The Panic of 1819 (19 page)

Passing both Houses by a very close margin, the bill was vetoed by the Council of Revision, which consisted of Governor Shadrach Bond, who had opposed such a bank in his opening message, and the judges of the State Supreme Court.
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The Council vetoed the bill unanimously, on the grounds of unconstitutionality, and issued a prediction that the bank notes would depreciate, and thus be an unsatisfactory medium, especially for interstate purchases.
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The House lost no time in countering the veto message. It referred the bill to a select committee, weighted with supporters of the bank, and the committee recommended overriding the veto in its report a few days later.
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The committee report, in addition to defending the constitutionality of the proposal, admitted that the bank paper might not be received outside the state, but hailed this development as beneficial. “If other states did refuse to receive Illinois paper, the citizens of Illinois would have more for their own use.” Despite the fact that Speaker John McLean, from Gallatin County, temporarily resigned his chair in order to combat the bill, the House overrode the veto (only a simple majority being needed) by seventeen to ten, a far greater margin than before. The Senate also overrode the veto, and the new State Bank of Illinois was established.
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The state bank was installed at Vandalia, in middle Illinois, with five branches, and a total nominal capital of $500 thousand. The only specie capital was $2 thousand from the State Treasury to pay for the cost of printing an issue of $300 thousand in inconvertible notes. The notes were distributed to the branches in the various districts with instructions to lend as fast as applications came in, in proportion to the number of inhabitants in each district. They were declared receivable in all debts due either to the bank or to the state. Loans above $100 were securable by mortgage on real estate and by personal security for loans under $100. The maximum loan to any one person was $1,000. The rate of interest was 6 percent, and the loans were renewable annually, with the payment of 10 percent of the principal—the bank was envisioned as operating for ten years. The bank notes were backed by a stay law, delaying all executions for three years unless the creditor agreed to receive the state bank notes. Thus, the state did its best to place the notes on as close to a legal tender basis as constitutionally seemed possible. All the funds of the State Treasury were, of course, deposited in the bank.

The bank lost no time in issuing and lending the notes. There was little concern about security or chance of repayment; in practice, anyone with an endorser could borrow $100.
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The officers of the bank, political figures appointed by the legislature, borrowed up to the legal limit, and thus were not averse to depreciation of the notes, a depreciation which would lighten the burden of repayment. The notes began to depreciate immediately, and fell rapidly from 70 percent, to 50 percent, and 25 percent and finally ceased circulating by 1823. In January 1823, with the notes rapidly losing value, the House overwhelmingly rejected the option of issuing an additional $200 thousand.
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No notes beyond the $300 thousand were ever issued, and the bank closed in 1824. Very few debtors ever repaid the loan; there was no prosecution for failure to pay. Specie, of course, was completely driven from circulation by the quasi-legal tender bills, while they continued in operation.

Despite the argument of the House Committee, the legislature was alarmed at the depreciation. It was particularly chagrined at the refusal of the land offices of the United States Treasury to accept the notes, and it formally petitioned the Treasury, without success, to accept the new bank notes as equal to specie. While attempting to bolster the value of the bank notes, however, the legislature took the expedient if ironic step of authorizing issue of auditor’s warrants by the state. These warrants exchanged on the market at three times the same nominal amount in bank notes. These warrants were specifically used to pay the salaries of state officials and of the members of the legislature, and arose from refusal of state officials to accept their salaries in the bank notes at their par value.
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In the frontier Michigan Territory, the territorial and local officials issued paper money, or scrip. The Governor and judges first issued paper in 1819 in small-denomination bills, from two to twenty dollars. The paper bore interest at 6 percent and was to be redeemed out of the sale of certain public lands, but these lands had already sold at a much lower price. As a result, the paper passed at a 10 percent discount as early as 1820. Wayne County, the site of the town of Detroit, found its taxes largely in arrears in 1819 and 1820, and so the county commissioners issued paper money to be redeemed out of future taxes. No tax at all was levied in 1821, however, and by March 1822, Wayne County was $3,000 in debt. As a result, the scrip depreciated at a 25 percent discount.
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Missouri, as noted previously, suffered from a burden of debt, particularly in land speculation. With the halving of migration during the depression and the general fall in prices, land value plummeted. The monetary situation intensified the difficulties.
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Missouri’s first bank, the Bank of St. Louis, had opened at the end of 1816, and
expanded credit heavily, particularly in real estate loans. Harassed by defaults of its debtors and the failure of other banks, the Bank of St. Louis failed in the summer of 1819. Much the same thing happened with the other major bank, the Bank of Missouri, which failed in 1821. The monetary contraction and resulting distress was intensified by the failures of banks in neighboring states, many notes of which circulated in the state. With notes vanishing or becoming worthless and with specie having been previously drained to the East, a demand arose for the state to furnish needed currency. Typical of the rising agitation for a state bank or loan office to provide paper money was a letter to the St. Louis
Enquirer
in the spring of 1821.
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The letter pointed to the sudden creation and withdrawal of a large amount of currency that had taken place in Missouri in recent years. The writer estimated that the total paper circulation in Missouri had risen as a result of the boom—including bank notes of Missouri, Kentucky, Ohio, and the Carolinas—to $1 million. Now, in two years time, the total circulation remaining amounted to only $100 thousand. This 90 percent contraction in the money supply, according to the writer, benefited the creditor tenfold, since the value of his credit had increased to that extent. The writer concluded that a state bank was needed for relief of the people. Many newspapers presented similar letters urging a state bank.
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Representative Duff Green, soon to emerge as leader of the pro-relief and pro-loan office measures in the legislature, set the stage for a loan office, placing the responsibility for the “hard times” squarely on unemployment caused by a shortage of currency.
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Although the legislature had discussed a loan office in the regular 1820–21 session, nothing had been done, but with the upsurge of interest in the spring of 1821, rumors of a special relief session of the legislature began to circulate. A special session was finally
called for June 4, amid vigorous protests from anti-reliefers. Governor Alexander McNair revealed the major purpose of the special session in his call for relief from the pecuniary troubles, and his submission of the relief proposals. The major bill submitted at this session was a loan office bill. Support was bolstered by the report of a legislative committee investigating the failure of the Bank of Missouri, which urged a new state currency; the committee estimated that the money supply had contracted to one-sixth of the 1818 total. The opponents of the loan office bill liked neither an inconvertible currency based on the state’s credit, nor the two-year stay provision for those creditors who refused to accept the notes in payment. The stay section was therefore eliminated from the bill, although it passed as a separate bill the following January. The loan office bill, after spirited opposition, narrowly passed the House on June 21, by a margin of three votes.
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There was no discernible sectional division in Missouri on the loan office or relief measures, either in the legislature or among the public. Each territorial district of the state was closely divided on the issues. Leading the opposition was United States Senator Thomas Hart Benton, later to be dubbed “Old Bullion” because of his staunch advocacy of hard money at Jackson’s side. Benton declared that the only satisfactory money was metallic and urged the citizens to end the specie drain to the East themselves by shifting their custom to a barter trade with New Orleans. Benton also suggested that the United States recognize the revolutionary Mexican government, in order to spur an influx of silver from Mexican mines.
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The loan office was established with four branch offices throughout the state. It aimed to provide an expanded circulating medium to relieve the shortage of money and to furnish loans, particularly on land, for relief of the burdens of the debtors. The law authorized the issue of $200 thousand of inconvertible paper, in denominations from fifty cents to ten dollars. The state agreed to
receive the notes in payments of all taxes and other debts due, and to pay them out to its officers for salaries and fees. A large portion of the law was a description of how the public could obtain loans of the new notes on their land. Loans were to be for one year at 6 percent interest, but the borrower had the right to renew the loan every year, and the state could not call in more than 10 percent of the principal every six months. However, the state was required to call in 10 percent of the notes annually. The loans were to be divided among the districts in proportion to their population. Maxima to each borrower were $1,000 on real estate and $200 on personal property, the landed property to be worth at least twice the amount of the loan. The similarity is obvious between this loan office act and the State Bank Law of Illinois earlier in the year.

The leading issue of the legislative session of the fall of 1821 was the loan office system. The expansionists and relief forces were eager to enlarge the scope of the loan office. The reliefers wanted strong stay laws, for their own sake and to give the notes a quasi-legal tender effect, and the battle over the stay legislation is recorded previously. They also suggested bills for expanding the loan office note issue, for longer loans, and for the use of the notes to finance internal improvements in the state.

Many petitions arrived in the legislature to enlarge the note issue. The St. Louis
Enquirer
declared that the $200 thousand issue would not be enough. That amount, it asserted, was highly inadequate “to the great purpose in contemplation.”
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Governor McNair, however, was noncommittal and left the initiative to the legislature. On November 9, a bill was introduced authorizing the State Treasury to redeem its auditor’s warrants in the new notes. The bill passed the legislature, and the scope of the notes was enlarged. Not only were they now receivable by the state for taxes and used in paying its officers, but it was now a means of paying the state’s debts. Furthermore, since the State Treasury “Auditor’s warrants” could be exchanged for loan office certificates at par, they were now usable
as money. To enable this backing, the law authorized a further $50 thousand issue of loan office notes.
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Others wanted the state to furnish the capital to build factories and mills with loan office certificates. New wealth would thus be created, people would obtain new products, and prosperity would be restored. The expanded money supply was in this way conceived as a method of increasing the capital and productive activity of the country, as well as simply of relieving debtors. James Kennedy, George H. Kennedy, and Ruggles Whiting petitioned the legislature to lend them money to build a steam mill. Duff Green, leader of the relief forces, sponsored the project, which needed a special law, since the loan office was legally limited to a $1,000 loan for each person. Furthermore, the loan required landed property, whereas these men and others wished to engage in manufacturing activity. The legislature passed this special bill, lending the three men $10 thousand in new loan office certificates. They used $10 thousand of the $50 thousand which had been previously set aside to redeem the auditor’s warrants. Emboldened by this move, the legislature also agreed to use the other $40 thousand in similar loans for internal improvements. Money to redeem the state’s warrants could wait on loan office receipts coming in from taxes.

Now all the authorized new money was spent. The legislature passed another special act for the issuance of yet another $50 thousand in certificates and the loan of them to a Neziah Bliss for the establishment of an iron works, with mortgaged real estate as security. Governor McNair recommended that new issues of loan office paper be made and be given to each district for lending to enterprisers to erect such factories as they deem most beneficial to the people of the district. The legislature balked, however, at any further increase in note issues. McNair’s proposal was endorsed in resolutions by both houses, but no law was passed to enact it. Various other plans were offered for increases in note issue, but few came to a vote. The major bill in the House was Green’s proposal to emit another $300 thousand
in note issue, but the bill was defeated. A similar bill in the Senate lost by a two-to-one vote. The door was emphatically closed on further emissions in this session when the House declared any further issue inexpedient. Authorized issues had totaled $300 thousand. The major action of the session was stay laws bolstering the credit of the loan office notes. As in the case of the stay laws, the voting on the loan office bill revealed no sectional division, but rather a division of opinion within every area and county.