THE CHARTER OF THE BANK OF THE UNITED STATE S had a term of twenty years and was due to run out in 1811. By that time there would be more than a hundred state banks in operation, each pursuing profit in the very peculiar business that is banking. For banks are in the money business: they safeguard it, loan it, and most importantly, they create it.
Money was in the form of coinage for the first two thousand years of its existence. And minting coins was usually a jealously guarded government monopoly. But the great influx into Europe of gold and silver from the New World in the sixteenth century not only caused a very considerable inflation, it brought about a new form of money. People often left precious metals on deposit with goldsmiths for safekeeping, taking receipts for the value. Before long, people started using the receipts for trading purposes. As long as the goldsmith was trusted, his receipt was just as good as the precious metal in his vault that it represented, and a lot more convenient to carry around. Once they were made negotiable by law (in 1704 in Britain) and thus belonged, absolutely, to the holder in due course, banknotes became money.
The goldsmiths had long been in the business of making loans and now began issuing receipts when doing so, rather than giving the borrower the metal itself. Soon, seeking increased profit, they began issuing more receipts than there was metal in the vaults to cover them. As long as the goldsmith had a good reputation, there was no problem with this, as it was highly unlikely that everyone holding receipts would try to redeem them at the same time.
By issuing more receipts than there was gold to cover them, the goldsmiths—who by this point had become bankers—created money out of thin air. Many highly intelligent and educated people failed to understand what banking was all about and thought that this was inherently dishonest. John Adams, for one, wrote that “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and therefore is a cheat upon somebody.”
But Adams was wrong. It was not dishonest in the least. The loans were, of course, collateralized with things of value, such as land and buildings. If the borrower defaulted, the lender would seize the collateral, sell it, and pay himself back. In fact, what a banker does is turn the dead capital of fixed assets into living—that is to say, liquid—capital that can be invested in new assets, multiplying the wealth of the community and creating a far more dynamic economy. Thus the assets behind the money created to make the loan are, essentially, the borrower’s not the lender’s. The precious metal in the vaults was simply the bank’s capital, the wealth the banker puts at risk as a vouchsafe of his honesty and business sense.
But it all hinges on people not deciding to redeem the receipts en masse, as the banker could never call in his loans fast enough to meet a flood of demand for the precious metal the receipts represented. He would be forced to suspend business, and by the time everything was sorted out he would likely be bankrupt. And panic—which is essentially a psychological term, not an economic one—is highly contagious. It can spread from one depositor to all of them, and then to depositors in other banks with frightening speed.
Thus the most precious asset a banker can have is his reputation for maintaining a sound bank. As the great British political scientist of the nineteenth century, Walter Bagehot, explained, “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
But despite the overwhelming need to maintain an impeccable reputation, bankers are human. They are sometimes too agreeable to their friends, sometimes too optimistic, sometimes too greedy, sometimes dishonest. Just as with politicians, once he is possessed of the magic power to create money, the banker’s temptation to create too much is always strong. This is precisely why Alexander Hamilton thought the country needed a central bank: to discipline the state banks and prevent excess money creation. And this is also, of course, why many of the country’s new commercial bankers resented the Bank of the United States that constrained their activities.
At the turn of the nineteenth century, obtaining a bank charter required an act of the state legislature. This of course injected a powerful element of politics into the process and invited what today would be called corruption but then was regarded as business as usual. Hamilton’s political enemy—and eventual murderer—Aaron Burr was able to create a bank by sneaking a clause into a charter for a company, called the Manhattan Company, to provide clean water to New York City. The innocuous-looking clause allowed the company to invest surplus capital in any lawful enterprise. Within six months of the company’s creation, and long before it had laid a single section of water pipe, the company opened a bank, the Bank of the Manhattan Company. Still in existence, it is today J. P. Morgan Chase, the second largest bank in the United States.
The Bank of the United States, headquartered in Philadelphia, had opened branches in New York, Boston, Baltimore, and Charleston, the major American ports, within a year of its creation. By 1810 it also had branches in Washington, New Orleans, Savannah, and Norfolk as well. Its interstate branches and its monopoly on deposits of the federal government made it by far the most powerful bank in the country and the only one whose notes were accepted at par everywhere.
This power, of course, attracted many enemies, especially the “Old Republicans,” who still looked to Thomas Jefferson, now retired, for political leadership, and the owners of the state banks. The bankers both chafed under the discipline of the BUS and wanted their share of federal deposits, which would allow them to expand their loans. Their political connections in state legislatures—which at that time appointed United States senators—made them a powerful lobby. This was especially true in the new western states, where banking laws were often lax and where resentment against eastern financial power was greatest and Anglophobia most intense. Westerners seldom missed an opportunity to point out that much of the bank’s stock was now held by British shareholders. Henry Clay, then a senator from Kentucky, led the opposition to rechartering the bank.
In favor of rechartering it were the merchants and traders in eastern cities, as close as the country then came to a financial establishment. Even James Madison, who had opposed its creation and was now president, recognized the bank’s utility both as agent for the federal government and as a provider of a uniform national currency. His secretary of the treasury, Albert Gallatin, also pushed hard to have the bank’s charter renewed.
It was due to expire on March 4, 1811, and the Madison administration submitted a bill to renew it for twenty years on January 24. Unfortunately Madison, while richly deserving of his place in the American pantheon as the father of the Constitution, was a largely ineffective president. He did not push hard enough to get the bill through or even to keep members of his own administration in line. When his vice president, George Clinton of New York, broke a tie vote in the Senate against the bank bill, the measure died. It was the most significant independent political act—nearly the only one—in the history of the vice presidency, and it would have disastrous consequences.
Most of the branches were recharted by the states where they were located, and the headquarters was sold—building, furniture, and all—to Stephen Girard, a Philadelphia merchant who had been born in France. Girard paid $115,000 for it, then a very large sum indeed to have in liquid assets. It turned out that he had far more where that came from. Girard, who traded around the globe, had been repatriating his money from abroad as the relations with both Britain and France deteriorated in the first decade of the nineteenth century.
Having bought a turnkey operation, Girard quickly opened a private bank of his own, backing the venture with negotiable securities amounting to $1.2 million and with cash in the staggering sum of $71,000. At a time when the country’s millionaires could be counted on the fingers of one hand, Stephen Girard had shown himself to be a multimillionaire.
The diplomatic situation continued to deteriorate and many in the West agitated for war, hoping to conqueror Canada in the process. In June 1812 President Madison sent a “warning message,” to the Senate, laying out the country’s grievances against Great Britain in detail. He did not specifically ask for a declaration of war. Instead, constitutionally scrupulous to a fault, Madison called that “a solemn question which the Constitution wisely confides to the legislative department of the Government.”
The West and South were very much in favor of war, the Northeast, with its great merchant marine and international trade that would be directly at risk, opposed it. The House voted 79–49 in favor of war, with only eight southern and western votes opposed. The Senate vote was even closer, 19–13. On June 19 Madison proclaimed a state of war to exist with Great Britain.
Having declared war on the only Great Power capable of attacking the United States, Congress voted to increase the army’s pay for privates from $5 to $8 a month and to provide generous enlistment bonuses of $31 and 160 acres of land, later increased to $124 and 320 acres. These were no small sums at the time, when an unskilled laborer might be lucky to earn $2.50 a week. But Congress, having decided to take on the most expensive of all public policies, war, and having raised the pay of the army substantially, took no action to pay for any of this and adjourned the following month. It was, without a doubt, the most feckless act in the history of the United States Congress, a title for which there has been much competition over the years.
Even worse, because the year before Congress had shut down the Bank of the United States, it had terminated the only institutional mechanism the government had for borrowing money to pay for a war. The secretary of the treasury would have no choice but to rely on public subscription to sell bonds, and most of the people with the liquid assets to buy them lived in the Northeast, where opposition to “Mr. Madison’s war” was most intense.
Military success in the early days of the war might have helped its popularity and therefore its funding. But while there were several stirring single-ship triumphs over the Royal Navy, they affected the outcome not a bit and the British blockade of American ports tightened inexorably, causing revenue from the tariff and tonnage duties to fall precipitously. On land, all was disaster. General William Hull, ordered to invade Upper Canada (today called Ontario) from Detroit, got no more than a few miles into Canada before retreating hastily to Detroit, which he then surrendered without firing a shot. Hull was court-martialed and sentenced to die for cowardice and neglect of duty, but Madison, in view of his service in the Revolution (Hull had served with Washington at the Battle of Trenton), pardoned him and only dismissed him from the army. Two other thrusts into Canada, at Niagara and Lake Champlain, were no more successful, if less ignominious.
By the early spring of 1813 the United States government was, financially at least, in extremis. On March 5 the secretary of the treasury had written President Madison that “We have hardly enough money left to last to the end of the month.”
On February 8, 1813, Congress had authorized the Treasury to borrow $16 million, by far the largest loan in the country’s short history. Gallatin did his best to structure the loan in attractive ways. People could subscribe for as little as $100 and pay for their investment in eight monthly installments. The loan was scheduled to close on March 13 but could be kept open until the end of the month if not enough subscriptions had come in. The entire $16 million had to be subscribed to or the loan would not go through.
Less than $4 million was subscribed by March 13, and Gallatin extended the subscription period. It did not help much, and while not all subscriptions had come in because of the slowness of communications, Gallatin knew the loan had failed. Later he told Madison that “The Treasury was so far exhausted on the first day of this month that the small unexpended balance, dispersed in more than thirty banks, could not have afforded any further resources.” The government was broke and the war effort was likely to sputter out not because of military defeat, but because of financial collapse.
Gallatin had allowed himself an extra five days to find a lender of last resort if necessary. On April 5 he went to see the one man in the country who could help, Stephen Girard.
Gallatin told him that subscriptions had totaled $5,838,200 and that a New York syndicate led by John Jacob Astor was willing to undertake $2,056,000 if the loan went through. That left $8,105,800 that needed to be subscribed to that day if utter disaster was to be averted. The sum was beyond staggering. Total government revenues from all sources in 1812 had been $9,801,000.
Rich as he was, $8 million was more than even Stephen Girard’s net worth. And yet he immediately said yes, subscribing, in writing, “to the residue of the said loan.” He simply asked that the residue be deposited in his bank until drawn down and that he receive a commission of one-quarter of 1 percent on the loan to cover his costs in selling portions to other subscribers.
It was not quite as daring a move as it seems on its face, although it was certainly daring enough. Girard had an unimpeachable credit rating, far better than the government’s, and he expected to be able sell considerable portions of it. And he had eight months in which to come up with the entire amount.
His credit rating was so much better than the government’s, in fact, that within ten days, once the news spread that Girard was a major participant, he was able to sell $4,672,800 to other investors.
With money once more in the Treasury, the military situation improved quickly. William Henry Harrison recaptured Detroit, and the American army won a considerable victory at York (now Toronto) and decisively defeated a British fleet on Lake Erie. The British, having an inkling of the U.S. government’s financial difficulties, had spurned an offer—accepted by Madison—from the Russian government to mediate. Now, wanting only to be done with this annoying little war on the margins of its global concerns, Britain proposed peace talks in Ghent, in what is now Belgium. The United States was able to get a draw out of what had very nearly been a catastrophe. Even so, it suffered the ignominy of having its capital burned by the enemy.
WITH THE EXTINCTION of the Bank of the United States, state banks proliferated, more than doubling in the two years after 1811. Most of them issued banknotes. Adam Smith had estimated that a bank could safely issue banknotes in the amount of five times capital, and some states restricted banknote issues to three times capital. But other states placed no such limits. In 1809 a bank in Rhode Island, capitalized at a mere $45, had issued banknotes amounting to $800,000, more than seventeen thousand times the capital. Of course, this was far more a fraud than a bank, but it represents the first of many thousands of bank failures in the United States; for bank failure, thanks in large part to Thomas Jefferson and his political heirs, was to become as American as apple pie.
Some states did not even limit the issuance of paper money to banks. Although technically called “scrip,” and intended to relieve the shortage of small change, paper currency was issued by municipalities, trade associations, factories, and even individuals. Something called “A General Assortment of Groceries in Philadelphia” issued scrip, including a note for six and a quarter cents (a sixteenth of a dollar, or half a “shilling”) that was redeemable “on demand, in groceries, or Philadelphia banknotes.”
The Madison administration, its mind wonderfully concentrated by the near disaster of 1813, wanted a new central bank. Madison vetoed a bill for one in 1815 on technical grounds, but signed a bill sent to him in 1816, chartering a Second Bank of the United States for twenty years. There had been a curious reversal in the politics of a central bank. In 1811 Henry Clay of Kentucky had opposed rechartering the first bank. Now he was in favor of it, as was John C. Calhoun of South Carolina. Daniel Webster of Massachusetts, once a staunch supporter, now opposed the measure.
The areas of the country represented by Calhoun and Clay were suffering from a chronic lack of specie. The reason was that New England, its manufactures growing rapidly as was its foreign trade, thanks to its ownership of much of the nation’s merchant marine, was running a large trade surplus with the rest of the country, causing specie to drain away from the West and South and toward the Northeast. Calhoun felt that only a national bank could solve this problem. Webster, who did not want the problem solved, now fought for the status quo.
But while the Second Bank of the United States, headquartered in Philadelphia like the first one, would, after a shaky start, be a stabilizing influence on the American monetary system, it would never have the power to control it that the first bank had had. The country was growing too rapidly and the state banks had proliferated too much in the five-year hiatus between the two banks.
Some states had sound banking laws. Missouri, admitted to the Union in 1821, and Indiana, admitted in 1816, had single, state-owned, many-branched central banks of their own, a system that worked well. Louisiana (1812) closely regulated its commercial banks and had a wide reputation for sound banking. Illinois (1818), on the other hand, had an equally wide reputation for flimflam, fraud, and failure among its banks. But despite the states with well-regulated banking systems, bank failure became endemic in this era. Fully half the banks founded between 1810 and 1820 had failed by 1825.
Hundreds more sprang into existence, however, many of them issuing banknotes. And many people who did not own banks at all also printed them and tried to pass them. Publishers began printing “banknote detectors” that listed, illustrated, and assessed the worthiness of banknote issues that were circulating in various areas of the country. By the mid-nineteenth century the number of paper money issues in circulation numbered in the thousands and created a monetary cacophony quite as bad as the colonial hodgepodge of bits of foreign coins, warehouse certificates, and provincial bills of credit.
NO ONE, not even Thomas Jefferson, had more influence on shaping the Democratic Party and its economic philosophy before Franklin Roosevelt than Andrew Jackson. Indeed, the modern Democratic Party coalesced around Jackson’s extraordinary political personality. Both Jackson and Jefferson believed in pushing the locus of power down the social scale. Both had a deep-seated dislike of inherited privilege and what Jackson called “the money power,” which is to say banks, especially large, well-established, and powerful ones.
But the two men were also profoundly different. Jefferson had reached his philosophy by intellectual means and was, first and foremost, a man of thought. Jackson was the quintessential man of action. It is hard to imagine Thomas Jefferson fighting a duel, but Jackson fought no fewer than three—killing his opponent in one of them—and avoided many others only because his opponents backed down. Jefferson never wore a uniform in his life; Jackson was an excellent general who achieved national fame for his smashing victory over the British at the Battle of New Orleans in 1815. (It was, however, a militarily inconsequential victory, as the peace treaty had already been signed.) Most of all, Jefferson had been born rich and was cavalier, at best, about money. Jackson had been born very poor. He had no intention whatever of dying poor, and he didn’t.
Andrew Jackson represented a revolution in American politics. So much so that the great nineteenth-century historian George Bancroft thought him the last of the Founding Fathers. His, wrote Bancroft, was “the last great name, which gathers round itself all the associations that form the glory of America.” Jackson was the first president who did not come from the seaboard states (indeed, he was the first president who did not come from Massachusetts or Virginia) and thus pushed the political center of the country sharply westward. He was also the first who had not been born into the colonial upper class. He was born on the South Carolina frontier in 1767 of Scots-Irish immigrant parents and orphaned while still a child, both his mother and his two brothers dying indirectly as a result of the British invasion of the Carolinas in the American Revolution. As a result, Jackson had a lifelong antipathy toward Great Britain.
Jackson did not receive much formal education, but studied law in a law office in Salisbury, North Carolina, and was admitted to the bar in 1787. He shortly thereafter moved to Nashville, Tennessee, then hardly more than a collection of log cabins. Jackson practiced law and speculated in land, the fastest if riskiest way to wealth. By the time Tennessee became a state in 1796, Jackson was wealthy by the standards of the time and place. He was elected Tennessee’s first congressman and the following year served briefly as a U.S. senator.
James Parton, an early biographer of Jackson, described what he called “the secret of his prosperity.” It was also, of course, the secret of most early fortunes on the frontier. “He acquired large tracts [of land] when large tracts could be bought for a horse or a cow bell, and held them till the torrent of emigration made them valuable.”
Like most speculators in land, Jackson sometimes got involved in complicated deals involving credit. In 1795, wanting to establish a trading post, he sold sixty-eight thousand acres to a man named David Allison, taking the latter’s promissory notes in payment. He used the notes as collateral to buy supplies for his trading post, but when Allison went bankrupt, Jackson was left holding the bag.
It would take him a decade and a half to finally settle everything in this affair, and it left him with a lifelong horror of debt and debt’s various instrumentalities. To Andrew Jackson, real money was specie—gold and silver coins. Paper money and what was coming in his day to be called commercial paper—bills of exchange, promissory notes, bank checks, and such—were to Jackson, just as they had been to John Adams a generation earlier, a form of fraud.
Just how different Jackson’s administration was going to be from earlier ones was clear on the very first day. Previous inaugural festivities had been invitation-only, decorous affairs for “polite society.” Jackson’s reception was attended by everyone who could get in the door of the White House, and several thousand dollars’ worth of glass, china, and furniture was destroyed. Finally the crowd became so great that Jackson’s safety was threatened and he escaped out a window while servants carried the liquor out onto the lawn to get the mob out of the White House.
Jackson’s first order of financial business when he entered the White House was a simple one: pay off the national debt. The national debt, which had stood at over $80 million in 1792, had been reduced to only $45 million by 1811. The War of 1812 had then caused the debt to soar to more than $125 million by 1815. The high tariff generated large surpluses after the war, and by the time Jackson reached the presidency, it stood at $48,565,000.
Jackson had two purposes in ridding the country of debt. The first, of course, was that he thought debt was bad in and of itself. He had called it a “national curse” in his first run for the presidency in 1824. But he thought that the institutions and the people who benefited from it were a national curse as well. “My vow,” he pledged, “shall be to pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend to its views, and ultimately destroy the liberty of our country.”
To achieve his goal, Jackson was perfectly willing to sacrifice the “internal improvements” such as roads that were so dear to the hearts of his fellow westerners, saying that once the debt was paid off, there would be plenty of money for improvements. When a Kentucky congressman pleaded with Jackson not to veto an improvements bill, Jackson promised to study the matter thoroughly. But the congressman reported to his friends that “nothing less than a voice from Heaven would prevent the old man from vetoing the Bill, and [I doubt] whether that would!”
By the end of 1834 Jackson was able to report to Congress in the State of the Union message that the country would be debt-free on January 1, 1835, and have a balance on hand of $440,000. Jackson thought it one of his greatest achievements and so did much of the country. The Washington Globe, noting that paying off the debt coincided with the twentieth anniversary of the Battle of New Orleans, wrote that “New Orleans and the National Debt—the first of which paid off our scores to our enemies, whilst the latter paid off the last cent to our friends.”
Chief Justice Roger B. Taney noted that it was “the first time in the history of nations that a large public debt has been entirely extinguished.”
It remains the only time to this day.
ALTHOUGH JACKSON’S MAIN MOTIVE for paying off the debt was the simple—indeed for sovereign governments, simplistic—notion that one should borrow only when absolutely necessary, he had another motive as well. Banks used federal bonds as backing for their issuance of banknotes, and Jackson, wanting to get rid of paper money, planned to do so by getting rid of the backing.
To Jackson, the heart and soul of the “monied aristocracy” he feared was the Second Bank of the United States and its president, the Philadelphia aristocrat Nicholas Biddle.
Biddle was everything Jackson was not: wellborn, highly educated, widely traveled, and financially sophisticated. Trained in the law, he spent three years in Europe, where he served as James Monroe’s secretary while the latter was minister to Great Britain. After marrying Jane Craig, a considerable heiress, he abandoned the law and became editor of a Philadelphia literary magazine, Portfolio. He soon built one of the finest houses in America, Andalusia, on the shore of the Delaware River just north of Philadelphia, where the Biddle family still lives.
In 1819 President Monroe appointed Biddle to the board of directors of the Second Bank of the United States, and in 1823 he became president of the bank. The Second Bank had gotten off to a rocky start under its first president, William Jones, who had speculated in the bank’s stock and engaged in other shady practices. Jones resigned after a congressional investigation and Langdon Cheves replaced him, straightening up the mess left by Jones. This, unfortunately, helped mightily to bring on the panic of 1819 and the brief business slowdown that followed.
By the time Biddle became president, most of the animosity against the bank had disappeared, thanks to economic recovery and sound policy on the part of the bank. It was not an issue in the presidential campaign of 1824—when Jackson won a plurality of the popular vote, but lost in the House of Representatives to John Quincy Adams—or in 1828, when Jackson won a smashing victory over the unpopular Adams. Biddle voted for Jackson in both elections.
But hardly had Jackson entered the White House than his visceral hatred of banks, especially large, powerful ones, manifested itself in his first message to Congress as president. He raised the question of rechartering the Second Bank of the United States a full seven years before its charter was due to expire. By 1832, when Jackson ran for reelection, it was clear that he intended to kill the bank.
Biddle fought back as best he could. Many congressmen enjoyed good relations with the bank (and many of them were beneficiaries of loans on favorable terms—again just business as usual in those days, not corruption), and Biddle pressed them to pass a bill rechartering the bank for fifteen years before Congress adjourned for the summer in 1832. He hoped that Jackson would not want to make it a campaign issue. In the bare-knuckle politics of the era, when most newspapers were openly partisan and tendentious in their coverage, the fight over the bank was a brawl.
Congress finally passed the recharter bill and prepared to adjourn. But when it was clear that Jackson would use a pocket veto to kill the bill, Henry Clay persuaded Congress to stay in session long enough to force Jackson to sign or veto the bill and state his reasons for doing so. Jackson, not exactly a man to back away from a fight, was only too happy to take up the challenge. He issued a blistering veto message that was as much a campaign speech as an act of statecraft. He argued that the bank was a monopoly and favored the rich and powerful over the ordinary citizens of the country. Further, despite Supreme Court rulings to the contrary, he declared it unconstitutional. Congress was unable to override the veto.
When Jackson won a landslide victory that November, the Second Bank of the United States, although it had four years left on its charter, was at best a dead man walking. Nor was Jackson content to simply allow the charter to expire. He began to withdraw federal deposits from the BUS and move them to what his opponents soon dubbed “pet banks.” As the bank’s deposits drained away, its ability to issue banknotes and exert discipline on the rapidly increasing number of state-chartered banks diminished apace. The pet banks, now flush with federal deposits, rapidly increased the amount of banknotes they had in circulation. The control of the country’s money supply shifted from a single institution with a long-term and national perspective to a myriad of local ones, each concerned only with its own short-term prosperity.
Although there was a brief dip in 1834 as the Second Bank of the United States called in its loans, prosperity was widespread in the early 1830s, as high cotton prices in the South, rapidly increasing manufacturing in the North, and an improving transportation system combined to increase GDP rapidly. The number of banks in the country increased from 329 in 1829 to 788 in 1837. But the face value of banknotes in circulation more than tripled, and outstanding loans quadrupled in this time.
As always in boom times, speculation increased rapidly as well. So much did stock trading on Wall Street increase that it was at this time that the term Wall Street first came to be used as a metonym for the American financial community.
But nowhere was speculation more rife than in the West, where land rather than securities was the focus of attention. People who had no intention of settling bought large tracts of land from the federal government and paid for them with paper money borrowed from local banks in ever greater amounts. Land sales by the federal government, handled through the government’s General Land Office, had amounted to $2.5 million in 1832. By 1836 they amounted to nearly $25 million, and in the early summer of that year were running at the astonishing rate of nearly $5 million a month. This rush to buy federal land is the origin of the phrase “to do a land office business,” and it horrified Jackson, who probably never understood just how much his own policies had increased what he most abhorred: speculation and paper money.
But he understood exactly what was happening. “The receipts from the public land were nothing more than credits on the bank,” he later wrote. “The banks let out their notes to speculators, they were paid to the receivers, and immediately returned to the banks to be sent out again and again, being merely instruments to transfer to the speculator the most valuable public lands. Indeed, each speculation furnished means for another.”
In typical Jacksonian fashion, he resolved to do something about it. That spring he proposed to his cabinet that the land office be instructed to accept only gold or silver in payment for land, except from genuine settlers who could buy up to 320 acres and pay for the land with banknotes until December 15 that year. Most members of the cabinet, many of whom were deeply involved in the speculation themselves, opposed the plan, and it was clear that Congress, many of whose members were equally involved, would not stand for it.
So Jackson waited until Congress adjourned and then, on July 11, issued the so-called Specie Circular as an executive order. The effect, needless to say, was to bring speculation in western land to an immediate halt. But it also created a considerable increase in demand for specie in the West, draining eastern banks of gold and silver and leading to hoarding. Many western banks were soon in distress, none more so than the pet banks, thanks to another part of the Jackson financial program.
With the national debt paid off and the government running large surpluses (government revenues increased by 150 percent between 1834 and 1836, in part due to the greatly increased land sales), the question of what to do with the money was increasingly urgent. Jackson convinced Congress to give it to the state governments, beginning January 1, 1837. Faced with having much of their government deposits withdrawn, the pet banks had begun to call in loans.
As highly illiquid borrowers defaulted on their loans, a wave of bank failure swept the West and began to roll eastward. Bankruptcies in other sectors of the economy followed as liquidity vanished. The Bank of England, trying to prevent an outflow of gold from that country, raised interest rates, and British investment in American securities declined as did British cotton purchases. Wall Street plunged. On January 2, 1837, the New York Herald reported that interest rates that had been 7 percent a year were now 2 or even 3 percent a month.
The American economy began to slide into deep depression. The price of cotton fell by half in March. Volume on Wall Street soared in the panic (sometimes reaching a then-staggering ten thousand shares a day). By April Philip Hone, former mayor of New York and himself badly burned, was writing in his diary that “The immense fortunes which we have heard so much about in the days of speculation, have melted like the snows before an April sun. No man can calculate to escape ruin but he who owes no money; happy is he who has a little and is free from debt.” By early fall, 90 percent of the nation’s factories were closed. Federal revenues fell by half in 1837.
In May the New York banks had suspended payment in specie, and were soon followed by the banks in the other major eastern cities. Worst hit were the big Philadelphia banks. Pennsylvania, with a huge state debt of $20 million and with its tax revenues falling sharply, was unable to meet payments of either principal or interest and defaulted. New York, which had a state debt of only $2 million, was able to meet its obligations, and its banks survived in far better shape. Philadelphia’s days as a rival to Wall Street were over.
Andrew Jackson, with the consummate timing of a great politician, had retired from the presidency on March 4. It would be his successor, Martin Van Buren, who would suffer the political consequences of his financial policies. The country suffered as well in the longest economic depression in the nation’s history. It didn’t reach bottom until February 1843, fully seventy-two months after it began.
And the country’s financial reputation suffered as well. The year the depression finally began to lift, 1843, was the same year that Charles Dickens published A Christmas Carol. In it he describes how Ebenezer Scrooge was relieved to find that the world had not ended, as he first feared it had, after the visit of the Ghost of Christmas Past. Thus a note payable to him in three days, Scrooge was relieved to know, was not as worthless as “a mere United States’ security.”