The Panic of 1819 (16 page)

There was a considerable amount of controversy in adjacent North Carolina over the actions of the banks in continuing operations while suspending specie payments, and over the role of the Bank of the United States. One of the leading advocates of inconvertible paper was the prominent Archibald D. Murphey, Chairman of the Legislative Committee on the Board of Internal Improvements. Murphey wrote to Colonel William Polk, of the State Bank of North Carolina (a private bank), attacking the Bank of United States branches for ruining banks and individuals, and calling for
paper unredeemable in specie.
²⁹
To Murphey, the Bank of the United States constituted the “greatest crime in years.” Murphey squarely faced the problem of depreciation:

[The] true interest of the state [is] to have a paper that has a par value at home . . . given to it by . . . the confidence of the people, and which will not pay debts or [circulate] distant markets without a loss. . . . The true mode of fixing our permanent prosperity is to adopt a system of policy as will give us a home market. Our money will easily sustain its credit among its own citizens, and if we had markets at home it could not travel much abroad.
³⁰

To help put this plan into effect, Murphey recommended that the legislature “throw” money into circulation in expenditure on public works, to the extent desired by the banks.

The North Carolina banks were not penalized by the legislature for suspending specie payments to those it considered “brokers,” while maintaining payments to others. North Carolina was particularly exercised over the problem of the “money brokers,” who were generally denounced in the press. This institution grew up, almost inevitably, in response to the universally varying depreciation of bank notes. Money brokers, centering in the large cities, would buy up the notes of distant banks at a discount, and then send agents to these banks with packets of notes to claim redemption in specie at par. Banks with depreciating notes liked having as wide a circulation for their notes as possible, but naturally did not like out-of-town
brokers descending upon them claiming payment. Many citizens were tempted to agree, since they found it easy to blame foreign brokers for their plight and the plight of the local banks.

Thus, the influential Raleigh
Star
, early in the crisis, denounced northern money brokers and accused them of being responsible for the monetary contraction and suspensions of specie payments in North Carolina.
³¹
The
Star
suggested that the banks should refuse to pay these demands for specie and advocated outlawing the buying and selling of coin at a premium for bank notes. The paper accused the brokers of being speculators, amassing princely fortunes, and of being obstructionists. The
Star
also went so far as to suggest a state loan office to issue inconvertible Treasury notes eventually redeemed out of the revenues from taxes and the sale of state lands. The
Star
presented a detailed plan for the number of branches and suggested the sizable note issue of $30 thousand to be loaned at low rates of interest, covering only the expenses of the institution.

Typical of the attack on money brokers was an article by a “Gentleman in North Carolina,” pointing to the recent withdrawal by two New York City brokers of $100 thousand in specie from the state. “Gentleman” charged that the “brokers are trying to break every bank in the country.”
³²

Defending the actions of the banks, “A Citizen” wrote to a friend in the North Carolina legislature that it should not compel them to resume specie payment. The banks had not overissued their notes, he declared; if they had, why was there still a general complaint of scarcity of money?
³³
The writer also made a point similar to Murphey’s, that the fact that North Carolina bank notes were not depreciated
within
the state proved that they were not overissued.

Backed by government and much of public opinion, an agreement not to pay specie to brokers or their agents was made at Fayetteville, in June, 1819, by the three leading banks—the state bank, the Bank of New Bern, and the Bank of Cape Fear. Their notes immediately fell to a 15 percent discount outside of the state. The banks, however, continued to insist that their debtors pay them in specie, although they loaned out depreciated notes. Further, the banks themselves began to send agents to New York City and elsewhere to buy up their own depreciated notes at a considerable discount and then to retire the notes.
³⁴

Controversy over the North Carolina bank action raged in the states. One Washington writer commended the banks as saving banks and public, and stated that unsound banks should only liquidate gradually. He suggested this action to all the states.
³⁵
The North Carolina banks were vigorously criticized in the neighboring state of Virginia. One article in the leading Virginia newspaper, the conservative Richmond
Enquirer
, defended the brokers and asserted that the banks would suffer from the partial suspension.
³⁶
The brokers, “Philo-Economicus” maintained, “were the only persons who kept up the value of the paper.” A Virginian would take a North Carolina note at par if he knew that at any time he might sell them to brokers for Virginia paper at a 2 percent discount. Should the brokers refuse to purchase the paper, the notes would depreciate and disappear from circulation to return to the issuing bank. “Few people will be willing to take it at a loss of 8 to 10 percent, and it will therefore be driven back to the counter where it first saw the light.” Thus, the individual noteholders themselves would more quickly return the notes to the bank, and the banks’ partial suspension would be of little avail.

The action of the North Carolina banks also drew sharp criticism from the influential New York
Daily Advertiser
, which
denounced this innovation in banking as unjustly discriminating in favor of banks as compared to ordinary debtors.
³⁷

In Virginia, a stronghold of financial conservatism, there was little agitation for, or consideration given to, plans for government to bolster or increase the supply of money. We have seen that Representative Miller, leader of the debtors’ relief forces in Virginia, took an
anti
-bank position, as contrasted to the situation in other states. A typical Virginia attitude was expressed by a writer in the influential Richmond
Enquirer
. “Colbert” observed that all sorts of monetary and relief projects had been proposed, and that he was “alarmed at the idea of legislative interference in any form or shape.” Such governmental interference would, in the long run, aggravate rather than mitigate the evil. Paper money schemes could only cause loss of confidence by driving specie out of circulation. Furthermore, bankruptcies were eliminating the evils of rashness and avarice. And if the current increase in the value of money were allowed to continue unhampered, specie would return to circulation. At this point, just when the evil paper system was being liquidated through bankruptcies, there were proposals urging Congress or the states to issue large amounts of treasury notes, benefiting only the speculator.
³⁸

The situation was more turbulent in Maryland. Maryland had been the scene of considerable expansion in banks and bank notes, and the Baltimore branch of the Bank of the United States was perhaps the most irresponsible of the branches, its officers engaging in lax practice and outright dishonesty. The practice of stockholders paying only the first installment of their nominal capital in specie, or the notes of specie paying banks, and the remainder in stock notes, was particularly prevalent in Maryland, notably in the country banks outside Baltimore, as was the practice of heavy borrowing by directors.
³⁹
The panic, as a result, brought about a large number of failures of the country banks and what has been estimated as a reduction of one-third of the bank capital in the state.

The legislature moved quickly to bolster the position of the banks. As in North Carolina, there was bitter criticism of the money brokers; and the legislature, in 1819, moved to require a license of $500 per annum for money brokers, in addition to a $20 thousand bond to establish the business. A milder requirement was soon substituted, however, after the legislature realized that this law was ineffective against out-of-state brokers. More stringent was an 1819 law prohibiting the exchange of specie for Maryland bank notes at less than par value for the notes. The law—repealed after the crisis was over, in 1823—was always readily evaded, the penalty merely adding to the discount as compensation for the added risk.
⁴⁰
The New York
American
aptly pointed out that the undervaluation of specie by this law would cause specie to be exported from the state and discourage its import.
⁴¹
In 1821, the legislature imposed a penalty for passing any note of a non-Maryland bank.
⁴²

There was considerable agitation for and against various expansionist proposals in Maryland. In the summer of 1819, three such widely scattered counties as Washington, in the north; Somerset, far down on the eastern shore; and Prince Georges, near the District of Columbia, were all the scenes of citizens’ meetings, petitioning for a special session of the legislature to permit suspensions of specie payment by the Maryland banks. The banks were to be allowed to continue in operation despite the suspension.
⁴³
A Baltimore writer pointed to England as reason for abandoning slavish devotion to specie payment in an emergency.
⁴⁴
“A Farmer of Prince Georges County,” in the influential Baltimore
Federal Republican
, called on all
of the state to follow the example of the three counties.
⁴⁵
To permit the banks to suspend specie payments would relieve the distress of the people. It was sufficient, the “Farmer” declared, for the banks to be able to pay specie for their notes at the expiration of their charters. Another writer, signing himself “Specie,” was quick to reply.
⁴⁶
His letter is particularly interesting as being evidence that the agitation for suspension was not an overwhelming movement in the grass-roots. “Specie” was interested in defending Prince Georges County from any inference that its citizens were anxious for such a special session. The “Farmer,” he asserted, was probably a bank director; otherwise he was a propertied debtor wishing to evade payment of his just debts or to pay them in a spurious “rag” currency. Suspension of specie payment he denounced as improper, unjust, and absurd. The device, he admitted, might produce a “slight degree of temporary ease,” but in the end would eventually increase our depression and distress. The writer also declared that far from the citizens’ meeting of the county endorsing the proposal, the opposite was true. The meeting was called, he declared, by a few “discontented, meddling, unknown persons.” At the meeting, however, the people were unanimously opposed. He also accused the “Farmer” of obtaining his cue from “Homo” (Thomas Law, the leading advocate of a federal inconvertible paper currency), whom he called a “notorious advocate . . . of the rag system.”
⁴⁷
Typical of the opposition to banks permitting suspension of specie payment was a public meeting at Elkton, in the extreme northeastern corner of the state. The meeting was held at the very beginning of the crisis, in the fall of 1818, and was given widespread publicity by the staunch hard-money Hezekiah Niles in
Niles’ Register
.
⁴⁸

Niles termed the meeting a gathering of “respectable” farmers, mechanics, and laborers of Cecil County. They resolved to refuse
the paper of non-specie paying banks and to receive no small-denomination notes. It was declared that refusal of the country’s banks to pay specie while continuing to pay large dividends to their stock-holders was a violation of their trust.

The legislature did not act to permit suspensions of specie payment. It did consider a proposal for a state loan office to increase the supply of money. A report of the proposal was given to the Maryland House by a prominent Federalist legislator, Representative Josiah F. Polk.
⁴⁹
Polk supported a loan office on the grounds that the cause of the depression was reduction in the currency. The restoration of the supply of currency to its former amount would raise prices, but would not, as critics charged, hinder our exports. In fact, declared Polk, exports from the state would be
greater in monetary value
, although the quantity of goods sold might be diminished. Polk presumably believed that the demand for American exports was inelastic. The price rise would enable debtors to pay their debts on just terms equal to the terms they had originally contracted, and would also bring about more diligent cultivation of the soil. Polk’s support of a state loan office, however, was very cautious in practice, since he advocated a paper currency redeemable in specie, with heavy specie reserve.

The Delaware legislature, as we have seen, rejected pleas for debtors’ relief legislation, but it did permit banks to suspend specie payments during the panic and continue operations. The citizens of New Castle County, who were in the forefront of pleas for debtors’ relief, also led in asking for monetary expansion. Their proposal, signed by 139 citizens, suggested that the Farmers Bank of Delaware and the Commercial Bank of Delaware be granted renewal of their charters with the proviso that they extend all of the loans to their present debtors for three and one half years.
⁵⁰
This plan was never considered by the legislature.

In the next session, however, the House Committee on Banks recommended a new system of banking in the state.
⁵¹
Under this plan, the private banks were to merge in one central bank, with branches throughout the state. The capital of the new bank would consist partially of the existing capital of the private banks and partly of new capital to be subscribed mainly by the state itself. This proposal would extend banking capital by state action, but did not involve the issue of inconvertible state paper. The proposal was amended in committee to be a planned merger of three private banks into the fourth—the Farmers’ Bank of Delaware—with some capital added by the state. In the amended plan, the additional capital was scaled down from $500 thousand to $200 thousand, compared to the existing nominal bank capital of $1.1 million. The bill passed by a vote of 11 to 8 in the House, but the Senate refused to concur.