The Panic of 1819 (28 page)

To the contention that the rate of interest depended upon, and moved inversely to, the quantity of money in circulation, Ritchie thus countered with a “real” theory of interest, and movements in the quantity of money affecting only prices; if they affected all prices equally, then it was clear that a
ratio
, such as the rate of interest, would not be altered. He deduced, therefore, that it was possible to
have excessive currency in circulation, without an increase in the profits of capital, and hence without effecting a change in the rate of interest. On the other hand, the supply of currency might be deficient, while the interest rate was low, because a poor prospect for profit had diminished the demand for capital. Ritchie concluded that interest need not be low when money was excessive; in fact, it was possible for excessive currency and boom conditions to be accompanied by a quickening of the spirit of enterprise and an increase in the prospects for profit. In that case, the bonds “would be converted into currency to be employed in active enterprises.” Thus, Crawford’s scheme was likely to have an
aggravating
, rather than a stabilizing, effect on excessive currency, and to propel the currency to a great stage of depreciation. Indeed, Ritchie declared, this was exactly what had happened in the recent boom before the depression. People had borrowed at high interest from the banks in order to acquire depreciated bank notes. This forgoing of fixed interest return to obtain money was certainly likely to occur under the Crawford national currency plan.

Similar perversity, added Ritchie, would occur in bad times. When the currency was deficient and the prospects for profit low, market interest rates would also be low, and people would tend to convert their currency into government bonds, thus aggravating the deficiency of currency.

Ritchie was not content to stop at this point in his penetrating analysis of the Crawford paper plan. He added that advocates of the scheme might reply that the government could always keep watch on the fluctuations in the prices of government bonds, and that, instead of maintaining convertibility into bonds at par, it could continually change the rates of convertibility in accordance with the rates of interest. To this early version of a “compensated dollar,” Ritchie replied that the scheme was illusory. “A thing so variable as the real or supposed profits of capital, as variable as the value of funded stock (government bonds); things—dependent upon such a variety of causes, can never be defined with sufficient accuracy to answer the purposes of a standard.” This “standard” was always changing in value, being affected by changes in many
factors; especially the supply of government bonds, and the supply of and the demand for capital. These changes would be too numerous and subtle to be detectable by the government. The best course was to leave gold and silver alone; they would have infinitely fewer fluctuations than these “paper thermometers.” Crawford’s plan was no better than all the other paper schemes and we must return to the use of specie, the universal medium, which ebbed and flowed from one country to another according to its excess or deficiency.

If Crawford’s doctrinal concessions to the inflationists angered the pure hard money advocates, his conclusion against paper and in favor of continuing deflation until convertibility was restored galled the inflationists. Thomas Law was moved to write a pamphlet specifically devoted to a critique of the Crawford Report.
⁴²
Law attacked the widespread phobia against depreciation of currency; admittedly paper issues had a tendency to depreciate, but they also activated industry. He praised the many state legislatures for permitting banks to operate without having to redeem in specie. Law did not actually attack Crawford’s paper proposal at length, but he took the occasions to present his own paper plan in detail.

James Madison, Ritchie’s fellow Virginian, was willing to concede the theoretical possibility of a regime of paper money rigidly limited by the government. He added, however, that in practice, when money depended on the discretion of government, it would be bound to depreciate. Madison declared:

It cannot be doubted that a paper currency rigidly limited in its quantity to purposes absolutely necessary, may be made equal and even superior in value to specie. But experience does not favor a reliance on such experiments. Whenever the paper has not been convertible into specie, and its quantity has depended on the policy of the government, a depreciation has been produced by an undue increase, or an apprehension of it.
⁴³

A general attack on paper money schemes was leveled by Hezekiah Niles. Niles hailed the opportunity brought by the depression to purge the country of speculation and excess bank paper, provided that paper money schemes did not interfere. Money would then rise to its legitimate value.
⁴⁴
As to the debt-burdened farmers, they deserve to reap the consequence of their imprudence.
⁴⁵
Niles further pointed out that widespread complaint of “scarcity of money” always arose after the country had been flooded with paper, and the result was a scarcity of
genuine
money.
⁴⁶
Hard-money pamphleteer “Seventy-Six” attacked the thesis of scarcity of money at length and added that anyone could purchase currency by selling his labor or his property. He also pointed out that “Whatever quantity of money exists . . . is used to the full; a greater or less quantity will simply lower or raise in exchange.”
⁴⁷

Monetary proposals did not loom large in the Congressional arena during the depression. In the spring of 1819, proposals for suspension of payment by the Bank of the United States developed into scattered demands for a special session of Congress, to compel the Bank of the United States to suspend payment. The
National Intelligencer
scoffed at these demands as holding up false hope for a remedy—a remedy which would only aggravate the monetary disease.
⁴⁸
The demands for a special session came to naught.

Another simple remedy was advanced to end the external specie drain: the prohibition of specie exports. A prominent advocate of this measure was Mordecai Manuel Noah, editor of the New York
National Advocate
. At the beginning of the panic, he stated simply that 1818 had seen a specie drain abroad of over $6 million, and that prohibition would end the drain and restore confidence in the banking system. Since almost all of the specie flowed to the East Indies,
Noah proposed that each vessel to the East Indies be limited to a certain quota of trade, and that imports of East India goods be limited to the amount “required for general consumption.”
⁴⁹
Another writer, “Solon,” coupled prohibition with the suggestion that the banks end their haphazard clearing operations and cooperate by not calling on each other daily for specie. This would permit expansion of the circulating medium.
⁵⁰
The call for prohibition of specie exports was promptly challenged. “H,” writing in the
National Intelligencer
and reprinted and specifically endorsed by the New York
Gazette
,
⁵¹
a very staid organ usually devoid of politics, charged that the proposal to prohibit export of specie was a “stale experiment . . . universally discredited by . . . every standard writer on political economy.” It would aggravate the evil of depression by spreading uneasiness among merchants. Furthermore, such a law would cause the “moneyed men to hoard every bit of gold and silver that they could obtain.” Stopping the East India trade would be quite harmful. The India trade provided “an immense advantage,” supplying us necessaries such as tea and sugar, and goods which we exported to Europe at a profit.
⁵²

“Virginian” compared the proposal for prohibiting the export of specie to Spain’s prohibition in the era when specie was its main article of wealth, after the mining discoveries in the new world.
⁵³
Specie would always be exchanged for “more essential articles” needed for use and would seek out those countries which furnished the best and cheapest supply. If the United States could compete, it would
have no deficiency of specie, as “Piano E. Sano” expressed it. Specie, like every commodity, contains a self-regulating principle.
⁵⁴
A superfluity in one region sought a better exchange elsewhere. The specie drain was clearly caused by an excess of bank paper, which made part of the specie superfluous. He advocated as a remedy the strict enforcement of specie payments by the banks.

One writer relied primarily on Adam Smith for his attack on export prohibition.
⁵⁵
“Hamilton” quoted verbatim from Smith’s attack on the concept of scarcity of money, in which Smith had asserted that the so-called scarcity was simply a difficulty of borrowing or selling goods for money and the results of previous misjudgments and overtrading.
⁵⁶

The export of specie held no terrors also for those who were ready to establish an inconvertible paper system. Thus, “Anti-Bullionist” stated that with specie demonetized, there would be no reason at all to prohibit the profitable specie trade with the West Indies, since specie would simply be another commodity.
⁵⁷

A curious and unique argument against prohibition of specie export was delivered by “N.O.” in the New York
Evening Post
.
⁵⁸
He went to the opposite extreme and declared that the cause of the depression was an
excess
amount of specie, and therefore the remedy was to
encourage
the export of specie rather than prohibit. The author, however, failed to develop the reasoning behind his position.

In Congress there was considerable interest in the possibility of prohibiting the export of specie. Senator Talbot of Kentucky, chairman of the Senate Finance Committee, reported negatively on the question of prohibiting the export of coin. He cited history to demonstrate the impotence of all such legislative prohibitions, even under the most despotic governments. Talbot took this
position despite the advocacy of export prohibition by Senator John Forsyth of Georgia, another member of the committee. Talbot declared that an unfavorable balance of trade would always cause a drain of specie. The best course, he concluded, was not to impose any such regulation but to let trade work itself without legislative restrictions.
⁵⁹
The cue had been given to the finance committee a month earlier by Secretary of the Treasury Crawford, in response to a House request for his opinion on this problem. Crawford contrasted such practices of the dark ages to the “progress of reason” and “the advancement of the science of political economy in the seventeenth and eighteenth centuries, and its immutable laws.”
⁶⁰
The flow of specie, stated Crawford, depends upon the general balance of trade, which had become unfavorable due to the expansion of bank notes and bank credit. No legislative interference was necessary, except to enforce the obligation of the banks to redeem their notes in specie on demand. Apart from the specie drain, another problem confronted the nation in this period—the disappearance of gold coin. This drain of gold resulted from the official American exchange rate between gold and silver undervaluing gold on the world market. Secretary Crawford and House committees, in 1819 and 1821, recommended a revaluation of gold to a ratio of approximately 15½ to 1 of silver, instead of 15 to 1. A House committee in 1821 reported that the United States had minted $6 million in gold but that practically none was being retained in this country.
⁶¹

On March 3, 1819, Congress passed an act ending the legal tender quality for foreign gold coins. In November of that year, it failed to extend the legal tender quality as it had in the past. French and Spanish silver coins, however, continued to be legal tender. The act injured the Southwest, the major point of import for foreign
gold coin. The General Assembly of Louisiana, led by David C. Ker, Speaker of the House, and Julien Pryches, President of the Senate, sent a resolution to the Senate in April, 1820, attacking the action for blocking a large flow of specie imports. The Assembly estimated that elimination of the legal tender provision, added to cutbacks in Mexican mining output due to the current revolution against Spain, had diminished the influx of specie into New Orleans by a half million dollars per year, which “flowing into circulation would have . . . diminished the general embarrassments under which our commerce labors.”
⁶²

One fleeting proposal was that Congress devalue the dollar to ninety-six cents. It was mentioned, though not identified further, by the astute New York writer “Senex,” who attacked such a proposal as injuring fixed income groups. Said “Senex”: “The stockholders, landowners and annuitants and all persons having fixed income, would suffer a diminution of income to the extent of 4 percent, while merchants, manufacturers, and traders would increase the prices of the articles in which they deal.”
⁶³

Surveying the state and national proposals, the expansionist argument ran as follows: the nation is suffering from a “scarcity of money”; the banks unaided are in no position to stop contracting or to expand currency; therefore the government should free the monetary system from the limitations of specie payment and permit expansion of inconvertible paper. The nation needed more currency, and government was the agency best able to provide it. Debtors would be relieved as the new notes were loaned to them and would be aided by the consequent price increases.

The expansionists also maintained that an increase in the money supply would bring about a low rate of interest—one of the essentials of prosperity. This view was grounded, of course, on an assumed inverse relation between the quantity of money and the
rate of interest. In keeping with this view, some writers elaborated plans to stabilize simultaneously the interest rate and the quantity of money.