Small Change and The Depression of 1837-1843 – Part Four
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Part four – Prices become the news
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When he won the 1828 national election, Andrew Jackson became one of only two men to be elected president of the United States without having gone to college. The other was George Washington. Washington had the further distinction of being the only American president at that time who had not been a lawyer. If, like Adams, Jefferson, Madison, Monroe and the other Adams, Andrew Jackson was guilty of being a lawyer, he did his best to live it down. Jackson never once offered his memberships in the North Carolina and then the Tennessee bar as evidence of his legal expertise.
Instead, he offered his moral righteousness as his greatest qualification for political office. He had, as attorney general of the Mero district and judge advocate of the Davidson county militia, always thought first about doing what was right. He would bring the same commitment to his responsibilities as president and show a reverence to the Constitution equal of the one held by the country’s first president.
In his speeches and writings, Jackson would repeatedly promise the voters that he would honor the “invaluable legacy of Washington.” He would obey Washington’s particular understanding of the Constitution and, in following Washington’s words, listen the “voice of prophesy, telling us of the evils to come.” In his interpretations of his obligation to, “preserve, protect and defend the Constitution of the United States,” Jackson would be both an originalist and a literalist. He would take words of the Constitution as civic scripture; as the only part of American law directly ratified by the American people, its words would have a standing beyond the reach of judges and legislators.
The day after his chosen successor, Martin Van Buren, was inaugurated as president, Jackson was asked if he had any regrets from his eight years in office. He is widely reported to have remarked, “Yes. That I didn’t shoot Henry Clay and I didn’t have John Calhoun hanged.” Jackson considered both men guilty of Constitutional heresy. Calhoun had claimed Congress and the president had no more power to tax imports to the United States than the predecessor Congress had held under the Articles of Confederation. Clay’s sin was even greater, one that Jackson thought he should have dealt with directly by himself. Clay had claimed that the second Bank of the United States had the power to print money because money could be “whatever Congress said it was.” As a politician in Tennessee, Jackson had found no difficulty in supporting the state’s banks. They had been his solid supporters and principal campaign contributors. When Jackson had campaigned for re-election in 1832, he had argued that the second Bank of the United States was inherently evil, not because it was a bank, but because it was the tool that Congress wanted to continue to use to print money.
Neither Jackson nor the conservative and liberal factions in Jackson’s own Democratic-Republican party questioned that the states had a right to incorporate their own banks. Even Thomas Jefferson had come to the belief that Virginia needed a strong state bank. In Jackson part of Washington’s “invaluable legacy” had been the creation of an equally strong federal bank to receive and hold the excise tax collections and other funds belonging to the United States. The United States and the states were to have equal and independent sovereignties and physical territories. The need to have the Treasury’s balances held by a bank not subject to state law regulation had been the very reason for the incorporation of the first Bank of the United States.
Jackson left only one financial task to Van Buren as his successor – the establishment of an independent Treasury to replace the second Bank of the United States. That goal shared the same premise as the Constitution’s establishment of the District of Columbia. The physical property used by the president, Congress and Supreme Court should not be subject to any state’s sovereign jurisdiction. Neither should any state’s money be held by institutions subject to federal regulation. The first Bank of the United States – the one established by President Washington – had not presumed to regulate Americans’ individual finances or to dictate to the states what their financial regulations should be.
Most important, under Washington’s constitution, neither the states and their banks nor the United States and its banks could claim the privilege of the Bank of England. No executive and legislature, state or federal, had the authority to make its bills of exchange legal tender; nor did they have the power to delegate such authority.
In Jackson’s reading of Washington’s thoughts on the matter, the coinage standard for the American dollar was the keystone for the American political economy. No other monetary rule could maintain both the separation and union of sovereignties among the individual states and the federal union. Congress and the president were only given the responsibility of setting the reference measures – the weights and measures – that specified the denominations of American money because the country must have a single currency. Congress and the president’s only power would be to enact changes in the reference measures. In vetoing the renewal of the federal charter for the Bank of the United States, Andrew Jackson believed he was restoring the very limit that Washington had considered the essential restraint against a financial tyranny by the sovereign. In his veto message, Jackson would tell the Congress and his successors that they must, once and for all, abandon the belief that the Constitution gave them any power over money other than to specify how much metal would be in each currency denomination.
Throughout most of Jackson’s first term in office, his political opponents thought they had the better economic argument. The country needed a central bank, and the Treasury and Congress must have the ability to coordinate with the bank to implement monetary policy. Failing to renew the charter of the second Bank of the United States was guaranteed to cause a financial crisis; the country would lose all of its foreign exchange and the banks would default. Without a central bank of issue, the political economy of the United States would literally starve from not having any properly regulated means of exchange.
In 1832, as the political tug of war usually described as “the Bank War” rose to an election-year climax, Jackson’s opponents were increasingly optimistic. Nicholas Biddle, the president of the bank and the largest contributor to the anti-Jackson media campaigns, was confident that Jackson had frightened the voters. The members of Jackson’s cabinet shared those fears; current events were not encouraging. The United States’ chronic shortages of coinage had not been overcome. If anything, they had gotten even more severe.
Because of the arbitrage inherent in bi-metallism, the United States mint and the Treasury found themselves unable to keep gold coin from fleeing the country. As fast as the gold discoveries in North Carolina and elsewhere were mined and their ore crushed and smelted, the mint’s production of eagles and half-eagles from those ingots would be sent onshore. Under the 15-to-1 silver-to-gold ratio of the Coinage Act of 1792, American silver dollars were now overpriced compared to the gold-silver exchange ratio in Europe and France, in particular. With the continuing reduction in transport costs from the Erie Canal and Mississippi and Ohio River steamboats, it had become wonderfully profitable for speculators to gather up the silver coins coming from Mexico and the Caribbean, ship them to Philadelphia for exchange into gold coin and then ship the newly minted American money to Europe. In the early 1830s, the melting of U.S. gold coins in Europe became a mania equal to any bubble. On a single day Paris in 1831, 40,000 half eagles would be reduced to bullion ingots in a single melt.
Yet, Jackson easily won re-election. The continuing shortages of Constitutional money had been thoroughly offset by the effects of George Washington’s other financial legacy – the further expansion of Thomas Willing’s banking system of open discount and deposit. If coin was hard to find, bank notes were not. From 1829 to 1836, the amount of bank notes in circulation by the state-chartered banks increased from $42.4 million to $161.3 million. Mr. Biddle’s central bank had been properly judicious in its issues of currency; during the same period, its notes in circulation had barely increased – from $15.8 million in 1830 to $16.4 million in 1836. (Note; the figure for 1836 is from the Bank of the United States’ accounts under the Pennsylvania state charter it acquired after its Federal charter expired.)
Even more important, the Bank of the United States’ share of the total bank notes in circulation in the country dropped nearly four-fold – from 37% to 10%. What made the rise in circulation possible was a comparable increase in the state-chartered banks’ capital. From 1830 to 1837, the authorized capital stock of the state-chartered banks grew from $170.4 million to $471.5 million. The basic rule for all American banks had been the one established by the incorporation of the first Bank of the United States: A bank’s liabilities for outstanding notes and customer accounts could not exceed the total amount of paid-in capital, “over and above the monies then actually deposited in the bank for safe keeping”.
The distinction between “monies actually deposited” and “paid-in capital” needs to be understood. No bank in the United States or Great Britain had ever begun or continued in operation with 100% of its paid-in capital in the form of “money deposited.” The Bank of England and the Bank of the United States had both begun using what is still viewed as a slight-of-hand by those who question the legitimacy of any currency that is not a warehouse receipt for precious metal in the vault. The share of the paid-in capital contributed by the sovereign governments to their national banks had consisted of loans that the bank itself had made to the sovereign. For the state-chartered banks in the United States, the paid-in capital could be a personal note from the founder and principal shareholder.
What prevented these transactions from being perceived as outright fraud was the fact that the loans made by the banks depended on the public acceptance of their notes and that included the ability to deposit them for credit to the customers’ own accounts in competing banks. The bank notes issued by “Fred’s Fraudulent Bank of Backwoods Tennessee” had to pass muster with tellers at “Charles’ Crooked Bank” in the same town. Banks accepted their own notes and other banks’ notes for deposit by discounting the paper to what it was worth in coin and crediting the balance of the customer’s account. Withdrawals were made not in coin but in notes that were themselves issued at a discount against a future redemption date.
The rise in both the paid-in capital and notes in circulation came from a continual churn of deposits and withdrawals to customers’ own accounts to which the customers’ commercial profits and the banks’ capture of discounts were added. To handle the increased volume of transactions banks found themselves always in need of experienced tellers who understood that a bank note’s exchange value would not automatically be its printed denomination. One had to be able to read “the fine print” of the terms of the note. For the banks, the profits were found in the implicit transaction fees, not in the annual interest charged on loans. The volume of deposits and withdrawals, often in notes with fractional denominations, was what mattered most because the discounting was applied to the exchanges. For the bankers themselves increases in wealth were measured primarily by the rise in their own account balances, not by the additions to the amounts of coin on hand.
Throughout his second term, Andrew Jackson’s “attack” on the second Bank of the United States would continue to be an unqualified political success. Mr. Biddle was now no more than an equal to every other rich man in the country; he, too, had gone and started his own state-chartered bank. Congress had abandoned its Constitutional heresy and surrendered in its attempts to restore its authority to supply itself with legal tender at will.
The Senate had even taken back all the harsh words it had previously spoken. On March 28, 1834, the Senate journal had recorded a formal condemnation of the president: “Resolved that the President in the late Executive proceedings in relation to the public revenue, has assumed upon himself authority and power not conferred by the Constitution and laws, but in derogation of both.” On January 16, 1837, the Senate voted to rescind its earlier indictment. The secretary of the Senate carried into the chamber the volume for the 1834 records, drew lines around that part of the text and wrote, “Expunged by order of the Senate.”
The country was experiencing an information revolution comparable to the dot-com boom of the 1990s. The 1830s saw an exponentially compounding growth in the amounts of news. Just as America Online would do helicopter drops of data access by sending free 3.5 inch “floppy” discs to everyone’s mailbox, journals and newspapers began appearing in every tavern and country store in even the smallest of towns. Scholars in the history of American religion calculate that the country’s churches, gospel groups and non-Christian affiliations regularly printed and distributed over 300 magazines. Thanks to the development of steam-powered printing press and Congress’ wholesale expansion of preferential postage rates for media (which survive to this day), the news about nearly everything began to be a part of the daily lives of most Americans. What had been enormously expensive – mailed letters and pamphlets – was becoming wonderfully cheap. The news could be had by anyone who could read and had a penny.
On September 3, 1833, the first edition of the New York Sun was offered to the public for the price of one cent. Its publisher, Benjamin Henry Day was 23; he was wonderfully ignorant of what a newspaper was supposed to be. He did not offer subscriptions, and he sold spaces in his pages for advertisements. The actual papers were sold not by the publisher but by labor contractors with gangs of children who bought the papers in bulk at a wholesale price and then resold them at the published price.
The same technological revolution that allowed Day to produce a daily paper for a fraction of a penny created an explosion in financial information. Pressing ink into paper and drying it on runs, then folding the sheets together – all without direct human labor – allowed prices for everything that was actively traded to be broadly published and shared. The data for prices and volumes that had been shared by brokers through private correspondence quickly became available public knowledge. Bank reporters and credit bureaus began publishing the Information about “the market” for property, goods and services.
If people were worried about whether they were receiving the proper discounts on bank note, their troubles were now over. Bicknell’s Counterfeit Detector, Bank Note List and General Price Current Reporter and other bank note and credit reports were available by subscription. In its regular print runs, Bicknell’s would detail the current discounts being asked and offered against coined money on the paper notes of over five thousand banks and brokers. Money and credit and “investments” (the word appears for the first time in common use) and their fluctuations became “the daily news.”
The most exciting information came from stories about the miraculous technological future that was about to unfold. Newspaper pages would be filled with predictions about the coming miracles of railroads and ocean-going steamships and the fabulous wealth that would be made. Technology became a matter of daily gossip because people could read about it in a newspaper. Yet, the information about what was “new” was being delivered to using the well-established technology of the recent past. Just as “the internet” in the 1990s would be accessed by people using dial-up on the traditional twisted-pair telephone network, the newspapers’ descriptions of the future in the 1830s would be spread by transportation technologies that were already “old” – horse-drawn wagons and canal boats, river steamboats, and square-rigged sailing ships. Steamships would not become reliable enough to be scheduled as part of the transatlantic traffic until the 1850s. It would be well into the 1840s before even local freight transportation began being carried by rail. Samuel Morse would invent the telegraph in 1832; but it would take 12 years for his first message to be transmitted from Washington, D.C., to Baltimore.
For the 1830s, as for the 1990s, the great change would come not in the technology of delivery systems but in the extraordinary increases in the volumes of news and financial information being delivered because of the dramatic reduction in the cost of reproducing each item of news.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.