The Panic of 1819 (22 page)

Several rural counties in Kentucky issued anti-Frankfort resolutions. Nelson, Washington, and Green Counties in the more southern part of the state, and Mason County on the northern border, attacked the proposals for legislative sanction of suspensions of specie payment and further bank note issue. Niles, perhaps over-optimistically, estimated that the large majority of citizens’ meetings throughout Kentucky believed that the banks “should pay their debts or shut up shop.”
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The Washington County resolution asserted that distress was not as great as generally represented, and that it was due to speculation and extravagance.
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A suspension of specie payment would unjustly withhold their rightful property from the creditors. Furthermore, it would weaken public confidence in the banks and would subsidize extravagance and imprudence. The increased issue of paper, the resolution declared, would, in the end, increase the economic difficulties. The best remedy was for the debtors to “bear the chastisements they bring on themselves.”

Mason County, in a meeting of six hundred citizens, passed a set of resolutions almost unanimously.
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A suspension, it pointed out, would destroy confidence in the state’s circulating medium. The Mason County resolution maintained that bank credit expansion had led to the panic, adding, in opposition to the Frankfort view, that they “contemplate with horror . . . a resort to that very policy as a remedy, which has produced so much distress . . . and which, instead of alleviating, must lamentably increase the evils which it pretends to remedy.”

A special session was not called. The major battle over relief, in the fall elections, was over proposed stay legislation. The victorious relief forces passed a stay law in February, 1820, granting a one year extra stay to debtors whose creditors refused the paper of the Bank of Kentucky, which had suspended specie payments.

By mid-1820, it had become clear that some remedy was needed for the troubled monetary situation. In effect, the legislature had granted the desire of the relief forces to permit banks to continue in operation while suspending specie payments, and had also granted special privileges to notes of the Bank of Kentucky. Yet, the bank notes continued to depreciate rapidly. The
Kentucky Gazette
warned its readers in the summer of 1819 not to receive any bank notes except with great caution, and with the help of appraisals by professional brokers, nor to exchange specie and specie paying notes for Kentucky notes. Even the banks themselves began to refuse each others’ notes.
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The public began to lose faith in all of the state’s bank notes. The tavern keepers and merchants of Frankfort decided not to receive the bills of any bank below the denomination of one dollar, and a meeting of butchers of Lexington decided to refuse any paper not acceptable to the banks of that town. As a result, one by one, the “independent” banks, those that had been chartered during 1818, were forced to close their doors. Public opinion generally held the banks responsible for the crash (as could be evidenced even in the Frankfort Resolutions), and this sentiment, coupled with the difficulties of the independent banks, resulted in repeal of all those bank charters in February, 1820.
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Consequently, the only bank still operating by mid-1820 was the Bank of Kentucky. In the meanwhile, the very severe monetary contraction added to the great economic difficulties in the state as debts
mounted and prices plummeted. Finally, in August, 1820, the conservative administration of Governor Gabriel Slaughter, which had done its best to block relief measures, was replaced by the pro-relief advocate, Governor John Adair. The expansionist forces moved rapidly toward the climax of their effort in Kentucky, the establishment of a wholly state-owned bank issuing inconvertible paper, the Bank of the Commonwealth of Kentucky.
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The Bank of the Commonwealth, enacted on November 29, had a nominal capitalization of $2 million. The legislature elected all the directors and the bank had branches throughout the state. The notes were inconvertible, but the state pledged future revenues from sale of its public lands in the West and other surplus revenue. The notes were receivable in all debts to the state. Loans were to be made on mortgage security, proportioned to the population of the district. It was stipulated that borrowers must use their notes either to repay debts or to buy stock and produce. The maximum individual loan was $200. To these ends the bank was authorized to issue up to $3 million in notes. The appropriation by the legislature consisted simply of $7,000 to purchase the plates and paper for printing the notes. The object of the act was providing cheap money for debtors for repayment of their debts. As we have seen, the legislature obligingly passed several stay laws to grant preferential treatment to its Bank of the Commonwealth. Courts favored debtors’ payment in Bank of Commonwealth notes.

Expansionist forces in the legislature had to struggle to beat down many amendments for making the new institution a specie paying bank. The hard money leader in the House was Representative George Robertson, who for fourteen years had been Chief Justice of the Kentucky Courts of Appeals. In the House, an amendment, defeated by a small margin, would have imposed an interest penalty on all notes not redeemed in specie. The provision for the state to pledge a redemption fund in the vague future, rather than provide it at present, only passed by a small margin. Another rejected amendment would have prevented the bank from opening until the
state had subscribed $100 thousand in specie or in the notes of specie paying banks. The conservative forces managed to defeat a provision permitting the bank to lend money on personal property as well as real estate—this was defeated by a two-to-one vote. The final bill passed the House by a vote of 54 to 40. There was also a sharp fight over the authorized note issue. The House had originally agreed to a $2 million limit, but the relief forces managed, by a three-vote margin, to increase the maximum to $3 million; they failed, however, in an attempt to extend it further to $3.5 million.
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In the Senate, the battle against the non-specie paying bank was led by John Pope, who had shifted from his previous inflationist stand. Pope’s amendment to begin penalties for non-redemption in specie after three years was defeated by one vote. On the other hand, an attempt by extreme pro-relief forces to
prevent
any future possibility of redemption was beaten down by a two-to-one vote.

Also, a provision to reduce the maximum interest rate on the banks’ loans from 6 percent to 3 percent was heavily defeated. The final bill passed the Senate by a vote of 22 to 15.
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The establishment of the Bank of the Commonwealth was a measure of the dissatisfaction of the expansionist forces with the semi-private Bank of Kentucky, for the conservatism of its operations. The charter of the latter bank was due to expire in 1821, and it was clear that the expansionists were aiming for non-renewal of the charter, thus closing the bank. The Bank of Kentucky reacted belligerently, contracting its loans and notes and refusing to accept the notes of the Bank of Commonwealth.

During 1821, the Bank of Commonwealth rapidly issued close to its authorized $3 million in notes, and the hopes of its proponents were high. At the opening of the October, 1821, session of the legislature, Governor Adair hailed the Bank of the Commonwealth and attributed an extensive relief of the “pecuniary embarrassments” of the state to the increased currency provided by the new bank.
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In particular, many heavy debtors had been saved from ruin. Adair pointed to the general scarcity of money, particularly the scarcity of specie, and the scarcity in circulation of the specie-backed notes of the Bank of the United States as evidence that specie did not suffice for the currency needs of the country. Banks, in order to obtain enough specie, were forced to make heavy calls on their debtors. With specie and Bank of the United States notes insufficient, and the Bank of Kentucky suspending specie payment, a state currency was needed. The duty of every government, declared Adair, was to supply a sound and sufficient circulating medium and to “prevent as far as practicable the evils of a fluctuating currency.” He admitted that, left alone, the condition of the people would gradually improve and commerce revive. But the government must not become an accessory to the distress of its citizens by refusing to perform its monetary duties. Pursuing the approach that the government should stabilize the value of its currency, Adair pointed out that specie itself was not of invariable value; that value was the price which the products of labor bore in relation to money. This value fluctuated in inverse proportion to an increase or decrease in the quantity of the circulating medium. The debtor and creditor should then receive, on repayment of the debt, money of the same value as of the time the loan was made. “To coerce a literal obedience to contract” when the value had greatly changed would be against true equity. The duty of the legislature in depressed times was to apply appropriate remedies and not await the slow growth of more favorable conditions. The clearly proper system was “an increase in the circulating medium.” A private specie paying bank could not successfully accomplish this, because of the demands upon it for specie should its notes increase. Therefore, only use of the resources and faith of the state itself could establish a general paper system.

Adair did not contemplate a permanent inconvertible paper system. He conceded that such would be impossible to establish, but felt that this bank merely “anticipated” the future revenues of the
state. Adair warned, however, that it was important to sustain the credit of the paper, and that therefore there should be no further note issues which might weaken public confidence.

Legislative satisfaction in their creation was bolstered by a report, a few days later, of the eminent John J. Crittenden, president of the new bank.
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Crittenden reported that, since April of the year, when the bank had begun operations, it had issued $2.5 million in notes and was preparing to issue half a million more. He reported that the bank had decided not to lend for too long a period, in order to avoid the evils of the unlimited time granted by banks during the boom. The present loans were, in contrast, from four to six months’ duration. The bank also decided to call the principal of their loans in gradually, at the rate of 1 percent per month. Crittenden also stated that since, unfortunately, only a limited number of people could obtain the benefit of the loans, the bank, as soon as it received payment from one set of borrowers, would lend again to another set.

Crittenden recognized that when the immediate debts were paid there would be less demand by debtors for the notes, and so he asserted that the regular rate of calls would support the credit of the notes until the legislature eventually made the notes redeemable.

Crittenden concluded that the bank was being highly successful in furnishing a circulating medium enabling debtors to repay their debts, and to transfer their debt burden to the bank, repaying the latter gradually.

The bank was also commended in a report by Representative Samuel Brents, chairman of the House committee on the Bank of the Commonwealth.
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Brents, from Green County in southern Kentucky, pointed out that, before the current year, most citizens were very heavily in debt, and there was little or no market for their
produce to enable them to repay. The bank and its note issues had enabled rapid liquidation of the debt burden. The report commended the bank and all of its decisions.

In their triumph, the relief forces failed by only a few votes to repeal the Bank of Kentucky charter immediately and to transfer all state funds to the new bank.
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They did pass a resolution urging the federal post office to receive the new notes in Kentucky in payment for postage. This resolution was attacked by Representative Thomas Speed of Nelson County, who asserted that this action implied that the inconvertible paper was permanent rather than temporary. He pointed out that the notes had already depreciated considerably.
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In his legislative message in the spring of 1822, Governor Adair continued to eulogize the bank; he declared that it had saved the community from severe suffering, permitted payment of debts, and helped the restoration of commerce.
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Adair also added that the increased currency had restored activity to construction of improvements and provided capital for depressed industry. A note of alarm was distinctly sounded in this message, however. Already the Bank of Commonwealth notes were beginning to depreciate rapidly. In fact, they sold at 70 percent of par as soon as they were first issued.
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Adair exhorted everyone to trust the new bank notes—backed by the faith of the state and advanced for the general good of Kentucky; he stated that he could not understand some people’s distrust of the new bank notes, a distrust that cast discredit on the fair name of Kentucky.

Before the session had opened, the bank, anxious about the depreciation, had decided to try to bolster its credit by increasing the rate of calls on its loans to 2 percent per month. This action ignited fervent controversy in the legislature. Three legislators moved rejection of the change: Representative Tandy Allen of
Bourbon County, a rural county adjacent to Lexington; Representative George Shannon of Fayette County, containing commercial Lexington; and Representative Speed. One legislator moved approval, and two others urged provision of some funds by the state to enable redemption in specie. Representative Hugh Wiley of Nicholas County advocated that the bank issue no further notes.
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Dominant sentiment was for the restoration of the more gentle 1 percent call, and resolutions to that effect were submitted by Representative Charles H. Allen and Representative Shannon from the Committee on Currency. Allen represented Henry County in western Kentucky.