The Panic of 1819 (15 page)

As a remedy for the monetary scarcity, business houses began to print “small change tickets,” declared to be worth twenty-five cents, and municipalities also engaged in this practice. There were widespread irregularities and forgeries. Finally, the Alabama legislature, in 1821, prohibited the issuance of private change tickets, leaving the issue of small notes to municipal governments.
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One particularly important monetary problem was the suspension of payment by the Huntsville Bank and the consequent depreciation of its notes. In 1821, the legislature refused to abide by the existing law which forbade accepting notes of non-specie paying banks in taxes. The decision to accept the depreciated notes was defended by Governor Thomas Bibb as necessary to avoid excessive harshness
toward the citizens of northern Alabama.
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This state forbearance bolstered the acceptance and raised the exchange rate of the Huntsville notes throughout the state. The Alabama legislature went further and issued Treasury notes payable in the depreciating currency of the Huntsville Bank. Under the government umbrella, the Huntsville Bank issued large quantities of notes, which sank to a 25–50 percent discount. The Treasury warrants depreciated correspondingly.
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With such disappointing results, the legislators began to look to another solution for the monetary difficulties: the establishment of a large, state-wide, state-owned bank. The constitution of Alabama in 1819 had specifically authorized the establishment of a state bank, with the state to own two-fifths of the stock.
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The legislature therefore chartered the Bank of the State of Alabama, on December 21, 1820, with a very large authorized capital of $2 million to which the state would subscribe $800 thousand. Unfortunately for the plan, however, the constitution had also provided that half of the capital stock must be paid in specie before beginning operations, and no such public subscriptions were forthcoming. The Bank remained a stillborn project.
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The legislature adopted another plan the following year: to consolidate the three private banks of the state into an amalgamated state bank. This bank plan was vetoed by the new Governor, Israel Pickens. The ostensible reason for the veto was that the plan linked a state bank with private banks. Actually, Governor Pickens was politically powerful in Southern Alabama, a region that had been angered by the actions of the Huntsville Bank and at the favoritism
shown toward it by Governor Bibb and the previous legislators.
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For his veto, Pickens was hailed by many of his followers as the savior of Alabama. Pickens’s veto was followed by barring the depreciated Huntsville Bank notes from acceptance in taxes. The result was a further rapid depreciation of Huntsville notes.

It is true that Pickens’s actions removed the state prop from the non-specie paying Huntsville Bank and defeated one plan for a state-owned bank. But Pickens was not necessarily opposed to state measures for monetary expansion. On the contrary, he advocated a state bank that would be wholly state-owned, non-specie paying, and would use forthcoming public land revenue for eventual redemption. Such a bank was finally established in December, 1823, but came too late to be considered an anti-depression measure. While Pickens and the Huntsville group each favored some form of monetary expansion, many in the commercial communities were opposed to the whole idea, in particular the newspapers of the metropolis Mobile.

The Alabama experience highlights the two basic measures for monetary expansion advocated or effected in the states: (1) measures to bolster the acceptance of private bank notes, where the banks had suspended specie payment and where the notes were tending to depreciate; and (2) the creation of state-owned banks to issue inconvertible paper notes on a large scale. Of course, the very fact of permitting non-specie paying banks to continue in operation, was a tremendous aid to the banks.

State-owned banks also existed in the neighboring state of Louisiana and in the territory of Mississippi, but these had been established prior to the crisis, and played a conservative rather than an expansionist role. The Bank of Mississippi, the only bank in the infant territory, had been formed from a private bank in early 1818, and was partially government-owned. The bank was partly independent of the government, but its notes were the legal
tender for the territory. The major struggle in the Mississippi legislature occurred over a bill by Representative Harman Runnels, of Lawrence County in central Mississippi, to authorize the receipt in taxes of bank paper from Alabama, Georgia, and South Carolina. This passed the legislature after a largely sectional fight between the eastern and central sections of the state, on the one hand—oriented toward the southeastern states—and more wealthy, commercial Natchez, leading town in the state and oriented toward Louisiana and the Mississippi River. Governor George Poindexter vetoed the bill, and it failed to pass over his veto.
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The Louisiana State Bank, established in early 1818,
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continued to be conducted with great caution. The Report of the House Committee on the Louisiana State Bank, in the 1819 legislature, praised the bank for its conservative discount policy and declared that the bank was necessary because of the great scarcity of specie in Louisiana and adjoining states.
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In fact, the Committee suggested that the bank could perhaps be more liberal in granting loans.

In Louisiana the crisis and the scarcity of money led to a tightening of credit rather than expansion. Typical was the reaction of the New Orleans
Louisiana Gazette
, which feared that “too much regulation” was becoming the order of the day, with “paper systems to substitute for gold and silver”—“one of the hobby horses of our times.”
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The state of Georgia had invested in private banks from the establishment of its first bank of 1807.
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These investments were for revenue purposes, however, rather than efforts to expand the supply of money. Before the war, revenues from the state’s investment in banks had nearly covered the total state expenditure, so that, after the war, the state increased its investment, culminating in the largely state-owned Bank of Darien, established in 1818. The latter bank was the depository of state funds, capitalized at $1.6 million of which over $600 thousand was paid up, and had branches throughout the state.
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A proposal for an agricultural bank, however, was turned down by the legislature at the same time.
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Banks were welcomed also for their aid in supplying money and credit to the merchants and planters of the state, and the Bank of the United States branch at Savannah was originally welcomed for the same reason. The branch expanded credit, while the Georgia banks engaged in heavy expansion of credit for purchases of Alabama public lands. When the panic struck, the Bank of the United States pursued a policy of forced contraction of the notes of its branches, leading to calls on the state banks to pay their balances due to the United States Bank. In Georgia, these balances were particularly heavy, because of the widespread use of Georgia bank notes in payment for the Alabama lands, and the deposit by the federal government of these funds in the Bank of the United States branch at Savannah.

The contraction policy of the Bank of the United States resulted in mounting bitterness against it among the local banks and the population of the state. A joint committee of local banks charged a plot
on the part of the bank to destroy them.
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In 1820, the Georgia legislature suspended the legal 25 percent interest penalty provision for nonpayment of specie by its banks, in so far as the nonpayment applied to debts owed to the Bank of the United States.
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In the summer of 1821, the two Savannah banks (the Planters’ Bank and the Bank of the State) took advantage of this provision to suspend specie payments to the Bank of the United States, while continuing them to individual note holders. In December, 1821, the Georgia legislature again voided the interest penalty on nonpayment of notes to the Bank of United States and extended this action to all cases of nonpayment. In recommending this action, the joint committee on the state of the banks of the Georgia legislature attacked the Bank of the United States Savannah branch for refusing to expand its note issue, and for draining the state banks of specie.
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The Bank of the United States sued in the courts, and the Supreme Court of the United States voided the Georgia law in 1824, whereupon Georgia repealed the law.
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Meanwhile this severe action by the Georgia legislature and banks disturbed Secretary William H. Crawford, one of Georgia’s leading politicians, and he took steps to ease the Georgia monetary situation. He ordered the Treasury office in Alabama to deposit all its funds in the Bank of Darien instead of the Bank of United States branch at Savannah. In its new role as Treasury fiscal agent, the Bank of Darien was able to continue the expansion of discounts and note issues, that it had originally based on the state’s stock subscription at the opening of the bank. In 1822, when the depression was over, the Treasury removed its funds from the Bank of Darien and returned them to the Savannah branch of the Bank of the United States. As a result
of its previous expansion and renewed pressure by the United States Bank, the Bank of Darien suspended specie payment, its notes depreciating rapidly by 1824.
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The justification for the Georgia government’s action in protecting the banks against the specie demands of the Bank of the United States was provided by Governor John Clark in his message to the legislature of November 7, 1820.
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Countering fears of depreciation, Clark admitted that the action might cause Georgia notes to depreciate outside the state, but justified it as preserving an important source of state revenue—the state’s bank investments—and as insuring “a circulating medium sufficient to supply the real wants of our citizens.”
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By the end of 1822, however, Clark had changed his mind on banks, which by now had all suspended specie payments. He declared his readiness to dispense with them altogether. Clark asserted that “the opinion . . . almost universally prevails, that the pecuniary embarrassments of the citizens is greater in proportion as you approach the vicinity of a bank.”
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Permitting banks to continue operations without redeeming their notes in specie was one basic means for a state to maintain or expand the supply of money in a time of financial crisis. The important neighboring state of South Carolina already had as its fiscal agent, a large state-owned bank, established in 1812 with a capitalization of $1.1 million. This Bank of the State of South Carolina, while conservatively operated, suspended specie payment on October 1, 1819, and continued operations until its resumption in 1823.
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Anger in the state was directed against the Bank of the United States, for the pressure on the state banks, and for the general monetary contraction.
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Some South Carolina leaders envisioned a general suspension of specie payments in the state. Robert Y. Hayne, then Attorney General of South Carolina, anticipated that the state would be forced onto an inconvertible paper system.
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He declared that the banks, with notes depreciating, must suspend specie payments, and he denounced agents of Virginia banks for buying up bank notes and coming to Charleston to redeem them. Hayne declared:

It seems to me that the final result will be a stoppage of specie payments by all the banks and then we will find it necessary to follow the example of Great Britain and deal on paper. The time is approaching rapidly when gold or silver will be regarded as merchandise only and bill will become the current coin.

Hayne thought that each bank could be required to maintain $1 million of government bonds (“stock”) and to limit its note issue to $1.5 million. “Might not such bills constitute a circulating medium and be a legal tender?” Hayne added that the legally or constitutionally required limit would be sufficient check on the danger of an excessive issue of the inconvertible paper, and that the notes of borrowers would be as good a backing for the bank notes as specie. He recognized that to secure a stable paper it would be necessary for the states—and perhaps the nations—to act in concert. Stephen Elliott, wealthy landowner and head of the Bank of the State, also advocated an inconvertible nationwide currency, based on land for stability of value.

On the other hand, there was considerable opposition to any suspensions of specie payment. A leader in opposition was Jacob N. Cardozo, influential editor of the leading Charleston daily, the
Southern Patriot
.
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He attacked state-owned banks including the one in his state, for a tendency to overissue their notes, and to cause excessive spending and speculation. On the other hand, he defended the Bank of the United States and its branches, the existence of which prevented excessive note issues by state banks. Cardozo was particularly angered at plans for inconvertible paper money. He denounced these alleged remedies for the crisis as the “grossest quackery.” Cardozo maintained that inconvertible paper issues would aggravate rather than cure the distress. According to Cardozo, the economic difficulties were largely caused by the banks “having chocked the channel of circulation with paper.” This distress had to be relieved, and the only way that this could be done was to “return to a free exchange of bank notes for specie.” “There is but one mode of relief,” he declared, “and that is the rigid enforcement of specie payments.” The excess of bank notes raised prices of staples and other products too high, and this had practically ended the American export trade. Only rigid enforcement of specie payment would permit removal of the excess paper and the consequent revival of exports.
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