Albert Gallatin

by John Austin Stevens

On December 3, 1833, Roger B. Taney, secretary of the treasury, reported to Congress that he had directed the removal of the deposits of the government from the Bank of the United States and placed them in banks of his own selection. He gave a number of reasons for this extraordinary exercise of the power which he obtained by his appointment on September 23, 1833. He received his reward in June, 1834, being then transferred by President Jackson to the seat of chief justice of the Supreme Court. In his annual report Taney named, among his elaborate reasons for the removal, that the bank had used its money for electioneering purposes, and that he “had always regarded the result of the last election of President of the United States as the declaration of a majority of the people that the charter ought not to be renewed.” He further expressed the opinion “that a corporation of that description was not necessary either for the fiscal operations of the government or the general convenience of the people.” It mattered little to him that Mr. Gallatin had only recently pointed out that from the year 1791 the operations of the Treasury had, without interruption, been carried on through the medium of banks; during the years 1811 to 1814, by the state banks, with a result which no one had as yet forgotten; before and since that brief interval through the Bank of the United States. Enough for Taney, that it was the will of his imperious master, 'the pugnacious animal,' as Gallatin aptly termed him.

In October, 1834, Taney's successor in the Treasury, Levi Woodbury, gave notice that the remaining debt, unredeemed after January 1, 1835, would cease to bear interest and be promptly paid on application to the commissioners of loans in the several States. On December 8, 1835, Mr. Woodbury reported “an unprecedented spectacle presented to the world of a government virtually without any debts and without any direct taxation.” The surplus revenues, about thirty-seven and a half millions of dollars, had by an act of the previous session been distributed among the several States. But the secretary and the country soon found that they were on dangerous ground. In December, 1837, the same secretary, alarmed at his responsibility, said to Congress, in warning words, “We are without any national debt to absorb and regulate surpluses, or any adequate supply of banking institutions which provide a sound currency for general purposes by paying specie on demand, or which are in a situation fully to command confidence for keeping, disbursing, and transferring the public funds in a satisfactory manner.”

The Bank of the United States, on the expiration of its charter in March, 1836, accepted a charter from the State of Pennsylvania; but, though its influence continued to be as great, its direction was no longer the same. Abandoning its legitimate business, it speculated in merchandise, and even kept an agent in New Orleans to compete with the Barings in purchases of the cotton crop as a basis for exchange. Precisely as in 1811, after the withdrawal of the control of the Bank of the United States, the state banks ran a wild career of speculation. From 1830 to 1837 three hundred new banks sprang up with an additional capital of one hundred and forty-five millions, doubling, as twenty years before, the banking capital of the country. This volume the deposits of the Treasury continued to swell. Mr. Woodbury was the first to take alarm. In December, 1836, he reported the specie in the country to have increased from thirty millions in 1833 to seventy-three millions at the date of his report, and the paper circulation, in the same period, to have advanced, since the removal of the deposits from the Bank of the United States, from eighty millions to one hundred and twenty millions, or forty millions in eighteen months; and the bank capital, in the same period, to have increased from two hundred to three hundred millions. Importation augmented; the balance of trade suddenly turned against the United States to the extent of one hundred and fifty millions, and coin began to flow abroad to liquidate the account. There was no debt to attract foreign investment and arrest the export of specie. Added to this was the withdrawal of the government deposits from the pet banks, which compelled an immediate contraction. The result was inevitable. On May 10, 1837, the New York banks suspended, Mr. Gallatin's institution being of course dragged down with the rest. It is idle to suppose that any single bank can hold out against a general suspension. It may liquidate or become a bank of deposits, but it cannot maintain its relations with its sister institutions except on a basis of common accord.

A general suspension followed. Mr. Woodbury proved himself equal to the emergency, and recommended a plan of “keeping the public money under new legislative provisions without using banks at all as fiscal agents.” This was the beginning of the sub-treasury system, a new departure in treasury management, and a further evolution in American finance. It still remains, and will no doubt be permanent. Its establishment was necessary because of the absence of a national bank.

Mr. Gallatin at once turned his attention to bring about first a liquidation and then a resumption. It was a favorite maxim with him, that “the agonies of resumption are far harder to endure than those of suspension,” as it is easier to refrain from lapse of virtue than to restore moral integrity once impaired. But in resumption the suffering falls where it belongs, on the careless, the improvident, and the over-trader.

On August 15, 1837, the officers of the banks of New York city, in a general meeting, appointed a committee of three to call a convention of the principal banks to agree upon a time for a resumption of specie payments. This committee, of which Mr. Gallatin was chairman, on August 18 addressed a circular to the principal banks in the United States, inviting the expression of their wishes as to the time and place for a convention, suggesting New York as the place, and October, 1837, as the time. They said, in addition, that the banks of New York city, in view of the law of the State dissolving them as legal corporations in case of suspension for one year, must resume at some time between January 1 and March 15, 1838. The circular committed the New York banks to no definite action, but expressed the opinion that the fall in the rate of exchanges indicated an early return of specie to par, when resumption could be effected without danger. The banks of Philadelphia held a meeting on August 29, and adopted resolutions declaring it inexpedient to appoint delegates to the proposed convention. Aware of the reasons for this action, the chief of which was the extended and perhaps insolvent condition of the United States Bank of Pennsylvania, the New York committee invited the banks in the several States to appoint delegates to meet on November 27, 1837, in New York. Delegates from banks of seventeen States and the District of Columbia appeared. On the 30th resolutions were brought in recommending a general resumption on July 1, without precluding an earlier resumption on the part of such banks as might find it necessary. The Pennsylvania banks opposed this action with resolutions condemning the idea of immediate resumption as impracticable, and also, in the absence of delegates from the banks of Louisiana, Mississippi, Alabama, and Tennessee, as unwise. The convention met again on December 2, when an adjournment was carried to April 11, 1838, when delegates from the banks not represented were invited to attend. Mr. Gallatin saw that the combination of the Philadelphia and Boston banks, under the lead of Mr. Biddle, would certainly force a further postponement. Exchange on London, which had been as high as 121, the true par being about 109-1/2, nominal, had fallen to 111-1/2, which, considering that the city bank paper was at a discount of five per cent., was at the rate of 2-1/2 per cent. below specie par. The exportation of specie had entirely ceased.

On December 15 Mr. Gallatin and his committee appointed at the general convention submitted a report which he had drafted, which, though addressed to the New York banks, covered the whole ground. Meanwhile the highest authority in Pennsylvania had given it as his opinion “that the banks of Pennsylvania were in a much sounder state than before the suspension, and that the resumption of specie payments, so far as it depends on their situation and resources, may take place at any time.”

On February 28, 1838, Mr. Gallatin's committee made a further report showing that the liabilities of the New York banks had been reduced more than twelve millions and a half, or fifty per cent., and asserting that with the support of the community and the state authorities they could resume on an equal footing on May 10. This declaration was welcomed with great satisfaction by a general meeting of the citizens of New York. On April 11 the general convention again met in New York. The Philadelphia banks declined to attend. A letter from Mr. Woodbury promised the support of the Treasury Department. A committee of one from each State was appointed, which recommended the first Monday in October as the earliest day for a general resumption. The convention could not, however, be brought to fix upon so early a day, but finally fixed upon January 1, 1839, and adjourned. The New York banks would have accepted July 1, 1838, but this being refused they resumed alone on May 10, and the force of public opinion compelled resumption by nearly all the banks of the country on July 1.

The terrible contraction was fatal to the United States Bank of Pennsylvania, which after a vain struggle closed its doors in October, 1839, and carried with it the entire banking system of the Southern and Southwestern States. Although in no way similar to the semi-governmental institutions which preceded it, yet, from its similarity of name and identity of location, its disastrous failure added to the blind popular distrust of its predecessors, which narrow-minded politicians had fostered for their own selfish purposes. Fortunately the sub-treasury plan of Mr. Woodbury supplied the need of a safe place of deposit which, since the refusal of Congress to renew the charter of the old bank, had been sorely felt.

In 1838, on the foundation of the Bank of Commerce under the free banking law of the State of New York, the presidency of it was first tendered to Mr. Gallatin. The directors of this bank were among the most distinguished financiers of the city, and its object was to provide a conservative institution with sufficient power and capital to act as a regulator upon the New York banks. Profit to the stockholders was secondary to the reserve power for general advantage.