Books: A Brief History of Panics

C >> Clement Juglar >> A Brief History of Panics

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In the middle of May, 1815, the first English vessel arrived, and
business became very active again. In May, June, and July it might have
been said "This is the golden age of commerce." Discounts of unsecured
paper were easy, and it was not an unusual occurrence to have notes of
$60,000 offered.

The banks had authorized a suspension of specie payment in order to
force the issue of bank notes, and to stimulate trade, although Mr.
Carey pretends that no over-trading had taken place. He blames them for
having restricted their loans in October and November, thus producing a
decline in prices; and the necessity of cutting down credits came about,
according to him, from the speculations in National securities.

Six Philadelphia banks with a capital of $10,000,000 held $3,000,000 in
Government stock.

On the 15th of February, 1815, when scarcely through with all this
confusion, an effort was made to re-establish for the second time a
United States Bank. It was authorized on the 10th of April, 1816, the
Act permitting the formation of a Company, with a capital of
$35,000,000, divided into 350,000 shares of $100 each, of which the
Government took 70,000 shares and the public 180,000 shares. These last
were payable in $7,000,000 of gold or silver, of the United States of
North America, and $21,000,000 in like money, or, in the funded debt of
the United States either in the 6 per cent. Consolidated Debt at par,
the 3 per cent. at 65, or the 7 per cent. at 106-1/2 per cent.; upon
subscription $30 was payable, of which at least $5 had to be in gold or
silver; in six months after, $35, of which $10 had to be in metal, and
twelve months after the same amount was to be paid in the same manner.
The directors were authorized to sell shares every year to the amount of
$2,000,000, after having offered them at the current price to the
Secretary of the Treasury for fourteen days. The Government reserved the
right to redeem the debt at the subscription price.

The charter, made out in the name of the president, ran until March 3,
1836. There were twenty-five directors of the concern, five of whom were
appointed by the President of the United States with the consent of the
Senate, and not more than three by the State; the stockholders chose the
others.

The corporation could not accept any inconvertible property, or any
farm-mortgage, unless for its immediate use, either as security for an
existing debt, or to wipe out a credit.

It had no right to contract any debt greater than $35,000,000, more than
its deposits, unless by special act; the directors were made responsible
for every violation, and could be sued by each creditor. They could only
deal in gold and silver exchange, and not in other country securities
which could not be realized upon at once. The Bank could purchase no
public debt nor exceed 6 per cent. interest on its discounts and loans.
It could lend no more than $500,000, to the United States, $50,000, to
each State, and nothing to foreigners. It could give no bill of exchange
greater than $5,000; bank notes less than $100 were to be payable on
demand, and greater sums were not allowed to run longer than sixty days.
Two settlements were to take place every year.

Branches were to be established upon demand of legislative authorities,
wherever 2,000 shares of stock were subscribed for.

There were to be no bank notes less than $5.00, and every bill of
exchange, or bill payable at sight, was to be receivable by the public
Treasury.

The duty of the Bank was especially to pay out and receive the public
money, without profit or loss. It was to serve as agent for every State
contracting a loan; the cash belonging to the United States was to be
deposited at the Bank whenever the Secretary of the Treasury did not
dispose of it otherwise, in which case he was to notify Congress.

Neither the Directory nor Congress could suspend payment of the bank
notes, discounts, or deposits: such refusal carried a right to 12 per
cent. interest. In exchange for this charter the Bank was to give
$1,000,000, to the Government in three instalments.

The charter was exclusive during its life, excepting in the District of
Columbia, where banks might be authorized, provided their capital did
not exceed $6,000,000. The Bank did not open at once, for it sent an
agent to Europe to look up bullion. Between July, 1817, and December,
1818, it thus procured $7,311,750, at an expense of $525,000. On the
20th of February, 1817, it was decided that, excepting gold and silver
and Treasury notes, no notes would be received at the Government
Treasuries, save such as were payable to the banks in hard money.
Notwithstanding this discrimination the Banks decided not to resume
specie payment until the 1st of July, 1817.

In the meantime an immense speculation had taken place in its stock,
which was compromising for the Bank and for the credit of its Directory,
because several of its Directors appointed by the Government took part
in it. For example, it became customary to loan a very large amount of
money on the Bank's own stock, as much as $125 on each share of $100.
Thus more than the purchase price was loaned upon them: in furnishing
the means of paying for them by credit, speculation was aroused, and on
the 1st of September, 1817, the market price advanced to $156.50, at
which rate it continued until December, 1818, when it fell to $110.

At last the public perceived that the excessive issue depreciated the
bank-note circulation, and that a greater shrinkage was imminent.

An office for the payment of bank dividends was opened in Europe, so as
to increase the price of the stock and the speculation in it through
this facility, rather than for the permanent benefit of the institution.
Let us note here the short-sightedness of the Directors, who thought
they would stem the depreciation of their means of payment by persuading
all the banks to declare what was not true, that the bank notes were
worth par.

On the 21st of February, still aiming at the same end, they announced
the resumption of specie payment. The State Banks, remembering the
embarrassment of the public, which for two years had paid an exchange of
6 per cent., persuaded themselves that few people would dare to ask for
large sums. They hoped to come to an understanding and to cause the
acceptance of a promise to pay upon a designated day.

We say "a promise to pay," for this was not a serious proposition,
inasmuch as foreign money and that of the United States had enjoyed a
higher market value for a long time.

The depreciation of the bank notes might result just as well, from the
fear of the public's enforcing its rights, as from a refusal of the
banks to make good their promises. This understanding was not, properly
speaking, a resumption of specie payment, but rather a kind of humbug.

In January the banks of New York, Philadelphia, Baltimore, Richmond, and
Norfolk decided to resume specie payment on the 20th of February,
provided the balance showing against them was not demanded by the Bank
of the United States before discounts became $2,000,000, at New York, as
much in Philadelphia, and $1,500,000 in Baltimore; and these conditions
were accepted.

The discount line of the Bank of the United States was thus greatly
increased; it grew from $3,000,000 on the 27th of February to
$20,000,000 on the 30th of April; to $25,000,000 on July 29th, and to
$33,000,000 on the 31st of October. The Bank imported much metallic
money, redeemed its notes and those of its branches without distinction;
the notes of its Eastern and Southern branches were returned as soon as
those of the North had paid them, and they were newly issued;
consequently eighteen months after this practice began the cash boxes of
the North were drained of their capital, the length of discount was
reduced, and 5 per cent. was charged for sixty days. On April 1, 1819,
only $126,000, cash remained on hand, on the 12th only $7l,000,
remained, $196,000, was owed to the city banks.

Scarcely had the Directors of the National Bank succeeded in replacing
the paper issued but not redeemed by their bank-note circulation, being
fully aware from their own experience that the circulation could only
reach a limited amount, than they inundated the market with it, and in a
few months all reductions vanished. In this way the market price shortly
resumed its former quotation, and all the difficulties reappeared. This
imprudent management necessarily threw one portion of the public into
debt, from which it had saved itself; and the other portion into the
vortex which it had avoided. The critical moment was delayed somewhat,
but the day of reckoning was near.

THE PANIC OF 1818.--The Bank at last discovered that it had passed the
bounds of safety through its issues, and that it was at the mercy of its
creditors. It saw firstly, on October 21, 1818, the payment of part of
the State of Louisiana's foreign debt withdraw large sums, and then
Chinese, Indian, and other goods reach fancy prices because of the
depreciation of the circulating medium. All these influences produced a
demand for specie payment which the Bank as a public one was obliged to
meet, under penalty of 12 per cent. interest, and without power to avail
itself of the same accounts as the State banks.

From this moment it thought fixedly of its safety and of how to reduce
its notes; this reduction obliged the other banks to imitate it, and a
new crisis shook trade in the end of October, 1818. During one year the
National Bank furnished from its cash boxes more than $7,000,000, and
the others more than $3,000,000.

The State banks naturally followed the same policy in their connection,
and their circulation became reduced as follows:

On November 1, 1816, to ............ $4,756,000
" " " 1817, " ............ 3,782,000
" " " 1818, " ............ 3,011,000
" " " 1819, " ............ 1,318,000

It will give a faint idea of the excessive issue to state that the only
difficulty was the impossibility of examination by the President and
Cashier, and of their jointly signing the notes, which was made
obligatory by the regulations; hence they asked power from Congress to
grant this right to the Presidents and Cashiers of the Branch Banks.
This facility was refused, but Congress granted a Vice-President and a
Vice-Cashier to sign. With these issues and a simple capital of
$2,000,000, the Bank discounted as much as $43,000,000, during one year,
in addition to $11,000,000, to $12,000,000, loaned upon public
securities.

In order to carry on its operations, it exchanged in Europe a portion of
its funded debt for gold and silver, and bought specie in the West
Indies. From July, 1817, to July, 1818, it imported $6,000,000, of
specie, at an expense of $500,000, but the excessive issue of paper
drained away the cash more rapidly than the Bank could import it. In the
face of this hopeless struggle, in July, 1818, it entirely changed its
course and reduced its discounts, and 10 per cent. premium was then paid
for cash, and the reduction of nearly $5,000,000, in the discount line
in three months only had a disastrous effect, while at the same time
they would only receive for redemption the notes issued by each Branch
Bank: hence general embarrassment arose, and as the Bank of the United
States was withdrawing cash from the local banks, Congress wished to
forbid the exportation of gold and silver. The committee appointed on
the 30th of November, 1818, to examine the affairs of the Bank concluded
that it had violated its charter:

1. In buying $2,000,000, of the Public Debt.

2. In not requiring from the purchasers of its stock the payment of the
second and third instalments in cash, and in the Public Debt of the
United States.

3. In paying dividends to purchasers of its stock who had not entirely
paid up.

4. In allowing voting by proxy to a greater extent than the charter
permitted.

Upon receipt of the report the Governor fled, and the shares fell to
$93. In 1818 the speculation was so wild that no one failed on account
of a smaller sum than $100,000. A drawing-room that had cost $40,000,
and a bankrupt's wine-cellar estimated to have cost $7,000, were cited
as instances of the general prodigality. The Senatorial Committee of
Inquiry declared that the panic imposed ruinous losses upon landed
property, which had fallen from a quarter to even a half of its value.
In consequence forced sales, bankruptcies, scarcity of money, and a
stoppage of work occurred. House-rents fell from $1,200, to $450; the
Federal stock alone held its own at 103 to 104.

On the 13th of December, 1819, a Committee of the House of
Representatives reported that the panic extended from the greatest to
the smallest capitalists. It concluded by demanding the intervention of
the legislative power to restrain the corporation, which, spreading its
branches throughout the Union had inundated it with nearly $100,000,000,
of new circulating medium. Those who unfortunately owed money lost all
the fruit of long work, and skilled laborers were obliged to exchange
the shelter of their old homes for the inhospitable western forests.
Forced sales of provisions, merchandise, and implements were made,
greatly below their purchase price. Many families were obliged to limit
their most necessary wants. Money and credit were so scarce that it
became impossible to obtain a loan upon lands with the securest titles;
work ceased with its pay, and the most skilful workman was brought to
misery; trade restricted itself to the narrowest wants of life;
machinery and manufactories lay idle; the debtor's prison overflowed;
the courts of justice were not able to look after their cases, and the
wealthiest families could hardly obtain enough money for their daily
wants.

The Committee appointed by the Senate of Pennsylvania reported on the
29th of January, 1820, that, to prevent a bad administration of the
banks, it was necessary:

1. To forbid them to issue more than half of their capital in notes.

2. To divide with the State all dividends in excess of 6 per cent.

3. Excepting the president, that no director should be re-appointed
until after an interval of three years.

4. To submit to the State's inspection the bank's business and books.

From this period excessive profits and losses ceased on the part of the
American banks. The change of directory of the National Bank, called
forth by the unfortunate experience of 1818, was the beginning of a very
fortunate epoch. As was always the case, business affairs resumed their
usual course when liquidation ceased. Among the various causes assigned
for the panic, the increase of import duties had to be pointed out, and
the decrease of the Public Debt which was reduced between 1817 and 1818
more than $80,000,000. It was impossible to turn any portion of the
public deposits in proper time either into Federal stock or such other
forms of value as its creditors might demand, without staking or
breaking down any respectable institution whatever. But these seem to be
only secondary causes.

Panic of 1825 to 1826.--In 1824 in Pennsylvania there was a new rage for
banks, and in 1825 there was a repetition of the marvellous days of
1815. American banking bubbles have always been exactly similar to the
English South Sea bubble, and to Law's bank in France. In July, after an
advance dating from 1819, there was a reaction, a panic, and
liquidation. Here we cannot point out any of the causes which we have
indicated above; the growth of trade and the exaggeration of discount
sufficiently explain the difficulties of the situation.

In Pennsylvania in 1824 a bill was passed re-establishing the charters
of all the banks which had failed in 1814. In New York they thought of
banks alone; companies with a capital of $52,000,000 were formed. Ready
money had never been so abundant, if we can judge of it by the amount of
subscriptions and the great speculations in stocks.

Three millions were subscribed to the "New Jersey Protection Company" in
one day. But in July, when the decline on the London market was
reported, the want of hard money forced itself into notice. Exchange on
England rose from 5 per cent. to 10 per cent.; the discount on New
Orleans notes, from 3 per cent. became 50 per cent., and on the 4th of
December it had fallen back to 4 per cent. What fluctuation! What
disasters!

Mr. Biddle, the President of the United States Stock Bank, said that the
crisis of 1825 was the most severe that England had ever experienced,
superinduced as it was by the wild American speculation in cottons and
mines. Cotton cloth fell from 18 to 13 cents per yard; and out of 4,000
weavers employed in Philadelphia in 1825 not more than 1,000 remained.
The reaction of liquidation was experienced in 1826, and from 1827 money
was abundant.

EMBARRASSMENT OF THE LOCAL BANKS IN 1828 TO 1829.--Is it necessary to
mention these embarrassments? The trouble of 1828 affected only the
local banks and not at a11 those of the United States. The chief cause
was the Bank of the United States' increase of circulation from August,
1822, to August, 1828. From $5,400,000 it had become $13,000,000 without
adding anything to the circulation, merely displacing an equal amount of
local bank notes through drafts of branches that it put into
circulation. These branch banks' drafts were in form of bank notes,
signed by the chief employees of the branches, drawn, it might be, on
each other or on the main bank. A great issue of paper was thus brought
about; without this roundabout method it would have been impossible to
have forced the issue of the notes from the mere physical inability of
the president and cashier to sign so large a number. Congress had always
refused to delegate this power to any other persons; in consequence of
this practice the inevitable result occurred in 1828, as might have been
foreseen, and a conflict between notes of the Bank of the United States
and that of the local banks occurred.

These drafts circulated everywhere; the branch banks received them on
deposit, but did not redeem them: hence it was necessary to guard
against panic by keeping hold of cash. This course increased the issue
of the Bank of the United States, and of the local banks which
discounted the paper of the central bank as if it were so much cash. The
local banks, then, whose paper did not widely circulate, exchanged their
bank notes for drafts, thus reducing the amount of circulation of the
first, increasing that of the central bank, and hence that of the total
issue of its bank notes; the local banks continued to exchange their
paper with its narrow and limited circulation for drafts of this latter,
which passed everywhere.

There occurred, then, in 1828 and 1829 an accidental and very brief
scarcity of cash, whose cause we have just indicated; but since the
second half of the year difficulties arising from metallic circulation
had disappeared.

PANIC OF 183l.--The course of business, having scarcely suffered a
stoppage, continued until 1831, and not till then did The Bank, being
the agent of the Treasury and having $11,600,000 on deposit, would have
been forced to become a borrower in order to pay out the $2,700,000
demanded from it. However, its request was granted.

Jackson soon learned with surprise that, business being more impeded
than ever, the President had despatched an agent to England to contract
with the Barings a loan of $6,000,000. Seeing the Bank to be insolvent
he resolved not to renew its charter. The Bank tried to hide its
insolvency by the most foolish land speculations, which had already
caused such great disaster in 1818 and 1820. The issue of bank notes had
given fresh spirit to speculation. These bank notes were received by the
National Treasury and returned to the Bank on deposit, which again
loaned them to pay for land upon security of the land sold, with the
result that the credit granted the Nation was merely fictitious.

In 1832, Congress having voted for the extension of the Bank's charter,
President Jackson refused to ratify it on account especially of certain
changes, it sought to introduce. "Why," said he, "grant a capital of
$35,000,000 when the first company only had $11,000,000?"

But though the Bank's charter could not be arranged, the law of July 10,
1832, dealing with the regulation of banks, prescribed that "a report"
upon their exact condition should be submitted to Congress every year.

In 1833 General Jackson ordered the withdrawal of the Government
deposits from the Bank. The law required that the reasons for the
withdrawal of the deposits should be given, and the secretary, Mr.
Duane, refused to give them, saying the Bank was not insolvent. He was
dismissed and replaced by a more amenable secretary. The deposits were
withdrawn and placed in different State Banks, The Bank of the United
States was obliged to limit its discounts and loans, thus causing
trouble; however, the President wished at any loss to establish a
metallic circulation.

President Adams favored small paper notes of 25 to 10 cents, to the
extent of $1,000,000. From 1831 to 1837, $3,400,000 twenty-five cent
notes, $5,187,000 ten-cent notes, and $9,771,000 five-cent notes were
issued. To prevent an abuse of this it was necessary to resume a
metallic circulation immediately. In 1833 the amount of small notes
issued had already reached $37,000,000; in 1837 it became $73,000,000;
it even exceeded these figures; it was this circulation of small paper
notes that had to be made smaller than $120,000,000

Notwithstanding these frequent panics the national prosperity and the
increase of wealth were unquestionable and astonished all observers.

From 1817 to 1834 the national expenses diminished from $39,000,000 to
$24,000,000, decreasing even to $14,000,000 in 1835, while the income
grew to $37,000,000.

From 1826 to 1836 the condition of business, despite the panic of 1831,
grew easier. Industries, agriculture, and commerce were prosperous and
every enterprise was successful. Both in New Orleans and in New York
there was much building, and more than 1508 houses were erected between
January 1 and September 1, 1836. This general prosperity carried with it
the seeds of trouble.

The rapid increase of the National revenue gave birth to the belief that
capital had increased in the same proportion. This superabundance of
income produced temporarily by the inflation in business was recklessly
thrown away. People speculated in land, projected a hundred railroads,
canals, mines, and every sort of scheme, which would have absorbed
$300,000,000 if carried out.

The national capital being insufficient, loans were made in England and
Holland, where the rate of interest being more moderate stimulated the
passion for enterprises. Finally, in order to stop the flow of English
capital to America, the Bank of England raised the rate of interest;
this brought people to their senses. They saw the impossibility of
carrying out a third of their schemes. Cotton fell, and panic seized the
public.

Since 1818 a period of flow and ebb in trade had been seen every five or
six years, but this stoppage was much more serious. The lack of ready
money and capital destroyed confidence. Money was not to be had upon any
collateral; and the banks stopped discounting. The people lacked bread,
the streets were deserted, the theatres empty; social observances were
in abeyance, there were no more concerts, and the whole social round was
stopped.

The Bank of the United States used various expedients to temporarily
moderate the crisis until the very moment that it burst all the more
violently in 1839, and brought about a new and radical reform.

From the time that the separation of the Bank of the United States from
the Government and the cessation of its operations as the National Bank
was brought about, the quotation on bank notes considerably decreased,
as well for those payable at sight as for the deferred notes payable in
twelve months. The President sent an agent to London to raise money upon
the bank shares.

Fearing that General Jackson would not establish a new bank, and by way
of counterpoise, one hundred banks were created with a capital of more
than $125,000,000; issues of bank stock were not to exceed three times
the amount of the capital, but this provision was not observed; the
issue was without regulation and without limits, and during an inflation
in prices of the necessaries of life which had doubled in value, and
which had turned the people's attention to agriculture. The price of
land had for some time advanced tenfold, and the advance in cotton
caused the Southern planters to abandon indigo and rice.

Imports in 1836 exceeded the exports by $50,000,000, which had to be
paid in gold or silver. This outflow of metal created a great void.

The advance in the discount rate in the Bank of England under such
circumstances came like a thunder-clap, and the distended bladder burst.
Banks suspended payment, and bank notes lost from 10 to 20 per cent.
Exchange on France and England rose to 22 per cent., all metal
disappeared from circulation, and a thousand failures took place. The
English export houses lost from L5,000,000 to L6,000,000 sterling;
values fell from maximum to minimum. The losses in America were even
greater; cotton fell to nothing. At the worst of the panic people turned
to the Bank of the United States, and its President, being examined as
to the means of remedying the trouble, stated that it was above all
necessary to maintain the credit of the Bank of England in stead and in
place of private credit, which had disappeared. He proposed to pay
everything in bank paper on Paris, London, and Amsterdam.

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