Life of Henry Clay/19 The Crisis of 1837

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The financial measures of the Jackson régime, the crisis of 1837, and the party struggle brought forth by that event, will be made more intelligible by a brief review of the situation.

The time of Jackson's presidency was a period of great material progress. The completion of the Erie Canal had made the Northern lake regions easily accessible, and accelerated their settlement. Steamboat navigation on the Western rivers increased rapidly. Between 1830 and 1834 the number of steamboats rose from 130 to 230, and their tonnage nearly doubled, opening more widely the valleys of the Mississippi and of its great tributaries. Railroad building, too, began in earnest. In 1830 only 23 miles had been in operation; in 1835 there were 1,098, and two years later, 1,497. The railroad did not yet pierce the "Great West," but railroad schemes were abundant there, and the imagination of bold speculators easily annihilated the distance between the Atlantic sea-board and the banks of the Mississippi. Canals for the transportation of goods were projected and begun everywhere. All these things naturally stimulated the desire of locomotion and the reach of enterprise. The fertile acres of Illinois, Missouri, and Wisconsin were drawn nearer and nearer to the great sea-port markets, and their prospective value seemed to outrun all sober calculation. It was not surprising that the venturesome mind of the American should have turned to speculation in new lands. In the South and Southwest the speculative spirit found a special stimulus. The price of cotton, which had been 6 to 8 cents a pound, touched 13½ in 1833, and vibrated between 14 and 20 in 1835. The value of cotton lands seemed, therefore, to leave far behind all previous estimates.

Under such conditions it required only some financial facilities to start the speculative spirit on its career. These facilities were not wanting. In England, owing partly to natural, partly to artificial circumstances, such as the establishment of many new banks of issue, large amounts of capital were ready to go into foreign investment and speculation. The United States were presenting the extraordinary spectacle of a nation extinguishing its public debt. The credit of the country rose, foreign capital was attracted, and American state bonds and other securities were easily sold on the European market in large quantities. Many American claims against foreign governments were settled at this period, and from this source, too, considerable sums of money flowed in. All this had a highly stimulating effect.

To the end of moderating the tendency to speculative enterprise, which is always apt to run into excess, nothing would have been more desirable than that the financial policy of the government should be even more than ordinarily circumspect and conservative. But it was just then that the government withdrew its funds from the United States Bank, an institution under a comparatively cautious management, naturally inclined to serve by preference the legitimate business of the country, and turned over the deposits to a number of favored state banks. But not only that. In order to reconcile the people to the change, the Secretary of the Treasury expressly admonished those "pet banks" to "afford increased facilities to commerce," and to expand their "accommodations to individuals," by means of the public money, — in other words, to lend out the public funds as freely as possible. This, of course, the deposit banks did with zest, by no means confining their favors to the "merchants engaged in foreign trade," whom the Secretary had especially commended to them. As the public debt became extinguished and the treasury surplus grew in consequence, the amount of public money deposited in the "pet banks" and available for the "accommodation of individuals" increased rapidly. The United States Bank, too, was drawn into the whirl. From August, 1833, to June, 1834, the bank had contracted its loans, in part probably for the purpose of creating the impression that the war made upon it by the administration was injuring the business of the country. But when it saw that the state banks were using this opportunity for efforts to draw its custom to themselves, it expanded again in order to keep its hold upon business.

But the prospect of the final downfall of the United States Bank, and the hope of getting for themselves some of the public deposits, encouraged greatly the establishment of new state banks. In 1830 there were about 330 in the country; there were 558 in 1835, and no less than 634 in 1837. Their capital rose from 61 millions in 1830 to 231 millions in 1835, and nearly 291 millions in 1837; their loans, from 200 millions in 1830 to 365 millions in 1835, and 525 millions in 1837; their note circulation, from 61 millions in 1830 to 103 millions in 1835, and to 149 millions in 1837, with respectively 22 millions, 44 millions, and 38 millions of specie behind the paper. The convertibility of the bank-note circulation was therefore very uncertain; the specie basis of many of the banks for their note issues ludicrously small. There was a perfect mania for establishing banks. As Niles reports, a bank was looked upon as a panacea to cure all kinds of troubles, as if it were the creation of capital by enchantment.

The expansion of the currency and the inflation of prices went hand in hand under the influence of unbridled speculation and reckless debt-making. The characteristic feature of the period was the speculation in wild lands. While the price of everything else rose, the government price of public land remained the same, say $1.25 an acre. In the light of the gorgeous future, land thus appeared ridiculously cheap; there could be no more promising investment. The land bought by the speculator was paid for in bank-notes. These bank-notes went from the land office as public funds to the deposit banks. The public funds so deposited were largely lent out again to speculators, who used them in buying more lands. The money paid for these new lands went back again as public funds to the deposit banks, to be lent out again and to return in the same way. Thus the money went round and round in the same circle, carrying larger and larger quantities of public lands from the government to the speculators, the government receiving for the land in fact only bank credits. No wonder the land speculation grew beyond all bounds. In 1832 the receipts from the sale of the public lands had been $2,623,000; in 1834 they were $4,857,000; in 1835 they rose to $14,757,000, and in 1836 to the amazing figure of $24,877,000. And all this increase swelled the treasury surplus at the disposal of the deposit banks for the "accommodation of individuals."

No sooner was a purchase made than the land, bought at $1.25 an acre, was estimated to be worth six, eight, ten times as much. The more a speculator had bought, and the more money he had borrowed to pay for the lands, the richer he thought himself to be. People were intoxicated with their imagined wealth won overnight. The fever of speculation remained by no means confined to the public lands. The contagion spread irresistibly. The insane expansion of credit was general. The frenzy raged from the cotton fields of the South to the pineries of Maine. In some cities the speculation in real estate assumed absurd proportions. At Mobile, a chief cotton mart, the assessed value of city property rose between 1831 and 1837 from 1,294,810 to $27,482,961; in New York, between 1831 and 1836, from $139,280,314 to $309,500,000. In other towns, large and small, similar things were going on. The importation of merchandise increased enormously during the same period, and there was the most reckless gambling in all things that could be bought and sold. It was a universal carnival in which people seemed to vie with one another in madness of venture and expectation.

Two government measures adopted in 1836 interfered with this crazy round dance, measures which, indeed, did not cause the explosion, — for there were other causes making it eventually inevitable, — but which hastened it, and probably rendered it more destructive. One proceeded from Congress, — the distribution of the surplus funds among the states. The idea of distributing among the states surplus funds accumulated in the national treasury was not a new one. Jefferson had suggested it; also Jackson in his annual message of 1829, though he afterwards repented of it. Clay's land bill, introduced, passed, and disapproved by Jackson in 1832, provided for the distribution of the proceeds of land sales. When, with the extinguishment of the public debt, the excess of revenue over regular expenditures lost its employment and simply accumulated, the question became more pressing, especially as not only the proceeds from land sales, but also, under the stimulus of general inflation, the customs revenue, increased amazingly, — between 1834 and 1836, from $16,200,000 to $23,400,000.

The public deposits amounted on January 1, 1835, to $10,223,000; on December 1, 1835, to $24,724,000; on March 1, 1836, to $33,700,000; and by June 1, 1836, they had risen to $41,500,000, distributed among thirty-five banks. This state of things created alarm, political as well as financial. The Whigs feared, not without reason, the enormous political power gathered in the hands of the administration by the control of banks in all parts of the country, which were to afford "accommodation to individuals" with so many millions of government money. As to the financial aspect of the case, it was seriously questioned whether the public funds were safe in the deposit banks, some of which were known to be weak; and that feeling of insecurity could not but be increased by the mad speculation which the public deposits, filtering through the banks, were so powerfully helping to keep up. Moreover, the existence of the surplus had its natural effect of stimulating jobbery and extravagance in Congress, as well as in other branches of the government. "We had a surplus which we knew not how to dispose of," said Preston of South Carolina, in September, 1837. "The departments were stimulated and goaded on to find out how much they could spend, while the majority in Congress seemed to be employed in finding out how much they could give." The surplus had to be disposed of, and Congress, at the session of 1835-1836, finally agreed upon a method.

A bill was passed which provided that the deposits of public funds in any one bank should not exceed three fourths of its "paid-in" capital stock; that the banks should pay all drafts on the public deposits in specie, if required; that no bank should have any public deposits that failed to redeem its notes in specie, and that circulated notes under five dollars; and, finally, that the surplus funds at the disposal of the treasury on January 1, 1837, reserving five millions, should be "deposited" with the several states in proportion to their representation in the Senate and the House of Representatives, to be paid back to the United States at the call of the Secretary of the Treasury. Jackson approved the bill in June, 1836, probably because, the presidential election impending, the failure of the popular distribution scheme through his veto might have injured Van Buren. In his message a few months later, he gave good reasons why he should not have signed it. Some of those who had supported the bill, — Calhoun, for instance, — holding a distribution of public funds as a gift among the states to be unconstitutional, but a deposit or loan to be constitutional, seriously thought that the states might be called upon at some time to refund the money. But generally the deposit was looked upon as a gift; and Clay, on his return to his constituents, said "he did not believe a single member of either house imagined that a dollar would be recalled." The Whigs represented the passage of the bill as a great victory on their side. It was a bad law in itself, but perhaps no worse than other available expedients, since the accumulation of the surplus had not been prevented by a timely reduction of the taxes.

The effect of the law was to hurry on a crisis. The distribution of the public deposits among the "pet banks" had served to place capital arbitrarily in different parts of the country, without much regard to the requirements of legitimate business. The regulations imposed upon the deposit banks by the new law, especially the provision that the public deposits in no one bank should exceed three fourths of its paid-up capital, led in some cases to an equally arbitrary dislocation of funds from banks which had an excess of deposits to other banks in other places which had less than the amount allowed. But the distribution of the treasury surplus among the several states produced this effect of arbitrary dislocation on a much greater scale. On January 1, 1837, the surplus available for distribution amounted to $37,468,859. That surplus was nominally in the banks, but really in the hands of borrowers who used it for legitimate business or speculation. Withdrawing it from the banks meant, therefore, withdrawing it from the business men or speculators who had borrowed it. The funds so withdrawn were made for some time unavailable. They passed under the control of the several states, some of which used them for public improvements, some for educational purposes, some for other objects. The money would, of course, gradually find its way back into the channels of business, but then into channels other than those from which it had been taken.

The distribution among the states was to take place in four quarterly installments; but the preparations for the transfer of large sums from one place to another — and a transfer, too, regardless of the condition of commerce, or of the money market, or of the needs of any economic interest, or of any person — had to be begun at once and vigorously. A fierce contraction of loans and discounts necessarily followed. The exchanges between different parts of the country were violently disturbed, so that when the first installment of the surplus was delivered to the states the bodily transportation of specie and bank-notes from place to place became necessary to an extraordinary degree. Millions upon millions of dollars went on their travels, North and South, East and West, being mere freight for the time being, while the business from which the money was withdrawn gasped for breath in its struggle with a fearfully stringent money market.

The trouble was aggravated by one of Jackson's own financial measures. For a while the enormous land sales struck Jackson's mind as something uncommonly fine. In his message of December, 1835, he spoke of them as "among the evidences of the increasing prosperity of the country," attesting "the rapidity with which agriculture, the first and most important occupation of man, advances, and contributes to the wealth and prosperity of our extended territory." Presently, however, he became aware that the land sales did not mean settlement and agriculture, but speculation. He learned also that the land sold was paid for generally in notes issued, in great part at least, by banks of very uncertain solvency, and granting loans with great readiness. Banks in the old states would lend their small notes in large sums to speculators, who would carry them "out West" to buy land with them; these notes would thus get into circulation far away from their places of issue and redemption, — far enough to find their way back but slowly. The land sales were, indeed, in a great measure, "a conversion of public land into inconvertible paper." Jackson resolved that this must be stopped.

His confidential friend, Benton, introduced a resolution in the Senate, that nothing but specie should be received in payment for public lands. The resolution had no support. Immediately after the adjournment of Congress, in July, 1836, President Jackson, although knowing that such a measure could not have passed either house of Congress, and also that a majority of his Cabinet was against it, ordered the famous "specie circular" to be issued, — an instruction to the land officers to accept in payment for public lands only gold and silver coin, with an exception in favor of actual settlers until December 15 ensuing. This would have been an excellent measure to restrain the speculation in lands at its beginning. At the time when it came it did, indeed, as Benton said, "overtake some tens of millions of this bank paper on its way to the land offices to be changed into land, — which made the speculators rage." But it did more. As Clay at a later period said, it expressed the distrust of the Executive in the solvency of the banks, and created an extraordinary demand for specie "at a moment when the banking operations were extended and stretched to their utmost tension," and when the banks "were almost all tottering and ready to fall, for the want of that metallic basis on which they all rested." It drew specie from the centres of commerce to transport it to the wilderness, where it found its way through the land offices into Western banks, in some of which, according to Jackson's message, there were already credits to the government "greatly beyond their immediate means of payment." Here was again a violent dislocation of capital, effected in the crudest way. As Webster described it, the specie circular "checked the use of bank-notes in the West, and made another loud call for specie. The specie, therefore, is transferred to the West to pay for lands. Being received for lands, it becomes public revenue, is brought to the East for expenditure, and passes, on its way, other quantities going West to buy lands also, and in the same way returns again to the East." Moreover, while specie was required at the land office, bank-notes passed at the custom-house.

All this was going on at the same time with the distribution of the treasury surplus, — a rare combination of measures to withdraw millions of capital from active employment, to enforce a violent contraction of loans, to keep large quantities of specie and bank-notes in aimless migration, and thus to produce a general confusion which set all calculations at naught. History shows few examples of wilder financiering. No wonder that the money market, which in times of inflation always suffers from spasmodic fits of tightness, became tight beyond measure, and that the signs of an approaching collapse multiplied from day to day. Business men and speculators cast about frantically for some means of relief. There was a loud cry for the withdrawal of the specie circular, and Congress, at the close of the session of 1836-1837, passed by large majorities a bill rescinding it. But that bill Jackson refused to approve. It could have done no good.

The first installment of the treasury surplus, amounting to $9,367,000, due on January 1, 1837, was taken from the deposit banks amid great agony, and transferred to the several states; also the second, about April 1. But before the third fell due the general collapse came. First the influx of capital from England ceased. The speculation, which had prevailed there during the same period, was brought to an end by financial embarrassments in the autumn of 1836. Discounts went up and prices down. Some banks were compelled to wind up, and three large business houses, which had been heavily engaged with America, failed. English creditors called in their dues. The manufacturing industries, which, carried along by the general whirl, had produced beyond demand, had to reduce their operations, and the price of cotton fell more rapidly than it had risen. In August, 1836, it had been from 15 to 20 cents a pound; in May, 1837, it was from 8 to 12. The cotton houses in the South went down. Nine tenths of the merchants of Mobile suspended. New Orleans was in a state of financial anarchy. Tobacco shared the fate of cotton. The whole South was bankrupt. It became painfully apparent that the speculation in public lands had anticipated the possible progress of settlement by many years. The imagined values of great possessions in the West vanished into thin air. The names of the paper towns located in the wilderness sounded like ghastly jests. Fortunes in city lots disappeared overnight. The accumulated masses of imported merchandise shrunk more than one third in their value. Stocks of all kinds dropped with a thump. Manufacturing establishments stopped. Tens of thousands of workingmen were thrown on the street. Bankruptcies were announced by scores, by hundreds. "Everybody" was deeply in debt; there was a terrible scarcity of available assets. The banks, being crippled by the difficulty in collecting their dues, and by the sudden depreciation of the securities they held, could afford very little if any help. In May, 1837, while the preparatory steps for the distribution of the third surplus installment were in progress, the Dry Dock Bank of New York, one of the deposit banks, failed. Runs on other institutions followed; and on May 10 the New York banks in a body suspended specie payments, — the effect of the surplus distribution act and the heavy drafts for specie being given as the principal causes. All the banks throughout the country then adopted the same course. Confusion and distress could not have been more general.