The Panic of 1819 (32 page)

Another writer, using the signature “A Merchant,” pointed out a second major argument against small note issue: that it leads to rapid disappearance of specie from circulation. He urged that the New York legislature follow the lead of Pennsylvania, Maryland, and Virginia and prohibit all notes under $5 denomination.
⁴⁶

Anti-bank sentiment was strong in Pennsylvania, which, as seen, was a battleground for expansionist proposals. As the panic arrived, alongside petitions for monetary expansion came petitions for coerced specie payment. Requests bombarded the legislature for liquidation of the charters of all the banks that had suspended specie payments, and for rendering the property of individual stockholders fully liable. Some of the petitions went so far as to urge revocation of all bank charters in the state. Conspicuous in sending such petitions were Mifflin County in central Pennsylvania, neighboring Union County, and Bucks County in the extreme eastern part of the state.
⁴⁷
In far west Pittsburgh, the Republicans of the district (and the Republicans were the only effective political party in the state), and all Republican candidates for office, favored a compulsory
specie payment law.
⁴⁸
These Republicans also favored a tax against the Bank of the United States. In both of these demands, they were endorsed by the
Pittsburgh Statesman
.
⁴⁹
State Senator Condy Raguet, in the course of his very extensive inquiry into the extent of the depression in Pennsylvania, sent a questionnaire to leading citizens as well as legislators in each county, sampling opinion on the depression. One of his questions was, “Do you consider that the advantages of the banking system have outweighed its evils?”
⁵⁰
Of the nineteen counties sampled, sixteen answered in the negative, and these covered all areas of the state.

Raguet, who concluded that the depression was caused by bank credit expansion in the boom and subsequent contraction when specie drained from bank vaults, urged that every new or renewed bank charter have the following restrictive provisions:

(1) a penalty of 12 percent interest per annum and forfeiture of the charter, should any notes or deposits not be redeemed in specie on demand. (This was the most important provision.
⁵¹
The inclusion of deposits with notes was characteristic of Raguet, who pioneered in emphasizing their simultaneity in constituting the money supply.)

(2) loans to be limited to 150 percent of paid-in capital.

(3) all profits over 6 percent to be divided equally between stockholders and the state.

(4) prohibition on borrowing from a bank by one of its directors, also ban on a bank director’s holding legislative office.

(5) annual inspection of bank accounts.

(6) prohibition of small notes under $5 denomination.

(7) no bank should be permitted to buy its own notes, or notes of any other bank, for less than par. (This was to check the speculative practice of country banks’ buying their own notes in the city at a discount, instead of having to redeem them at par.)

(8) no bank should be able to own any securities of the United State government, or its own stock, or the stock of any other corporation. (The purpose of banks, as gleaned from their charters, wrote Raguet, was to accommodate merchants, farmers, mechanics, and manufacturers, and not to lend to stock speculators. Investing in government securities was a particular spur to speculation, since the greater marketability of government bonds caused government to issue more notes than it would otherwise.)

(9) no loans on security of bank’s own stock.

(10) a required contingency fund for redemption of 10 percent of the bank’s capital.

Although Raguet was decidedly unsympathetic to the existence of any banks aside from those with 100 percent reserve for their demand liabilities,
⁵²
he doubted whether repeal of existing charters was expedient. Instead, he advocated inserting the provisions listed, before any charters were renewed. For existing banks in suspension, Raguet recommended that the charters not be renewed, that they be prohibited from making any new loans or note issue, and that they be given three to five years to collect their debts and wind up their affairs.

Similar calls for restrictions on banks, particularly for the forcing of specie payment, were made in William Duane’s Philadelphia
Aurora
.
⁵³
Duane advocated compulsory specie payments and full individual liability for banks’ stockholders. Similar provisions had unfortunately been turned down in 1814, when forty-two new banks were incorporated. And now, as then Governor Simon Snyder and other critics had predicted, those rural counties which had been the most enthusiastic supporters of bank expansion were “the most distressed and impoverished,” and the same areas were petitioning the legislature to confine all banks to cities.

“A Pennsylvanian,” in an article in the Philadelphia
Union
, in the course of an open letter to the Raguet Committee, recommended the following provisions in bank charters:

(1) no bank may refuse to redeem its paper when it has specie in its vaults (a milder provision than recommended by Raguet).

(2) no bank suspending payments should be allowed to issue paper or declare dividends.

(3) directors of suspending banks must call on stockholders not yet paid in full, and sue defaulting stockholders.

(4) every director to be individually liable for the paper. The writer asserted that these measures, in addition to ending fraudulent practices, would prevent future depreciation of bank paper, reduce bank paper outstanding, and increase its value.
⁵⁴

The Pennsylvania legislature began restricting bank expansion in late 1818, at the urging of former Governor Snyder, now a State Senator. It passed resolutions compelling suspended banks to make public statements of their affairs and prohibiting them from declaring dividends during the period of suspension.
⁵⁵
In the spring of 1819, Pennsylvania annulled the charter of any bank refusing to redeem its notes in specie, except for the very important case of brokers who had bought the notes at a discount.
⁵⁶

In 1819, the Pennsylvania legislature passed a law forfeiting the charter of any bank established under the mass incorporation act of March, 1814, which, after August of 1819, should refuse to redeem its notes in specie. Stockholders and directors would be individually liable and there would be a 6 percent interest penalty on the bank.
⁵⁷
In 1820, the Pennsylvania General Assembly suggested a constitutional amendment prohibiting the United States Bank from having branches within the states.

In Rhode Island, the panic quickly led to abolition of the state’s peculiar system of debt collection—particularly speedy in the case
of a bank collecting from its borrowers, as compared to creditors trying to collect from the bank. Another step taken by Rhode Island, in June, 1820, was to prohibit banks from circulating notes in excess of their paid-up capital. This was not really necessary in a state with conservative banking.
⁵⁸

Vermont had passed a stringent law, in 1817, prohibiting the circulation of non-specie paying bank notes, so that the hard money forces needed mainly to repulse expansionist programs, which in Vermont consisted largely of appeals for chartering new banks. One intense dispute took place over a phenomenon peculiar to Vermont the fact that there were many private Canadian bills in use in the state as money. A bill was presented in the legislature to prohibit the circulation of Canadian private notes; this bill almost passed, but was finally rejected. In the meanwhile, the opposition attempted to pass a law compelling the state to receive Canadian notes for taxes and debts due, but this was summarily dismissed.
⁵⁹

In New Hampshire, hard money forces, led by former Governor William Plumer, caused a great stir in the 1820 session, by petitioning the legislature against any charter renewals for banks. The suggestion was tabled by the legislature.
⁶⁰

A New England writer, “O.,” brought up an acute point: one cause of excess bank credit expansion was the banks’ agreement between themselves to accept and exchange each others notes. In effect, they borrowed from each other without paying interest. “O.” saw perceptively that competition between numerous banks could restrict the total supply of bank notes, for each bank could only issue its notes to a narrow, limited clientele, beyond which the notes would be returned to the bank quickly for redemption. Interbank agreements could suspend this force. Therefore, “O.”
recommended that legislatures consider such agreements to be violations of bank charters.
⁶¹

Thomas Jefferson’s thoroughgoing opposition to paper money was heartily concurred in by his old enemy and current friend, Massachusetts elder statesman John Adams. Adams, writing to his old Jeffersonian opponent, John Taylor of Caroline, denounced banks roundly and placed the blame for the depression on their shoulders. Paper money beyond the value of specie he considered to be “theft” and bound to depreciate as in the case of debased coins.
⁶²
He cited a similar abysmal failure of paper money in Massachusetts in 1775, which was quickly and efficiently replaced in circulation by silver.

John Adams’ son, Secretary of State John Quincy Adams, had similar views on bank paper at that time.
⁶³
A plan for government paper money had been sent to him by a Frenchman, Peter Paul De Grand. Adams wrote De Grand that he would send the plan on to Secretary of Treasury Crawford, but that he himself felt that it would create fictitious capital. He commended to De Grand the Amsterdam bank system, where paper was “always a representative and nothing more”—a 100 percent equivalent of the specie in the banks vaults.

In Indiana, a bill in 1821 to prohibit issue of irredeemable bank currency failed in the legislature,
⁶⁴
although a citizens’ meeting in Washington County, across the river from Louisville, denounced the entire banking system as a destructive and fraudulent monopoly.
⁶⁵
Missouri outlawed private unchartered bank notes in 1819.
⁶⁶
In Ohio, Governor Ethan Allen Brown laid the blame for the depression on excessive bank credit and declared the only remedy to be the gradual reduction of bank paper, which would revive the credit of the banks.
⁶⁷
As early as the beginning of 1819, a Committee on the State of the Currency and Banks of the Ohio House recommended that the law against private unchartered banks be enforced, and that inquiries be made into the conditions of banks not reporting their accounts.
⁶⁸

The depth of sentiment throughout the West against banks in general and the Bank of the United States in particular, for their excessive expansionist and contractionist activities, was revealed by incidents in rural Ohio. In the fall of 1819, General William Henry Harrison, later President of the United States, was a successful candidate for the Ohio State Senate. A citizens’ meeting before the elections criticized him for being a director of a local branch of the Bank of the United States. Harrison, in a lengthy reply, insisted he was a sworn enemy of all banks and especially the Bank of the United States.
⁶⁹
He declared that he was unalterably opposed to the establishment and continuance of the United States Bank.

The major energies of Ohio during this period, in fact, were occupied by its famous war against the Bank of the United States. This war was not depression-born, having begun in late 1817 with a proposal to tax the business of the bank’s Ohio branches, in order to drive them out of the state. The tax was defeated in this session, but carried overwhelmingly in February, 1819, after the anti-bank forces had triumphed in the fall elections of 1818. Leader in the fight was Representative Charles Hammond, from Belmont
County.
⁷⁰
Anger at the bank was compounded of three elements: inflationists’ irritation at the bank’s contractions and calling on state banks for redemption; hard money resentment at the bank’s expansionist activities during the boom; and general political anger at a privileged “money power.” The law that levied a tax on the bank also imposed the same tax on all unincorporated banking in the state, thus revealing the predominance of general anti-bank opinion in Ohio. Attempts to tax or penalize the bank were struck down in famous United States Supreme Court decisions—Maryland’s in
McCulloch vs. Maryland
(1819) and Ohio’s in
Osborn vs. Bank of United States
(1824).
⁷¹

In the frontier town of Detroit, in Michigan Territory, the citizens became aroused about the depreciated state of their circulating medium, which consisted principally of Ohio bank notes. In early 1819, they organized a meeting to deal with the depreciated small-change notes which individuals were issuing and circulating. The meeting pledged the members not to accept any individual change notes that were not redeemable within three days after demand for redemption.
⁷²
In December of the same year, the leading citizens of Detroit held a meeting over the depreciated state of Ohio bank notes. They noted in alarm that the recent suspension of specie payment by these banks opened the door to a much greater depreciation. Therefore, the citizens resolved that those banks not redeeming their notes in specie were unworthy of confidence. The meeting appointed a committee of five to inquire into the condition of all the banks whose notes were circulating in Michigan, and to publish their
results periodically in the Detroit
Gazette
. The committee was also directed to inquire into the status of individuals issuing small notes.
⁷³