Part 2 (1/2)
[The various tables spread through this pamphlet are fully explained by their headings and the text.]
In conclusion I wish to express my thanks for the courtesy M. Juglar has extended me, and to state my appreciation of the motives, painstaking patience, and undoubted originality he has shown in explaining and executing so faithfully and with such genius a most laborious and yet spirited work. It is only justice that such an achievement should have been awarded a prize by the French Inst.i.tute (Academy of Moral and Political Sciences) and have gained for M. Juglar the Vice-Presidency of the ”Society for the Study of Political Economy.”
DeCourcy W. Thom.
Wakefield Manor.
A HISTORY OF PANICS IN THE UNITED STATES CONSIDERED WITH SPECIAL REFERENCE TO AMERICAN BANKS.
The English Colonies soon after their settlement issued paper money.
The first was Ma.s.sachusetts, which issued it even before her independence, in 1690, to obtain funds in order to besiege Quebec.
This example was followed to such an extent that it caused a marked speculation in favor of hard money, varying according to the quant.i.ty of notes in circulation. In 1745, after a successful campaign against Louisburg and the taking of that fortress, two million pounds of paper money were issued, which step decreased its value. When liquidation occurred these paper pounds were not worth 10 per cent. of their face value.
The War of Independence obliged Congress to issue three million of paper dollars. This amount increased to $160,000,000, so that Congress declared, in 1779, that it would not issue more than $200,000,000.
Notwithstanding this guaranty, notwithstanding the forced and legal rating conferred by this enactment, notwithstanding the war spirit, it depreciated; and in 1779 it was necessary to decree that, disregarding its normal value, it should be taken at its face. In 1780 it was no longer taken for customs dues. In 1781 it had no rating and was not even taken at 1 per cent. of its face value.
Between 1776 and 1780 the issue of paper money increased to $359,000,000.
BANK OF NORTH AMERICA.--In 1781 Mr. Morris, Treasurer, persuaded Congress to form a bank (the Bank of North America) with a capital of $10,000,000, of which $400,000 should be turned over to help the national finances. The capital was too insignificant and the course of politics too unpropitious to accomplish this end. However, the example encouraged the States to take up their paper money. Upon the adoption of the United States Const.i.tution the issuing of paper money ceased, and gold and silver were the only means of circulation. Thence arose great embarra.s.sment for the Bank of North America, which, hampered by its loans to the Government, increased its note circulation to an enormous proportion. The ebb of paper through every channel finally aroused the public fears, and people refused the notes. Every one struggled to obtain metallic money, hence it became impossible to borrow, and bankruptcy followed. Such was the, excitement that the Philadelphians as a body demanded and obtained from the a.s.sembly of Representatives a withdrawal of the charter; but the Bank, relying upon Congress, continued until March 17, 1787; succeeded even in extending its charter fourteen years; and later obtained a second extension, limited, however, to Pennsylvania.
The difficulty experienced in the manufacture of money led Mr. Hamilton, Secretary of the Treasury, to propose to Congress in 1790 the founding of a National Bank. After some doubts as to the power of Congress, it was authorized. It began operations in 1794, under the t.i.tle of ”Bank of the United States,” with a capital of ten millions, eight millions being subscribed by private individuals, and two millions by the Government.
Two millions of the first sum were to be paid in metallic money, and six millions in 6 per cent. State bonds; the charter was to run till March 4, 1811. It seemed to be a good thing for the public and the stockholders, for during twenty-one years it paid an average of 8 per cent. dividends. In 1819 the question of renewing its privileges came up, the situation being as follows:
a.s.sETS. LIABILITIES.
6 per cent. Paper $ 2,230,000 Capital Stock $10,000,000 Loans and Discounts 15,000,000 Deposits 8,500,000 Cash 10,000,000 Circulation 4,500,000
The profits from the Bank, the prosperous state of the country, and the increase of productions led people to think that the issuing of paper money caused it all; seduced by this alluring theory the ”Farmers' Bank”
was founded in Lancaster in 1810, with a capital of $300,000. Others followed; such was the mania that the Pennsylvania Legislature was forced to forbid every corporation to issue notes. Despite this preventive message the excitement rose so high that companies, formed to build harbors and ca.n.a.ls, also put notes into circulation; in this way the law was eluded.
From 1782 to 1812 the capital of the banks rose to $77,258,000; upon the 1st of January, 1811, there were already eighty-eight banks in existence. Until the declaration of war (June, 1812), the issuing of notes was always made with the intention of redeeming them, but the over-issue soon became general, and depreciation followed. The periodical demands for dollar-pieces for the East Indian and Chinese trade were warnings of the over-speculations on the part of those companies whose members were not personally liable. Traders, who through their notes or their deposits had a right to credit with the banks, did not hesitate to ask for $100,000, whereas, formerly they would have hesitated to ask for $1,000. The war put a stop to the exportation of precious metals, which, in the ordinary course of things, limits the issue and circulation of paper. The upshot of this was to redouble the note issue, each one believing its only duty was to get the largest amount into circulation. Loans, and enormous sums of money, were distributed above all reason among individuals and among the States. The increase of dividends and the ease of obtaining them extended the spirit of speculation in certain districts, and especially among those who owned land. The remarkable results shown by the Bank of Lancaster, the ”Farmers' Bank,” which, by means of an extraordinary issue of notes, had yielded as much as 12 per cent. and piled up in capital twice the amount of its stock, caused it to be no longer thought of as a bank intended to a.s.sist trade with available capital, but as a mint destined to coin money for all owning nothing at all. Led by this error, laborers, shopkeepers, manufacturers, and merchants betook themselves to quitting active occupations to indulge in golden dreams. Fear alone restrained some stockholders connected with the non-authorized companies, and led them to seek for a legal incorporation.
In Pennsylvania, during the session of 1812, an act was pa.s.sed authorizing twenty-five banks, with a capital of $9,000,000. The Executive nevertheless refused to ratify it, and returned it with some very well-deserved comments. In a second debate the first resolution was rescinded by a vote of 40 to 38. In the following session the proposition was renewed with more vigor, and forty-one banks with a capital of $17,000,000 were authorized by a large majority; the representations of the Executive proved useless, and they immediately entered upon their duties with an insufficient capital.
To discount their own stock was a soon-discovered method. They thus increased the amount of notes, which depreciated in comparison with hard money, and dissipated on all hands the hope of exchanging with it.
In the absence of a demand from abroad for hard money, the demand came from within our own borders.
The laws of New England, which were very severe upon the banks, had placed a penalty of 12 per cent. upon the annual interest payments of those persons who did not pay their notes. The natural result was a difference of value between New England and Pennsylvania, which measured the depreciation caused by paper in the latter district. As remittances on New England could only be made in hard money, the equilibrium of the banks was disturbed; they were not able to respond to the demands for redemption, and a suspension of payments by the banks of the United States, except those of New England, took place in August and September, 1814.
THE PANIC OF 1814.--An agreement took place at Philadelphia between the bank and the chief houses allied with it to resume payments at the end of the war.
Unhappily, the public did not demand the accomplishment of this promise at the time fixed, and the banks, led on by the thirst of gain, issued an unprecedented amount of bank notes. The general approbation brought about a still further increase in their number: the bank notes of the Bank of Philadelphia were at a discount of 80 per cent.; the others at 75 per cent, and 50 per cent., and metallic money disappeared to such an extent that paper had to be used to replace copper coin. The depreciation of fiat money raised the price of everything; this superficial occurrence was looked upon as a real increase, and gave rise to all the consequences that a general inflation of value could produce.
This mistake on the subject of artificial wealth made landed proprietors desire unusual proceeds. The villager, deceived by a demand surpa.s.sing his ordinary profits, extended his credit and filled his stores with the highest-priced goods; and importations, having no other proportion to the real needs than the wishes of the retailers, soon glutted the market. Every one wished to speculate, and every one eagerly ran up debts. Such was the abundance of paper money that the banks were alarmed lest they could not always find an investment for what they manufactured. It thus happened that it was proposed to lend money on collateral, while the greatest efforts to bring about its redemption were being made. This state of things lasted till the end of 1815, when it was recognized that the paper circulation had not enriched the community, but that metallic money had enhanced.