The Panic of 1819 (23 page)

On May 21, a frankly grave report was submitted by President Crittenden and the Board of Directors, on the “present depreciation of the paper of this bank” and the means to correct it.
¹⁶⁵
The report declared that for the past several weeks there had been constant and rapid depreciation of the bank notes in the main commercial centers of Lexington and Louisville, and that, at this time, it had depreciated to about 62 percent of par. In contrast to the optimism of the previous fall, Crittenden declared that there was no prospect of preventing further rapid depreciation, unless the cause were removed. The major cause was the “super-abundance of bank paper, compared with the demand of the community.” The original heavy debt burden had been extinguished, while the circulating medium had “increased to a degree hitherto unknown.” Thus, the demand for use of the notes had decreased just at a time when its amount had been rapidly increasing. Once the redundant paper came “into contact with” specie and the various commodities, it instantly depreciated. Crittenden deprecated the alleged influence of brokers in bringing about the decline, asserting that the depreciation would have occurred without them. The final consideration for Crittenden was that Kentucky, being a part of a great, interconnected nation, could not maintain a purely local inconvertible currency without suffering the evils of depreciation as well as great fluctuations in its value, especially since the surrounding states were either on a specie basis or were rapidly returning to one. Unless checked by drastic action, Crittenden warned, the depreciation would proceed, and end circulation of the paper entirely, destroying the bank. The people, already fearing such an eventuality, were accelerating the very depreciation. Farmers and mechanics were beginning to realize that such a depreciated currency was ruinous to their interests, and that the increased prices of imports from other states and countries constituted a virtual tax upon their industry. In self-defense they would soon completely reject the paper of the bank.

Thus, its president virtually repudiated the basis of the bank’s operations. He maintained that the only means of saving the bank would be to cease lending, and heavily contract, thus sharply reducing the notes in circulation.

The legislature, however, was in no mood as yet for such blunt messages. On the contrary, the House passed the Allen Resolution submitted by Representative Tandy Allen of Bourbon County, to reduce the rate of calls to 1 percent per month, by a two-to-one margin, and beat down by slim margins modifying amendments to reduce the note issue of the bank, and to begin providing funds for redemption of the notes. The Senate, however, refused to agree to this resolution, and the 2 percent recall rate was finally allowed to stand.
¹⁶⁶

The state, in the meantime, was in turmoil over the bank notes. Actually the notes had never been at par, and by the spring of 1822 were depreciated by 50 percent. Dispute was bitter on the merits of the bank notes. One critic wrote caustically that the only good quality of the notes was that they were too valueless to be worth counterfeiting.
¹⁶⁷
Many people refused to accept the Commonwealth notes at any price, and this included many stock raisers, hemp and tobacco growers, commission merchants, and stage drivers. In fact, by 1822, it was impossible to use the notes in any everyday transactions. This included postage, which had to be paid in specie or United States Bank notes.

Bitterly and increasingly, opponents denounced the bank as destroying confidence, commerce, credit, and trade, and leaving the poor with a heavy debt to the state as well. Many had opposed the bank from its inception on the ground that it was no concern of the state’s to help debtors, and that thrift and industry were the only remedies for the crisis, as well as on predictions of inevitable depreciation. On the other hand, the advocates of expansion continued to declare that the depreciation was really a blessing, since the very fact that imports from other states were cut off encouraged manufacturing in the state. The
Kentucky Gazette
went so far as to declare it good that the federal government did not accept the new notes in payment for public lands, since there would now be no great incentive for good Kentuckians to emigrate further West. It added that the depreciation “protects” Kentucky from imports of iron, leather, wool, and hemp.
¹⁶⁸

The end of the state bank experiment was signaled by the capitulation of the leader of the relief forces, Governor John Adair.
¹⁶⁹
In his message to the legislature in October 1822, only a year after his warm approval of the bank, Governor Adair concluded that legislative intervention could not really aid financial troubles. The only remedies, he asserted, were economy, industry, and the trade of foreign commerce. It was true, he declared, that government aid was often useful in emergencies, but to continue such measures would be destructive and demoralizing. The relief measures succeeded in alleviating distress, but now they must be ended. Adair recommended rapid contraction of loans and notes, and immediate withdrawal of one-sixth of the total outstanding. In this way, the exchange value of the notes would appreciate. Adair recognized that diminution in the money supply would be inconvenient, but he concluded that the state would be more than compensated by the reestablishment of credit and the “freedom of circulation” of the appreciated currency.

The legislature moved more than enthusiastically to implement these recommendations. It provided for the calling in of $1 million of Commonwealth notes in twelve months, with one half to be immediately recalled, and the received notes to be burned. The burning of Bank of Commonwealth notes took place in public bonfires in Frankfort throughout the ensuing year, to the plaudits of such conservative observers as Hezekiah Niles, and to the discomfiture of the expansionists, who complained of the injustice to debtors. In January, 1823, more than $770 thousand worth of notes were publicly burned.
¹⁷⁰
As the notes diminished in quantity and half were withdrawn from circulation, they gradually approached par.
¹⁷¹
A proposal to repeal the Bank Act immediately failed by a two-to-one vote, but the bank ceased to play an active role, although it continued formally in existence until the Civil War.
¹⁷²

Another monetary experiment was performed in March 1822, by the city of Louisville. Louisville issued an inconvertible city currency in small denominations, from six cents to one dollar, to an amount totaling $47 thousand. This currency was receivable for all taxes and debts due the city; future city taxes and property were pledged for future payment. These notes soon depreciated to a negligible value, and all were retired and burned by the end of 1826.
¹⁷³

In sum, the most spectacular expansionist measures were the establishment in several western states—Tennessee, Kentucky, Illinois, and Missouri—of new state-owned banks to issue inconvertible currency. In each of these states, all the banks had suspended specie payment during the depression. After controversy, they had been allowed to continue in operation, but their notes depreciated rapidly. The legislatures then turned, despite heavy opposition, to establishing the new state-owned banks.

All of these monetary ventures began in high hopes to issue large quantities of notes. But all came quickly to grief, despite such aid by the states as legal tender provisions and penalties against depreciation. The notes depreciated rapidly almost as soon as operations began, until the public began to refuse acceptance. In Missouri and Tennessee, the depreciation was spurred by court decisions adverse to the constitutionality of the notes or the accompanying stay laws. Opinion in each of the states swung sharply against the new paper, and where the notes did not disappear from circulation, steps were taken to halt and eventually to liquidate the projects.

This record of monetary expansion should not lead us to label the West as simply “soft money” and the East as “hard money.” Many western states were monetarily quite conservative during the depression. And those that adopted loan office projects did so only over bitter opposition. Nor were the other states, especially in the South, free from expansionist proposals or policies. In some southern states, banks were allowed to suspend specie payment completely and continue operations, while in others, banks were allowed to suspend payment to suspected “money-brokers.” These brokers were money-changers who purchased bills of shaky or remote banks at a discount and then attempted to redeem the mass of notes at par. They performed the function of a rudimentary clearing system, and were naturally hated by the banks whose notes came home to roost.

Only staunchly hard money Virginia remained free from expansionist agitation. Maryland and Delaware passed anti-depreciation laws over bitter opposition, in vain attempts to bolster the credit of suspended banks by outlawing depreciation. Loan office proposals were considered in several eastern states, but were turned down in all of them. On the other hand, many eastern states enforced specie payment on most of their banks, and New York and New England remained largely free of expansionist agitation or policy. Massachusetts, however, considered, and rejected, an anti-depreciation measure.

Thus, one of the sharpest and most interesting controversies generated by the panic centered on the money supply. One group urged various plans for monetary expansion, some of which were adopted; while the majority of articulate opinion advocated restoration of specie payments and abstinence from inflationist schemes. Leading figures on both sides were propelled to engage in trenchant economic analysis in finding support for their positions. Although it is true that the inflationists were relatively stronger in the West, it must not be overlooked that bitter disputes raged within each region, state, and locality. Neither was there a discernible class, or occupational, demarcation of opinion, and both sides were headed by wealthy, respectable men.

______________

¹
For the economy of Alabama in this period, see Abernethy,
Formative Period
, pp. 25, 50ff., 86ff

²
The Bank of St. Stephens opened in September 1818, with only $7,700 of paid-in capital. U.S. Congress,
American State Papers: Finance
3, no. 637 (February 14, 1822): 767–68.

³
Abernethy,
Formative Period
, pp. 86ff.

⁴
Alabama General Assembly,
Journal of the Senate
(1821): 8–9. By 1823, ex-Governor Bibb had become a director of the Huntsville Bank.

⁵
Philadelphia
Union
, November 2, 1821.

⁶
Knox,
A History of Banking
, p. 594.

⁷
Albert B. Moore,
History of Alabama
(Chicago: American Historical Society, 1927), vol. 1, pp. 159–60.

⁸
Pickens himself was President of the Tombeckbee Bank of St. Stephens. Abernethy,
Formative Period
, pp. 93ff.

⁹
Poindexter was one of the leading politicians in the State, and later became a staunch Whig. On the veto of the Runnels Bill, see Robert C. Weems, Jr.,
The Bank of the Mississippi: A Pioneer Bank of the Old Southwest, 1809–44
(New York: Columbia University, 1951, microfilm), p. 388.

¹⁰
Stephen A. Caldwell,
A Banking History of Louisiana
(Baton Rouge: Louisiana State University Press, 1935).

¹¹
Louisiana General Assembly,
Official Journal of the Proceedings of the House of Representatives, 1819
(January 18, 1819): 16.

¹²
Issue of May 6, 1820. Quoted in Joseph George Tregle, Jr., “Louisiana and the Tariff, 1816–46,”
Louisiana Historical Quarterly
25 (January 1942): 35.

¹³
Thomas P. Govan, “Banking and the Credit System in Georgia, 1810–60,”
Journal of Southern History
4 (May 1938): 166ff.

¹⁴
George G. Smith,
The Story of Georgia and the Georgia People, 1732–1860
(Macon, Ga.: G.G. Smith, 1900), p. 300.

¹⁵
Milton S. Heath,
Constructive Liberalism
(Cambridge, Mass.: Harvard University Press, 1954), pp. 176–78.

¹⁶
Report on the Joint Committee of the Planters’ Bank and the Bank of the State of Georgia, June 21, 1820, in U.S. Congress,
American State Papers: Finance
4, pp. 1055–56.

¹⁷
Govan, “Banking,” p. 169.

¹⁸
Washington (D.C.)
National Intelligencer
, December 15, 1821; Heath,
Constructive Liberalism
, p. 188.

¹⁹
Heath,
Constructive Liberalism
, p. 182.

²⁰
Ibid., pp. 183ff.

²¹
Georgia General Assembly,
Journal of the House of Representatives, 1820–21
(November 7, 1820): 6.

²²
For an example of hard money attack on depreciation, see the Washington (Ga.)
News
, reprinted in the Washington (D.C.)
National Intelligencer
, August 4, 1821.

²³
Georgia General Assembly,
Journal of the Senate, 1822
(November 5, 1822): 14–15.

²⁴
Knox,
A History of Banking
, p. 564; Sumner,
History of Banking
, pp. 87, 115.

²⁵
On the report of Stephen Elliott, appointed head of the Bank of the State of South Carolina, criticizing the action of the Bank of the United States, and the allegedly resulting scarcity of money, see Joseph Dorfman,
The Economic Mind in American Civilization, 1606–1865
(New York: Viking Press, 1946), vol. 1, pp. 370–71.