WEBVTT NOTE 11. The Jacksonian Movement and the Bank War 1 00:00:00.000 --> 00:00:03.000 The Jacksonian Movement and the Bank War 2 00:00:03.000 --> 00:00:16.000 Out of the bitter experiences of the Panic of 1819 emerged the beginnings of the Jacksonian Movement, dedicated to hard money, the eradication of fractional reserve banking in general, and of the Bank of the United States in particular. 3 00:00:16.000 --> 00:00:22.080 Andrew Jackson himself, Senator Thomas Hart, quote, Old Bullion Benton of Missouri, future 4 00:00:22.080 --> 00:00:27.540 President James K. Polk of Tennessee, and Jacksonian economists Amos Kendall of Kentucky 5 00:00:27.540 --> 00:00:33.320 and Condi Rigo of Philadelphia, were all converted to hard money and 100% reserve banking by 6 00:00:33.320 --> 00:00:36.860 the experience of the Panic of 1819. 7 00:00:36.860 --> 00:00:42.180 The Jacksonians adopted, or in some cases pioneered in, the currency school analysis, 8 00:00:42.180 --> 00:00:46.820 which pin the blame for boom-bust cycles on inflationary expansions followed by contractions 9 00:00:46.820 --> 00:00:48.420 of bank credit. 10 00:00:48.420 --> 00:00:52.780 Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians 11 00:00:52.780 --> 00:00:58.340 were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School. 12 00:00:58.340 --> 00:01:03.700 Indeed, no movement in American politics has been as flagrantly misunderstood by historians 13 00:01:03.700 --> 00:01:05.860 as the Jacksonians. 14 00:01:05.860 --> 00:01:10.100 They were emphatically not, as historians until recently have depicted, either quote 15 00:01:10.100 --> 00:01:31.340 The Jacksonians were libertarians, plain and simple. 16 00:01:31.340 --> 00:01:34.100 Their program and ideology were libertarian. 17 00:01:34.100 --> 00:01:38.680 They strongly favored free enterprise and free markets, but they just as strongly opposed 18 00:01:38.680 --> 00:01:43.080 Special Subsidies and Monopoly Privileges Conveyed by Government to Business or to Any Other 19 00:01:43.080 --> 00:01:44.080 Group 20 00:01:44.080 --> 00:01:48.000 They favored absolutely minimal government, certainly at the federal level, but also at 21 00:01:48.000 --> 00:01:49.080 the state level. 22 00:01:49.080 --> 00:01:53.160 They believed that government should be confined to upholding the rights of private property. 23 00:01:53.160 --> 00:01:57.320 In the monetary sphere, this meant the separation of government from the banking system and 24 00:01:57.320 --> 00:02:01.960 a shift from inflationary paper money and fractional reserve banking to pure specie 25 00:02:01.960 --> 00:02:05.620 and banks confined to 100% reserves. 26 00:02:05.620 --> 00:02:09.540 In order to put this program into effect, however, the Jacksonians faced the grueling 27 00:02:09.540 --> 00:02:14.020 task of creating a new party out of what had become a one-party system after the War of 28 00:02:14.020 --> 00:02:19.820 1812, in which the Democrat Republicans had ended up adopting the Federalist program, 29 00:02:19.820 --> 00:02:23.300 including the reestablishment of the Bank of the United States. 30 00:02:23.300 --> 00:02:28.620 The new party, the Democratic Party, was largely forged in the mid-1820s by New York political 31 00:02:28.620 --> 00:02:33.620 leader Martin Van Buren, newly converted by the aging Thomas Jefferson to the laissez-faire 32 00:02:33.620 --> 00:02:34.620 cause. 33 00:02:34.620 --> 00:02:47.620 Van Buren cemented an alliance with Thomas Hart Benton of Missouri and the old Republicans of Virginia, but he needed a charismatic leader to take the presidency away from Adams and what was becoming known as the National Republican Party. 34 00:02:47.620 --> 00:02:54.620 He found that leader in Andrew Jackson, who was elected president under the new Democratic banner in 1828. 35 00:02:54.620 --> 00:03:03.620 The Jacksonians eventually managed to put into effect various parts of their free market and minimal government economic program, including a drastic lowering of tariffs 36 00:03:03.620 --> 00:03:08.820 And for the first and probably the last time in American history, paying off the federal debt. 37 00:03:08.820 --> 00:03:12.820 But their major concentration was on the issue of money and banking. 38 00:03:12.820 --> 00:03:18.420 Here they had a coherent program, which they proceeded to install in rapidly succeeding stages. 39 00:03:18.420 --> 00:03:24.620 The first important step was to abolish central banking, in the Jacksonian view, the major inflationary culprit. 40 00:03:24.620 --> 00:03:30.620 The object was not to eliminate the Bank of the United States in order to free the state banks for inflationary expansion, 41 00:03:30.620 --> 00:03:44.220 The Bank of the United States Charter was up for renewal in 1836, but Jackson denounced 42 00:03:44.220 --> 00:03:47.780 the bank in his first annual message in 1829. 43 00:03:47.780 --> 00:03:52.340 The imperious Nicholas Biddle, head of the second bank, decided to precipitate a showdown 44 00:03:52.340 --> 00:03:58.460 with Jackson before his reelection effort, so Biddle filed for renewal early in 1831. 45 00:03:58.460 --> 00:04:03.420 The host of national Republicans and non-Jacksonian Democrats proceeded to pass the Recharta bill, 46 00:04:03.420 --> 00:04:08.380 but Jackson, in a dramatic message, vetoed the bill and Congress failed to pass it over 47 00:04:08.380 --> 00:04:09.940 as veto. 48 00:04:09.940 --> 00:04:14.680 Triumphantly re-elected on the bank issue in 1832, President Jackson lost no time in 49 00:04:14.680 --> 00:04:18.660 disestablishing the Bank of the United States as a central bank. 50 00:04:18.660 --> 00:04:23.220 The critical action came in 1833 when Jackson removed the public treasury deposits from 51 00:04:23.220 --> 00:04:27.740 the Bank of the United States and placed them in a number of state banks, soon labeled as 52 00:04:27.740 --> 00:04:34.820 The original number of pet banks was seven, but the Jacksonians were not interested in 53 00:04:34.820 --> 00:04:39.500 creating a privileged bank oligarchy to replace the previous monopoly, so the number of pet 54 00:04:39.500 --> 00:04:43.540 banks had increased to 91 by the end of 1836. 55 00:04:43.540 --> 00:04:48.280 In that year, Biddle managed to secure a Pennsylvania charter for his bank, and the New United States 56 00:04:48.280 --> 00:04:53.060 Bank of Pennsylvania functioned as a much-reduced but still influential state bank for a few 57 00:04:53.060 --> 00:04:54.980 years thereafter. 58 00:04:54.980 --> 00:04:59.100 Orthodox historians have long maintained that by his reckless act of destroying the Bank 59 00:04:59.100 --> 00:05:03.980 of the United States and shifting government funds to the numerous pet banks, Andrew Jackson 60 00:05:03.980 --> 00:05:08.140 freed the state banks from the restraints imposed on them by a central bank. 61 00:05:08.140 --> 00:05:12.740 Thus, the banks were supposedly allowed to pyramid notes and deposits rashly on top of 62 00:05:12.740 --> 00:05:18.260 existing species and precipitate a wild inflation that was later succeeded by two bank panics 63 00:05:18.260 --> 00:05:20.860 and a disastrous deflation. 64 00:05:20.860 --> 00:05:24.460 Recent historians, however, have totally reversed this conventional picture. 65 00:05:24.460 --> 00:05:28.420 In the first place, the record of bank inflation under the regime of the Bank of the United 66 00:05:28.420 --> 00:05:30.940 States was scarcely ideal. 67 00:05:30.940 --> 00:05:37.660 From the depths of the post-1819 depression in January 1820 to January 1823, under the 68 00:05:37.660 --> 00:05:41.980 regime of the conservative Langdon Chivas, the Bank of the United States increased its 69 00:05:41.980 --> 00:05:46.180 notes and deposits at an annual rate of 5.9%. 70 00:05:46.180 --> 00:05:49.780 The nation's total money supply remained about the same in that period. 71 00:05:49.780 --> 00:05:53.380 Under the far more inflationist regime of Nicholas Biddle, however, the Bank of the 72 00:05:53.380 --> 00:06:01.380 The United States notes and deposits rose after January 1823 from $12 million to $42.1 million, 73 00:06:01.380 --> 00:06:05.060 an annual increase of 27.9%. 74 00:06:05.060 --> 00:06:09.560 As a consequence of this base of the banking pyramid inflating so sharply, the total money 75 00:06:09.560 --> 00:06:16.300 supply during this period vaulted from $81 million to $155 million, an annual increase 76 00:06:16.300 --> 00:06:18.340 of 10.2%. 77 00:06:18.340 --> 00:06:22.940 It is clear that the driving force for monetary expansion was the Bank of the United States, 78 00:06:22.940 --> 00:06:27.820 which acted as an inflationary rather than a restraining force upon the state banks. 79 00:06:27.820 --> 00:06:32.580 Looking at the figures another way, the 1823 data represented a pyramid ratio of money 80 00:06:32.580 --> 00:06:38.100 liabilities to specie of 3.86 to 1 on the part of the Bank of the United States and 81 00:06:38.100 --> 00:06:46.320 4 to 1 of the banking system as a whole, or respective reserve ratios of 0.26 and 0.25. 82 00:06:46.320 --> 00:06:52.700 By 1832, in contrast, the Bank of the United States reserve ratio had fallen to 0.17 and 83 00:06:52.700 --> 00:06:55.960 and the country as a whole to 0.15. 84 00:06:55.960 --> 00:07:01.860 Both sets of institutions had inflated almost precisely proportionately on top of specie. 85 00:07:01.860 --> 00:07:05.980 The fact that wholesale prices remained about the same over this period is no indication 86 00:07:05.980 --> 00:07:10.060 that the monetary inflation was not improper and dangerous. 87 00:07:10.060 --> 00:07:15.100 As Austrian business cycle theory has pointed out, any bank credit inflation sets up conditions 88 00:07:15.100 --> 00:07:16.660 for boom and bust. 89 00:07:16.660 --> 00:07:19.340 There is no need for prices actually to rise. 90 00:07:19.340 --> 00:07:23.660 The reason that prices did not rise was that the increased production of goods and services 91 00:07:23.660 --> 00:07:27.780 suffice to offset the monetary expansion during this period. 92 00:07:27.780 --> 00:07:33.380 But similar conditions of the 1920s precipitated the great crash of 1929, an event that shocked 93 00:07:33.380 --> 00:07:38.900 most economists who had adopted the proto-monetarist position of Irving Fisher and other economists 94 00:07:38.900 --> 00:07:45.380 of the day that a stable wholesale price level cannot, by definition, be inflationary. 95 00:07:45.380 --> 00:07:50.040 In reality, the unhampered free market economy will usually increase the supply of goods 96 00:07:50.040 --> 00:07:55.380 and services and thereby bring about a gently falling price level, as happened in most of 97 00:07:55.380 --> 00:07:59.120 the 19th century, except during wartime. 98 00:07:59.120 --> 00:08:03.000 What then of the consequences of Jackson's removal of the deposits? 99 00:08:03.000 --> 00:08:10.460 What of the fact that wholesale prices rose from 84 in April 1834 to 131 in February 1837, 100 00:08:10.460 --> 00:08:15.180 a remarkable increase of 52% in a little less than three years? 101 00:08:15.180 --> 00:08:18.660 Wasn't that boom due to the abolition of central banking? 102 00:08:18.660 --> 00:08:23.580 An excellent reversal of the orthodox explanation of the boom of the 1830s, and indeed of the 103 00:08:23.580 --> 00:08:26.980 ensuing panic, has been provided by Professor Temin. 104 00:08:26.980 --> 00:08:31.800 First, he points out that the price inflation really began earlier, when wholesale prices 105 00:08:31.800 --> 00:08:39.540 reached a trough of 82 in July 1830 and then rose by 20.7% in three years to reach 99 in 106 00:08:39.540 --> 00:08:41.540 the fall of 1833. 107 00:08:41.540 --> 00:08:43.700 The reason for the price rise is simple. 108 00:08:43.700 --> 00:08:51.300 The total money supply had risen from $109 million in 1830 to $159 million in 1833, an 109 00:08:51.300 --> 00:08:57.100 increase of 45.9% or an annual rise of 15.3%. 110 00:08:57.100 --> 00:09:01.860 Breaking the figures down further, the total money supply had risen from $109 million in 111 00:09:01.860 --> 00:09:09.660 1830 to $155 million a year and a half later, a spectacular expansion of 35%. 112 00:09:09.660 --> 00:09:13.820 Unquestionably, this monetary expansion was spurred by the still-flourishing Bank of the 113 00:09:13.820 --> 00:09:20.540 United States, which increased its notes and deposits from January 1830 to January 1832 114 00:09:20.540 --> 00:09:26.940 from a total of $29 million to $42.1 million, a rise of 45.2%. 115 00:09:26.940 --> 00:09:32.260 Thus, the price and money inflation in the first few years of the 1830s were again sparked 116 00:09:32.260 --> 00:09:35.740 by the expansion of the still-dominant central bank. 117 00:09:35.740 --> 00:09:38.740 But what of the notable inflation after 1833? 118 00:09:38.740 --> 00:09:42.940 There is no doubt that the cause of the price inflation was the remarkable monetary inflation 119 00:09:42.940 --> 00:09:48.220 during the same period, for the total money supply rose from $150 million at the beginning 120 00:09:48.220 --> 00:09:58.340 of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84% or 21% per 121 00:09:58.340 --> 00:09:59.340 annum. 122 00:09:59.340 --> 00:10:03.580 But as Temin points out, this monetary inflation was not caused by the liberated state banks 123 00:10:03.580 --> 00:10:05.940 expanding to a fairly well. 124 00:10:05.940 --> 00:10:10.060 If it were true that the state banks used their freedom and their new federal government deposits 125 00:10:10.060 --> 00:10:15.360 to pyramid wildly on top of specie, then their pyramid ratio would have risen a great deal, 126 00:10:15.360 --> 00:10:20.940 or conversely, their reserve ratio of specie to notes and deposits would have fallen sharply. 127 00:10:20.940 --> 00:10:26.320 Yet the bank's reserve ratio was 0.16 at the beginning of 1837. 128 00:10:26.320 --> 00:10:30.140 During the intervening years, the reserve ratio was never below this figure. 129 00:10:30.140 --> 00:10:34.060 But this means that the state banks did no more pyramiding after the demise of the Bank 130 00:10:34.060 --> 00:10:37.980 Bank of the United States as a central bank than they had done before. 131 00:10:37.980 --> 00:10:42.100 Conventional historians, believing that the Bank of the United States must have restrained 132 00:10:42.100 --> 00:10:47.280 the expansion of state banks, naturally assumed that they were hostile to the central bank. 133 00:10:47.280 --> 00:10:51.420 But now, Gene Wilburn has discovered that the state banks overwhelmingly supported the Bank 134 00:10:51.420 --> 00:10:56.660 of the United States, quote, We have found that Nicholas Biddle was correct when he said 135 00:10:56.660 --> 00:11:02.540 state banks in the main are friendly, specifically only in Georgia, Connecticut and New York 136 00:11:02.540 --> 00:11:07.060 Bank was their positive evidence of hostility. A majority of state banks in some states of 137 00:11:07.060 --> 00:11:11.940 the South, such as North Carolina and Alabama, gave strong support to the bank, as did both 138 00:11:11.940 --> 00:11:17.540 the Southwest states of Louisiana and Mississippi. Since Virginia gave some support, we can claim 139 00:11:17.540 --> 00:11:22.000 that state banks in the South and Southwest for the most part supported the bank. New 140 00:11:22.000 --> 00:11:26.660 England, contrary to expectations, showed the banks of Vermont and New Hampshire behind 141 00:11:26.660 --> 00:11:31.900 the bank, but support of Massachusetts was both qualitatively and quantitatively weak. 142 00:11:31.900 --> 00:11:37.760 The banks of the middle states all supported the second bank except for those of New York." 143 00:11:37.760 --> 00:11:42.340 What then was the cause of the enormous monetary expansion of the 1830s? 144 00:11:42.340 --> 00:11:47.060 It was a tremendous and unusual expansion of the stockpile of specie in the nation's 145 00:11:47.060 --> 00:11:48.060 banks. 146 00:11:48.060 --> 00:11:53.020 The supply of specie in the country had remained virtually constant at about $32 million from 147 00:11:53.020 --> 00:11:56.980 the beginning of 1823 until the beginning of 1833. 148 00:11:56.980 --> 00:12:01.260 But the proportion of specie to banknotes held by the public as money dropped during 149 00:12:01.260 --> 00:12:07.180 in this period from 23% to 5% so that more species flowed from the public into the banks 150 00:12:07.180 --> 00:12:11.780 to fuel the relatively moderate monetary expansion of the 1820s. 151 00:12:11.780 --> 00:12:15.860 But starting at the beginning of 1833, the total species in the country rose swiftly 152 00:12:15.860 --> 00:12:25.860 from $31 million to $73 million at the beginning of 1837 for a rise of 141.9% or 35.5% per 153 00:12:25.860 --> 00:12:26.860 annum. 154 00:12:26.860 --> 00:12:31.260 Hence, even though increasing distrust of banks led the public to withdraw some specie 155 00:12:31.260 --> 00:12:37.240 from them, so that the public now held 13% of its money in specie instead of 5%, the 156 00:12:37.240 --> 00:12:41.060 banks were able to increase their notes and deposits at precisely the same rate as the 157 00:12:41.060 --> 00:12:44.140 expansion of specie flowing into their coffers. 158 00:12:44.140 --> 00:12:51.100 Thus, the Jackson administration is absolved from blame for the 1833 to 1837 inflation. 159 00:12:51.100 --> 00:12:56.540 In a sense, the state banks are as well, certainly, they scarcely acted as if being, quote, freed 160 00:12:56.540 --> 00:13:01.400 by the Demise of the Bank of the United States. Instead, they simply increase their money 161 00:13:01.400 --> 00:13:06.560 issues proportionately with a huge increase of specie. Of course, the basic fractional 162 00:13:06.560 --> 00:13:11.620 reserve banking system is scarcely absolved from responsibility, since otherwise the monetary 163 00:13:11.620 --> 00:13:15.440 expansion in absolute terms would not have been as great. 164 00:13:15.440 --> 00:13:20.500 The enormous increase in specie was the result of two factors. First and foremost, a large 165 00:13:20.500 --> 00:13:26.000 influx of silver coin from Mexico, and second, the sharp cut in the usual export of silver 166 00:13:26.000 --> 00:13:31.180 The latter was due to the substantial increases in China's purchase of opium instead of 167 00:13:31.180 --> 00:13:32.880 silver from abroad. 168 00:13:32.880 --> 00:13:37.280 The influx of silver was the result of paper money inflation by the Mexican government, 169 00:13:37.280 --> 00:13:41.680 which drove Mexican silver coins into the United States, where they circulated as legal 170 00:13:41.680 --> 00:13:42.680 tender. 171 00:13:42.680 --> 00:13:46.680 The influx of Mexican coin has been attributed to a possible increase in the productivity 172 00:13:46.680 --> 00:13:51.220 of the Mexican mines, but this makes little sense since the inflow stopped permanently 173 00:13:51.220 --> 00:13:53.440 as soon as 1837. 174 00:13:53.440 --> 00:13:58.920 The actual cause was an inflation of the Mexican currency by the Santa Ana regime, which financed 175 00:13:58.920 --> 00:14:03.720 its deficits during this period by minting highly debased copper coins. 176 00:14:03.720 --> 00:14:08.440 Since the debased copper grossly overvalued copper and undervalued gold and silver, both 177 00:14:08.440 --> 00:14:13.200 the latter metals proceeded to flow rapidly out of Mexico until they virtually disappeared. 178 00:14:13.200 --> 00:14:18.120 Silver, of course, and not gold was flowing into the United States during this period. 179 00:14:18.120 --> 00:14:23.060 Indeed, the Mexican government was forced to rescind its actions in 1837 by shifting 180 00:14:23.060 --> 00:14:35.140 A bank credit inflation, the magnitude of that of the 1830s, is bound to run into shoals 181 00:14:35.140 --> 00:14:38.860 that cause the bank to stop the expansion and begin to contract. 182 00:14:38.860 --> 00:14:43.380 As the banks expand and prices rise, specie is bound to flow out of the country and into 183 00:14:43.380 --> 00:14:47.260 the hands of the domestic public, and the pressure on the banks to redeem in specie 184 00:14:47.260 --> 00:14:52.260 will intensify, forcing cessation of the boom and even monetary contraction. 185 00:14:52.260 --> 00:14:56.620 In a sense, the immediate precipitating cause is of minor importance. 186 00:14:56.620 --> 00:15:00.820 Even so, the Jackson administration has been unfairly blamed for precipitating the Panic 187 00:15:00.820 --> 00:15:06.420 of 1837 by issuing the Species Circular in 1836. 188 00:15:06.420 --> 00:15:11.060 In 1836, the Jackson administration decided to stop the enormous speculation in western 189 00:15:11.060 --> 00:15:15.940 public lands that had been fueled during the past two years by the inflation of bank credit. 190 00:15:15.940 --> 00:15:20.860 Hence, Jackson decreed that public land payments would have to be made in Specie. 191 00:15:20.860 --> 00:15:24.940 This had the healthy effect of stopping public land speculation, but recent studies have 192 00:15:24.940 --> 00:15:29.220 shown that the specie circular had very little impact in putting pressure on the banks to 193 00:15:29.220 --> 00:15:30.860 pay specie. 194 00:15:30.860 --> 00:15:34.660 From the point of view of the Jackson program, however, it was as important as moving toward 195 00:15:34.660 --> 00:15:39.140 putting the U.S. government finances on a purely specie basis. 196 00:15:39.140 --> 00:15:43.860 Another measure advancing the Jacksonian program was also taken in 1836. 197 00:15:43.860 --> 00:15:47.820 Jackson, embarrassed at the government having amassed a huge budget surplus during his eight 198 00:15:47.820 --> 00:15:53.220 Years in Office, ordered the Treasury to distribute the surplus proportionally to the states. 199 00:15:53.220 --> 00:15:56.900 The distribution was made in notes, presumably payable in specie. 200 00:15:56.900 --> 00:16:01.220 But again, Temin has shown that the distribution had little impact on movements of specie between 201 00:16:01.220 --> 00:16:05.820 banks and therefore in exerting contractionist pressure upon them. 202 00:16:05.820 --> 00:16:10.780 What then was the precipitating factor in triggering the panic of 1837? 203 00:16:10.780 --> 00:16:15.100 Temin plausibly argues that the Bank of England, worried about inflation in Britain and the 204 00:16:15.100 --> 00:16:19.420 and the consequent outflow of gold tighten the money supply and raise interest rates 205 00:16:19.420 --> 00:16:22.060 in the latter half of 1836. 206 00:16:22.060 --> 00:16:28.020 As a result, credit contraction severely restricted the American cotton export trade in London. 207 00:16:28.020 --> 00:16:33.380 Exports declined, cotton prices fell, capital flowed into England and contractionist pressure 208 00:16:33.380 --> 00:16:37.140 was put upon American trade and the American banks. 209 00:16:37.140 --> 00:16:41.640 Banks throughout the United States, including the Bank of the United States, promptly suspended 210 00:16:41.640 --> 00:16:47.200 Specie Payments in May 1837, their notes depreciated at varying rates and interregional 211 00:16:47.200 --> 00:16:49.680 trade within the country was crippled. 212 00:16:49.680 --> 00:16:54.320 While banks were able to evade specie payments and continue operations, they were still obliged 213 00:16:54.320 --> 00:16:58.680 to contract credit in order to go back on specie eventually, since they could not hope 214 00:16:58.680 --> 00:17:03.360 to be creating fiat money indefinitely and be allowed to remain in business. 215 00:17:03.360 --> 00:17:07.560 Finally, the New York banks were compelled by law to resume paying their contractual 216 00:17:07.560 --> 00:17:12.340 Obligations, and the other banks followed in the fall of 1838. 217 00:17:12.340 --> 00:17:19.260 During the year 1837, the money supply fell from $276 million to $232 million, a large 218 00:17:19.260 --> 00:17:22.880 drop of 15.6% in one year. 219 00:17:22.880 --> 00:17:28.580 Total species in the country continued to increase in 1837, up to $88 million, but growing 220 00:17:28.580 --> 00:17:32.920 public distrust of the banks, reflected in an increase in the proportion of money held 221 00:17:32.920 --> 00:17:44.040 The Bank's reserve ratio rose from 0.16 to 0.2. 222 00:17:44.040 --> 00:17:49.480 In response to the monetary contraction, wholesale prices fell precipitately by over 30 percent 223 00:17:49.480 --> 00:17:57.200 in seven months, declining from 131 in February 1837 to 98 in September of that year. 224 00:17:57.200 --> 00:17:59.760 In 1838, the economy revived. 225 00:17:59.760 --> 00:18:02.040 Britain resumed easy credit that year. 226 00:18:02.040 --> 00:18:07.100 When prices rose and a short-lived boomlet began, public confidence in the banks unwisely 227 00:18:07.100 --> 00:18:11.440 returned as they resumed specie payment, and as a result, the money supply rose slightly 228 00:18:11.440 --> 00:18:19.360 during the year and prices rose by 25%, increasing from 98 in September 1837 to 125 in February 229 00:18:19.360 --> 00:18:21.480 1839. 230 00:18:21.480 --> 00:18:26.240 Leading the boom of 1838 were state governments, who, finding themselves with the unexpected 231 00:18:26.240 --> 00:18:30.360 windfall of a distributed surplus from the federal government, proceeded to spend the 232 00:18:30.360 --> 00:18:35.300 the money wildly and borrow even more extravagantly on public works and other uneconomic reforms 233 00:18:35.300 --> 00:18:37.400 of quote, investment. 234 00:18:37.400 --> 00:18:41.580 But the state governments engaged in rashly optimistic plans that their public works would 235 00:18:41.580 --> 00:18:46.040 be financed heavily from Britain and other countries and the cotton boom on which these 236 00:18:46.040 --> 00:18:49.740 hopes depended collapsed again in 1839. 237 00:18:49.740 --> 00:18:55.340 The states had to abandon their projects en masse, cotton prices declined and severe contractionist 238 00:18:55.340 --> 00:18:57.360 pressure was put on trade. 239 00:18:57.360 --> 00:19:01.620 Furthermore, the Philadelphia-based Bank of the United States had invested heavily in 240 00:19:01.620 --> 00:19:06.620 cotton speculation, and the falling price of cotton forced the Bank of the United States, 241 00:19:06.620 --> 00:19:11.400 once again, to suspend payments in October 1839. 242 00:19:11.400 --> 00:19:15.920 This touched off a wave of general bank suspensions in the South and West, but this time the banks 243 00:19:15.920 --> 00:19:20.200 of New York and New England continued to redeem their obligations in specie. 244 00:19:20.200 --> 00:19:24.560 Finally, the Bank of the United States, having for the last time played a leading role in 245 00:19:24.560 --> 00:19:30.980 and generating a recession and monetary crisis was forced to close its doors two years later. 246 00:19:30.980 --> 00:19:37.560 With the crisis of 1839, there ensued four years of massive monetary and price deflation. 247 00:19:37.560 --> 00:19:39.840 Unsound banks were finally eliminated. 248 00:19:39.840 --> 00:19:42.840 Unsound investments generated in the boom were liquidated. 249 00:19:42.840 --> 00:19:46.560 The number of banks during these four years fell by 23%. 250 00:19:46.560 --> 00:19:54.440 The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843. 251 00:19:54.440 --> 00:20:12.440 A seemingly cataclysmic drop of 34% or 8.5% per annum. Prices fell even further, from $125 in February 1839 to $67 in March 1843, a tremendous drop of 42% or 10.5% per year. 252 00:20:12.440 --> 00:20:19.440 During the boom, as we have indicated, state governments went heavily into debt, issuing bonds to pay for wasteful public works. 253 00:20:19.440 --> 00:20:25.480 In 1820, the total indebtedness of American states was a modest $12.8 million. 254 00:20:25.480 --> 00:20:29.200 By 1830, it rose to $26.5 million. 255 00:20:29.200 --> 00:20:35.240 But then it started to escalate, reaching $66.5 million in 1835 and skyrocketing to 256 00:20:35.240 --> 00:20:38.620 $170 million in 1839. 257 00:20:38.620 --> 00:20:43.420 The collapse of money, credit banking and prices after 1839 brought these state debts 258 00:20:43.420 --> 00:20:44.960 into jeopardy. 259 00:20:44.960 --> 00:20:49.680 At this point, the Whigs, taking a leaf from their forebears, the Federalists, agitated 260 00:20:49.680 --> 00:20:53.960 for the federal government to bail out the states and assume their debts. 261 00:20:53.960 --> 00:20:58.320 After the crisis of 1839 arrived, some of the southern and western states were clearly 262 00:20:58.320 --> 00:21:02.340 in danger of default, their plight made worse by the fact that the bulk of the debt was 263 00:21:02.340 --> 00:21:06.640 held by British and Dutch capitalists and that specie would have to be sent abroad to 264 00:21:06.640 --> 00:21:08.880 meet the heavy interest payments. 265 00:21:08.880 --> 00:21:12.560 The Whigs pressed further for federal assumption of the debt, with the federal government to 266 00:21:12.560 --> 00:21:28.440 The American people, however, spurned federal aid, including even the citizens of the states 267 00:21:28.440 --> 00:21:33.160 in difficulty, and the advent of the Polk administration ended any prospects for federal 268 00:21:33.160 --> 00:21:34.280 assumption. 269 00:21:34.280 --> 00:21:38.200 The British noted in wonder that the average American was far more concerned about his 270 00:21:38.200 --> 00:21:52.160 Demonstrating an astute perception of the reckless course the states had taken, the 271 00:21:52.160 --> 00:21:56.640 typical American response to the problem, quote, suppose foreign capitalists did not 272 00:21:56.640 --> 00:22:02.200 lend any more to the states, end quote, was the sharp retort, quote, well, who cares if 273 00:22:02.200 --> 00:22:03.200 they don't? 274 00:22:03.200 --> 00:22:09.240 Now as a community heals overhead in debt and can scarcely pay the interest." 275 00:22:09.240 --> 00:22:12.840 The implication was that the disappearance of foreign credit to the states would have 276 00:22:12.840 --> 00:22:17.140 the healthy effect of cutting off their wasteful spending as well as avoiding the imposition 277 00:22:17.140 --> 00:22:20.960 of a crippling tax burden to pay for the interest in principle. 278 00:22:20.960 --> 00:22:24.620 There was in this response an awareness by the public that they and their government 279 00:22:24.620 --> 00:22:30.300 were separate and sometimes even hostile entities rather than one in the same organism. 280 00:22:30.300 --> 00:22:36.620 By 1847, four western and southern states, Mississippi, Arkansas, Michigan and Florida, 281 00:22:36.620 --> 00:22:39.500 had repudiated all or part of their debts. 282 00:22:39.500 --> 00:22:45.720 Six other states, Maryland, Illinois, Indiana, Louisiana, Arkansas and Pennsylvania, had 283 00:22:45.720 --> 00:22:49.500 defaulted from three to six years before resuming payment. 284 00:22:49.500 --> 00:22:55.660 It is evident then that the 1839 to 1843 contraction was helpful for the economy in liquidating 285 00:22:55.660 --> 00:23:00.380 and unsound investments, debts and banks, including the pernicious bank of the United 286 00:23:00.380 --> 00:23:01.740 States. 287 00:23:01.740 --> 00:23:06.780 But didn't the massive deflation have catastrophic effects on production, trade, and employment 288 00:23:06.780 --> 00:23:08.860 as we have been led to believe? 289 00:23:08.860 --> 00:23:15.420 In a fascinating analysis and comparison with the deflation of 1929 to 1933 a century later, 290 00:23:15.420 --> 00:23:19.340 Professor Temin shows that the percentage of deflation over the comparable four years 291 00:23:19.340 --> 00:23:37.900 In 1929 to 1933, real gross investment fell catastrophically by 91%, real consumption 292 00:23:37.900 --> 00:23:41.920 by 19% and real GNP by 30%. 293 00:23:41.920 --> 00:23:50.440 In 1839 to 1843, investment fell by 23% but real consumption increased by 21% and real 294 00:23:50.440 --> 00:23:53.240 GNP by 16%. 295 00:23:53.240 --> 00:23:57.400 The interesting problem is to account for the enormous fall in production and consumption 296 00:23:57.400 --> 00:24:03.900 in the 1930s as contrasted to the rise in production and consumption in the 1840s. 297 00:24:03.900 --> 00:24:07.680 It seems that only the initial months of the contraction worked a hardship on the American 298 00:24:07.680 --> 00:24:12.480 in Public, and that most of the earlier deflation was a period of economic growth. 299 00:24:12.480 --> 00:24:16.960 Salmon properly suggests that the reason can be found in the downward flexibility of prices 300 00:24:16.960 --> 00:24:23.040 in the 19th century, so that the massive monetary contraction would lower prices but not particularly 301 00:24:23.040 --> 00:24:26.840 cripple the world of real production or standards of living. 302 00:24:26.840 --> 00:24:31.900 In contrast, in the 1930s, government placed massive roadblocks on the downward fall of 303 00:24:31.900 --> 00:24:36.960 prices and wage rates and hence brought about severe and continuing depression of production 304 00:24:36.960 --> 00:24:38.920 and Living Standards. 305 00:24:38.920 --> 00:24:43.320 The Jacksonians had no intention of leaving a permanent system of pet banks and so after 306 00:24:43.320 --> 00:24:47.880 the retirement of Jackson, his successor, Martin Van Buren, fought to establish the 307 00:24:47.880 --> 00:24:52.400 independent treasury system in which the federal government conferred no special privilege 308 00:24:52.400 --> 00:24:55.240 or inflationary prop on any bank. 309 00:24:55.240 --> 00:24:59.120 Instead of a central bank or pet banks, the government was to keep its funds purely in 310 00:24:59.120 --> 00:25:04.680 specie in its own treasury vaults or its quote, sub-treasury branches and simply take in 311 00:25:04.680 --> 00:25:06.880 Banking and Spend Funds from there. 312 00:25:06.880 --> 00:25:11.120 Van Buren finally managed to establish the independent treasury system, which would last 313 00:25:11.120 --> 00:25:13.120 until the Civil War. 314 00:25:13.120 --> 00:25:17.720 At long last, the Jacksonians had achieved their dream of severing the federal government 315 00:25:17.720 --> 00:25:23.120 totally from the banking system and placing its finances on a purely hard money, specie 316 00:25:23.120 --> 00:25:23.640 basis.