The Panic of 1819 (29 page)

Restrictionists replied that the quantity of money determines its value, or purchasing power, and not the rate of interest. Interest rates were determined by prospects for profit on investments.

Restrictionists, on the other hand, averred that any increase in paper money would aggravate rather than cure the depression. Most of this group laid the basic cause of the depression to a monetary cycle of expansion and contraction. Not only would a present expansion renew the process but the inconvertible notes were bound to depreciate, wreaking further havoc and postponing recovery. The emission of inconvertible paper, therefore, would not really increase the
effective
money supply. The only cure for the depression from the monetary side was rigid enforcement of specie payment, permitting a return to thrift and a liquidation of unsound bank notes and business positions. This point of view was common to practically all the opponents of inconvertible paper. Some restrictionists added that bank notes were also excessive because they kept the price of American export staples too high for competition in world markets. Enforcement of specie payments and ensuing contraction were necessary to reduce export prices and revive the export trade. To this argument, some inflationists offered two ingenious objections. One was that higher domestic prices might indeed reduce exports in
physical
terms, that they would still increase the
monetary
value of exports. Another was that contraction would also cause a fall in the prices of
non-exportable
goods such as land and houses, and that a fall in such prices would not stimulate exports.

Confidence
was another key point in dispute. The inflationists urged the equivalent of pump-priming, stressing that note emissions would restore confidence, thereby inducing money out of idle hoards and into credits and investments. As debtors were relieved, creditors would gain confidence, lend their money again, and recovery would ensue. To the restrictionists, on the other hand, confidence depended upon strict maintenance of specie payment. Strict specie payment would restore industry and economy and bring back
confidence, drawing hoarded specie back into circulation. To the inflationist’s contention that new loans to debtors would bolster general confidence, some hard money writers countered that lack of confidence and hoarding were
not
caused by purely psychological factors, but rather by the objective lack of good security available. This could only be remedied by enforcing specie payment and liquidating unsound banking and credit positions. They also replied to advocates of an increased velocity of circulation that increased velocity of money would only further depreciate the paper currency.

The
depreciation
issue was, indeed, the main problem for the expansionists; it was the main burden of the opposition attack and the most difficult to answer. Some expansionists conceded that the notes might depreciate and that this would be troublesome, but upheld the far superior advantages of an increased money supply. Other advocates were much bolder and frankly hailed depreciation as a desirable development. Within each state, expansionists proclaimed the advantages accruing to that state from building up a state-wide “home” market. Money would be retained to circulate at home, increasing the rapidity of circulation of the notes. Interstate debtors would be paid in farm produce instead of money, and this would help develop the home market for the state’s farm produce.

Other expansionists, conversely, upheld as their ultimate goal the maintenance of a stable value of money. Instead of a vague policy of endless expansion, they hoped for a stabilization of money and prices after the current contraction had been offset. These writers reminded the specie advocates that specie also fluctuated in value. A truly stable money could only be obtained by a limited, regulated issue of inconvertible paper by the government. Some pursued the old will-o’-the-wisp of a money based in some way on the land values of the country. The notes, they alleged, would not depreciate because they would be backed by appraised public land holdings. The hard money writers countered this criticism of specie by admitting that while theoretically the government could issue and maintain a currency more stable than specie, in practice governments always tended to overissue paper.

Against the protectionist emphasis on higher tariffs as a cure for the depression, the inflationists argued that manufacturing was depressed, not from lack of markets but from lack of money. It was lack of money that prevented the manufacturer from buying raw materials, hiring workers and constructing plants.

In a sense, this clash of emphasis was a forerunner of the “Austrian” vs. the underconsumptionist theory of the crisis, both of which were to come to the fore in the depression of the 1930s. For the underconsumptionists stressed the cause of the crisis to be lack of consumer markets for products, while the Mises-Hayek theory blamed the crisis on a shortage of saved capital. In the panic of 1819, the protectionists stressed the lack of consumer markets abroad and the necessity for building up a market at home. The inflationists, on the other hand, stressed the shortage of money capital available to manufacturers as a cause of the crisis. Curiously, the policy prescriptions of the two groups were diametrically opposed rather than parallel. For the underconsumptionist of 1819 believed that consumption would be stimulated by tariffs, while the underconsumptionist of a later day urged monetary expansion as the remedy. On the other hand, the remedy proposed for the shortage of money capital was monetary inflation in 1819, encouragement of savings and thrift in the 1930s. The crucial difference seems to be that the inflationists of the early period saw monetary expansion primarily as a way of providing capital, whereas the inflationists of the twentieth century saw it as a means of stimulating consumption, increased investment following as a consequence.

The hard money forces denied that a scarcity of money existed. After all, money could always be purchased on the market. And if a scarcity of money did exist, it was a scarcity of
genuine
money—of specie—and this scarcity would continue until specie payments were fully restored.

With the economic argument conducted so often on so high a level, one might wonder why there were virtually no proposals for devaluating the dollar to account for the higher price levels in relation to specie. It must be remembered, however, that there were
scarcely any advocates of such a course in Great Britain at this time—or even a hundred years later.

The debates over proposals for nationwide monetary expansion strengthen our previous conclusions on the absence of rigid geographical or class lines in the inflation controversies. Certainly the leading inflationist, Thomas Law, one of the most influential citizens of Washington, was the opposite of a poor agrarian.

______________

¹
“Mercantile Correspondent,” Washington (D.C.)
National Intelligencer
, December 30, 1819.

²
Oliver Wolcott,
Remarks on the Present State of Currency, Credit, Commerce, and National Industry
(New York: Wiley Co., 1820).

³
“One of the People—A Farmer,” Washington (D.C.)
National Intelligencer
, April 17, 1819. Also see “A Citizen,” Baltimore
Telegraph
, reprinted in the Richmond
Enquirer
, June 1, 1819.

⁴
“Agricola,” in Washington (D.C.)
National Intelligencer
, April 21, 1819.

⁵
“An Anti-Bullionist,” An
Enquiry into the Causes of the Present Commercial Embarrassments in the United States with a Plan of Reform of the Circulating Medium
(1819): 45ff.

⁶
On Law see Allen C. Clark,
Greenleaf and Law in the Federal City
(Washington, D.C.: W.F. Roberts Co., 1901).

⁷
Law stated that he had begun recommending his plan in 1812. “Justinian” (T. Law), Washington (D.C.)
National Intelligencer
, November 3, 1821.

⁸
See the caustic comment of the editors on Law’s plan in the Washington (D.C.)
National Intelligencer
, May 19, 1819. Also see the vigorous attack on Law by William Duane in the Philadelphia
Aurora
, October 11, 1820.

⁹
Ibid., May 12, 1819;
City of Washington Gazette
, May 12, 1819.

¹⁰
“Justinian” (T. Law),
Remarks on the Report of the Secretary of the Treasury
(Wilmington: R. Porter Co., 1820), pp. 22–23.

¹¹
Law also cited Russia, where the Emperor had wisely established a National Currency Board to provide a new circulating medium for the development of agriculture and manufactures in Russia. “Justinian,”
Remarks
, p. 34. Emperor Peter III had established state banks issuing inconvertible paper in 1777, and bank issues expanded and depreciated until 1817. See Michael T. Florinsky,
Russia
(New York: Macmillan Co., 1953), vol. 1, p. 567; vol. 2, pp. 708ff

¹²
“Justinian,”
Remarks, passim
.

¹³
Ibid.

¹⁴
Washington (D.C.)
National Intelligencer
, May 22, May 26, June 1, 1819. Law evoked the authority of Arthur Young and Sir Josiah Child in saying that low interest rates were the soul of commerce.

¹⁵
Ibid., May 15, 1819.

¹⁶
In early 1818, before the economic crisis had arrived, Law answered a critic who had advised that his paper money plan be held in reserve for emergency times, that it would surely succeed better in time of prosperity. Ibid., February 10, 1818.

¹⁷
Ibid., April 24, 1819. Also April 22, May 1, 1819.

¹⁸
Ibid., October 30, 1819.

¹⁹
“Justinian,”
Remarks
, p. 30. This does not imply that Law was hostile to tariffs. Far from it. Indeed, Law fulminated against the competition of cheap Asian labor in the form of cotton goods and urged exclusion of these goods from the country. Washington (D.C.)
National Intelligencer
, June 1, 1819;
City of Washington Gazette
, May 12, 1818.

²⁰
“Justinian,”
Remarks
, p. 37.

²¹
Ibid. The main evil of the banks was their requirement of specie payments for their notes.
City of Washington Gazette
, May 12, 1818.

²²
Washington (D.C.)
National Intelligencer
, May 19, 1819.

²³
Ibid., April 1, 1820.

²⁴
Ibid., November 28, 1820.

²⁵
Ibid., October 31, 1821.

²⁶
Ibid., November 3, 1821.

²⁷
Ibid., July 21, 1819. The writer was vague on whether 100 percent specie backing was necessary for legitimacy, or whether redeemability would suffice.

²⁸
(Anonymous), “The Circulating Medium,”
Niles’ Weekly Register
15 (November 21, 1818): 220.

²⁹
“Agricola,” in Washington (D.C.)
National Intelligencer
, January 25, 1820.

³⁰
“An Independent Citizen of North Carolina,” in ibid., January 13, 1820. Also see “Hominus Amicus” from Baltimore, ibid., May 15, 1819.

³¹
Swan was an adventurer and land speculator, who had participated in the Boston Tea Party, and later became an agent of the French Republic; he had lived in Boston, but the last two decades of his life he made headquarters in a French debtor’s prison from which he wrote this pamphlet. His plan was presented in his pamphlet, James Swan,
An Address to the President, Senate, and House of Representatives of the United States
(Boston: W.W. Clapp, 1819), pp. 1–24; Dorfman,
Economic Mind
, vol. 2, pp. 243–46, 310–12.

³²
“A Reader from North Carolina,”Washington (D.C.)
National Intelligencer
, August 11, 1819. Also ibid., February 11, 1819, and Wolcott, passim.

³³
New York
American, December
15, 1819. Also see the criticism in the New York
Daily Advertiser
, January 17, 1820.

³⁴
New York
Daily Advertiser
, July 30, 1819.

³⁵
Philadelphia
Aurora
, August 19, 1819. Duane, by the way, was certainly an outstanding exception to the general “era of good feeling” and support of President Monroe. He fought Monroe’s re-election with great bitterness.

³⁶
Niles’ Weekly Register
16 (July 31, 1819).

³⁷
On February 24, 1820.
Reports of the Secretary of the Treasury of the United States
(Washington, 1837), vol. 2, pp. 481–525. Also reprinted in U.S. Congress,
American State Papers: Finance
3, no. 582 (February 24, 1820): 494–515.

³⁸
Law, in fact, maintained that Crawford privately agreed with his monetary views. Clark,
Greenleaf and Law
, p. 320.

³⁹
on the necessity of continued diminution of circulation see Philadelphia
Aurora
, October 2, 1821.

⁴⁰
Philadelphia
Aurora
, October 11, 1820.