

 

 

The Bank of England's response to these mounting
problems at first was a decision to pursue business as
usual and this meant a relatively easy money policy. The
directors of the Bank announced on November 29, 1838 that
they were prepared to lend funds at a rate of three and
one-half per cent interest until January 22, 1839 on bills
of exchange as well as other approved securities. Most
writers then and now, agree that this was the wrong pOlicy
to pursue.6 Throughout the first quarter of 1839 the Bank
lost bullion, this loss amounted to an estimated £1,200,000
whereas in the last half of 1838 it had lost only £300,00.
By the end of May 1839 the Bank of England appears to have
lost an additional £3 million in specie while it continued
to increase its security holdings.7

The policy of inaction is all the more surprising as

the news at home and abroad pointed to a worsening situation.

260

During April news reached London telling of the stopping of
trade at Canton as well as of the continuing failures in
France. At home the London banking house of Coutts and
Company began to call in all loans secured with American
securities, and they were not alone in curtailing their
activities,

The Barings had decided that the time to furl sails
had come once more. They gave orders to curta§l all
types of Operations--commerc1al and finanCial.

Finally in mid-May the Bank of England took action.

On the 16th it raised its discount rate a full point to
five per cent, yet it continued to increase its security
holdings until the early fall. ‘Within a few days of the
Bank's action, the London Morning Chronicle was reporting
about an increased demand for money and rising discount
rates on short-term commercial paper. This, however, was
attributed to the continuing problems on the Continent and
the flood of bills coming on the market from cotton and
grain speculators.9

A little more than a month later, on June 20, the

Bank again raised the discount rate, this time to five and
one-half per cent, what was to then the highest rate in the
Bank's history. In addition to this, the Bank, as it had
done in the crisis of late 1836 and early 1837, applied
(qualitative restrictions by limiting the types of credit

instruments that it would accept for discounting. It now

limited discounts only to bills of exchange and according

261

to King these would only be allowed to have a maturity of
thirty days. Smith believes that these restrictions amounted
to the Bank's not discounting bills coming from joint-stock
banks or those arising from speculations in cotton or

10 It should be noted for future reference that

grains.
cotton prices in both England and New Orleans started to
fall in May with a fairly substantial drop--12 per cent in
the New Orleans average and 26 per cent in the English high
and a 19 per cent drop in the English low cotton prices--
taking place in July.11
The Bank of England attempted to stem its continuing
specie losses by borrowing £2 million in Paris and £900,000
in Hamburg in July and by further raising its discount rate
to six per cent during August, but it continued to lose
specie. The 1839-1840 grain crops were also poor and this
was especially true in Ireland.12 Finally in the last
quarter of 1839 the Bank of England was able to halt its
specie losses. These losses amounted to approximately
£6.4 million during the year while net British specie ex-
ports were £4.4 million. The cost of halting these losses

was to be great, not only for Great Britain but also for

America.

The British Economy in 1839
Poor grain crOps, declining domestic and foreign
markets, tightening monetary conditions, all these inter-

acted to bring about a deflation in Great Britain which

262

lasted from 1839 until 1843. In this section we will
briefly examine the state of the British economy in 1839,
paying particular attention to the cotton textile industry.

The economic picture was bleak in the money and

financial markets, Overend, Gurney's index of the annual
average rate for first class three month bills rose from
three per cent in 1838 to 5.19 per cent in 1839, this being
the highest recorded from the inception of the series in
1824 until 1847. Bankruptcy fiats doubled between the

first and fourth quarters of 1839, while according to

Hidy, the English railroad boom was brought short in 1839.13
Clapham described the British economy during the 1839-1843
period in the following terms.

Prices fell continuously and far from 1839 to 1843,
although until the good harvest of 1842 that of bread
kept high. The whole country was distressful and
discontented, never more so. The new Poor Law of 1834
was desperately unpopular. Employment was irregular.
Rioting was endemic. Chartism was in its militant
phase. From 1840 bankruptcies were steadily and
abnormally high. Discounting was slack; private
lending was not very active. 4

The British industry most severely affected by these

developments was the cotton textile industry. It was being
squeezed from all sides. Raw cotton prices rose until
April, while demand fell at home and abroad increasing the
problem of excess capacity, brought about by the drop in
demand and by the after-effects of the expansion of produc-
tion facilities which took place during 1836-1838.15 In

the last month or two of 1838 the cotton textile market was

already feeling the pressure of declining demand and excess

 

 

 

263

capacity. Cotton speculators were the major buyers of raw
cotton as the spinners began to feel the pinch of declining
continental demand. To sell their steadily building inven-
tories, the cotton manufacturers were extending extensive
book credits to American buyers.

By February 1839, the Liverpool Price Current was

reporting, "that the production of yarn has overtaken the

z—‘im-A
F
I

wants of consumption," and that the mills of Manchester had

16 Note that this action was undertaken

gone on short time.
prior to the Bank of England's raising the discount rate in
May. Part of the reason for going on short times involved
an attempt to reduce inventories of finished cotton goods,
but it was also done in order to force down the price of
raw cotton.l7 It is difficult to judge the results of this
policy on cotton prices as the Bank of England in the late
spring started to tighten the monetary screws. At least
one contemporary source did not even discuss the Bank of
England's actions. In an article dealing with the state
of the cotton trade, the Liverpool Albion on May 21, five
days after the Bank of England raised its discount rate by
one per cent,,did not refer to this but rather dealt with
what it described as a general depressiOn in the trade.
This depression was not confined only to Great Britain but
was,

. . . felt with at least equal severity in every

market to which the shock of 1837 extended. The
manufactures at Ghent and the neighborhood are all

 

 

 

264

in the same situation as our own establishments in

Lancashire, only two or three are working full time,

all the others are working only half time.18

It does seem likely, however, that the second increase

in the discount in late June in combination with the restric-
tions placed on bills to be discounted increased the pressure
on the manufactures to continue on short time. At the same
time it made it harder for the cotton speculators to keep
the cotton off the market. The manufacturers and their
customers found it more difficult and expensive to obtain
credit to finance sales. The speculators, finding themselves
being excluded from the London money market had to sell

19 Given that the

cotton to meet maturing cotton bills.
JBritish cotton manufactures were having difficulties in

late 1838 and were on short time as early as February 1839
the relative stability of cotton prices indicates that the
speculators, aided by the relatively short crOp, were able

to maintain prices until their supply of credit ran out in
the early summer of 1839.

Poor harvests, monetary difficulties on the Continent
as well as at home, economic and political disturbances in
Asia, the Mid-East and South America as well as the border
difficulties between the United States and Canada and the
Chartist disturbances at home, all of these combined to bring
about a downturn in the British economy starting in late 1838.

As Redford remarked in his history of the Manchester mer-

chants, "the depressed thirties merged into the hungry

265

20 As far as the United States was concerned the

forties."
question was not whether it could avoid the fate that had
befallen Great Britain but when would it start to feel the

first effects of the British deflation.

The End of the Recovery: America in 1839

 

If we focused our attention solely on the available
price series such as those given in Table 8.2, we find that
most peaked during the first four months of 1839 and that
significant declines in prices occurred in two waves. The
first downturn in prices took place during June and July
when the tightening money conditions in Great Britain began
to be felt in the New York and other East coast money mar—
kets and when cotton prices broke sharply in July. The
second wave of price declines occurred during the last
quarter of 1839 paralleling the monetary panic and sus-
pension of most American banks outside New York and New
England.

A search of contemporary and more.recent works
reveals that there was little mention of monetary or com-
mercial stringency in the East until July whereas it was
believed that the South and Southwest were having problems
as early as the winter of 1838 and the early spring of
1839. As with our examination of the situation in Great
Britain we shall proceed chronologically, paying particular
attention to the two periods or rapid price declines as

well as to movements in the cotton and money markets. It

2656

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267

would be in these two markets that the economic problems of
Great Britain and the Continent were first felt in the
United States.

The American economy does not appear to have been
experiencing any significant economic difficulty during the
last quarter of 1838, though the price indices in Philadel-
phia and Cincinnati peaked in October and December respec-
tively. Up until March, 1837 the economy appears to have
been marking time, waiting for something to either send it
upward or to start it downward.

The events of the spring were not propitious. Almost
all commodity price series, excluding New Orleans and cotton
prices, reached their peaks in February and March. Border
difficulties between Maine and.Canada contributed to a
decline in the sale of American securities in London during
the spring of the year.21

Monetary conditions in the mid-West were confusing.
Scheiber wrote that the directors of the Commercial Bank of
Lake Erie in Cleveland were still extending loans and buying
state securities in the spring. Berry noted, on the other
hand, that a monetary contraction started in Cincinnati at
the end of April as specie started to leave the city for
the East, and to other banks in the‘interior.22

In May cotton prices started to ease slightly and

in the middle of the month the Bank of England raised its

discount rate. It is unlikely that the effects of these

 

268

developments were felt in the American money market until
early June. The average time by steamship between England
and New York in 1839 was seventeen days while a packet
took at least thirty-five days on the average.

The Price Declines of Late Spring ,
and Early Summer i

 

 

Prices in most markets had been declining prior to
June but in this month the financial markets of the East
appear to have began to react to this downturn and to
developments on the Eastern side of the Atlantic. The
short-term interest rate rose in New York while railroad
stock prices fell by six points, making it the second month
in a row that the index fell by this amount. The index of
Bank and Insurance company stocks fell by four points,
this was the second largest absolute and percentage decline
in the year.23

In Philadelphia, the banks had been curtailing
lending activities as loans and discounts fell by six per
cent between April and June. At the same time, they lost
20 per cent of their specie while their current demand

24 At least part of the

liabilities fell by 17 per cent.
specie loss was due to the public's converting bank money,
current demand liabilities, into specie as the decline in
bank money exceeded the decline in bank lending. As we

shall see this was not an isolated event in the East.25

269

In the West, as well, banks were losing specie.
Ohio banks cut back their lending slightly, three per cent,
between April and June but their specie fell by 10 per cent

while current demand liabilities fell by nine per cent.

 

During the months of May and June, the Commercial Bank of
Cincinnati, cut back its lending by seven per cent but its

current demand liabilities and specie holdings fell by 26

r‘.‘ Ind”.— \-

and 29 per cent respectively, again indicating that the
public was beginning to lose confidence in the banks.26
Berry notes that in June there was increasing difficulty

in obtaining funds to pay bills coming due in the Cincinnati
banks. Capital was no longer flowing to the mid-West from
the East and Europe. Just as the United States had a bal—
ance of payments problem with Great Britain, so did the

mid-West have a similar problem vis a vis the East. A

liquidity crisis was the result of the former problem in

 

the East later in the year while it was already starting

in the mid-West.27

Between April and June it appears that the American
economy had started on a downward trend, yet we find in the
first issue of Hunt's Merchant's Magazine the following
comments by Charles F. Adams,

Here we are in the year of our lord 1839, to all

external appearances recovered from the effect of
every injury . . . the wages of labor are as high as

ever--the returns from industry are as quickly
realized--the profits of business do not fall short.28

‘4

270

TABLE 8.3.~~Major Assets and Liabilities of Selected Banks,
1838-1840.

 

Percentage Changes

 

 

 

 

 

Current
Banks and Dates Loans and Specie Demand
Discounts Liabilitiesa

Ohio
June 1838-June 1839 + 9 ~21 ~ 7
June 1839-Jan. 1840 ~16 ~26 ~32.5
June 1838-Jan. 1840 ~15. ~42 ~37
Geor ia
Oct. 1838-Apr. 1839 +14 ~22 0
Apr. 1839-Oct. 1839 ~20 ~44 ~45.5
Oct. 1838-Oct. 1839 - 8 ~56 ~46
Pennsylvaniab
Jan. 1839—Apr. 1839 +10 + 8 +23
Apr. 1839-Oct. 1839 ~16 ~21 ~33
Jan. 1839-Oct. 1839 ~ 7 ~12 ~14
Philadelphiab
Jan. 1839-Apr. 1839 + 6 + 6 +24
Apr. 1838-Oct. 1839 ~16 ~27 ~32
Jan. 1839-Oct. 1839 -1l ~23 ~10
New York City
May 1838-Jan. 1839 +28 '24 +18.5
Jan.1839~Jan. 1840 ~25 ~10 ~11

 

aThese are gross figures which include inter-bank
holdings.

bExcludes the United States Bank of Pennsylvania.

Sources: Ohio, Georgia, Pennsylvania: United States
Congress, House, 26th Congress, lst Session,
House Document 111. Philadelphia: United States
Congress, House 29th Congress, lst Session House
Ex. Document 226. New York City: Appendix
Table B-ll.

271

In July there was a further worsening of the health
of the economy and by the end of the month we begin to find
the press commenting on the turn of events. The two main
developments in this month were the sharp drop in the cotton
market and reports of massive specie exports from the United
States. We have already seen that cotton prices in New
Orleans and England fell sharply in July. This had immedi~
ate consequences not only for those directly involved in
the trade but also for the foreign exchange market and money
markets of the North.

The foreign exchange market was, prior to the fall
in cotton prices having difficulties due to the increased
level of imports. Imports stimulated by the revival of
late 1838 were 63 per cent above the level of 1838 and the
second highest in the 1830-1845 period. The monetary situa-
tion in Great Britain as well as the uncertainty caused by
the border disturbances between the state of Maine and
Canada brought about a decrease in the demand for American
securities in London. This decreased the available supply
of foreign exchange.

The United States Bank of Pennsylvania, at least
temporarily filled the void by selling foreign exchange.

In mid-July the New York Express reported that the bank was
supplying exchange at a 10 per cent premium over nominal
par. Though there was some apprehension about gold exports,

the paper believed that cotton sales would provide a source

272

of exchange to keep the rate below the specie export point.29
Unfortunately, like so many other expectations in 1839, this

one was not to be fulfilled. Both McMaster and McGrane wrote
about massive specie exports during the summer of 1839. The

former noted that,

By July, every packet, every steamship that left
New York carried out specie.

At the end of the month, the following was found on the front
page of Niles' National Register,
The foreign news published in the present sheet
is of great interest, indicating as it does a great
and disastrous revolution in the commercial relations
of this country with England in which our merchants
and planters will be the principal sufferers.3l
By mid-summer the economic signs pointed to a crisis.
Cotton prices were falling and with them the mercantile and
banking structure of the South. In the mid—West, it became
increasingly difficult for merchants to obtain funds as the
banks contracted in response to specie losses to the East.
Finally, in the East, the money markets began to react to
the losses of specie to Great Britain and the decline in

trade with the South and the interior. As in 1837, a liqui-

dity crisis was approaching.

The United States Bank Enters the Picture

In August the United States Bank of Pennsylvania
entered the money and foreign exchange markets in a massive
way as it attempted to extricate itself from problems par-

tially of its own making-~the cotton transactions and its

273

generally poor portfolio management-~and partially from
those problems facing all banks at that time. The bank's
immediate problem was that it needed specie to meet domes-
tic demand and to ship to Great Britain to pay the large
amount of its debts which would be maturing there during
the last half of the year. According to Smith, between
August 26 and the end of October, the bank's agent in
London, Jaudon, had to somehow pay or refinance approxi-
mately £720,000 (approximately $3.5 million) in maturing
short-term and long-term obligations. With a collapsing
cotton market and the drying up of the London capital
market, the bank was hard put to meet its obligations. In
fact, to meet the needs of Jaudon, Humphreys and Biddle
were forced to sell cotton, this in August when cotton
prices were down from their spring highs and selling meant
losing money.32

To meet its needs for specie, the bank expanded
its issue of post notes while at the same time selling
large amounts of foreign exchange bills in New York. Most
of these bills were drawn on the Paris firm of Hottinquer
and Company with others drawn on its agency in London.

Can we be certain that these sales of post notes
and exchange bills were for the purpose of obtaining specie?
Or was there another reason for the sales? Bray Hammond
believed that the main purpose of these sales was to force

the New York banks to suspend, thus allowing the United

~—

l' ."’- _I x. r
I l

 

274

States Bank to escape the onus of suspending first. This
View is supported by a letter written by Joseph COWper~
thwaite, cashier at the bank's home office, in March of 1841
to Nicholas Biddle, explaining the bank's actions in the

last half of 1839.

 

"‘

Another crisis was anticipated, and it was feared
that the banks generally would be obliged again to
suspend. This was unhappily too soon to be realized
for the storm was then ready to burst, but, instead
of meeting its full force at once, it was deemed best
to make it fall first upon the banks of New York .

. . . The proceeds of these immense sales of exchange
created very heavy balances against the New York
banks, which after all, signally failed in producing
the contemplated effect.

m “an .3.
In 5

Whatever the motives the obvious result of the bank's

 

action was to increase the pressure already on the money
centers of the East. According to Hammond, specie and
other loanable funds were being withdrawn not only from

34 This meant

New York but also from Boston and Baltimore.
less credit to the merchants and manufactures, and where
it was obtainable, more expensive credit. The short-term
interest rate on commercial paper rose from 12 per cent at
the beginning to 15 per cent by the end of August. Some
would be forced to sell goods in order to meet maturing
debts while others might have had to contract production
because they could not Obtain funds to purchase raw materi—
als or pay their workers.

As the supply of money contracted, due to specie

exports and bank actions, economic activity and prices could

be maintained only if velocity were to increase. But bills

 

275

of exchange which decreased the need for money became more
unsuitable. The discounts on domestic bills began to in-
crease in August and for the remainder of the year. Bills
on Cincinnati rose from a two and one-half to three per cent
discount in the summer to four to five per cent by October.
On Southern cities the discount started to rise in August

35

and September. The increase in the short-term interest

rates might have attracted more funds into the Eastern money

7‘ mat-h

markets, but as we saw above, most of these funds were being
absorbed by the post-notes sold, in the main, by the United
States Bank and the Girard Bank of Philadelphia.

The lack of credit and money was severely felt in

the interior. Berry wrote that,

In September the banks (of Cincinnati) were refus-
ing to discount altogether, forcing traders to rely
upon their own resources and employers to refuse con-
tracts because they could not collect cash to pay
their hands.36

September closed with a continuing deterioration in

the money and commodity markets. Interest rates and dis-
counts on bills of exchange continued to increase and with
a rising exchange rate specie continued to leave the banks
and the country.37 Confidence left the financial community
as it realized that the revival was ending and that they
had overextended themselves once again. At the end of the
year, the New York State Bank Commissioners reported that,

Dismay and distrust prevaded the whole commercial
community. . . . Every moneyed institution, and every

capitalist, held with a closer grasp, the means of
self-preservation.38

 

276

Nowhere was the problem as severe as in Philadelphia
where the largest bank in the country, the United States
Bank, found itself at the end of its rope. It was over—
committed in the cotton trade and in the South in general.
It held large amounts of bonds as a result of its investment

banking transactions. The bank had to sell future commit-

 

 

ments to Obtain specie to meet its present commitments

having lost a little over 50 per cent of its specie hold-

E
E
E

ings between January and September. It was apparently
surviving on a day to day basis and this was not to last

for long.39

The End of an Era: The Panic of 1839

In May 1837, the New York City banks were forced to
suspend because of a run by their depositors who feared that
the banks would become, or already were, insolvent and thus
unable to exchange their current demand liabilities for
specie. In 1839 the scene was again repeated, but this
time it was the turn of the United States Bank of Pennsyl-
vania to lead the way. Unknown to it, and for that matter
to anyone on the Western side of the Atlantic, the fate of
the United States Bank had been sealed in late September
when it became known on the Continent and in Great Britain
that Hottinguer and Company of Paris had refused to pay the
foreign exchange bills which the United States Bank had
drawn on it and sold in New York during August. As it

happened this news, and the later news that the Paris

 

277

branch of the Rothschilds did agree to accept the drafts,

reached the United States after the United States Bank had

already suspended.40

The United States Bank of Pennsylvania
Suspends

On October 9, 1839 the United States Bank quickly

 

‘~

 

followed by the other Philadelphia banks, suspended. The

suspension was immediately caused by a run on the bank

3.

resulting from the disclosure of a meeting held the previ-
ous evening by the directors of the bank. This meeting was
held to consider its response to the presentation that day
of large drafts drawn on it by the New York City banks. As
the news of the Philadelphia suspension spread, many banks
to the South and West of the city also suspended. The
suspension was not uniform in these regions, and excluding
Rhode Island, the banks of New York and New England appeared
not to have suspended.41
In 1837 and 1839 bank suspensions were initiated by
bank runs. The underlying causes were the same in both
cases; an increasing illiquidity in the American economy
brought about by an overextended banking and financial
structure having to face the reality of its overexpansion
as commodity prices fell and as the money and commodity
markets of Britain moved into recessionary periods. The

difference is that there was to be no rapid recovery in 1840,

but rather a deepening deflation which lasted until 1843-1844.

 

278

The Nonuniformity of Suspension:
Possible Causes

 

When the New York City banks suspended in May, 1837,
they were quickly followed by what appears to have been all
the other banks in the nation, yet in 1839, when the largest
bank in the nation suspended first, there was to be no uni-
formity in the suspension that followed. Why was this so?
Whether a bank suspended or not appears to have depended on
two factors, the confidence which depositors had in it and
the banking philOSOphy of the bankers in the particular
locality. Depositors--according to Hammond these were more
important in starting a bank run than note holders--started
a run on a bank when they believed that the bank could not
or through suspension, would not redeem demand deposits in
specie.42 Obviously in a fractional reserve system, no
bank could normally meet all the demands placed on it for
the redemption of current demand liabilities into specie,
even if only the depositors tried to do this. We can assume
that the large depositors knew this.

What conditions then, initially induced these deposi-
tors to withdraw their funds from a particular bank or group
of banks? Thomas D. Willett, has recently written that the
expansion ratio--the ratio of a bank's current demand lia-
bilities to its specie--would increase prior to suspension
and thus acted as an indicator to the public of the dif-
ficulties that a bank was experiencing.43 Willett implicitly

assumes that the public knew about this ratio. This may have

 

 

279

been true for deposit banks which had to submit monthly
reports to the Treasury, but we do not know the time lag
between the time the report was submitted and the time its
contents were made public. But how did the public find
out about the non-deposit banks?

Did movements in the expansion ratio predict which
banks actually suspended? Banks in Philadelphia, New

Orleans, and Rhode Island suspended, while those of New

York, Massachusetts, and Maine did not. Table 8.4 contains l
estimates for these banks for the period around the sus—
pension. It should be remembered that the higher the
expansion ratio, the smaller the amount of specie behind
each dollar of bank current demand liability. To say the
least, the results obtained from the table do not substan-
tiate Willet's analysis, at least in so far as the suspen-
sion of 1839 was concerned. All three of the regions where
banks suspended, and for which we have information, had
lower expansion ratios than the banks of Maine and Mas-
sachusetts. Furthermore, the expansion ratio of the New
Orleans banks rose only after news of the suspension in
Philadelphia reached that city.

If we follow Hammond's lead and concentrate not on
total current demand liabilities but only on the relation-
ship between specie and demand deposits, we obtain similar
results. The information available does not support Ham-
mond's hypothesis. Obviously then, bank balance sheets do

not tell the entire story.

 

 

280

 

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mflommm mflommm on
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pcmEma ucmnnsu

 

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on wpwmommo ocmEmo paw mmHuHHHQMHA pcmEmQ ucmnuso mo moflummln.v.m mqm<a

 

281

So far we have looked at the situation from the point
of view of the depositor, which assumes that bankers mainly
reacted to the actions of their depositors. But bankers may
have done more than just anticipate runs: they may have
attempted to convince their large depositors that individu-
ally or together and in local or regional groupings, bankers
would not simply suspend but would try to meet all normal
specie needs of their customers. For this to work, bankers
and depositors needed to have had some degree of confidence
in each other and the same general philosophy about the
negative aspects of suspension.

In the preceding chapter we saw that during the
struggle over the timing of resumption in 1838 the bankers
of New York and New England generally held to the belief
that banks should convert current demand liabilities into
specie at all times. If for some unavoidable reason they
were forced to suspend, they should attempt to resume as
quickly as possible.

Many bankers outside New York and New England did
not judge convertibility to be of that vital a nature in
the management of banks and thus perhaps were more willing
to suspend if and when the opportunity arose. The state-
ments of the Philadelphia bankers after they suspended
supports this latter View. The Philadelphia bankers in a

report issued on October 23, 1839 claimed that because of

 

 

 

282

the specie losses to Great Britain--they did not discuss
the question of what role poor banking practices had in
this--they had two choices, either contract and call in
loans or suspend. They preferred to do the latter rather
than hurt business and the general community more than it
already was.44 One may ask however, whether they could L
have done the former, contract, without in fact causing ‘fi

the latter?

nJ-mh-a'
A .
o' _

There are three ways in which the banking system
as a whole can increase its specie holdings:

1. From transactions, such as calling in loans or
not renewing maturing loans, which cause dishoarding on the
part of the private non-banking sector or government;

2. From importation;

3. From domestic production.

In 1839, the banks of America, taken as a whole, had a net
specie loss of approximately $12 million. Most of this
appears to have gone in to the private sector and govern-
ment holdings outside of banks as net specie exports were
only about $3.2 million in fiscal 1839.45

If one or several of the Philadelphia banks attempted
to increase their specie holdings by calling in loans, they
could do this only at the expense of other banks, inside or
outside the city. But Philadelphia banks taken as a whole
lost Specie during this period. According to Berry, they

were losing specie at a more rapid rate than they were

283

receiving it from the interior.46 It appears then that any
widespread attempt by the Philadelphia banks to contract
rather than suspend eventually would have led to suspen-
sion. It is surprising and perhaps revealing that in their

report they did not take this into account as a justifica- ’

 

tion for suspension. {3‘
We are still left with the question of why the New [
York Banks and those of New England, excluding Rhode Island,
did not suspend. We have seen that balance sheets do not
tell the story. Mutual confidence and understanding between
merchants and bankers in a locality might have been impor-
tant. But were there other factors, perhaps exogenous to
the banking system which may explain the actions of the
non-suspending banks.
Obviously, by suspending, the United States Bank
and the other Philadelphia banks eased the pressure on New
York and Boston banks. They now did not have to fear losing
specie to Philadelphia banks because of the sale of post-
notes and foreign exchange bills in the Northern money
markets. The New York City banks were also able to obtain
a loan in mid-October which helped to alleviate pressures
in the foreign exchange markets and thus two sources of
specie losses were eliminated or reduced.
On October 18, a loan of $1.5 million was negotiated
between Prime, Ward and King of New York and the commis-

sioners of the New York State Canal Fund which issued

284

securities which were, "used to obtain foreign exchange by

47 This

the use of drafts drawn on Barings and Company."
loan enabled the New York City banks to remit bills instead
of specie to Great Britain causing the exchange rate on
London to ease during the rest of the year. The funds
which the Canal Fund received were deposited in the New
York City banks without interest, thus in a sense a loan

to the banks, and withdrawn from those banks at fixed inter-
vals to pay for work on the canals of the state; these
expenses were estimated to have averaged about $450,000 a

48 The New York City banks thus were given two types

month.
of aid which helped them to sustain specie payments, foreign
exchange bills to substitute for specie and short-term
interest free loans.

The New York and New England banks did not suspend
because both banker and depositor had confidence in each
other. This was reinforced by the removal of the post-
notes from these two Northern money markets, as well as by
the fall in the exchange rates below the specie export
points due in part to loans granted to New York City banks.
That banks in other sections of the country did not sus-
pend perhaps attests to the confidence in the banks which
existed in the particular locality. As we have seen, no
simple comparison of bank expansion ratios or other com-

ponents of a bank's balance sheet gives an a priori estimate

of whether a bank would or would not suspend. We may hazard

285

the guess that the economic position of bank's major deposi-
tors--that is the degree to which they were hurt by the
price movements of the summer and fall of l839--as well as
the liquidity of the bank's income earning assets and their
specie holdings were the major factors structuring the
degree of mutual confidence between the bankers and their
depositors. In the last few pages we have attempted to

see why the suspension was not uniform. What about the
economic consequences of the suspension? Could they be
localized in the regions where suspension took place or
would they spread to all parts of the country?

The American Economy During the Last
Quarter of 1839

 

 

The prospects did not seem good for localizing the
damage done by the suspensions; the two great agricultural
sectors of the country were in serious difficulty while the
monetary system was in disarray. Not only did farmers and
merchants have to face declining prices, but they also
found themselves being paid with bank notes usable only
at large discounts, and this was also true for domestic
bills of exchange. In mid-November, the bank-notes of
Pennsylvania, Maryland and District of Columbia banks were
at a 15 per cent discount in New York City. Domestic
exchange at New York City during the week prior to sus-
pension ranged from maximum discount rates of one-quarter

per cent at Philadelphia three and three-quarters per cent

286

at New Orleans and to five per cent at Cincinnati. During
the first week of November the rates at these same cities
were 15 per cent, 10 per cent and there were no quotes on
Cincinnati exchange until December when the discounts
ranged between 14 to 16 per cent.49

The suspension meant not only a declining money
supply in nominal terms but also in real terms as bank
notes fell in value, compounding the problem was the rise
in the discount on domestic exchange which by decreasing
the usefullness of these bills, further decreased the
velocity of the money supply.

Until the suspension, the price decline was cen-
tered in agriculture, between January and September the
index of agricultural prices fell 12 per cent and for the
remainder of the year they fell an additional 12 per cent,
indicating the severity of the problem facing the agri-
cultural sectors. Industrial prices on the other hand fell
only five per cent between January and September, but it
then fell 11 per cent during the remainder of the year.50
In its December issue, the Merchant's Magazine announced
that as soon as it had obtained the necessary information,
it would start a series of articles on the laws concerning
debtor-creditor relations in the United States and Great
Britain. The announcement ended with the statement that,
“the utility of a series of articles of this kind is obvi-

"5]-
0115 o

287

We have looked at the unfolding, month by month,
of a deflation which was highlighted, but not culminated,
by the suspensions of late 1839. Unlike the suspension of
May, 1837 where prices did not fall substantially after
the suspension, in 1839 they would continue their decline
until a slight respite in mid-1841. The purpose of this
chronological approachlunsbeen to show that the suspen-
sions were part of a process which had started not in the
fall of 1839, but rather in the fall of l838, and not in
the United States but in the grain fields and money mar-
kets of Great Britain and the markets of the Continent.

The economic difficulties of the Eastern side of
the Atlantic was transmitted by means of the cotton and
credit markets--the latter with the aid of the specie flOw
mechanism--to the United States, to an economy which ap-
peared outwardly healthy but because of its dependence on
an unstable money and credit system and the health of the
British economy was overly receptive to any strong eco-
nomic stimuli, be it inflationary as in the mid-1830's or
deflationary as in 1837 and now in 1839. The year, which
had opened with hopes of continuing recovery ended in
gloom. The Bank Commissioners of New York State described
the events of late 1839 in the following terms, even though
the New York banks had not suspended,

The pecuniary distress of the last autumn was

decidedly more intense, more general, and more embar-

rassing than any that has occurred since our acquaint-
ence with the subject.52

 

 

 

 

FOOTNOTES

CHAPTER VIII

 

lFinancial Register, II, p. 139.

.P.‘

 

2Financial Register, II, p. 229; Thomas Tooke, A
History of Prices and the State of the Circulation in 1838-
1839 (London: Longman, Orme, Brown, Green and Longman,
1840), p. ll.

.. A“

3Clapham, II, p. 166; Hidy, p. 267; and Tooke, p.

 

75.

4

Jenks, pp. 95-96.

5Hidy, p. 224; Clapham, II, p. 169.

6Tooke, pp. 114-115; Nolte, p. 429; Clapham, II,
p. 167.

7Hunt's Merchants Magazine, September 1840, p. 262.

 

8Hidy, pp. 267-268. In its April 27, 1839 issue,
Niles reported that money was very tight in Holland and
that the Bank of Amsterdam had increased its discount rate
from two and one—half per cent to three and one-half per
cent but no information was given as to the date of this
action though it was indicated that this had taken place
during the first quarter of 1839, Niles National Register,
April 27, 1839, p. 130.

 

9London Morning Chronicle, May 19, 1838 reported
in Niles National Register, June 29, 1839, p. 280.

10W. T. C. King, History of the London Discount
Market (London: George Routledge and Sons, Ltd., 1936),
p. 82; Niles National Register, July 27, 1839, p. 341.

 

 

11See Appendix Table C-5. Interest rates in New
York started their upward rise in June.

12Niles National Register, November 9, 1839, p. 162;
Clapham, II{—pp. 169-170.

 

288

 

289

13B. R. Mitchell and Phyllis Deane, Abstract of
British Historical Statistics (Cambridge: University
Press, 1962), pp. 333, 460; Silberling, The Review of
Economic Statistics, V, Supp. 2, p. 252; Hidy, p. 272.

14

 

 

 

 

Clapham, II, p. 176.

15Tooke, p. 63.

16Journal of the American Institute, March, 1839,
p. 324; The Manchester Guardian, April 23, 1839 quoted in
Niles National Register, June 1, 1839, p. 213.

l7R.C.O. Matthews, A Study in Trade Cycle History
(Cambridge: University Press, 1954), p. 138; Hammond, p.
503.

 

 

 

 

18Liverpool Albion, May 2l, 1839 quoted in Niles
National Register, June 19, 1839, p. 282.

19John B. McMaster, A History of the PeOple of the
United States (New York: D. Appleton and Company, 1906),
VI, p. 524.

20Arthur Redford, Manchester Merchants and Foreign
Trade, 1794-1858 ("University of Manchester Economic History
Series," No. XI; Manchester: Manchester University Press,
1934), p. 83.

21

 

 

 

 

 

 

Hidy, pp. 237, 264, 267, 268.

22Scheiber, Business History Review, Spring, 1966,
pp. 60—61; Berry, pp. 457-459.

23

 

Sources cited in Table 8.2 and Appendix Table B-7.

24See Table 8.3.

25For a contemporary discussion of this contraction
see Niles National Register, June 29, 1839, p. 273.

26United States Congress, House, 26th Congress, lst
Session House Document No. 172; and Table 8.3.

27

 

 

Berry, pp. 453, 466—467.

28Merchant's Magazine, I, No. 1, July 1839, p. 47.

 

29Niles National Register, July 20, 1839, p. 326.

 

 

290

30John B. McMaster, VI, p. 524; Reginald C. McGrane,

The Panic of 1837 (Chicago: The University of Chicago Press,
1924): pp. 205-206.

31Niles National Register, July 27, 1839, p. 337.
For the situation in the Cincinnati market see Berry, p. 453.

BZSmith, pp. 200, 217, 257, 259, 260; Merchant's
Magazine, I, No. 6, December 1839, p. 508.

33Niles National Register, April 24, 1841, p. 123;
Hammond, p. 505.

34Hammond, pp. 505-506; Nathan Appleton, Remarks on
Banking and Currency (2nd edition: Boston: Little and
Brown, 1841), p. 17.

35United States Commercial and Statistical Register,
IV, March, 1841, pp. 151-155.

36Berry, p. 453. According to Berry, grain prices
did not break in the interior until the October suspensions,
although a liquidity crisis had been building since spring.
See Berry, pp. 453-467.

37According to an article in the New York Courrier
and Enquirer of October 2, 1839, the United States would
continue to lose specie until the rate of exchange on London
was at least two points below actual par. On October 2,
the rate was between 9 5/8 and 10 1/4 per cent above nominal
par while actual par was about 9.35 per cent. Niles National
Register, October 5, 1839, p. 81 and source given in foot-
note 35.

38New York State, Assembly, 63rd Session, Annual
Report of the Bank Commissioners of the State of New York,
I839, Assembly Document No. 44, p. 37.

39

 

 

 

I

 

 

 

 

 

 

 

Smith, p. 301.

40According to Hidy, the Barings knew as early as
September 11 that Hottinquer would dishonor the bills drawn
on it by the United States Bank. Hidy, p. 278; Smith, p.
215.

4lSmith, p. 219; Redlich, II, p. 267.

42Hammond, p. 689.

43Thomas D. Willett, "International Specie Flows
and American Monetary Stability, 1834-1860," The Journal of
Economic History, XXVIII, No. l(March, 1968), p. 44.

 

 

 

291

44United States Commercial and Statistical Register,
I, October, 1839, p. 299; John B. McMaster, VI, p. 527.

45Appendix Tables A-1 and B-1, domestic production
was less than $1 million.

46Berry, pp. 458-459; Niles' National Register,
October 19, 1839, p. 121.

47Hidy, p. 282.

48Niles National Register, October 19, 1839, p. 121.
49Jonathan Elliott, The Funding System of the United

States and of Great Britain (New York: Augustus M. Kelley,
1968), p. 1170; United States Commercial and Statistical

Register, IV, March 1841, p. 155.
OSources cited in Table 8.2.

51Merchants Magazine, I, No. 6, December 1839, p.

 

Sl8.

52Robert E. Chaddock, The Safety Fund Banking System
in New York, 1839—1866, National Monetary Commission,
United States Congress, Senate, 6lst Congress, 2nd Session,
Senate Document No. 581, p. 305.

 

 

 

 

CHAPTER IX

THE BECALMED YEARS: 1840-1843

The 1830's ended on a bleak note for the United
States. Many banks were suspended, the second suspension
in a little more than two years. The entire financial
community felt uncertain. The major market for American
cotton and its main source of short- and long-term foreign
capital, Great Britain, was in the midst of a recession
which would last as long as British grain crops were poor.

The problems facing the American economy were not
only those of overexpansion of production and transporta-
tion facilities during the mid-1830's boom and of the finan-
cial system which supported the boom. There was also a
shift from a boom psychology to one of uncertainty struc-
tured by recent suspension, bankruptcies, and declining
prices.

We shall see in this chapter that prices in the
United States declined until the spring and summer of 1840.
After a revival which lasted until the late summer of 1841,
they fell until the bottom was reached in early 1843.
Unfortunately, we will not be able to explain fully the
movement of prices during this period, especially for the

revival of 1841. Yet we will see that as in the 1830's,

292

 

 

 

293

the health of the British economy was important in bringing
an end to the period of falling prices.

In the first section of this chapter we shall examine
the years 1840-1841, a period in which prices reached a
temporary bottom. The second section will cover the period
when the economy was at its low point and the beginning and
end of the recovery. The final section will compare the

1839-1843 recession with others of the ante-bellum period.

Reaching a Temporary Bottom, 1840

 

The first year of the 1840's did not start propi-
tiously for the United States and Great Britain. The 1839-
1840 cotton crOp was the largest on record up to that year
while the British grain crOps were again poor. Yet prices
in the United States in general stabilized during the last
half of the year and actually rose until the late summer

of 1841.

Trade and Credit

 

Commercial activity in the United States declined
in 1840, though as far as the textile industry was concerned,
the decline was in sales, not in production. Sales in
dollars fell by 41 per cent in fiscal 1840 from their 1839
level, while output in yards rose slightly, by less than
one-half of one per cent. The reason for the divergent
movement of sales and output appears to derive from the

indivisibilities in textile production, that is large fixed

294

costs. "It was therefore advantageous, unless prices were
very low, to produce either at levels near capacity or not

at all."1

Auction sales in New York City, the only other
indicator of sales we have for this period, also fell, with
American dry goods falling by 21 per cent and European by
17 per cent.2 Indirectly, we have other indications of a
decline or perhaps at the most a levelling off of sales.

For the second year in a row the money supply de-
clined and by an estimated three and one-half per cent more
than the decline in 1839, and bank lending fell even more.3
In relative terms bank lending fell by 16 per cent as com-
pared to a 13 1/2 per cent decline in the money supply, but
in absolute terms, bank lending fell by an estimated $76
million whereas the money supply fell by $29 million.4

The contraction in bank lending and the money supply
seems to have been the result of bankers attempting to
increase their liquidity and perhaps of the declining demand
on the part of the business community for credit. Bankers
appear to have been successful as their specie holdings rose
in 1840. While the supply of money and credit was declin-
ing, short—term interest rates in New York City fell through-
out the year. This can be taken as an indication that the
demand for credit was also declining.

The public lost specie to the banks and perhaps to
the sub-Treasuries during 1840. The net specie holdings of

the banks increased by approximately $2 million while the

295

United States during 1840 had a net specie inflow of slightly
less than $500,000. The banks gained specie as they con-
tracted their lending activities. The sub-Treasuries gained
specie as the business community paid its bills due the
government. As the Federal government was running a deficit
in 1840, the drain was only temporary.5

We might expect that the contraction in the money
and credit supply, and especially that of credit, not only
in the United States but also in Great Britain, led to a
decline in American imports. This did happen, and at least
part of it was due to declining prices in the United States
relative to the price of imported goods, though of course
falling incomes in the South and West were also important.
It is impossible to say which was more important as we do
not know the composition of imports, especially the com-
ponents which fell the most in 1840, and the degree to
which domestic goods were substitutes for imported goods.
The United States import price index fell by 3.9 per cent
while the Warren and Pearson index of wholesale commodity
prices fell by 15 per cent.6 Imports fell by $59.4 million,
37 per cent,7 but this was a mixed blessing as it meant
less trade and therefore less income for the merchants,
shippers and others involved in the import trade.

While imports were falling, exports were expanding
but because of price movements this did not mean a concom-

mitant increase in export earnings. The index of the prices

of United States Exports fell 36 per cent in 1840, the

296

simple barter terms of trade thus turned sharply against
the United States.

The significance of this fall in prices was that
though the aggregate value of exports increased, the per
unit value fell and if costs did not fall by as much, the
producers of these exports faced declining profits and
perhaps even losses.8 Expanding cotton and grain exports
accounted for more than half of the increase in exports
and the prices of both commodities fell in 1840. The average
price of the various grains and flours exported fell from 13
to 37 per cent; flour prices fell by 29 per cent and wheat
prices fell by 37 per cent. These two commodities accounted
for approximately 95 per cent of the increase in grain
exports.9 Commenting on the economic consequences of in-
creased grain exports in the face of lower prices, the
National Intelligence wrote the following in late June,

While the exports are large, (they) amount to

but little when sold in Europe. Flour continued to
go out notwithstanding the promise of a loss on every
barrel sent, but it is here (New York City) on hand
with no demand for it at home, and what else can be
done.

Cotton prices--export value--in the face of the
largest crop on record at the time and declining demand at
home and abroad, fell by 42 per cent in 1840. In late
June, Niles reported on the depressed state of the cotton

market due to the large crop and existing inventories. It

held out hope, as others had done in 1839, of a good British

297

grain crOp reviving the cotton market, and as in 1839, this
was not to be.11

Matthew Hammond in his work on the American cotton
industry noted that if raw cotton sold at eight cents a
pound in local markets--Hammond was referring to the early
l840's--the planters could afford to produce it. If this
was true than for most of the first half of the 1840's
planters would have been in serious trouble unless they
were able to lower their costs of production significantly.
Cotton prices in New Orleans, excluding the last quarter of
1840 and the first half of 1841, were below eight cents a
pound and this was true until the 1845-1846 crop.12

For the majority of American exports, expanded value
in 1840 did not mean increased income for the growers and
for those dependent on the trade in cotton and grains. An
examination of the movements of goods on the New York State
canals, mainly the Erie, indicates that demand in the
interior fell in 1840, and most likely to a greater extent
than in 1837. Westbound tonnage from tidewater in general
fell by nine per cent but shipments destined to the states
and territories West of New York fell by 26 per cent, the
comparable figures for 1837 being eight per cent and 11 per

13 Falling farm incomes contributed to

cent respectively.
an economy already burdened by a contracting supply of
money and credit. The United States was not alone in its

problems in 1840, for Europe was also in the grip of a

recession as well as political disturbances.

_ ”ml"

 

298

European Problems in 1840

Throughout the first half of 1840 Niles National
Register contained stories of economic difficulties in
France and Great Britain. In February there were reports
of widespread distress in all parts of France and a de-
pressed state of trade in all industries and especially in
the textile industry. The monetary situation was similar
to that in Great Britain and the United States, "there was
no promising means for the employment of capital in trade."14
By late April there were reports of corn riots in the prov-
inces, Great Britain was apparently not alone in having poor
harvests, and continuing distress in the industrial centers.
The problems of French manufactures and merchants was in
part allegedly due to conditions in the United States, and
this was most likely true to some extent.

The American merchants, debtors to our towns of

Paris, Lyons . . . make no returns, send no cargoes,
forward no bills.15

A similar picture could be painted for Great Britain.16
In both European countries the economic problems
centered around poor harvests producing declining domestic
demand after a period of expanding production facilities.
.Added to the drop in domestic demand was that of foreign

demand, and to both this meant the American market as well

as each others.

 

.4 L50. C ‘
l
l

299

The Revival of Late 1840 and 1841

 

By mid-1840 the economic picture began to change in
the United States and to a lesser degree in Great Britain,
but as we shall see in this section the reasons for the
changes are not readily apparent and still remain somewhat
of an unknown. In terms of general price movements, the
decline in the United States came to a halt first in the

South and then, within a few months, in the North. For the

 

remainder of the year and for about the first three quarters
of 1841, excluding the drop in prices after the failure of
the United States Bank and the renewed suspension of some
other banks, prices were relatively stable or rose slightly.
Besides the price series which are given in Table 8.2,
other indicators of economic activity also paint a picture
of stability during this period. Whereas the money supply
fell by approximately 13 1/2 per cent in 1840, it fell by
only six and one half per cent during 1841.

Price Movements and Economic Activity
fin Late 1840 and 1841

 

Because we have only one source of monthly data,
price series, this information is used to designate the
turning points in the American economy. The low point in
the 1839-1840 price decline was reached by late summer in
all parts of the country excluding the West, that is

Cincinnati.

 

300

The last half of 1840 was primarily one of consolida—
tion where prices reached bottom and gradually began to
rise. The first comments we find of an upturn in economic
activity was in the November issue of the Merchant's Maga—
zine.l7 That is all the information we have as far as the

state of the upturn was concerned in 1840.

 

In 1841, price movements influenced by the attempts
of some of the suspended banks to resume and their subsequent
resuspension, and in some cases, most notably that of the
United States Bank, failure, painted a confusing picture of
upward and downward movements. In fact if we only used
price series such as those found in Table 8.2 it is dif-
ficult to speak about a revival at all. Information on
output and sales, however, point to the conclusion that a
recovery, albeit short, did in fact take place.

In order of occurrence, security prices were the
first to halt their decline and stabilize. This took place

18 It seems likely that the increase

in the spring of 1840.
in security prices was due to the fact that the securities
were a relatively safer form of investment than the alter-
natives available to individual and corporate investors
such as banks.

Movements in cotton prices were more important to
the American economy than were changes in security prices.

Cotton prices reached their low of 6.5 cents a pound at

New Orleans in March and then slowly rose to 8.3 cents a

 

301

pound by August. Prices remained around this latter level
for the remainder of the year and, with the marketing of
the 1840-1841 crop, rose to a high of 10.1 cents a pound
in May of 1841 after which prices fell to a low of 4.9

cents a pound in March, 1843.

 

The factors underlying the movement of cotton prices
in 1840 are difficult to uncover. Whereas prices in New
Orleans reached bottom in March, they continued to fall in
England until what appears to have been late May or early
June.19 This may indicate that the movement of prices at
New Orleans was the result of speculative activity. As
far as we can determine there was no recovery in the British
textile industry at this time, but we cannot find any infor-
mation supporting the speculation hypothesis. The New
Orleans banks continued their contraction in lending until
July and there was no significant increase in lending until

the last two months of 1840.20

Another possibility might
have been that the last of the 1839-1840 crop had gone to
market and prices could not be further depressed especially
as the 1840-1841 crop was to be much smaller than that of
the preceding year.

When we look for indications of an economic turn-
around, the most dramatic perhaps was the rise in imports.
Using the data for the port of New York, it appears that
the increase in imports was concentrated in the first three

21

quarters of 1841. During 1841, imports rose by 25 per

 

 

302

cent over their 1840 level, and in conjunction with declining
export earnings, shifted the American balance of trade from

a surplus of $23 million in 1840 to a deficit of $13.6
million in 1841. Unlike the mid—1830's, this deficit had

to be paid off without the massive capital inflows of the
boom period. In a real sense, the revival, at least as it
was characterized by this balance of trade deficit, carried
with it its own seeds of destruction.

Just as in 1840 when the decline in commercial
activity was reflected in the drop of imports, auction sales
in New York City and other indicators of commercial trade,
so we find an upturn in these activities in 1841. Auction
sales in New York City rose by 21 per cent, but most of
this, almost 69 per cent, was in European goods.22 Ship-
ments to the region west of New York State, via the canals
of that state increased by 29 per cent over their 1840
levels.23 The recovery was also felt in the New England
textile industry as its sales and output rose in fiscal
1841 over the 1840 levels by 20 per cent and 23 per cent
respectively. As capital expenditures fell in the textile
.industry, it appears that underutilized or unused facilities
Ivere again being placed into production.24

Although the Riggleman index of building construc-
‘tiOh.turned up slightly in 1841, the level of internal
inqprovements investments reached a peak in 1840-1841. As

it; turned down so did the incomes of those dependent on

303

these projects. We shall spend a few moments examining

this area of economic activity because it was another ele-
ment assuring that the revival could not continue and

because it again demonstrates the relationship between the

American and British economies.

The End of the Canal and Railroad Boom

During the railroad and canal building boom of the
mid and late 1830's, most projects whether public, semi-
public or privately owned, obtained financing through the
sale of bonds, and many of these were sold directly or
indirectly in the London capital market and other European
capital markets.25 With the problems in the European
capital markets and in London and with the disorganization
<of the banking and financial communities of the United
Statrxs, the inflow of funds gradually dried up. At the
sanma time state and local governments were facing declin-
ing Ixyvenues as trade and commerce stayed relatively sta-
ticuuxry during the first three years of the 1840's.

The flow of American securities to England and the

Conthnent slowed to a trickle in 1840 with the low point
iIi'theaxnarket for these securities being reached in late

1842 auud early 1843.26 Both economic and political factors

cxnrtrilNJted to this decline. Monetary conditions in England

did ruyt significantly ease until late 1842. In America,

stxite gravernments began to take a second look at the methods

used_1x) sell their bonds as the interest payments came due

304

at a time when incomes were declining and many projects
were still incomplete. In March 1840 the governor of
Mississippi, a state where bonds were issued solely to
finance banks, made some statements casting doubt on the
legality of state bonds sold below par. When the Union
Bank of Mississippi, in whose behalf the bonds were issued,
then lost its charter in July, 1840 because it did not pay
specie, the bond market suffered a serious loss of con-
fidence.27

According to Fishlow gross capital formation in
railroads peaked in 1839 and fell by 20 per cent in 1840

28 Cranmer estimated that

and continued to fall until 1843.
canal construction peaked in 1840 though Segel believes
that owing to the financial and monetary problems of the
1839-1843 period, payments lagged behind actual construc-
tion and that as a result of this, construction did not

actually peak until 1841.29

Whatever the actual pattern of
expenditures, the drop in construction was another factor
ensuring that the economy would not witness continuing
recovery in 1842.

In 1840 state governments witnessed a continuing
expansion of their expenditures while their incomes declined
from the distribution peak in 1836. From Table 7.3 we see
that the estimated aggregate state deficits in 1840 were

the highest in the 1830-1845 period. By 1841 the states

were able to cut back expenditures and increase revenues

305

as the economy stabilized and temporarily turned up. Some
states raised their tax rates and others used the principal
still remaining from their share of the Distribution to
support current consumption or to meet interest payments
on their bonds. A few would try to float new bond issues.30

Mounting deficits and difficulties in meeting
interest payments on existing debts together with the mea-
ger returns from some of the existing projects discouraged
the states from undertaking new or sometimes completing
existing internal improvement projects. Problems at home
and abroad, all at a time when many banks were suspended
or had failed led to the end of the internal construction
boom.

Though the American economy recovered slightly in
1841, the probable factors producing it were not strong
enough to sustain it in the face of the decline in con-
struction, the increasing deficit in the balance of trade
and other problems which arose during 1841. The recovery
was basically a temporary expansion of output and sales
utilizing existing production facilities. The increase in
cotton, wheat, and sugar prices during at least part of
1841 helped to stimulate demand and resulted perhaps, in
Inerchants restocking inventories which had been allowed
to deplete during the latter half of 1839 and through

31

1840. But even as imports were increasing and sales

Exicked up it became clear that all was not right. During

306

the first quarter of 1841 there was an unsuccessful attempt
by many of the suspended banks to resume specie payment and
by the end of the second quarter cotton prices were again

falling.

The End of the Revival

In April 1840, the legislature of Pennsylvania
passed a law which would have taken away a bank's charter
if it did not resume specie payment by January 15, 1841.
Many banks South and West of Philadelphia also decided or
were similarly forced to resume in the first months of
1841. Thus when the Philadelphia and other Pennsylvania
banks resumed on January 15, they were quickly followed by
the banks of Maryland, Virginia, Georgia and other banks
throughout the country, most of the banks in the deep South
however, did not follow suit.32

Unable to meet the specie demands which were placed
on it, the United States Bank failed—~it did not just sus-
pend——on February 4, 1841.33 This led to the resuspension
and failure of banks not only in Philadelphia but also in
.Maryland and in two neighboring states which did not generally
suspend in 1839 or resumed prior to the beginning of 1841.
These being Delaware and New Jersey.

Prices in the North fell in the months immediately

fcflllowing these banking develOpments and the effects were

felt in the interior as well.

 

 

 

307

In the first quarter of 1841 the Cincinnati par
medium (bank notes) suddenly depreciated to an extent
not realized since 1820. . . . From the currency
angle, the darkest days were those between January
1841 and March 1842.3

Michigan appears to have been seriously hurt by the failure
of the United States bank. Niles' National Register
reported in mid-March that,

The Detroit Daily Advertiser states that the
failure of the United States Bank will be a severe
blow to Michigan, that institution holding nearly
two millions of the Michigan state bonds. It says
all the hopes of Michigan to prosecute her internal
improvements, have been based on the ability of the
bank to pay the state the amount of these bonds.35

One might have assumed that prices should have

reflected the problems in the banking community yet, except

for a slight drop in prices during the first quarter, prices

rose slightly in the North, and at Cincinnati and in

Charleston, while they remained stable in New Orleans

until the fourth quarter of the year. This was all the

more surprising as cotton prices in New Orleans peaked

and started to fall during the second quarter of the year.
The end came to the recovering cotton market in

the spring. Prices reached their peak in England during

April and a month later in New Orleans, the reverse of the

pattern when the market started to rise in the spring of

1840. In mid-June reports reached the United States of a

spreading stagnation throughout the industrial regions of

Great Britain. The money markets were again in difficulty.

Short-term interest rates in London which had been below

308

five per cent during the second and third quarters went
above five per cent while there was a sharp drop in bills

of exchange issued during the third and fourth quarters of
the year.36 Again, as in 1837 and 1839 cotton prices fell
as the major market for American cotton ran into difficulty.
Just as in these two previous years, the East coast banks
were losing specie at least in part due to the decreased
flow of cotton bills.

By the last quarter of 1841 the situation and out-
look was obviously bleak as far as the American economy was
concerned. We have seen that eXpenditures on internal
improvements were already declining in 1841. At least in
the case of Michigan and most likely in other states and
localities as well, the failure of the United States Bank--
it had been the investment banker for many such projects—-
contributed to and perhaps accelerated this decline.

The economic outlook was not improved by the develop—
ments in the cotton markets and the massive specie outflows
which took place in the latter half of the year. A large
balance of trade deficit, a decline of about 15 per cent
in the value of cotton exports, and the lack of short- and
long-term capital inflows contributed to the largest net
specie losses experienced by the United States in the 1830-
1845 period and the second largest in the 1815-1845 period.38

The unsuccessful attempt of many banks to resume in

the first months of 1841 increased the uncertainty in the

309

mind of the public as to the usefulness of bank notes. Even
though the money supply contracted at a slower rate than in
1840, banks lost specie in 1841 and as these specie losses
were estimated to have been $2 million greater than the net
export of specie it appears that they went into the hands

of the non-banking sectors of the economy.39

It seems surprising that there was any recovery at
all, but just as certain it was not surprising that the
recovery could not be sustained into 1842. The recovery

came to an end, not with the tumult of 1837 and 1839 but

quietly under the weight of a sagging economy.

The American Economy Reaches Botton:
1842-1843

For the United States 1842 and 1843 were darwinian
jyears as weak firms and banks fell by the wayside and as
'the poorer states, poorer not just in resources but perhaps
Inore importantly poorer in leadership, found themselves
tunable to meet interest payments and a few would disown
some of their debts.

In the United Kingdom the picture was just as bad.
IMxring the first three quarters of 1842 there were a record
rummber of bankruptcies. Exports in the year were the lowest
sizuce 1837, this being mainly due to a fall of slightly over
50 Iper cent in the exports to the United States. Industrial

prtxiuction as measured by the Hoffman index fell five per

 

 

 

310

cent. In the money markets the market rate of discount on
short-term bills--three months--declined by a third to the
lowest level in eight years while the amount of bills of

exchange fell by 13 per cent.40

By the end of the year the outlook was to brighten
for Great Britain as well as for the United States. The
1842-1843 British grain crops were the best since that of
1838—1839 and grain prices fell accordingly, stimulating
domestic demand. Foreign demand increased with the end of
the Opium War in China and the settlement of the Canadian-
American boundry dispute by the Webster-Ashburton Treaty.
In the United States the banking community was stabilized
by the end of the year with many banks being able to resume
specie payments as specie was again flowing into the United

States, gradually rebuilding the depleated holdings of the

banks.

The Economic Problems of the Private and Public
Sectors of the American Economy: 1842

Both business and government faced serious problems
during 1842. During the first half of the year the mercan-
tile interests along the East coast were under increasing
jpressure as they had bills to pay while the banks, in their
attempts to resume or remain solvent, curtailed their lend-
ing and discounting activities.

On March 12, 1842 the Philadelphia banks again

attempted to resume, and all but the Girard Bank were able

 

 

311

to do so. The banks of Baltimore soon followed suit and
one immediate result of these resumptions was a sharp drop
in domestic exchange rates between these cities and New
York.41 In mid-May the New Orleans banks also attempted
to resume but most were again forced to suspend by early
June.

Further North, the banks in Kentucky, Missouri,
Indiana and Illinois resumed during June. But here again
the attempts were not completely successful for the State
Bank of Illinois failed. This left that state virtually
without any incorporated banking facilities until 1857.

By the end of the year resumption appears to have
been achieved in most parts of the country and 1842 was to
be the last year in the 1840's in which there was a decline
in the number of banks in the United States.42

As we noted above, the banks curtailed their activi-
ties during the period of resumption. There was a net
decline in both bank lending and current demand liabilities
during 1842, the former falling by $69 million (21 per cent),
the latter by $32 million (22 per cent). The money supply
(Hi the other hand fell by only nine per cent, this being
$16 million. As there was no significant change in specie
:flows during 1842, there being a net export of about $730,000,
'this meant that about 50 per cent of the decline in current

(humand liabilities was due to inter-bank transactions. This

.is not out of line with the estimates of inter-bank

312

transactions given by Van Fenstermaker and others for the

mid-1830's.43

The money market reflected the decline in bank
lending and the money supply. The short-term interest rate
in New York did not fall to five per cent until the last
quarter. On the other hand, there appears to have been
funds available, especially towards the end of the year.
During fiscal 1842 the United States government was able
to sell about $14.8 million in treasurynotes and bonds,
although in the first half of the year, at rates around
six per cent.44 The purchase of these securities and more
significantly the increase in their prices and those of
New York State and City bonds during the last half of 1842
and the first quarter of 1843 indicate that it was not
;primarily the lack of resources which kept bankers from
Lending to merchants. Rather, it was the unwillingness of
Imoney lenders to undertake what the thought of as exces-
sively risky loans.

As we previously noted, in the early spring of 1842
'the large merchants in the East coast cities found themselves
1J1 dire straits as they had spring payments to make to their
suppliers. Many of these payments were due prior to the
resumption of the Philadelphia and Baltimore banks, thus

art a time when domestic exchange rates were still disorgan-

ized and the banks were still in the process of curtailing

their activities .

313

The banks were fearful of extending themselves
in the smallest degree . . . remittances from the
country could not be obtained . . . goods could
scarcely be sold for money at any prices . . .
enormous fluctuations in bills and extravagant rates
destroyed all means of remittance to the cities . . .
caused a great number of failures among mercantile
houses extending along the line of the Atlantic,
from Boston to New Orleans.46
The textile industry was hard hit by the declining
demand. In July, the textile companies in Lowell and else-
where in New England attempted, because of rising inventories
and falling profits, to restrict output as well as force
down wages. But prices continued to fall and capital expen-
ditures for expansion and replacement in fiscal 1842 were
the lowest on record.47
In general, economic activity reached a low point
during this year and the first quarter of 1843. According
to Abramovitz, 1842 was the low point in such activities
as business incorporations, ship building and urban con-
struction though the Riggleman Building Index showed 1843
as the low point.48
In the farming regions the situation was not good.
In the South cotton prices continued to fall and sugar
prices reached their ante-bellum low. In the North, wheat
prices were rising while corn prices were relatively stable

49 The disorganization of

even as production increased.
trade and the lack of money, however, helped to keep Western
demand down even as prices rose. The tonnage on the canals

of the State of New York destined to points West of the

314

state again declined as did the receipts of the Ohio canal
system.50 Conversely, this pent-up demand would, as the
money supply and bank lending increased during 1843, help
to turn the economy around.

The private sector was not alone in having serious
problems. Many states found themselves pressed to meet
interest payments on their debt obligations. In order to
meet these payments as well as current expenditures, they
were forced to raise taxes, issue state treasury notes,
force loans from banks and sell stock, as well as other
assets, which they held.

At mid-year the states of Pennsylvania and Maryland
were unable to meet the interest payments on their bonds.
This brought to eight the number of states which had fallen
into arrears in interest payments. By that time Arkansas,
Mississippi, Michigan and the territory of Florida had
repudiated part or all of their outstanding debts.51 With
these develOpments in state securities and the failure of
the Merchant's Exchange in New York City after it could not
Ineet a debt of $30,000, the bottom fell out of the market
for American securities in London and on the Continent.52

The depressed state of the American economy was
reflected in the balance of trade. Smaller cotton exports
Jneant less income in the South as well as less cotton bills

for Northern importers already facing a London money market

.all.but closed to American debt instruments. Declining

315

money and perhaps real income in the United States, a con-
tracting American money and credit base and the decline in
British credit, not only to American importers but also to
British exporters contributed to the fall in American imports.
Because of the fall in American exports, they were the
lowest since fiscal 1833, the surplus in the balance of
trade was relatively small, less than $2 million.53
Allegedly contributing to the decline in imports
was a change in the tariff laws during 1842 which also was
supposed to have helped in the recovery which took place
in 1843. Under the Tariff Act of 1833 substantial cuts in
the tariff rates were scheduled for January 1 and July 1,
1842 so that after the latter date there would be a uniform
tariff of 20 per cent on all imported goods. But on Septem-
ber l, 1842 a new tariff law was passed which significantly
raised tariff rates. The immediate effect of this on im-
ports does not appear to have been substantial if one takes
the following statement found in the Merchant's Magazine at
farm; value—-the Merchant's Magazine was considered to be a
'qnnotectionist journal"--remembering that the full impact
cflf the new legislation would not be felt until fiscal 1843.
The Operation of the tariff, passed at the late
session, appears hitherto to have produced but little
effect . . . owing to the very restricted state of

the currency in the interior, and the extreme low
‘prices of produce.5

VWa shaJJ.see in the next.section that even taking into account
tflmazfact that in 1843 the fiscal year contained only nine

moniflns, there was still a large drop in imports.

316

The important question is how much of this decline
in imports was due to import substitution and the extent
to which domestic production expanded to meet this new
demand. Furthermore how much of the decline was due to the
relatively low levels of income and hence demand for import
and import type goods in 1843 as well as to the possible
existance of sufficient if not excessive inventories which
had to be worked down first? According to Taussug the
Tariff Act of 1842 did stimulate domestic production in the
textile, woolen and iron industries among others,55 but
this was in 1843 and the next few years until the Tariff
Act of 1846. The Act of 1842 had little effect on economic
activity in 1842 as the statement in the Merchant's Magazine
indicated.

1842 ended with only a faint glimmer of hope. In-
comes and prices were falling as was the money and credit
base. State governments were in difficulty and American
securities were no longer pOpular in London and on the
Continental markets, yet the picture was not all bleak. In
Great Britain the new grain crops were to be the best since
1838-1839, this together with the end of the Opium War
Ihelped to revive British industry. The upturn in the
British economy along with an eased monetary situation in
:London enabled American banks, through a flow of funds into
Innerica in search of higher returns to increase their specie

luoldings. Thus--as we shall see below--they had the facilities

317

to expand the money and credit base when demand did start

to rise in late 1843 and 1844.56

The Path to Recovery; 1843-1844

By the end of 1842, as we have just seen, the worst
was over for both the British and American economies.57 In
America all but industrial prices bottomed by March, and
this series reached bottom in July. Prices were relatively
stable throughout the remainder of the 1840's and it was
only in the mid-1850's that they again reached the levels
obtained during the boom period of the mid-1830's.58

Just as we had difficulty in determining the sequence
of events and factors which led to the temporary recovery in
1841, so will we have the same type of problem, but to a
lesser extent, with the developments of 1843 and 1844. The
basic problem is that although the banks were to build up
their specie holdings throughout the year and the money
Inarket was easing at the same time, economic activity did
not start to show signs of picking up until the last half
of 1843 and especially not until the last quarter. Further-
lnore, we have very little quantitative data to show that,

(excluding the increase in the money supply, there was any

significant upturn, or cuase for such an upturn, until 1844.

'The Monenyarkets and Economic Activity

Throughout the first half of 1843 the Merchant‘s

kagazine as well as Niles' National Register were commenting

318

on the fact that even though there were massive specie
inflows--the latter publication estimated that during the
first six months of 1843 about $12.83 million in specie
had been imported--little if any were being used to support
the extension of credit to merchants, planters and farmers.
The money lenders were still too uncertain about the future
course of the economy to again enter into the commercial
credit markets. One factor inhibiting the flow of funds
into these fields was the debtor laws enacted in the Western
states. "A merchant cannot trust a western dealer because
state law gives him no protection."59
Most of these funds flowed into the financial mar-
kets driving up the prices of good grade state securities
as well as United States bonds as we see in Table 9.1. The
stock market also felt the inflow, Smith and Cole's index
of Bank and Insurance Company stocks rose from 77 in January
to 90 by May. The short-term interest rate in the New York
.money market also began to reflect the increasing supply of
loanable funds as interest rates fell from six per cent in
.January to a range of three and one-half to four per cent
during the last half of the year.60 Eventually the flow of
funds into the financial markets spilled over into the mar-

l<et.for goods and services, but this took longer than if

‘there was a direct expansion of credit for trade and manu—

facturing.

319

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320

More was needed than the availability of loanable
funds to bring about an increase in economic activity. The
inertia of money lenders had to be overcome and perhaps
also, that of merchants. On the one hand, they had to
extend credit to farmers and planters and on the other,
order new goods, thus again undertaking new debt obligations.

It was in August, as the new cotton and grain crops
were being harvested, that we began to find reports in
Niles' National Register of a slow upturn in trade.

The papers of Boston, New York, New Orleans, and
Philadelphia as well as those upon all the interior
thoroughfares of trade, indicate the gradgal revival
of trade . . . restoration of confidence.

For the remainder of the year there were increasing reports
of the revival of manufacturing and commerce resulting from
the renewed trade in agricultural products.62

Even though prices, excluding industrial, stopped
falling by the spring and banks were increasing their hold-
ings of specie throughout the year, it was not until the
last three or four months in the year, as we have just seen,
‘when the new crOps were coming into the markets that we find
contemporary comments about an upturn in trade. This is to
be eXpected, for even if we take the VieWpoint that it was
changes in the money supply, resulting from the specie
inflows, that led to an increase in economic activity, we

saw in the preceding section statements about the lack of

Inoney inhibiting trade--there was still a lag between the

321

time the money supply increase and the time economic activity
responded to this.

The fact that funds first flowed into the financial
markets and only later into the commodity markets insured
that there was some lag. The institutional structure of
the American banking and financial system, especially the
time it took to actually transmit specie from the Eastern
sea ports to the interior also produced a lagged response

63 The inflow of specie

on the part of economic activity.
enabled banks to eXpand their lending when demand picked
up, but what brought about the large specie inflow during

1843?

Specie Inflows During 1843
During the nine months of fiscal 1843, the last
quarter of 1842 and the first two of 1843, the United States
had the largest net specie inflow up to that time, an
estimated $20.8 million. Only in 1847 was there a larger
inflow during any fiscal year in the ante-bellum period.
These massive specie inflows could be the result
of either a large surplus in the balance of trade which
was paid in specie, or as in the mid-1830's, because of
capital inflows arising from the exportation of debt instru-
ments. The net balance of trade surplus in fiscal 1843 was
approximately $39.5 million, the largest surplus in the

65

ante-bellum period. Because of the change in the fiscal

year, can we be certain that the trade surplus was due to

322

real factors and not just a change in accounting periods?
In Table 9.2 we have taken estimates of imports via the
port of New York, which were originally given in quarterly
and calander year terms, and have converted these into
constant fiscal years--fiscal years as determined prior

to 1843-~50 that we can obtain an estimate of imports not
influenced by the changes in the accounting periods. As
we can see there was a sharp drop in imports.

The next question is what caused this drop in
imports? From what we have already seen of the American
economy in 1843 the answer is not difficult to find.
Incomes, certainly money and perhaps real, was depressed
and this meant less imports. Parallel with this was the
contracting money supply and credit base which contributed
to the declining demand for domestic as well as imported
goods. Finally, domestic prices as measured by the Warren
and Pearson index fell by nine per cent while the index of
prices of imported goods fell by four per cent thus making
imports relatively more eXpensive.

The economic situation in England was another factor
'tending to depress American imports more than it did exports
'to Great Britain. Domestic bills of exchange, fell to their
.lowest level since 1835, and this drop in bills of exchange
Ivas very important as there was a significant change in the
:financing of British exports to the United States in the

ynears just after 1842 which placed more of the burden of

 

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324

financing this trade on the London and Continental money

markets.
As a consequence of the crippling effects in the
United States of the long depression, a larger pro-
portion of the flow of merchandise to America after
1842 was on British or European account.66
It is impossible, given the available information,
to determine how much of the decline in imports was attri-
butable to the new tariff legislation. As we noted in our
discussion dealing with the decline in imports in 1840, we
do not know the composition of imports. Further adding to
our data problems is the change in fiscal years during 1843.
What information we do have indicates that there
may have been some import substitution in the iron industry
but little if any in the cotton textile industry. Iron
imports during 1843 were about 25 per cent of their 1842
level. Taking into account the difference in fiscal years,
this still represents a considerable decline. Domestic
production, on the other hand, rose substantially indicating

67 American cotton

that import substitution did take place.
textile production concentrated mainly on areas which were
not in direct price competition with British textile im—
ports.68 Since domestic production was estimated to have
fallen by about two per cent during 1843 the decline in
demand, both for domestic and textiles appears to have come
from falling incomes and a contracting supply of money and

credit.69

 

 

 

325

So far we have looked at the balance of trade
surplus from the import side, but what about exports?
Exports in 1843 were $17 million less than in 1842. How
much of this decline was due to the shorter fiscal year?

Lacking a complete breakdown of exports by calander year

 

we cannot answer this question with any accuracy. We do

know that cotton exports rose by $1.5 million while exports

_—.‘-‘-
I

from New York City fell by only $70,000 during the year.70
Improved harvests in Great Britain led to decreased Ameri-

can grain exports, wheat and flour exports fell by about

71

$4.25 million. It appears then that some of the decline

 

in exports was due to the change in fiscal years.

In addition to the specie inflows resulting from
the trade surplus, there appears to have been some capital
inflows resulting from the continuing drop in interest
rates in Great Britain. The Merchant's Magazine reported
at mid-year that British investors were sending funds to
New York City in an attempt to invest in mortgages at a
hoped for six per cent return.72 Specie inflows thus were
the result of a large balance of payments surplus arising
from a sharp drop in imports due to the poor state of the
American economy and a lack of short-term credits from
abroad which inhibited imports. There also appears to
have been some inflow of long-term capital, especially

during the last half of the year.

 

326

What was the relationship between these massive
specie imports and the recovery in the American economy?
Most of the specie imports appears to have flowed into the
banking system. What induced the bankers to again lend
money to merchants, manufactures, planters and farmers?

We have already seen that by the middle of 1843 funds were
going into the financial markets raising security prices
and lowering rates of return. Eventually as the return on
government securities--Federal as well as state and local-—
fell, bankers started to look to commercial loans as a
source of higher earnings. But why should merchants, manu-
factures and others again begin to borrow from the banks?
An answer to this question appears if we look at the "neo-
Keynesian" eXplanation of the factors causing an upturn in
the business cycle.73

As the economy moves toward the low point in a busi-
ness cycle merchants and manufactures, facing declining
sales and the unavailability of credit drew on their inven—
tories rather than reorder or expand production in order to
meet the low levels of demand facing them. Eventually
inventories would be so depleted that in order to meet
the existing demand, reordering and then production would
increase. This upturn in demand can coincide with an upturn
in gross investments as replacement investments might no
longer be postponable. According to McGouldrick's estimates

gross investment in plant and equipment by New England

 

 

 

 

327

textile mills increased from $20,000 in fiscal 1843 to

$409,000 in fiscal 1844.74

The increasing liquidity in the
economy, due not only to the effects of the specie inflows
but also perhaps to the liquidation of debts during 1842
and 1843, coming at a time when demand for consumer goods
and investment good was picking up, helped to turn the
economy upward.

This upturn in demand generated by inventory and
capital replacement needs took place at a time when the
stabilization of agricultural prices and the late summer
harvests gave added reason for merchants and manufactures
to expand their ordering and production schedules. Bankers
and merchants throughout the chain of commerce and credit
from the manufacturer and importer to the final consumer
felt renewed confidence and ability in extending new credit.
The combined effects of renewed demand and increased liqui-
dity and stability in the financial system meant the end of
the 1839—1843 recession and the gradual recovery of the
American economy.

By the end of 1843 agricultural incomes began to
expand, although the full effect of this was not felt until
1844. The rising prices and the prospect which this gave
of increasing farm incomes and demand, revived trade. With
this in mind the merchants began to come to the Eastern
mercantile centers to rebuild their stocks of goods. They

were aided in this as bankers, having watched their specie

 

9;
v
d

 

 

328

holdings increase, began to extend credit, first to those
buying financial instruments and then, in the last months
of the year to the merchants all along the channels of
trade. The prospect of renewed agricultural demand, both
in the North and in the South fueled the fires of recovery

while an expanding money and credit based resulting from

 

near record specie inflows, stoked the fires of recovery.

P-fi‘mn

The 1839-1843 Recession in Historical
Perspective

 

 

Having examined the 1839-1843 recession we shall
conclude this chapter by comparing this recession first
with that of the 1930's and then with other ante-bellum
economic disturbances.

Peter Temin has made a thorough comparison of 1839-
1843 with the 1930's. He concluded that while the monetary

effects of the former disturbance were greater than that of

 

the later one, because of the assumed flexibility of prices,
real output did not decrease but actually increased during
1839-1843.75

This perhaps surprising conclusion depends on the
confidence which one places on the available aggregate out-
put estimates and the base years used. Temin comments on
one of the problems in using the aggregate estimates which
were derived from the work of Gallman.

The author of these estimates of G.N.P. . . . in

the 1840's emphasized that the annual data were
derived only 'to reduce our dependence on benchmark

 

329

year estimates.‘ They were not intended to be used
for analyses of yearly changes. . . . If they are to
reduce our dependence on benchmark year estimates . . .
they must also reflect the conditions of the economy
in the intervening years.76
Moreover, two components of output were excluded from these
estimates, value added by home manufactures and changes in

77 Could their exclusion significantly over-

inventories.
state or understate changes in G.N.P. during 1839-1843?
This would depend on:

1. the ability of households to shift from the
consumption of manufactured goods to goods produced either
at home or locally and obtained through barter;

2. the relationship of inventories to total sales;

3. the relative size of these two components to
G.N.P. in 1839 and 1843.

As incomes fell and with the contraction of money
and credit, households shifted from the purchase of manu-
factured goods to those produced at home or locally and
obtained by barter. If this led to an increase in the
ratio of home manufactured goods to market manufactured
goods, then output in 1843 would be understated. The only
information available which might throw some light on the
magnitude of home manufactures are the estimates of West-
ward shipments on the New York Canals. These shipments
fell in 1840 and 1842 and the tonnage in 1843 was only

about one per cent above the level of 1839. Shipments to

states and territories west of New York also fell in 1840

 

 

 

330

and 1842 and the 1843 tonnage was 15 per cent below that

of 1839.78

If we accept this information as representative
of what actually happened throughout the economy we could
then conclude that the ratio of household manufactures to

manufactured goods was higher in 1843 than in 1839. The

 

estimate of G.N.P. in 1843 thus are understated by excluding

this component of total output.

 

A decrease in inventories reduces gross private
domestic investment and thus the magnitude of G.N.P. Was
the ratio of inventories to total production and sales at
a lower level in 1843 than in 1839? We have no quantitative
means of determining this. But it seems likely that with

declining demand and contracting credit, merchants and

 

manufactures might have drawn down their inventories rather
than make commitments for new goods or raw materials. To
the extent that this happened the G.N.P. estimates are
overstated in 1843. Given the methods used to derive the
G.N.P. estimates for these years the errors introduced by
the omission of these two components do not appear to sub-
stantially alter Gallman's estimates. A more serious pro-
blem, however, arises from the years chosen.

We have seen in this chapter that there was a tem-
porary revival in economic activity during 1841. The
question obviously arised is how much of the estimated
increase in G.N.P. in the 1839-1843 period actually took

place in 1841. The G.N.P. data does not throw light on

 

331

this, but by looking at the textile industry we can readily
see the problem involved. According to Temin,
Two estimates of the cotton-textile industry's
have been made recently. They differ on many counts,
including the method of derivation, but they both fail
to show a sustained decline in production in the
early 1840's. In fact the production in 1843 was
shown to be about 15 per cent above the 1839 level
in both estimates.7
The estimates Temin refers to are those of Davis and Stettler
which have been published in a National Bureau study and that
of Zevin which is not yet available.80
A closer look at the Davis and Stettler data shows
that while textile output did increase by 15 per cent,

81 If this is

almost all of this was concentrated in 1841.

also true for other sectors of the economy, and the data

on internal trade tend to support this, then much of the

growth in output during the 1839-1843 period took place in

1841. Growth rates may still have been positive in 1842

and 1843, but at much smaller levels than Temin indicates.
The paucity of data is not the only stumbling block

in any attempt to compare the 1839-1843 period with that of

the 1930's, for what we are attempting to do in this case

is to compare two different economies. The American economy

was not the same in these two periods and the differences

were not just simply that of size but also of structure.

Using Gallman's estimates, not for yearly changes but for

interdecade changes, we see that the share of output attri-

buted to agriculture fell from 72 per cent in 1839 to 56 per

332

cent in 1859 and 33 per cent by 1899. In 1929-1933, agri-
culture accounted for slightly less than 10 per cent of
output. The 1840 Census estimated that about 11 per cent
of the pOpulation lived in urban centers with population

of 2,500 or more, while in the 1930 Census the figure was
56 per cent.82 Thus, if we want to gauge the relative
magnitude of the 1839-1843 recession it is more appropriate
to compare it to other ante-bellum economic disturbances.

A Comparison of Ante—Bellum Economic
Disturbances

 

 

The data available for a comparison of the three
major ante-bellum economic disturbances; 1818-1822, 1837-
1843, and 1857-1860, will be found in Table 9.3. There are
many similarities between these three periods.83

All were characterized by domestic banking problems
leading to suspension as well as by international monetary
disturbances. In the first period the international mone-
tary picture was disturbed by the attempts of the European
powers to return to specie payment following the Nepoleonic
Wars. In the second period there were the specie losses of
the Bank of England arising from poor harvests and monetary
problems on the Continent, especially in France and Belgium.
Finally, in the last period the attempt of the French
government to rebuild its specie holdings caused a con-
traction in the British capital markets which in turn

affected the railroad speculation then going on in the

United States.

333

TABLE 9.3.—rComparison of Three Ante-Bellum Economic Dis-
turbances, 1818—1822, 1837-1843, 1857-1860.

 

Percentage Changes

Series 1818- 1837- 1839- 1857-
1822 1843 1843 1860

 

Warren & Pearson Wholesale

Price Index (1830 = 100) -31 -35 -33 -20
Export Price Index

(1830 = 100) -48 -47 -51 -16
Import Price Index

(1830 = 100) -30 -24 -19 -06
Western States Terms of

Trade (1824-26 = 100) -31 -27 -29 -04
Money Supply -05 -43 -27 -18
Number of Banks n.g. -17 -23 +04
Bank Lending

(Total loans) n.g. -45 -43 -15
Current Demand

Liabilitiesa n.g. -48 -40 -22
Imports -57 -67 -73 —24
Exports -41 -26 -26 -07
Land Sales Acreage -81 -91 -78 -87

Cotton Prices
(New Orleans) -62 -63 -54 -13

 

aGross figures, includes inter-bank holdings.
n.g. ~ not given.

Sources: Rows 1-4, 9-10 Douglas C. North, The Economic
Growth of the United States, 1790-1860 (New York:
W. W. Norton and Company, Inc., 1966), pp. 240,
242, 255, 233, 234. Row 5, Source cited in
Appendix Table B-7, Col. E. Rows 6—8, 11, The
Statistical History of the United States Fram_'
Colonial Times to the Present (Conn.: Fairfield
Publishers, Inc., 1965), pp. 624-625, 239. Row
12, Source cited Appendix Table C-5, Series A.

 

 

 

 

334

Agricultural overproduction in the United States
also characterized all three periods, cotton in the first
two and grains in the last one and to some extent in the
middle period. The first two periods were also character-
ized by international price deflations.

The recessions of 1818-1822 and 1837-1843 were fairly
similar, at least in terms of the fluctuations in the series
given in Table 9.3, though according to Berry the West, the
area up to the Ohio Valley, appears to have been worse off
in 1821 than in 1842.84

In general it appears that the latter recession was
more severe than the former. An economy with most of its
labor force in agriculture and with few urban centers--
according to the 1820 Census only about 7.2 per cent of
the total population lived in urban centers--wou1d be less
affected by economic disturbances, as contrasted to natural
disturbances such as poor crops, then a relatively more
industrialized economy.85 It would be easier for a small
labor force not fully committed to the work place to move
back to the farm during hard times and for farmers to in-
crease the amount of home manufacturing they undertake as
the market for their cash crops declines. This does not
mean that there would not be serious problems, especially
for those regions which were mainly involved in plantation
agriculture such as cotton, sugar and rice, or in manu-

facturing and commerce, but rather that there would be

335

relatively less real hardship involved. In this light it
may be assumed that for the country as a whole, the reces-
sion period of 1837—1843 involved more economic hardship
than the earlier recession period.

From the information we have on internal as well
as external trade in the 1830's it seems safe to assume
that there was unemployment. We have, however, no informa—
tion on its relative seriousness in the manufacturing and
trade centers of the East coast and South and perhaps those
of the interior, such as Cincinnati and Pittsburgh, as
well. The lack of any significant body of contemporary
comment about unemployment in the 1840-1843 period indicates
that the problem, at least to the commentators, was not
serious. Price flexibility, the ability of some of the
unemployed workers to switch to agricultural occupations,
though not necessarily through a westward migration, mini-
mized the declines in output and unemployment that did take

place during the 1837-1843 recession.86

The End of the 1839-1843 Recession,
an Overview

 

 

Through the early 1840's the American economy at-
tempted to recover from the after effects of the panic's of
1837 and 1839. This was almost accomplished in late 1840
and early 1841 but the recovery could not be sustained in

the face of falling prices and renewed monetary problems

336

highlighted by the failure of the United States Bank in
February 1841.

The situation was worsened by the end of the internal
construction boom. States became discouraged over the fail-
ure of many of these projects to provide the financial
benefits claimed for them. It became clear that ordinary
tax revenues would have to be used to pay the interest pay-
ments on the bonds issued for these projects, this helped
to dampen the fervor for continuing them.

The London and Continental capital markets reacting
in part to the financial difficulties of the various state
governments, some of whom missed interest payments and
repudiate their obligations in part or total, closed their
doors for the time being to American securities.

Contracting trade and concommitantly a contracting
money and credit base brought the economy to its low point
in 1842 and early 1843. But the fall in demand, prices,
and money, led to a large balance of trade surplus which,
with better crOps in Great Britain and increased Conti-
nental supplies of specie enabled near record amounts of
specie to flow into the United States. Sustained recovery
came in late 1843 and 1844 as the crops of the South and
the West went to market and the banks and the entire finan-
cial community again felt confident enough to extend credit
to the agricultural, mercantile and manufacturing interests

of the country.

FOOTNOTES

CHAPTER IX

lMcGouldrick, pp. 29, 142. Davis and Stettler
estimated that output rose by less than one-half per cent
during calander 1840. Davis and Stettler, Output, Employ:
ment and Productivity in the United States After 1800, p.
221.

 

 

2Fred M. Jones, Middlemen in the Domestic Trade of
the United States 1800-1860 (Illinois Studies in the Social
Science, Vol. 21, No. 3, Urbana: University of Illinois
Press, 1937), p. 70.

 

 

3See Appendix Table B-6.

4In 1840 an estimated $7 million in United States
Treasury notes were issued. These notes were interest
paying post—notes and can be considered to have been part
of the money supply and thus the decline in the money supply
would be overstated as these estimates excluded Treasury
notes. Peter Temin, The Jacksonian Economy (New York: W.
W. Norton and Company, Inc., 1969), p. 192; Niles' National
Register, April 24, 1841, p. 28.

 

5The Independent Treasury Act was passed on July 4,
1840. As there was little contemporary comment on the
sub-treasuries withdrawing money, especially specie, from
circulation, it is likely that the main recipient of the
public's specie was the banks. See Myers 1, pp. 180-181.

6North, Economic Growth, p. 243; Warren and Pearson,

 

p. 12.

7In 1837, imports fell by $47 million or 26 per cent.
See Appendix Table A-1.

8North, Economic Growth, p. 243.

 

9Louis B. Schmidt, "The Internal Grain Trade of the
United States," Iowa Journal of History and Politics, Vol.
8, No. 1 (January, 1920), pp. 42, 44, 45; North, Economic
Growth, p. 243.

337

338

10Niles National Register, July 4, 1840.

 

llNiles National Register, June 27, 1840, p. 257;
Appendix Table C-3.

12Matthew B. Hammond, The Cotton Industry (American
Economic Association Publications, New Series, No. 1; New
York: Macmillan 1897), p. 118; Appendix Tables C-3 and C-5.

13

 

Albion, p. 411.

l4Niles National Register, April 18, 1840, p. 98;
For a similar statement about the London money market in
late June see Niles' National Register, July 25, 1840, p.
321.

 

 

15Niles National Register, July 25, 1840, p. 322;
May 23, 1840, p. 178.

l6Niles National Register, July 25, 1840, p. 321;
December 26, 1840, p. 257.

l7Merchant's Magazine, Vol. 7, November 1840, p.
456. According to Caroline Ware the election of Harrison
buoyed the spirits of manufactures as they believed he
would be for a higher tariff and the restoration of a
national bank. C. Ware, p. 105.

18Bank and Insurance Index included only New York
City firms, the Railroad index included those of Massachu-
setts, New York, New Jersey, Pennsylvania, and Maryland.
See Smith and Cole, pp. 175-176.

19

 

 

 

See Appendix Table C-5.

20Merchant's Magazine, Vol. 7, October, 1840, p. 361.
Also see comments of Smith on the financial situation in
New Orleans and Mobile in the Spring of 1840. Smith, p.
221.

21Merchant's Magazine, Vol. 11, November 1844, p.

 

452.

22Jones, p. 70. $21 of the $25 million increase in
imports came from Europe, $13 from Great Britain and $8
million from France. Statistical History of the United
States, p. 553. Victor Clark implies that at least part
of these imports resulted from British and Continental
manufactures dumping goods on the American market. Clark,
p. 249.

23Albion, p. 411.

 

339

24McGouldrick, pp. 142, 159.

5Domestic financing was most important in the
railroads of New England. See Alfred D. Chandler Jr.,
"Patterns of Railroad Finance, 1830-1850," Business History
Review, Vol. 28 (Sept. 1954), and Taylor, pp. 98-99.

 

26Hidy, pp. 289-290; Smith, p. 221-222.

27Smith, p. 222. For a discussion of the Canadian-
American border difficulties which also helped to depress
the London bond market see Samuel Eliot Morison, The Oxford
History of the American People (New York: Oxford University
Press, 1964), p. 66.

28Fishlow, pp. 385, 399; Fogel has the peak in the
consumption of rails in 1841, Robert W. Fogel, Railroads
and American Economic Growth (Baltimore: John Hopkins
Press, 1964), p. 174.

29H. Jerome Cranmer, "Canal Investment, 1815-1860,"
Trends in the American Economy in the Nineteenth Century,
ed. William N. Parker (New York: National Bureau of Eco-
nomic Research Studies in Income and Wealth, Vol. 24,
National Bureau of Economic Research, 1960), pp. 555-556;
Comment of Harvey H. Segal, pp. 565-566.

30Rezneck, American Historical Review, LX, p. 680.
For those states which used DistrIbutIon funds in this
manner see Bourne, pp. 122-123. States which had difficulty
in meeting interest payments as well as those which defaulted
are discussed in B.U. Ratchford, American State Debts
(Durham: Duke University Press, 1941), pp. 97-107 and
Benjamin R. Curtis, "Debts of the States," North American
Review, Vol. 58 (1844), pp. 132-134.

31

 

 

 

 

 

 

 

 

Statistical History of the United States, p. 115.

 

32For a discussion of the aid given by New York and
Boston banks and other financial firms to the United States
Bank and the other banks of Philadelphia see Smith, pp.
225-226; Niles National Register, January 30, 1841, p. 352;
and Redlich, II, p. 272.

33For some of the reasons behind the failure of the
United States Bank see Smith, pp. 60, 226; and Niles Na-
tional Register, February 13, 1841, p. 372.

 

 

 

34Berry, p. 463.

340

35Niles National Register, March 13, 1841, p. 32. On
April 17, the National Register carried news that the Mich-
igan State Legislature had passed a law limiting fore-
closures. Niles National Register, April, 17, 1841, p. 105.

36Niles National Register, June 19, 1841, p. 252;
September 25, 1841, pp. 52, 64; October 30, 1841, p. 129.
Gayer, Rostow and Schwartz reported that at the end of the
year, both Britain's home and foreign markets were depressed.
Gayer, Rostow, Schwartz, I, p. 283.

37The National Register reported that there was a
shipment of $1.1 million in specie from New York City to
Great Britain and the Continent during one week in late
September. Niles National Register, October 9, 1841, p.
96. '

 

 

38North, p. 236.

39There are some problems in the use of the bank
specie data for 1841. According to Smith the United States
Bank during the month of January lost $6 million in specie
of which $4 million was due to the redemption of bank
notes. Furthermore the reports of aggregate bank specie
holdings as of the end of 1841 and the beginning of 1842
appear not to have included Ohio banks, which, at the end
of 1840 held a reported $1.2 million in specie. On both
accounts then, the losses of specie by banks appears to
have been overstated. See Smith, p. 226; Berry pp. 588-
589.

4OSilberling, The Review of Economic Statistics, V,
Supp. 2, p. 252. Mitchell and Deane, p. 271; Williamson,
p. 285; Appendix Table B-5.

41Redlich, II, p. 272; Niles National Register,
April 2, 1842, p. 80.

42Niles National Register, June 18, 1842, p. 256;
James, p. 143; Hammond, Banks and Politics, p. 612; Sta-
tistical History of the United States, p. 624.

43J. Van Fenstermaker, The Development of American
Commercial Banking: 1782-1837 (Kent, Ohio: Kent Uni-
versity, Bureau of Economic and Business Research, 1965),
pp. 66-67; Elliot, p. 983.

44Elliot, pp. 988-999, 1017. Treasury notes accounted
for $11.4 million of this borrowing. Merchant's Magazine,
Vol. 6, May, 1842, p. 478.

45See Table 7.1. The National Register carried
comments on this in July. Niles National Register, July 2,
1842, p. 288.

 

 

 

 

 

 

 

 

341

46Merchant's Magazine, Vol. 6, May, 1842, p. 482.

47McGouldrick, pp. 33, 159-160.

48Moses Abramovitz, "Long Swings in American Eco-
nomic Growth," in New Views on American Economic Develop-
ment, ed. Ralph Andreano (Cambridge, Mass: Schenkman
Publishing Co., 1965). .

49There is a confusing picture in grain prices.
Wheat prices at Baltimore fell from $1.25 in May-June to
88 cents by the end of the year. Niles National Register,
August 17, 1844, p. 399. Schmidt shows a rise in average
prices of wheat from 95 cents in 1841 to $1.12 in 1842.
Schmidt, Iowa Journal of History and Politics, Vol. 8, p.
45. Finally, the price of wheat at Albany, New York fell
between January 1842 and January 1843. New York States,
Assembly, 69th Session, Senate Document 92, pp. 25-27.
Prior to the 1840's most of the mid-western grains were
shipped via New Orleans. See Morton Rothstein, "Ante-
bellum Wheat and Cotton Exports: A Contrast in Marketing
Organization and Economic Development," Agricultural
History, Vol. XL, No. 2 (1966), p. 95.

50

 

 

 

 

North, p. 253; Albrion, p. 411.

51Paul B. Trescott, "Federal-State Financial Rela-
tions," Journal of Economic History, Vol. 15, No. 3 (Septem-
ber 1955), p. 242; Ratchford, pp. 107, 110-112.

52

 

Hidy, pp. 294, 302-303.

53See Appendix Tables A—1 and B-5.

54Merchant's Magazine, Vol. 7, December 1842, p. 553;
Joseph Dorfman, The Economic Mind in American Civilization,
1606-1865, II (London: George G. Harrap and Co. Ltd.,
1957), p. 750. Note the comment about the lack of money
in the interior.

55Frank W. Taussig, The Tariff History of the United
States, 8th Rev. ed. (New York: Capricorn Books, 1964),
Chapter 3; V. Clark Stressed the psychological boost of the
new tariff legislation, especially in its role of removing
uncertainty as to what the new schedule would be. V. Clark,
p. 205.

 

 

 

56According to Clark Warburton as long as the Bank
of England's discount rate was five per cent or more, it
would be able to attract specie from other countries or at
least reduce its losses. In April, 1842 the Bank lowered

342

its discount rate to four per cent from the previous five
per cent, this together with increased Russian gold produc-
tion enabled both American and British banks to simultane-
ously increase their gold holdings. Clark Warburton,
"Monetary Disturbances and Business Fluctuations in Two
Centuries of American History," In Search of a Monetary
Constitution, ed. Leland B. Yeager (Cambridge: Harvard
UnIversity Press, 1962), pp. 73-74.

57The Barings began to expand their activities
during the summer of 1842, Hidy, p. 311.

58

 

 

59Merchant's Magazine, Vol. 8, March, 1843, p. 273;
Estimates of specie imports found in Niles National Register,
July 15, 1843, p. 307.

6ONiles National Register, April 8, 1843, p. 83;
Merchant's Magazine, Vol. 8, June 1843, p. 558; Appendix
Table B-7, and Smith and Cole, p. 174.

61

 

 

 

Niles National Register, August 26, 1843, p. 416.

 

62See Comments in Niles National Register, September
14, 1843; Merchant's Magazine, Vol. 9, October 1843, p. 272;
and December 1843, p. 561.

63Most monetary interpretations of this period,
such as Temin's appear to assume an instantaneous response
of economic activity to changes in the monetary base--
mainly specie in the banks--and in the money supply. In
part this is due to the necessity of working with annual
data, but as we have seen, this oversimplifies the rela-
tionship between money and economic activity. For the
present day state of knowledge on the size and time path
of the lag between money and economic activity see the
article by Cagan and Gandolfi and the comments by Davis
and Tucker in the April, 1969 American Economic Review.
Phillip Cagen and Arthur Candolfi, "The Lag in Monetary
Policy as Implied by the Time Pattern of Monetary Effects
on Interest Rates," American Economic Review, LIX, No. 2
(May, 1969).

64

 

 

North, p. 236.

651bid., pp. 219, 220.

66Hidy, p. 356.

67Frank W. Taussig, "Statistics of Iron and Cotton,
1830-1860," Quarterly Journal of Economics, II (April,

343

1888), p. 379; and Taussig, The Tariff History of the United
States, p. 126; Domestic production estimates are found in
TauSSig, Quarterly Journal of Economics, II, p. 380; and
Rovert W. Fogel, Railroads and American Economic Growth
(Baltimore: The John Hopkins Press, 1964), p. 132.

68

 

McGouldrick, p. 31.

69Davis and Stettler, Output, Employment and Pro-
ductivity in the United States After 1800, p. 221.

 

7OAppendix Table C-2 and Niles National Register,
January 27, 1844, p. 344.

71Schmidt, Iowa Journal of History and Politics,
V01. 18’ p. 430 '

72Niles National Register, July 8, 1843, p. 304.
British capital exports rose from a £600,000 in 1842 to
+ 59.3 million in 1843, though a large part of this outflow
was destined for the Continent and not the United States.
On this latter point see A. G. Kinwood, "Railway Invest-
ment in Britain, 1825-1875," Economics, New Series, Vol.
XXXII, No. 127 (August, 1965), p. 320; for British capital
eXports see Williamson, p. 280.

73The following is based on Robert Gordon's analysis
of the factors causing economic recovery from the low point
in a business cycle; Robert A. Gordon, Business Fluctua-

tions, 2nd ed. (New York: Harper and Brothers, 1961), pp.
302-312. .

74

 

 

 

 

McGouldrick, p. 164.

75Temin, pp. 155-165, especially pp. 156-157.

76Ibid., p. 157.

77Gallman, Output, Employment, and Production in the
United States After 1800, pp. 26, 61, 62.

78

 

 

Albion, p. 411.
79Temin, p. 161.

80David and Stetler, Output, Employment and Produc-
tivity in the United States After 1800; Robert B. Zevin, The
Growth of Cotton Textile Production After 1815, forthcoming.

81

 

 

 

Davis and Stettler, p. 221.

344

82Robert E. Gallman, Trends in the American Economy_
in the Nineteenth Century, p. 26; Statistical History_of the

 

 

 

United States, p. 14.

83The following discussion is based on North, pp.
182-188, 212-214; Smith, pp. 108-110.

84

 

Berry, p. 468.

85Statistical History of the United States, p. 14.

 

86The "Safety Valve Tyeory," supposedly does not
apply to the United States after the late 1830's, yet what
did happen to the workers made unemployed by the ending of
the canal and railroad projects. We can find no contempo-
rary comment on the disposition of these workers during
the early 1840's, only for 1837 and 1839 do we find comments
about them and then only in cities such as New York. For a
discussion of the Safety Valve Theory see F. A. Shannon,
"A Post Mortem on the Labor Safety-Valve Theory," Agricul-
tural History, Vol. 29 (January, 1945).

 

CHAPTER X

CONCLUSIONS

During the mid-1830's and early 1840's the United
States economy went through a period of economic prosperity
and recession. This movement in economic activity and
growth was brought about by economic and non-economic
forces Operating on both sides of the Atlantic. In this
work I have attempted to show how important components in
the structure of the American economy; the economic rela-
tionship between America and Great Britain and the mechanics
of international monetary relations enabled economic dis-
turbances on one side of the Atlantic to be transmitted to
the other side, and in the process multiplying the magni-
tude of the disturbances. The structural elements were the
cotton industry and the banking and financial system. Both
the American and British economies being connected through

the cotton and credit markets and the specie flow mechanism.

Excess Demand and Economic Growth

 

America during this period had both an excess demand
for goods and services and an excess demand for money--
specie coins, bank notes, demand deposits--with both being

financed by an excess supply of securities.1 The demand was

345

346

excess in terms of domestic production at the full employ-
ment level of output. It was generated by the incomes
produced by the rapid growth of cotton and grain production
and by the expansion in gross domestic investment mainly
due to the boom in internal improvement projects such as
canals and railroads. This excess demand meant not only
rising prices but also balance of trade deficits between
fiscal 1831-1837 inclusively.

Concommitant with the excess demand for goods and
services was an excess demand for money generated by the
growth in output and demand as well as by the continuing
specialization of production taking place in the economy.
This excess demand for money was reflected in different
ways, economic and political. Between fiscal 1832 and 1837
inclusively, while the United States had trade deficits it
also had net specie imports. The excess demand allowed
the rapid expansion of banks and current demand liabilities
and it was here that the political problems arose.

There were conflicting political pressures as the
growing demand for money came face to face with the "hard
money" beliefs of important figures in the Jackson adminis-
tration led by Jackson himself. Thus we had the so-called
Bank War. The formation of the Deposit banks was a response,
however unconscious, to meet the demand for banks and banking
facilities. At the state level the Free Banking Laws en-

acted in the last years of the 1830's facilitated the growth

 

il ll Il‘lll’1,. -

347

of banks and bank money creation as the case of Michigan
shows. But at the same time the Federal government as
well as some state governments attempted to limit the use
of bank notes.

Finally, prices of goods and services could rise
with the excess demand, and the United States could import
specie because American securities found a ready market in
Great Britain and the Continent.2 Throughout this period,
short—term credit instruments were important not only in
America's domestic trade but also in its foreign trade.
According to North's balance of payments estimates, United
States aggregate indebtedness to foreigners rose from $89
million in fiscal 1331 to $297.2 million by the end of
fiscal 1839.

The volume of capital imports between 1830 and

1839 was sizable. Relative to the size of the economy
it was probably the most significant inflow of
capital during the nineteenth century.
The excess demand for goods and services, the excess demand
for money, and the sale of securities strongly suggest that

economic growth in the United States depended on the growth

and health of the British economy.

A Summer of the 1833-1843 Period

 

The 1834-1836 Boom

 

A boom in the market for raw.cotton developed during
the mid-1830's. British demand for raw cotton expanded

rapidly to meet the needs of a growing textile industry

348

serving home and foreign markets. Good grain harvests in
the British Isles stimulated demand for British textiles
and other goods. They meant lower food prices and an
increasing real income for the British working population,
therefore an increased demand for textiles and other manu-
factured goods. Finally, good harvests meant that large
grain imports were not needed so that specie outflows would
be minimized. The Bank of England was able to maintain its
bullion holdings at levels that allowed expansionary mone-
tary policies.

‘ Expanding credit aided by the discounting practices
of the newly important joint-stock banks, especially those
dealing in the Anglo—American trade, and the lenient poli-
cies of the Bank of England facilitated the expansion of
British domestic and foreign trade. Easy credit in the
short-term capital markets spilled over into the London
capital market which absorbed large amounts of American
securities.

British credit was vital for the expanding world
trade in general. As American money and credit is used
to supplement gold in international trade today, so in the
nineteenth century Great Britain's money and credit was
used to supplement the inadequate supply of gold and silver
to finance international trade.

On the Western side of the Atlantic the boom in

the cotton market came at a time when the American supply

349

was expanding. The United States became the major source
of supply of raw cotton to the British and Continental
textile industries. At the same time the American banking
and credit system also grew rapidly, fed by the growing
volume of specie inflows and the bills of exchange arising
out of the cotton trade.

The Bank War facilitated this expansion. The re-
moval of the Second Bank of the United States as a possible
controller over the note issues of the state banks was not
as important as the shifting of Federal deposits to the
newly created deposit banks; banks which as we have seen,
did pursue a generally more expansionary lending policy
than non-deposit banks.

Concommitant with the expansion of the cotton trade
and the banking and financial system was a desire at the
state and local level to emulate the success obtained by
the State of New York and New York City from the Erie
Canal. This emulation led to a great eXpansion in internal
improvements as East coast centers such as Baltimore,
Boston, and Philadelphia attempted to build canals and
railroads to compete with the Erie Canal which was fun-
nelling the trade of the west in increasing amounts to New
York City.

In the interior Ohio and Michigan and other states
were building canals to connect their states via the Great

Lakes to the Erie Canal and other East-West transportation

350

lines then being built. The South had some interest in
internal improvements but most of the efforts were on the
founding of banks which would finance the development of
new cotton lands.

From the West, South, Mid-Atlantic and to a much
lesser degree the New England States, securities flowed
across the Atlantic to the capital markets of Great Britain
and the Continent. The Second Bank of the United States--
which would become the United States Bank of Pennsylvania
in 1836--became the main intermediary between the issuing
state and local authorities and the foreign capital mar-
kets.

As domestic goods and labor were the largest component
cf’ cost for internal improvements, the main purpose of
the foreign capital inflow was the supplying of foreign
exchange or specie to maintain or expand domestic currency.
Much of the specie was used to satisfy the public's demand
for gold and silver thus minimizing the drain on bank
specie holdings.4

By the end of 1835 the United States was in the
midst of a boom from the timber of Maine to building in
New York City and the Pennsylvania, New Jersey and Maryland
canals. Further South the boom encompassed the cotton
lands of the lower Mississippi Valley. In the West it
encompassed the growth of new cities, the construction of

canals and the eXpanding cultivation of new grain lands.

351

The boom was financed by an unusual assortment of
domestic and foreign bankers, capitalists and merchants.
There was an amalgam of the new money of New York, the
South and the joint-stock banks of Great Britain with the
old money of Boston, Philadelphia and London. The con-
servative banking practices of Boston and London contrasted
with those of the cotton banks in the South and the joint—
stock banks of the industrial areas of Great Britain.
Governmental bodies in the United States and Great Britain
~generally had little control over bankers besides the
latters own conceptions of proper and prudent banking.

How banks were regulated was still being worked out by a
trial and error process.

The mercantile credit systems on both sides of the
Atlantic were in similar straits. There were old line
mercantile houses such as Brown Brothers and the Barings
and newer firms in the Anglo-American trade such as
Humphreys and Biddle. The scramble for the expanding
American trade caused many British firms to loosen their
credit policies. The same loosening occurred in the domes-
tic American trade as the lines of credit stretched further
and further from the importer or manufacturer to the final
consumer. Thus the potential was being stored up for a

larger and larger reaction once the credit chain was broken.

352

The Panic of 1837

 

The bubble was pricked, and not just once. In the
United States in late 1836 and early 1837 a series of
natural and political events destabilized the American
economy and made it highly vulnerable to shocks from Great
Britain. The American grain crops were poor in 1836,
necessitating grain imports in the East while farm incomes
were falling because of ruined crops, in the interior.
Eastern merchants and their bankers now found bills of
' exchange returning from the interior unpaid. At the same
time the Eastern bankers were under pressure from the South
and Great Britain as well as from the monetary and fiscal
policies of the Federal Government.

Cotton prices fell as British demand slackened. As
in America, the grain crops in the British Isles were poor,
but the consequences were much more serious. British home
demand for textiles fell as rising food prices decreased
the purchasing power of the working population and as the
money and credit supply began to undergo severe strain.
These strains in the money markets would culminate in
failures among the joint-stock banks and the Anglo-American
mercantile houses. The Bank of England found its bullion
holdings declining as more and more grain had to be im-
ported and as it extended aid to the hard-pressed joint-
stock banks of England and Ireland. Eventually, the Bank

of England implemented a contractionary monetary policy

353

with special attention on the Anglo-American houses and the
joint—stock banks.

With the clamps being placed on the money and credit
supply, the situation became more bleak for British mer-
chants and manufacturers, for credit was vital to domestic
and foreign trade. One place where this contraction was
most felt was the market for raw cotton. It could not be
sustained in the face of declining demand and contracting
credit facilities. With the continuing fall in cotton
prices more unpaid bills of exchange flowed across the
Atlantic.

A declining supply of cotton bills in the American
foreign exchange market, together with rising short-term
interest rates in London, combined to raise the exchange
rate on London to the specie export point. The Eastern
banks, especially those in New York City, found themselves
losing specie as merchants drew down their deposits to
obtain specie to ship to creditors in Great Britain and
the Continent.

Even before this was taking place, the Federal
government's fiscal and monetary policies increased the
pressure on the New York and other East coast banks and
shook public confidence in banks in general. The various
Federal laws designed to remove bank notes from circula—
tion, culminating in the Specie Circular, increased the

pressure on banks, especially those in the West. The

354

Specie Circular was not as crucial to the Eastern banks as
was the handling of the Federal surplusses. The sections
of the Deposit Act dealing with the distribution of the
Federal surplus caused large movements in Federal deposits
at deposit banks in New York City and elsewhere. Nowhere
was this more untimely than in New York City. The city
banks lost a great prOportion of their Federal deposits
during the last half of 1836 and the first few months of
1837. Large depositors watched these losses with increasing
anxiety. They felt confident in the banks only so long as
they believed that the banks could redeem their deposit
liabilities and their bank notes in specie. Continued
specie losses due to the shifting of Federal deposits and
specie exports added to an already worsening financial
situation.

The supply of money and credit contracted as banks
in New York City and other commercial centers curtailed
their lending activities as bills came from the interior,
and the South unpaid. The inflow of British short-term
credit temporarily dried up as the Bank of England tightened
the pressure on the Anglo-American houses and as bills of
exchange drawn on British firms returned to American unpaid.

In Early May, 1837, the crisis turned into a panic
in New York City when depositors started runs, first on a
few banks which were in difficulty and then on all city

banks. On May 10, 1837, the New York City banks suspended

355

specie payments, and as news of this spread throughout the
country the other banks in America followed suit. The boom
bubble had been pricked. As in 1929, many speculators
found that paper profits had turned into real losses.
Farmers and planters found themselves with debts that

could not be repaid until grain harvests improved and cot-
ton prices rose. Merchants and manufacturers found them-
selves over-supplied with goods but.under-supplied with
money, credit or customers.

There was unemployment in New York and other cities,
but the preponderant role of agriculture and the apparent
flexibility of prices dissipated much of the unemployment
and dislocation by the middle of 1838. People in the cities
had difficulties in making it through the fall and winter
of 1837. It is difficult to judge the actual extent of the
dislocation for with the exception of New York City, for
which information on the size of the relief rolls is avail-
able, other quantitative information is 1acking. The worst
of the economic hardships, however, appears to have passed

by the spring of 1838.

The Recovery and the Panic of 1839

 

By the end of 1838 the American economy was in the
midst of a recovery. The resumption of specie payments
during 1838, the upturn in the cotton market, improvement
in the grain trade, and the continuing inflow of British

long-term capital helped to bring about the recovery.

356

However, the recovery could not be sustained. There had
been no significant changes in the structural factors which
made the American economy highly vulnerable to economic
disturbances from the cotton and money markets of Great
Britain and the United States. There was nothing on the
horizon to justify expectations of continuing recovery.
Rather, there were signs that the recovery would end.
Adverse conditions in Great Britain and the Continent
would soon make themselves felt in the cotton and money
markets of America and Britain.

It became apparent by the late summer of 1838 that
the grain crops in the British Isles would be exceptionally
poor. At the same time, a monetary crisis and recession
developed in France and Belgium. Taken together these
develOpments dampened the home.and Continental demand for
British manufactured goods while at the same time increasing
the outflow of Specie from Great Britain.

By the late spring of 1839 the recovery in America,
dependent as it was on the health of the British economy,
appears to have run out of momentum. Cotton prices were
falling again and banks in most sections of the United
States, perhaps mindful of their problems in 1837, began
to curtail their lending activities. During the summer
lyrices fell across the country, and as in 1837, this meant
'unpaid bills of exchange to merchants and bankers. Falling

gnzices, unpaid bills of exchange, a contracting supply of

357

credit and money and increasing exports of specie to Great
Britain brought on another financial crisis.

Caught in the middle was the United States Bank of
Pennsylvania, overcommitted in cotton and state securities
at a time when the British markets were contracting. It
was losing specie to other domestic banks as well as to
its foreign creditors. The United States Bank suspended
in October and soon afterwards many other banks in the
nation, excluding those of New York and most of New England,
also suspended or failed. These suspensions marked the end
of the boom of the 1830's and the beginning of a depression
which, except for a slight recovery during 1841, lasted

until early 1844.

The 1840-1843 Depression

 

Unlike the suspension of 1837, that of 1839 did not
bring with it any relief to the economy. Prices, especially
industrial, fell sharply during the remainder of the year
and into the middle of 1840. The boom in the construction
of canals and railroads came to an end in 1840. The inflow
of foreign long-term capital slowed to a trickle when the
British grain crops once again were poor, further contract-
ing the inflow of foreign capital, while the disorganized
American banking system made it difficult to obtain funds
to continue construction.

There was a temporary halt to the decline in economic

activity in the last months of 1840 and through most of 1841.

358

This was due mainly to an upturn in agricultural prices,
especially cotton, causing demand, which had been relatively
dormant during 1840 to increase. Merchants rebuilt their
inventories and this led to increased domestic production
and expanded imports.

But with the continuing decline in the construction
of canals and railroads, intensified in February 1841 by
the failure of the United States Bank, and the worsening
economic situation in Britain, the outlook again became
poor. Cotton prices fell and the expanding imports of 1841
had to be paid in specie. The American economy again sank
into a depression which continued until a low point was
reached in early 1843.

Recovery finally came to the United States in 1844
in an almost textbook fashion. A record trade surplus
resulting from low levels of domestic demand and the revival
of the British economy due to better grain harvests led to
massive specie imports. The increased liquidity of the
banks and the financial community in general and the stabi-
lization of cotton and other agricultural prices led to a
renewed demand for manufactured goods. This stimulated the
rebuilding of depleted inventories. Added to these increases
in demand was an upturn in gross investment as accumulated
replacement needs began to be met. The sum total of all this
was an upturn in aggregate demand which was widespread
enough to turn the economy around and start it on the road

to recovery.

359

Concluding Comments

 

The boom in the American economy during the 1830's
could continue only as long as aggregate demand continued
to increase. It was fed by the growing cotton trade, expand-
ing investments in internal improvements, and increasing
economic specialization as reflected in the growth of the
textile industry and the breaking of new grain lands in the
west. But this growth in aggregate demand which outstripped
domestic production could be maintained only as long as
overall equilibrium in the commodity, money and security
markets was maintained. Thus, because there was excess
demand for goods large balance of trade deficits developed.
These deficits might have led to Specie outflows, a con-
tracting supply of money and credit therefore at least
slowing down the rate of growth of demand and output.

America was fortunate for easy money conditions in
Great Britain during the 1830's facilitated specie inflows.
Directly specie inflows were facilitated by American export
of short— and long-term debt instruments to British and
Continental firms which supplied credit to American import-
ers and foreign capitalists who purchased American securi-
ties. Indirectly it was when British short-term credit
instruments--later supplemented by those issued by the
United States Bank, which in turn obtained credit in Britain
and France--were substituted for Mexican silver and other

specie in the China trade. These capital flows enabled the

360

United States to retain a greater portion of the specie
inflows.

The sale of long-term securities in Britain and the
Continent enabled the builders of canals and railroads in
America to obtain imported machinery, but more importantly
foreign exchange. The foreign exchange could be sold for--
or specie could be directly obtained and used for--domestic
currency needed to pay the day to day construction costs of
these projects. The securities were also used to refinance
a portion of the country's short—term debts as they matured.

The excess supply of American securities--excess in
terms of the American market--flowed into the foreign capital
markets, of which the British was the largest, and enabled
the United States to finance much of its infra-structure
construction as well as its trade deficits.

British capital and cotton markets were crucial to
the American economic boom of the 1830's. The financial
crises of 1837 and 1839 and the economic downturns which
followed resulted fundamentally from the adverse conditions
of these markets arising from poor grain harvests and
financial disturbances. In 1837 the financial disturbances
centered in the joint-stock banks of Great Britain and
Ireland while in 1839 they centered in banking disturbances
in France and Belgium. In both years domestic problems
made the American economy more receptive to the shocks

emanating from the eastern side of the Atlantic.

361

The pattern of boom and bust, growth and stagnation
in American during the 1830's and early 1840's did not
result from any single source. It cannot be explained
solely in terms of the actions of the Jackson and Van
Buren administrations as many of the earlier writers have
done. Neither can it be eXplained as Temin did mainly in
terms of changes in the supply of money and credit as the
banking and financial sector of the economy adjusted to
the changing inflows and outflows of specie. Finally this
pattern of economic activity cannot be explained as the
result of the growth in the cotton market and the concom-
mitant increase in economic specialization which took place.
Rather movements in the American economy were due to cir-
cumstances on both sides of the Atlantic. If America did
not have an almost monopolistic position in the world cotton
market, and if the British grain crops had been uniformly
poor through the 1830's; the British cotton and capital
markets would not have been able to purchase American cotton
and securities to the extent that they did. American eco-
nomic growth in the 1830's depended on a healthy British
economy, just as Europe's in the late 1940's and early

1950's did on that of the American economy.

FOOTNOTES

CHAPTER X

lCopper coins in the denominations of cents and
half-cents were minted but in terms of value were minor
in comparison to the total money supply.

2Estimated total state debts rose from $25.6 million
in 1830 to approximately $174 million by the end of 1838.
See Table 4.1 for sources.

3Douglass C. North, "The United States Balance of
Payments, 1790-1860," Trends in the American Economy in the
Nineteenth Century, p. 585, and Table on p. 581.

 

 

4We can think of individuals as holding a portfolio
of money assets consisting of bank notes, demand deposits
and specie. Between these components there will be some
desired ratio determined by such factors as income, availa-
bility of banking services, confidence in banks, and the
types of payments which have to be made. During the 1830-
1834 period Temin has estimated that the proportion of
money held as specie was about one-half the average level
of holdings during the 1820's. The massive specie inflows
of 1834-1836 made it easier for the public to increase
their specie holdings. We should also remember that in times
of uncertainty over the safety of paper money, people have
tended to increase their holdings of gold and other precious
metals. The best current example of this was the French
public's movement into gold coins during the currency pro-
blems of the late 1960's.

362

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Circulation. Vols. 2, 3, 4. London: Longman,
Orme, Brown, Green and Longman, 1838

 

Trescott, Paul B. "Federal-State Financial Relations,
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378

Trescott, Paul B. "The United States Government and National
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Nineteenth Century, Studies in Income and Wealth.
Vol. 24. New York: National Bureau of Economic
Research, 1960.

 

 

Trotter, Alexander. Observations on the Financial Position
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Longman, Orme, Brown, Green, and Longman, 1839.

 

 

 

Tucker, George. The Theory of Money and Banks Investigated.
Boston: C. C. Little and J. Brown, 1839.

Tucker, George. Progress of the United States in Population
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United States, Department of Agriculture, Statistical Bureau,
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Van Deusen, Glyndon G. The Jacksonian Era, 1828-1848. New
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Van Fenstermaker, J. The Development of American Commercial
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Walker, Amasa. The Science of Wealth. Boston: Little,
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Warburton, Clark. "Variations in Economic Growth and Banking
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Warburton, Clark. "Monetary Disturbances and Business
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Ware, Caroline F. The Early New England Cotton Manufactures.
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Ware, Nathanial. Notes on Political Economy. New York:
Leavitt, Trow and Co., 1844.

379

Ware, Norman. The Industrial Worker, 1840-1860. Boston:
Houghton-Mifflin Co., 1924.

 

Warren, George, and Pearson, F. A. Prices. New York: John
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Wender, Herbert. Southern Commercial Conventions, 1837-
1859. John Hopkins University Studies in Historical
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more: The John Hopkins University Press, 1930.

 

 

Wicker, E. R. "Railroad Investment Before the Civil War."
Trends in the American Economy in the Nineteenth
Century. Studies in Income and Wealth. Vol. 24.
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1960.

 

Wilburn, Jean A. Biddle's Bank. New York: Columbia Uni-
versity Press, 1967.

 

Willett, Thomas D. "International Specie Flows and American
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History. Vol. 28. March, 1968.

Williamson, Jeffrey G. "International Trade and United
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Williamson, Jeffrey G. American Growth and the Balance of
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Wunderlich, Herbert J. "Foreign Grain Trade of the United
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Politics. Vol. 33, No. 1. January, 1935.

 

Yeager, Leland B. International Monetary Relations. New
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Zevin, Robert B. The Growth of Cotton Textile Production
After 1815. (Forthcoming).

 

 

Governmental Documents

 

New York State, Report of the Bank Commissioners:

New York State Assembly,
56th Session, Assembly Document No. 69.
57th Session, Assembly Document No. 102.
58th Session, Assembly Document No. 74.

380

59th Session, Assembly Document No. 80.
60th Session, Assembly Document No. 78.
6lst Session, Assembly Document No. 71.
62nd Session, Assembly Document No. 101.
63rd Session, Assembly Document No. 44.
64th Session, Assembly Document No. 64.
65th Session, Assembly Document No. 29.
66th Session, Assembly Document No. 34.
New York State. Assembly, Report of the Select Committee

 

Appointed to Investigate the Banks. 60th Session,
60th Session, Assembly Document No. 328.

New York State, Senate, 65th Session Senate Document No. 82.

 

 

 

 

 

United States, Bureau of the Census. Tenth Census of the
United States: 1880. Report on Voluation, Taxation
and Public Indebtedness in the United States. Vol.

7. Washington: Government Printing Office, 1884.

United States Congress,

House, 22nd Congress, 2nd Session, House Document No. 105.
23rd Congress, lst Session, House Document No. 498.
23rd Congress, 2nd Session, House Document No. 190.
24th Congress, 2nd Session, House Document No. 21,

65, 77, 62.
25th Congress, lst Session, House Document No. 28,
30.
25th Congress, 2nd Session, House Document No. 79.
25th Congress, 3rd Session, House Document No. 66,
227.
26th Congress, lst Session, House Document No. 172.
26th Congress, 2nd Session, House Document No. 111.
28th Congress, 2nd Session, House Document No. 35.
29th Congress, 1st Session, House Document No. 226.
United States Congress,
Senate, 23rd Congress, 2nd Session, Senate Document No. 17.
24th Congress, lst Session, Senate Document No.423.
24th Congress, 2nd Session, Senate Document No. 21,
29.
25th Congress, lst Session, Senate Document No. 7.
25th Congress, 2nd Session, Senate Document No.189.
25th Congress, 2nd Session, Senate Document No.365,
457, 471.
26th Congress, lst Session, Senate Document No. 14.
53rd Congress, 3rd Session, Senate Report No.986.

APPENDICES

381

APPENDIX A

382

 

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385

TABLE A-3.--Receipts From Public Land Sales by the United
States Quarterly, 1830-1845.

 

 

 

(1927), p.

Lands," Review of Economics and Statistics,

 

($000)
Year First Second Third Fourth
Quarter Quarter Quarter Quarter
1830 479 351 520 1059
1831 406 1029 1029 902
1832 597 524 630 1052
1833 608 799 768 1998
1834 1054 982 955 3073
1835 1990 3144 4083 6949
1836 5847 8423 5859 4805
1837 3479 1834 1699 928
1838 548 524 700 2239
1839 1823 1672 1283 1710
1840 950 794 468 536
1841 416 313 367 416
1842 253 591 263 345
1843 551 388 473 638
1844 497 489 525 729
1845 447 531 690 794
Source: Arthur H. Cole, "Variations in Sale of Public

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APPENDIX B

388

389

TABLE B-l.--Estimates Of Major Assets, all United States

Banks, 1829, 1833-1845.

 

 

 

 

 

 

($000,000)
End Of Loans and Discounts Specie
Year
I II III Ia IIa IIIa IVa Va
1829 200.5 22.1 20
1833 324.1 324 26.6 27
1834 350.8 365.2 365 42.9 43.9 43.9 47.0 44
1835 458.8 457.6 458 39.9 40.0 40.0 44.8 40
1836 519.5 525.1 525 37.5 37.9 37.9 43.3 38
1837 476.3 485.6 486 34.9 35.2 35.2 36.1 35
1838 497.6 492.3 492 44.5 45.1 45.1 48.7 45
1839 460.6 462.9 463 33.1 33.1 33.1 36.7 33
1840 385.8 385.8 387 32.7 34.8 38.0 35
1841 349.8 324.0 324 29.6 28.4 31.6 28
1842 255.5 254.6 255 33.9 33.5 40.1 34
1843 265.5 264.9 265 49.7 49.9 56.6 50
1844 285.5 289 43.8 44.2 51.0 44
1845 311.5 312 41.8 42.0 42
Sources: I and Ia, Thomas S. Berry, Western Prices Before

 

1861 (Cambridge: Harvard University Press, 1943),

p. 588.

II and IIa, Hunt's Merchants Magazine, August, 1841,
p. 186; Niles' National Register, January 14, 1843,
p. 308; and David R. Dewey, Financial History of

the United States, 12th ed., New York: Longmans,
Green and Co., 1939), p. 225.

III. The Statistical History Of the United States
From the Colonial Times to the Present (Conn:
Fairfield Publishers, Inc., 1965), Series X22, p.
624.

IIIa, Jeffrey G. Williamson, American Growth and
the Balance of Payments, 1820—1913 (Chapel Hill:
University of North Carolina Press, 1964), p. 277.

 

 

 

 

 

 

 

 

IVa, George Macesich, "Sources of Monetary Disturb-
ances in the United States, 1834-1845," Journal Of
Economic History, Vol. 20 (September, 1960), pp.
430-431.

Va, Peter Temin, The Jacksonian Economy (New York:
W. W. Norton and Co., Inc., 1969), pp. 186-187.

 

 

 

 

390

TABLE B-2.--Estimates Of Major Liabilities, all United States
Banks, 1829, 1833-1845.

 

 

 

 

I

‘3‘

 

($000,000)
End Of Note Circulation Deposits
Year
I II Ia IIa IIIa

1829 61.3 55.6

1833 94.8 75.7 102

1834 101.9 103.7 85.1 83.1 122

1835 148.1 140.3 120.7 115.1 166

1836 146.5 149.2 131.9 127.4 190

1837 115.5 116.1 82.9 84.7 146

1838 135.6 135.2 90.4 90.2 143

1839 111.6 107.0 73.9 75.7 120

1840 106.4 107.3 66.5 108

1841 86.7 83.7 62.6 88

1842 60.2 58.6 55.5 78

1843 76.3 75.2 83.2 117

1844 91.1 90.0 86.2 114

1845 104.9 106.0 96.5 125
Sources: I and Ia, Thomas S. Berry, Western Prices Before

 

1861 (Cambridge:
p. 588.

II, Statistical History of the United States from
Colonial Times to Present (Conn: Fairfield Pub-
lishers, Inc., 1965), Series X39, p. 625; Hunt's
Merchants Magazine, August 1841, p. 186; Niles'
National Register, January 14, 1842, p. 308.

Harvard University Press, 1943),

 

 

 

 

IIa, Hunt's Merchants Magazine, August 1841, p.
186; Niles National Register, January 14, 1842,
p. 308.

IIIa, Statistical History of the United States
From Colonial Times to the Present, Series X34,
p. 625. Listed as total deposits.

 

 

 

 

391

TABLE B-3.--Selected Assets and Liabilities Of Federal Deposit
Banks, 1834-1837.

 

 

($000,000)
Year & Loans and Specie Circu- Private Deposits Of
Month Discounts lation Deposits U.S.Treasury
1834
Jan. n.a. 2.92 7.80 n.a. 9.36
Oct. n.a. 4.57 8.07 n.a. 12.00
1835
Jan. 47.36 6.86 15.52 n.a. 9.34
Dec. 62.58 9.59 21.79 n.a. 22.35
1836
Feb. 65.44 10.20 26.24 15.04 28.24
March 64.03 11.07 27.30 15.91 30.81
May 70.16 10.20 29.18 16.72 35.52
June 71.28 10.45 27.97 16.04 37.28
Nov. 115.08 15.52 41.48 26.57 45.06
1837
March n.a 15.31 44.83 29.96 38.96
May n.a 13.33 37.62 30.78 26.86
July n.a 11.43 31.78 30.11 21.04
Aug. 112.9 10.58 32.63 29.49 12.94
Per cent Change
Jan. 1835 143% 125% 168% 77%a 382%

NOV. 1836

 

aFebruary 1836-November 1836.

Sources: Harry N. Scheiber, "The Pet Banks in Jacksonian
Politics and Finance, 1833-1841," Journal of Eco-
nomic History, Vol. 23, NO. 2 (June, 1963), p.
203; Niles National Register, April 9, June 4,
and July 9, 1836; Financial Register, Vol. 1, 1836,
p. 205.

 

 

 

 

392

 

 

 

 

 

 

 

 

 

 

 

 

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395

TABLE B-6.--Estimates of the United States Money Supply,

 

 

1833-1845.
($000,000)

End of Year A B C D
1833 113.0 226 168
1834 123.8 187.0 268 172
1835 160.9 268.8 366 246
1836 160.0 277.4 407 276
1837 153.3 198.4 345 232
1838 175.6 226.0 363 240
1839 159.3 185.5 306 215
1840 139.4 172.9 294 286
1841 144.0 149.3 252 174
1842 127.5 115.7 225 258
1843 137.2 159.5 284 194
1844 165.1 177.3 292 214
1845 195.3 201.0 318 241

 

Sources: A. Report of the Comptroller of the Currency 1896
found in Jeffrey Williamson, American Growth
and the Balance of Payments (Chapel Hill: The
University of North Carolina Press, 1964), p.
277.

B. Thomas S. Berry, Western Prices Before 1861
(Cambridge: Harvard University Press, 1943),
p. 588, includes only bank money.

C. The Statistical History of the United States
From Colonial Times to the Present (Conn:
Fairfield Publishers, Inc., 1965), Series X,
281, p. 647, includes only bank money.

 

 

 

 

 

D. Peter Temin, The Jacksonian Economy (New York:
W. W. Norton and Co., Inc., 1969), pp. 61, 159.

 

396

TABLE B-7.--Interest Rates in London and New York Money
Markets and the Bank of England's Discount Rate, Monthly,
January 1834-December 1844.

 

 

Month and London Bank of New Yorka
Year England
January 1834 3 1/4 4 15,18,24
February 3 4 Business unsettled
March 2 3/4 4 Rates High and
April 3 4 Variable
May 3 1/4 4 "
June 3 1/4 4 "
July 3 1/4 4 "
August 3 1/4 4 "
September 4 4 "
October 3 3/4 4 "
November 3 3/4 4 "
December 3 3/4 4 12,10,8
January 1835 3 3/4 4 5
February 3 1/4 4 5
March 3 1/2 4 5
April 3 3/4 4 5
May 3 3/4 4 5
June 4 4 5
July 4 4 5
August 3 1/2 4 5
September 3 3/4 4 5
October 3 3/4 4 5
November 3 3/4 4 5
December 3 3/4 4 8, 10
January 1836 3 3/4 4 10
February 3 3/4 4 10
March 3 1/2 4 12
April 3 1/4 4 12,15
May 3 1/4 4 15,18
June 4 4 15,12
July 4 4, 4 1/2 15,18
August 4 1/2 4 1/2 18,24
September 5 5 24
October 5 5 24,36
November 5 1/2 5 24,30
December 5 1/2 5 24,30
January 1837 5 1/2 5 16,20,13
February 5 1/2 5 15,21,18
March 5 1/2 5 18,20,27
April 5 1/2 5 27,26,30
May 4 1/2 5 27,32
June 4 1/2 5 18,9,6
July 4 1/2 5 7 1/2
August 4 5 7 1/2

TABLE B-7.--Continued.

Month and

 

397

 

London Bank of New Yorka

Year England
September 3 1/2 5 7 1/2, 6 1/2
October 3 1/4 5 6 1/2
November 3 1/4 5 6,9
December 3 1/2 5 ‘ 10
January 1838 3 1/2 5 11
February 3 5 12
March 3 5 12,18
April 2 3/4 5 18,12
May 2 1/2 5 lo; 9! 7
June 2 3/4 5 7, 6
July 3 5,4 6
August 2 3/4 4 6, 7
September 3 4 6, 7
October 3 4 6, 7
November 3 1/4 4 6, 8
December 3 1/2 4 7, 9, 7
January 1839 3 3/4 4 6, 9
February 3 3/4 4 6, 9
March 3 3/4 4 6, 9
April 3 3/4 4 6, 9
May 4 4,5 6, 9
June 5 5,5 1/2 9
July 5 1/2 5 1/2 11,12
August 6 6 12,15
September 6 1/2 6 15,18,21
October 6 1/2 6 21,30
November 6 1/2 6 20,33,36
December 6 1/2 6 18,15, 9
January 1840 6 6,5 9
February 4 3/4 5 9,12
March 4 3/4 5 9,12
April 4 3/4 5 12, 7
May 4 1/4 5 7
June 4 3/4 5 6, 8
July 4 1/2 5 8, 5
August 4 1/2 5 5, 7 1/2
September 4 3/4 5 6, 7
October 5 5 6, 7
November 6 5 6, 7
December 5 3/4 5 6, 7
January 1841 5 1/2 5 6, 7
February 5 5 6, 7
March 5 5 6, 7
April 4 1/2 5 6, 7
May 4 1/2 5 6
June 5 5 6
July 4 1/2 5 6

398

TABLE B-7.--Continued.

 

 

 

Month and London Bank of New Yorka
Year England

August 4 1/2 5 6
September 4 3/4 5 6, 7
October 5 5 6, 7 1/2
November 5 1/2 5 6, 9
December 5 5 9,12
January 1842 4 3/4 5 9,12
February 4 1/2 5 9,12
March 3 3/4 5 9,12
April 3 3/4 5,4 8

May 3 1/4 4 8
June 3 1/2 4 8
July 3 1/4 4 8
August 3 4 7 1/4
September 2 1/2 4 7
October 2 3/4 4 6 1/2, 6
November 2 1/2 4 6, 6 1/2
December 2 1/2 4 6, 9
January 1843 2 1/2 4 6
February 2 1/4 4 6, 5
March 2 4 5, 6
April 2 4 5

May 2 4 5, 4 1/2
June 2 1/4 4 5, 4 1/2, 3 1/2
July 2 1/4 4 4
August 2 4 3 1/4, 4
September 2 1/4 4 3 1/2, 4
October 2 1/4 4 3 1/2, 4
November 2 1/4 4 3 1/2, 4
December 2 1/2 4 3 1/2, 4
January 1844 2 1/4 4 4
February 2 4 4
March 2 4 4, 5
April 2 4 5

May 1 3/4 4 5
June 2 4 5
July 2 4 5
August 1 3/4 4 5
September 2 4, 2 1/2, 3 5, 5 1/2
October 2 1/4 3, 2 1/2 5
November 2 3/4 3, 2 1/2 5, 5 1/2
December 2 3/4 2 1/2 5

 

aRates quoted are for the beginning, middle, and end
of each month.

Source: Erastus B. Bigelow, The Tariff Question (Boston:
Little Brown and Co., 1862), p. 206.

 

399

TABLE B-8.--Foreign Exchange Rates, Dollar and Pounds

Year and
Month

January,

1834-December,

Sixty Day Bills

Per cent Premium

on Nominal Para

1843.

Sovereigns

 

January 1834
February
March
April

May

June

July
August
September
October
November
December
January 1835
February
March
April

May

June

July
August
September
October
November
December
January 1836
February
March
April

May

June

July
August
September
October
November
December
January 1837
February
March
April

May

June

July 1837
August
September

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TABLE B-8.--Continued.

 

400

 

Sixty Day Bills

 

Year and Per cent Premium Sovereigns
Month on Nominal Para

October 14 -15 p 13 1/2-14 3/4p
November 15 1/2 -16 p 14 3/4-15 1/4p
December 14 -14 1/2 p 14 3/4-15 1/4p
January 1838 9 1/8 -10 1/4 p 11 3/8-12 1/2p
February 9 — 9 1/2 p 12 1/2-13 3/4p
March 7 1/4 - 7 1/2 p 11 3/8-11 7/8p
April 4 1/5 - 5 p 10 1/4-11 3/8p
May 6 1/4 - 6 3/4 p 9 1/8-10 1/4p
June 8 - 8 1/2 p 9 1/8-10 1/4p
July 7 1/2 - 8 1/2 p 9 1/8-10 1/4p
August 7 1/2 - 8 1/2 9 1/8
September 9 - 9 1/4 9 1/8
October 10 1/4 -10 1/4 9 1/8
November 9 1/4 - 9 1/2 9 1/8
December 10 -10 1/4 9 1/8
January 1839 9 1/8 - 9 5/8 9 1/8
February 8 7/8 — 9 1/8 9 1/8
March 8 5/8 - 8 7/8 9 1/8
April 8 1/2 - 9 3/8 9 1/8
May 8 1/2 - 8 7/8 9 1/8
June 9 3/8 - 9 5/8 9 1/8
July 8 7/8 - 9 3/8 9 1/8
August 9 1/8 - 9 7/8 9 1/8
September 8 1/2 - 8 7/8 9 1/8
October 9 5/8 -10 1/4 9 1/8
November 6 7/8 - 7 3/8 9 1/8-10 1/4
December 8 5/8 - 9 1/8 9 1/8-10 1/4
January 1840 7 3/8 - 8 1/2 9 1/8-10 1/4
February 8 - 8 1/2 9 1/8-10 1/4
March 8 - 8 1/4 9 1/8-10 1/4
April 7 3/8 - 8 1/4 9 1/8-10 1/4
May 7 5/8 - 8 1/4 9 1/8-10 1/4
June 7 3/8 - 8 9 1/8-10 1/4
July 6 5/8 - 7 1/8 8 7/8
August 6 3/8 - 6 7/8 8 7/8
September 6 3/8 - 6 7/8 8 7/8
October 8 - 8 1/4 8 7/8
November 8 5/8 - 8 7/8 8 7/8
December 8 1/2 - 8 7/8 8 7/8
January 1841 8 1/2
February 8
March 8
April 7
May 7 1/2
June 8 1/4
July 8 1/2
August 8 1/2

401

TABLE B-8.--Continued.

 

 

Sixty Day Bills

 

 

Year and Per cent Premium Sovereigns
Month on Nominal Para

September 9

October 9 3/4
November 10

December 9 1/4
January 1842 8 3/4
February 8 1/4
March 8 1/4
April 6 1/2
May 7 1/2
June 8

July 7 1/2
August 6 1/4
September 7 3/8
October 8 1/8
November 6 1/4
December 6 1/2
January 1843 5 1/2
February 5 3/8
March 6

April 5 3/4
May 7 1/4
June 8 1/2
July 8 3/4
August 9 1/4
September 9 1/4
October 9 1/4
November 8 1/2
December 8 1/2

aNominal par was $4.4444 = 1 b. p = premium;

d = discount; high and low for each month.

bMay, 1837-December, 1837 s = L

May 1837 $4.95-$5.05 September 1837
June 1837 $5.25-$5.35 October 1837
July 1837 $5.45-$5.475 November 1837

August 1837 $5.30-$5.35 December 1837

Sources: United States, Congress, Senate, 25th
Session, Senate Document No. 457, pp.
Appendix Table B-lO. Walter B. Smith

$5.35-$5.38
$5.05-$5.10
$5.10-S5.l3
$5.10-$5.13

Congress, 2nd
92-97;
and Arthur H.

Cole, Fluctuations in American Business, 1790-1860

 

(Cambridge: Harvard University Press, 1935),pp.

187, 190-191. Hazard's United States

Commercial

 

and Statistical Register, Vol. 4, March 1841, pp.
154-155; June 1841, pp. 408-409. United States
Congress, House, 25th Congress, 3rd Session, House

 

Document 227, pp. 646-647.

402

TABLE B—9.-—Value of the Pound Sterling in Dollars.

 

 

Per cent of Dollars and Cents
Par (Nominal)a Per Pound Sterling
Par $4.4444
Premium 1/4% .4555
1/2% .4666
3/4% .4777
1 4.4888
2 .5333
3 .5777
4 .6222
5 .6666
6 .7111
7 .7555
8 .8000
9 .8444
10 .8888
11 .9333
12 .9777
13 5.0222
14 5.0666
15 5.1110
20 5.3332

 

aPrior to the Act of June 28, 1834, the ratio of
gold to silver at the mint was 15.1. The American eagle
($10) of the old coinage--previous to July 31, 1834—-
contained 247.5 grains of pure gold. As the British
sovereign (51) contained when minted 113 1/623 grains of
pure gold, the gold par was $4.65 to the pound, while the
legal par was $4.44 to the pound.

After the Act of June 28, 1834, mint ratio was changed to
16 1/464 to 1. New eagle contained 232 grains of pure gold
and the gold par was equal to the exchange rate at $4.87075
to the pound.

After the Act of January 18, 1837, the mint ratio was
changed to 15.988+ to 1. Exchange rate was then, assuming
that British sovereigns were of full weight and standard
fineness, $4.86656 to the pound.

It was estimated by the Assey Office at the Philadelphia
Mint in 1837 that the average weight of British sovereigns
was 112.8577 grains.

Source: United States, Congress, House, 25th Congress, 3rd
Session, House Document No. 227, pp. 648-649.

403

TABLE B-10.-—The Condition of the New York City Banks
July 1834-May 1844.

 

 

 

Month and Loans and Specie Circu- Deposits U.S.
Year* Discounts lation Deposits
July 1834 24364 2494 3687
January 1 1835 30480 4359 4994 11594
January 1 1836 43240 4731 7569 14849 9292
June 1 1836 44572 6389 8578 18141
January 1837 46246 4731 9693 14855 10135
Junea 1837 38434 1711 5284 11300 3908
July 1837 37725 1710 5575 10929 3152
August 1837 36988 1758 6061 11481 708
September 1837 35308 1782 5492 11890 587
October 1837 33724 1966 5541 13384 431
November 1837 32078 2100 4827 12969 237
December 1837 31070 2374 4004 12843 131
January 1838 34057 2875 3608 12497d
February 1838 31038 2623 3008 11725 134
March 1838 30489 2740 2657 11180 110
April 1838 29729 3329 2322 11458 35
May 1838 28220 6571 3180 12600 130
January 1839 35947 5008 5494 13201
January 1840 26900 4495 4029 12456
Januaryb 1841 22763 3776 4153 10639
JanuaryC 1842 21583 3341 4151 9396
January 1843 29579 7280 4631 15453
August 1843 36514 12966 5309 23476
May 1844 42130 8486 5894 25001
*
Unless otherwise indicated the first week of the

month.

aReport of the Bank Commissions given the following
for May 25, 1837: $43,649,000, $3,092,000, $6,836,000,
$12,680,000.

b18 Safety Fund Banks.
c20 Safety Fund Banks.

dFinancial Register gives $12,491,000.

New York State Report of Bank Commissioners, New
York State Assembly, 56th Session, Assembly
Document 69; 57th Session, Assembly Document 102;
58th Session, Assembly Document 74; 59th Session,
Assembly Document 80; 60th Session, Assembly
Document 78; 60th Session, Assembly Document 328;
6lst Session, Assembly Document 71; 62nd Session,
Assembly Document 101; 63rd Session, Assembly
Document 44; 64th Session, Assembly Document 64;
65th Session, Assembly Document 29; 66th Session,
Assembly Document 34; Financial Register, Vol. I.

Sources:

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405

TABLE B-12.-—Quarter1y Indications of Monetary Conditions in the United Kingdom

 

 

1833-1842.
(£000,000)
Value of
Year and Average Yield on Net Note Bank of Total Note Bills of
Quarter Market Consols Circula- England Circulation Exchange
Rate of Per Cent tion in Note Cir- in England Created in
Discount England culation and Wales England
Per Cent and Wales and Wales
1833 1 2.5 3.43 19.3 50.8
2 2.9 3.38 19.3 48.3
3 2.7 3.39 19.8 51.6
4 3.3 3.41 10.2 18.2 28.4 51.8
1834 1 3.1 3.35 10.2 19.1 29.3 53.3
2 3.1 3.27 10.5 18.9 29.4 50.9
3 3.5 3.31 10.2 19.1 29.3 55.6
4 3.8 3 30 10.7 18.0 28.7 51.8
1835 1 3.5 3 28 10.4 18.6 29.0 56.7
2 3.8 3.27 10.9 18.3 29.2 57.2
3 3.8 3.32 10.4 18.2 28.6 58.3
4 3.8 3.29 11.1 17.3 28.4 57.4
1836 1 3.6 3.29 11.4 18.1 29.5 64.0
2 3.5 3.27 12.2 17.9 30.1 64.8
3 4.5 3.31 11.7 18.1 29.8 78.1
4 5.3 3.34 12.0 17.4 29.4 73.4
1837 1 5.5 3.33 11.0 18.4 29.4 74.5
2 4.8 3.30 10.9 18.2 29.1 63.0
3 3.8 3.28 10.1 18.9 29.0 63.1
4 3.4 3.22 10.9 17.9 28.8 58.1
1838 1 3.2 3.26 10.9 19.0 29.9 63.5
2 2.7 3.18 11.7 19.0 30.7 62.9
3 2.9 3.19 11.4 19.7 31.1 71.8
4 3.2 3.19 12.2 18.2 30.4 68.2
1839 1 3.8 3.23 12.3 18.4 30.7 72.9
2 4.3 3.21 12.3 18.1 30.4 74.0
3 6.0 3.28 11.1 18.0 29.1 82.0
4 6.5 3.31 11.4 16.3 27.7 74.7
1840 1 5.2 3.30 10.8 16.8 27.6 76.8
2 4.4 3.26 11.1 16.9 28.0 73.6
3 4.6 3.33 10.0 17.2 27.2 79.3
4 5.6 3.37 10.4 16.1 26.5 70.7
1841 1 5.2 3.37 10.0 16.5 26.5 75.5
2 4.8 3.33 10.3 16.6 26.9 70.4
3 4.6 3.35 9.1 17.6 26.7 76.4
4 5.2 3.38 9.5 16.7 26.2 64.1
1842 1 4.3 3.36 8.3 16.9 25.2 67.9
2 3.5 3.25 8.3 17.8 26.1 63.8
3 3.1 3.26 7.9 19.9 27.8 62.5
4 2.6 3.19 8.4 18.8 27.2 55.2

 

aNote circulation of private and joint stock banks. No information
given as to intra-bank holdings.

Source: R. C. 0. Matthews, A Study in Trade Cycle History (Cambridge:
Cambridge University Press, 1954), pp. 199, 201.

 

4(16

TABLE B-l3.--Major Liabilities, New York City Banks, January 1837-May 1838.

 

 

 

($000)
Deposits Amount Due Out-
side the City
Note U.S. To Other From Other Net
Date No. of Circu- Treas- Private Banks and Banks and Bankers
Banks lation ury Corporations Corporations Balances

(l) (2) (3) (4) (5) (6) (7) (8)
Jan. 1837 21 8822 7176a 12510 14245b
June 1837 21 5284 3908 11300 5093 5447 + 354
July 1837 21 5575 3152 10929 6218 5761 - 457
Aug. 1837 21 6061 708 11481 7190 6216 - 974
Sept. 1837 21 5492 587 11890 6745 6720 - 25
Oct. 1837 21 5541 431 13384 5277 6686 +1409
Nov. 1837 21 4827 237 12969 5711 6829 +1118
Dec. 1837 21 4004 131 12843 5884 6770 + 886
Jan. 1838 22d 3608 n.g. 12497C 11284e 11835f + 551
Feb. 1838 21 3008 134 11725 6329 5833 - 496
Mar. 1838 21 2657 110 11180 6321 5108 -1213
Apr. 1838 21 2322 35 11458 6273 4887 -1386
May 1838 21 3180 130 12600 6049 4175 -1874

 

aThis figure is for the Safety Fund Banks.

bThis is the total amount due all banks and corporations which performed
banking functions inside and outside the city. The comparable figure for June
1837 was $8,270,000.

CListed as deposits, no mention made of Treasury deposits.
dManhattan Company included.
eTotal due all banks and corporations both inside and outside the city.

fTotal due from all banks and corporations both inside and outside the
city.

Sources: Financial Register, Vol. 1, pp. 92, 93, 143, 152, 157, 170, 224, 287,
319, 320, 349, 408. New York State, Assembly, 6lst Session, Assembly
Document No. 71. United States, Congress, House, 25th Congress, 2nd
Session, House Document, No. 79, pp. 342-345. United States, Con-
gress, Senate, 25th Congress, 2nd Session, Senate Document No. 471,

pp. 816-817.

 

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APPENDIX C

411

412

TABLE C-1.--Estimates of United States Cotton Prices, 1830-
1845.
(Price Per Pound)

 

 

American Export Price
Year Liverpool Midlings New Orleans Per Pound
Uplands and Uplands Uplands Gross Weight
Cents Pence Centsa Centsb
1830 13.6 6 7/8 8.4 9.9
1831 11.8 6 9.0 9.1
1832 13.7 6 5/8 10.0 9.8
1833 17.5 8 l/2 11.2 11.1
1834 17.6 8 5/8 15.5 12.9
1835 20.6 10 1/4 15.2 16.8
1836 20.3 9 7/8 13.3 16.8
1837 14.2 7 9.0 14.2
1838 14.2 7 12.4 10.3
1839 15.7 7 7/8 7.9 14.8
1840 12.1 6 9.1 8.6
1841 13.5 6 1/4 7.8 10.2
1842 10.5 5 3/8 5.7 8.1
1843 9.1 4 5/8 7.5 6.2
1844 10.1 4 7/8 5.5 8.1
1845 8.3 4 1/8 6.8 5.9

 

aData is for crop year, 1830 is thus from September
1830 to August 1831.

bData is for fiscal year, 1830 is thus from October
1, 1829 to September 30, 1830.

Sources: Liverpool upland: Victor S. Clark, History of
Manufactures in the United States, 1607-1860
(Washington: Carnegie Institute, 1916), p. 611.
American midlings: United States Congress, Senate,
Report of the Committee on Agriculture and Fore-
station, 53rd Congress, 3rd Session, Senate Report
986, Vol. 2, p. 157. New Orleans Upland: Lewis C.
Gray, History of Agriculture in the Southern
United States, Vol. 2 (Washington: Carnegie
Institute, 1933), p. 1027. Export Price: United
States Department of Agriculture, Statistical
Bureau, Circular Number 32, Cotton Crops of the
United States, 1790-1911, August 15, 1912, pp. 6-7.

 

 

 

 

 

 

 

 

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413

 

 

 

 

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415

 

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416

TABLE Cu5.~-Monthly Prices of Short‘Stable American Cotton, New Orleans
and England, January 1834-January 1845.
(Price Per Pound)

H———-———. -m--.
--——-._. — .. .——.--.——-—-

New Orleans

 

 

Year and
Month (Cents) (Pence) (Pence)

Series A Series B England Liverpool

January 1834 10.3 10 1/2- 9 3/4

February 1834 9.8 10 1/2- 9

March 1834 10.0 10 1/2- 9 1/2

April 1834 10.8 11 -10

May 1834 11.3 11 1/2-11

June 1834 11.3 12 -11.

July 1834 11.8 12 -11 1/2

August 1834 11.8 12 -11 1/2

September 1834 11.8 12 -11 1/2

October 1834 14.3 14 1/2-12 1/2

November 1834 13.3 15 -12 1/2

December 1834 15.8 16 -14

January 1835 15.3 15 1/2-14

February 1835 14.8 16 -14 1/2

March 1835 15.8 16 —15 1/2

April 1835 16.0 16 1/2-15 1/2

May 1835 17.0 17 1/4-16 1/2

June 1835 17.0 17 1/2-16 1/2

July 1835 18.5 19 -16 1/2

August 1835 18.5 19 ~18

September 1835 n.g. n.g.

October 1835 15.3 15 1/2-15

November 1835 15.3 14 1/2-14

December 1835 14.6 14 1/2-13

January 1836 14.5 15 -13 1/2 10 l/2~ 7 1/2

February 1836 14.5 15 1/2-14 10 1/2- 8 3/4

March 1836 15.5 16 -15 11 1/4- 9

April 1836 16.8 17 -15 12 -10 1/2

May 1836 15.5 16 1/2-15 11 3/4-10 13 - 9 1/2

June 1836 15.5 16 -14 1/2 11 - 9 13 - 8 3/4

July 1836 14.8 15 -14 1/2 10 3/4- 8 1/2 12 1/2- 8 1/4

August 1836 14.8 15 -14 1/2 10 1/2- 8 1/2 11 1/2- 7 3/4

September 1836 n.g. n.g. 11 3/4- 8 3/4 11 3/4- 7 1/2

October 1836 15.0 16 -14 11 3/4- 8 3/4 9 1/2- 6 1/4

November 1836 15.3 16 -14 11 1/4- 7 1/2 9 - 5

December 1836 14.3 14 1/2-13 1/2 11 1/4- 7 1/2 n.g.

January 1837 14.1 14 1/2-13 11 1/4- 7 1/2 11 1/2- 7 3/4

February 1837 12.8 13 1/2-12 1/2 10 - 7 11 3/4- 7 1/2

March 1837 13.8 14 -11 ' 8 - 6 9 1/2- 6 1/4

April 1837 11.5 10 1/2- 8 1/2 8 - 5 1/2 9 - 5

May 1837 11.5 n.g. 7 3/4- 5 1/4 8 1/2- 4 3/4

June 1837 n.g. n.g. 7 1/2- 4 3/4 7 3/4- 4 1/4-

July 1837 n.g. n.g. 8 - 5 8 - 4

August 1837 11.3 11 1/4-11 1/4 8 - S 8_1/4- 4 1/2

September 1837 9.4 n.g. 8 - 5 1/2

October 1837 9.8 10 - 9 1/2 8 - 5 1/2

November 1837 9.3 9 1/2- 8 1/2 8 - 6 1/2

December 1837 9.1 9 1/2- 8 1/2 8 1/2- 6 3/4

417

TABLE C-5.--Continued.

 

New Orleans

 

 

Year and
Month (Cents) (Pence) (Pence)
Series A Series B England Liverpool

January 1838 9.1 9 1/2- 9 8 3/4- 7 1/2
February 1838 9.1 9 1/2- 8 8 - 6 1/2
March 1838 8.1 8 1/2- 8 8 1/4- 6 1/2
April 1838 8.8 8 3/4- 8 1/4 8 - 5 3/4
May 1838 9.3 9 1/4- 8 1/2 8 1/4- 5 1/4
June 1838 9.3 9 - 8 1/4 8 1/4- 5 1/4
July 1838 8.4 9 - 8 1/4 8 1/4- 5 1/2
August 1838 9.3 9 - 8 1/2 8 - 5 1/4
September 1838 8.8 9 - 8 8 1/4- 5 3/8
October 1838 10.4 11 1/2- 8 8 1/4- 5 1/8
November 1838 10.5 11 1/2-10 1/4 8 1/2- 5 3/4
December 1838 11.5 12 1/2-11 8 3/4- 6 1/2
January 1839 12.3 12 3/4-11 1/2 9 - 7 3/8
February 1839 12.9 14 -12 8 3/4- 7 1/8
March 1839 13.8 14 1/2-13 1/2 9 3/4- 8
April 1839 14.6 15 -13 1/2 0 - 8 1/2
May 1839 14.4 14 3/4-13 1/2 9 5/8- 7 3/4
June 1839 14.3 14 1/2-11 1/2 9 1/2- 7 3/8
July 1839 12.5 13 -12 7 - 6
August 1839 10.3 13 1/2-10 8 1/2- 6 1/2
September 1839 9.3 10 1/2-10 7 1/2- 6 1/4
October 1839 10.3 10 3/4-10 8 1/2- 6
November 1839 9.3 10 1/2- 8 1/4 7 3/4- 5 3/4
December 1839 7.5 8 1/2- 7 1/4 7 3/4- 6
January 1840 7.9 8 1/2- 7 1/4 6 3/4— 5 1/2
February 1840 7.3 7 3/4- 6 3/4 5 3/4- 5
March 1840 6.5 7 - 6 5 3/4- 5
April 1840 6.8 7 1/4- 6 1/4 5 3/4- 5

May 1840 6.9 7 3/4- 6 1/2 5 1/2— 4 3/4
June 1840 7.5 8 - 7 1/4 6 3/4- 4 1/2
July 1840 7.8 8 - 7 1/2 6 3/4- 5
August 1840 8.3 8 1/2- 7 1/2 6 3/4— 5
September 1840 8.3 9 - 8 6 3/4- 5
October 1840 8.4 9 - 7 3/4 6 3/4- 5 1/4
November 1840 8.3 8 1/2- 8 6 1/2- 5
December 1840 8.4 8 1/2- 8 1/4 6 1/2- 5
January 1841 8.5 9 1/4- 8 1/4 7 1/4- 6
February 1841 9.6 9 3/4- 9 1/4 7 1/4- 6
March 1841 9.6 9 3/4- 9 7 1/4- 6
April 1841 10.0 10 1/4- 9 1/2 7 1/2- 6 1/8
May 1841 10.1 10 1/2-10 7 1/2- 5 5/8
June 1841 9.8 10 - 9 1/4 7 1/4- 5 3/8
July 1841 9.3 9 1/2- 9 7 - 5 1/4
August 1841 9.0 9 1/4- 9 7 - 5
September 1841 8.5 8 1/2- 8 1/4 7 ~ 5
October 1841 8.6 8 3/4— 8 1/4 7 - 5
November 1841 8.6 8 3/4- 8 1/4 6 3/4- 4 3/4
December 1841 8.3 8 3/4- 8 6 3/4- 4 3/4
January 1842 7.9 8 - 7 1/2

February 1842 7.3 7 3/4- 7 1/4

March 1842 7.4 7 1/2- 6 3/4

418

TABLE C-5.--Continued.

 

New Orleans

 

 

 

 

Year and
Month (Cents) (Pence) (Pence)
Series A Series B England Liverpool

April 1842 7.5 7 1/2- 6 3/4
May 1842 6.6 7 - 6 1/4
June 1842 6.6 7 - 6 1/2
July 1842 7.6 7 1/2- 6 1/4 "1"
August 1842 6.3 7 - 6
September 1842 7.4 7 1/2- 6
October 1842 6.1 7 - 5 3/4
November 1842 6.0 6 - 5 1/2
December 1842 5.6 6 - 5 1/4
January 1843 5.8 6 - 5 1/4
February 1843 5.2 5 1/2- 5
March 1843 4.9 5 1/4- 4 1/2
April 1843 5.4 5 5/8- 4 7/8
May 1843 6.0 6 1/4- 5 1/2
June 1843 6.0 6 1/4- 5 3/4
July 1843 6.0 6 1/4- 5 3/4
August 1843 6.0 6 1/4- 5 3/4
September 1843 6.6 7 1/2- 5 3/4
October 1843 7.1 7 1/2- 6 3/4
November 1843 7.1 7 3/8- 6 3/4
December 1843 9.0 9 - 7 1/8
January 1844 7.7 9 - 8 1/4
February 1844 7.7 9 1/8- 8 1/4
March 1844 7.8 8 5/8- 7 1/2
April 1844 7 l 8 - 6 3/4
May 1844 7.2 7 3/8- 6 1/2
June 1844 7.1 7 3/8- 6 3/4
July 1844 7.0 7 1/8- 6 1/2
August 1844 7.0 7 - 6 1/4
September 1844 5.8 6 1/4- 6
October 1844 5.8 6 - 5 3/8
November 1844 5.3 5 1/2- 4 7/8
December 1844 5.3 5 1/4- 4 1/2
January 1845 4.7 5 - 4 3/8

 

n.g. = not given.

Sources: Price Series A: Lewis C. Gray, History of Agriculture in the
Southern United States to 1860 (Washington: Carnegie Insti-
tution, 1933), Vol. II, p. 1027. Price Series B: James E.
Boyle, Cotton and the New Orleans Cotton Exchange (Garden
City: 1934), pp. 176-178. England: Walter B. Smith,
Economic Aspects of the Second Bank of the United States
(Cambridge: Harvard University Press, 1953), p. 190.
Liverpool: Journal of the American Institute (March, 1839),
p. 131.

 

 

 

 

 

 

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