The Panic of 1819 (17 page)

Delaware did, however, pass a law in 1820 similar to Maryland’s, making it illegal for any person to exchange any bank note for less than its par value.
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Ironically, as passed by the House, this bill was originally designed to abolish the circulation of notes of non-specie paying banks by closing down banks whose notes were not at par in Philadelphia. The Senate reversed the intent by shifting the onus for depreciation on the noteholders rather than on the banks.

In New Jersey, serious consideration was given to a state loan to persons in need, mainly debtors, upon security presented for repayment. This borderline measure—between monetary expansion and direct debtors’ relief—was rejected in the same Hopkinson Report which ended the possibility of a stay law in the state.
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Hopkinson objected that the “state has no money to lend.” Only a very large sum, say half a million, could appreciably affect the situation, and
this could only be obtained through borrowing. Yet, heavy taxes would be required to pay the annual interest. Furthermore, there would be a social loss of the interest earnings, during the time that must elapse between the state’s borrowing and its reloaning to debtors, and, in addition, there would be losses due to expenses of distribution and expenses of recovery. Furthermore, how could the neediest give the required security? Even more fundamental was Hopkinson’s objection that the loan to needy debtors would only be temporary; the debtor would simply change his creditor, and the time of debt would be extended. Addition to state debt and taxes, he declared, was no cure for the depression; the only remedies were industry, economy, and a favorable change in the European situation.

New York opinion was highly critical of all inconvertible paper schemes. Typical was an editorial in the New York
Evening Post
declaring that at least there would be no suspensions of specie payments in New York City. The attempt to raise prices by increasing the circulating medium would only make the same quantity of produce pass for a greater nominal amount in paper.
⁵⁴

Financially conservative New England also remained generally free of controversies over monetary expansion proposals.
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It was necessary for the Joint Committee on Banks of the Massachusetts legislature, however, to consider and turn down proposals to prevent circulation of bank notes in the state at a discount. It curtly declared that the exchange value of notes must be regulated by the community itself, according to public wants and needs.
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In Vermont, the desire for increased money supply took the form of advocating charters for several new banks, and the battle over these charters raged furiously. Leader in the fight for the new banks was the wealthy, influential Cornelius Peter Van Ness.
⁵⁷
Particularly
controversial was a proposed new Bank of Burlington—the leading town in northwest Vermont. The bill was heavily favored by citizens of this area, which was a Federalist stronghold in the state. Van Ness piloted the bill through the General Assembly, passing the House in November, 1818 by a vote of 97 to 81.
⁵⁸
Even so, many restrictions were imposed on the new bank. There was a penalty of 12 percent interest and forfeiture of the charter for suspending specie payment. Furthermore, the note issue was to be limited to the amount of specie plus three times the
paid-in
capital, and there were provisions for strict supervision. Even so, Governor Jonas Galusha vetoed the bill, and the veto was sustained.
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By a slim margin, the House refused to charter a new bank in Windham County, and five other proposed banks were rejected or refused consideration. In fact, in the three years of agitation from 1818–21, only one bank was chartered, the Bank of Brattleboro, and that over heavy opposition.

A clue to the determined opposition to new bank charters lies in the annual message of Governor Galusha to the state legislature, in the fall of 1819.
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Galusha pointed to the general distress, the scarcity of circulating medium, and the inability of debtors to pay their debts. He reasoned that the cause of this distress was the multiplicity of banks, and that therefore adding new banks would merely aggravate the problem. Observing the various states, he declared:

In those states where the banks are the most numerous and the means of credit the most easy, the recent cry of scarcity of medium, and its consequent distresses, have been the most heard and felt.

Pennsylvania was hit heavily by the crisis and was particularly noted for extensive investigations by its legislature into the extent of,
and the possible remedies for, the depression. Most notable was the special committee headed by State Senator Condy Raguet of Philadelphia. Raguet received reports of widespread depression throughout the state. After studying written testimony, sheriff’s records, petitions, and answers to committee questionnaires by members of the legislature, Raguet concluded that the economic distress was unprecedented. The distress took the following forms: ruinous sacrifices of landed property at sheriff’s sales for debt; forced sales of merchandise; bankruptcies in agriculture, trade, and manufacturing; a general scarcity of money, making it almost impossible to borrow; a general “suspension of labor”; general stagnation of business; suspension of manufactures, and unemployment.

Raguet tended to be conservative in his economic views. His committee report brusquely rejected any direct debtors’ relief or stay law legislation. On the other hand, Raguet advocated a State Loan Office to lend paper money to distressed debtors. He suggested that the state form a $1.5 million loan office to lend to the largest possible number of sufferers, particularly farmers and manufacturers, on landed security. The loans would be at long term (from five to ten years) and the attempt would be made to exclude speculators. Raguet declared that in this crisis the paternal care of the government was necessary. Not all individuals could be saved, but many unfortunate farmers and debtors could be greatly relieved. Although the details of the plan were never clarified, it appears that, unlike the loan office plans in the western states, this proposal did not involve inconvertible state paper but rather the borrowing of money from the public and relending it to debtors. Raguet declared that such a scheme would diffuse capital and greatly benefit the community. Money would be more plentiful, for

the plenty or scarcity of money depend no less upon the rapidity or slowness of circulation, and upon the expansion or contraction of confidence, than upon its absolute quantity.
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The greater the turnover of money, the more debts it could cancel.

A loan office for Pennsylvania had originally been suggested the month before by Governor William Findlay, in his annual message to the legislature.
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Findlay suggested a state loan office fund, to draw money away “from comparative inactivity” to be loaned on landed security. This would help to check the sacrifices of property and would also “aid in giving new life and activity to numerous pursuits of productive industry, and facilitate the progress of restoration from the embarrassments.” Thus, the government would cooperate in providing the citizens with relief.

Despite the initial impetus to the loan office proposal by the State Administration and the support of such an influential legislator as Raguet, the proposal met with powerful opposition. One of the most influential newspapers in the state was the Philadelphia
Aurora
, traditionally the organ of ultra-Jeffersonianism. Its editor, William Duane, was a staunch conservative on monetary matters and was in bitter political opposition to the Findlay administration.
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In the House, Duane, a representative from Philadelphia, was named chairman of the Special Committee on the General State of the Domestic Economy.
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In his report, Duane also stressed the widespread extent of the distress in all economic occupations throughout the state. Rejecting debtors’ relief proposals as did Raguet, Duane also firmly rejected a state loan office. He declared that such proposals had always aggravated rather than removed the depression. Furthermore, pointed out Duane, lending only on landed security would be unjust and would discriminate against those who did not own landed property. Those in most distress were the speculators who had little land to pledge in security. But
more important, a loan office would extend the very evils of “fictitious capital” largely responsible for the depression, would give false new hope to debtors, and would delay the vital restoration of domestic thrift. Also, Duane was highly critical on political grounds, fearing that a large class of debtors to the state would always manage to avoid repayment of their loan. Thus, the public debt would increase with no corresponding increase of capital.

Duane’s report aroused a storm of controversy in the House. Leading the angry opposition was Representative Henry Jarrett, from rural Northampton County in eastern Pennsylvania. Jarrett, a minority member of the committee, who had originally called for the committee investigation to establish a loan office, objected that the Duane report opposed all the petitions from his constituents. These constituents were in great distress and were demanding some relief.
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As a result, the House voted to prevent the official printing of the report; the vote was a narrow one, 49 to 40. Heaviest support for the Duane Report in the vote came from the city of Philadelphia, and from nearby Bucks and Chester Counties, all voting unanimously for printing. (Yet, in the previous session, citizens of Chester County had petitioned for a state-owned bank.) On the other hand, while rural York County, for example, voted heavily against printing, so did the representatives from Philadelphia County.
⁶⁶

Emboldened by this success, Representative Jarrett submitted, on February 1, a substitute report of his own on the pecuniary distress.
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Interestingly enough, in his analysis of the
causes
of the depression, Jarrett was as conservative as Raguet and Duane, in attributing it largely to excessive bank credit in the boom. But their agreement on causes did not prevent a sharp disagreement on remedies or on the specific question of a loan office. Essentially the controversy was whether now—in the depression—a dose of money and credit would considerably alleviate distress or would aggravate
matters by adding more of the alleged original poison leading to the present ills. To Jarrett there was no question that some relief to debtors was needed. At present, he declared, there was a great burden of unpaid debt, and this burden was causing loss of confidence by potential creditors and a consequent near prostration of all private credit. Jarrett conceded that the most important remedy was not new money but restoration of confidence. But he reasoned that if the government established a loan fund, granting loans on ample security, this would tend to re-establish confidence and credit in general. Furthermore, he visualized a similar pump-priming effect as did Raguet. A dollar thus loaned would rapidly circulate, and tend to repay many times itself in outstanding debts. As Jarrett stated:

An inconsiderable sum of money, for which the most ample security could be given, being loaned to a single individual in a neighborhood, by passing in quick succession, would pay perhaps a hundred debts.

Furthermore, the impetus to confidence and credit would “thereby bring into action additional sums that are now dormant, and give renewed impetus to industry.” He therefore called for a $1 million state loan office.

Faced with this controversy, the House tabled the entire issue. Finally, a loan office bill, providing for $1 million—$2 million of state loans on landed security, failed to pass by the narrowest possible margin—a tie vote. According to the well-informed
National Intelligencer
, much of the support for the loan office bill came from the “log-rolling” of those eager to advance a bill for the appropriation of state money for extensive internal improvements.
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The loan office issue continued to be a lively one in the state, however. A year and a half later, the Philadelphia
Union
, a paper of Federalist leanings and a notable stronghold of conservatism on monetary matters, warned that in Pennsylvania the “rage is for a loan office.”
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The loan office, it asserted, was being advanced as the sovereign panacea—for the payment of debts, to end speculation, to encourage industry, and even to reorganize society. The
Union
declared that Pennsylvania had about fifty banks, five hundred brokers, and from five thousand to fifty thousand private lenders of money. Yet they were not willing to lend to all who would like to borrow, so a loan office was supposed to be necessary. Yet, since overextension of credit was the cause of the distress, the loan office would attempt to cure the evil “by forcing still further the causes to which they owe their existence . . . instead of looking for relief in the restriction of the credit system, we are to look for its extension.”

The
Union
pointed particularly to the plan of a local newspaper in Paradise—in Lancaster County—a small town close to Philadelphia. The Paradise editors advocated a $3 million–$5 million fund loaned for twenty years to distressed persons. Their argument was simply: why shouldn’t the legislature grant such relief “when it is in their power to do so?” The
Union
attack was directed at the losses that would accrue from unwise lending by government. Private lenders were willing to risk continued fluctuations in the value of money. With proper security, there were plenty of lenders available, and no forcing was required. If a man could not borrow privately, he was really bankrupt and could not put up the security envisioned in the loan office plan. In sum, the
Union
could only see in the plan a sacrifice of permanent prosperity for mere temporary relief.