The Forgotten Man, and Other Essays

by William Graham Sumner

The advantages of a new country were credited to the political institutions of democracy, and increasing prosperity, due to the fresh resources brought within reach, was held to be proof of the truth of the political dogmas entertained by the workers. A sort of boyish exuberance, compounded of inexperience, ignorance, and fearless enterprise, marked politics as well as industry. Jackson’s election in 1828 brought to power a party which had been produced by these circumstances.

The war debt of 1812 became payable in the years after 1824 and was distributed over the period down to 1835. With growth and increasing prosperity, the revenue increased with such rapidity that the debt could be paid almost as fast as it became payable. The chief purposes for which the Bank of the United States had been founded in 1816 were to provide a sound and uniform paper currency convertible with specie, of uniform value throughout the Union, and to act as fiscal agent for the government, holding the revenue wherever collected and disbursing the expenditures wherever they were to be made. The interest of the government and the people was the motive, and the bank charter was a contract with the Bank to perform the services for specified considerations. One of the considerations was the right of the Bank to use the deposits as loanable capital. The government was not bound to keep any balance over expenditure, but the revenue was so large that the Bank came to hold annually increasing average deposits of from five to eight or nine millions of public money, which it used for profit. From this vicious arrangement two consequences followed: first, public attention was directed to the deposits, not as existing for the public service, but for the profit of the Bank; and, second, the public considered itself entitled to claim something of the Bank besides true business credit, in the matter of discounts.

Jackson opened the war on the Bank publicly in his first message. Sharp correspondence had been going on already between the Secretary of the Treasury and the Bank, which had reached such a point that the Secretary had referred to the removal of the deposits as a power in his hands to coerce the Bank. Generally speaking, the state of the Bank and the state of the currency were satisfactory in 1830, but the Bank had begun in 1827 to issue branch drafts which stimulated credit and soon produced mischief. Of the war on the Bank it is not necessary to speak in detail. In December, 1831, Clay was nominated for President by the National Republicans, and he and his friends determined to bring on the question of the re-charter of the Bank as a campaign issue. The re-charter was passed by Congress and vetoed by the President in 1832. The issue in the campaign was thus made up between the personal popularity of Jackson and of the Bank. The former won an overwhelming victory which he construed to mean that the people had weighed the question of re-chartering the Bank and had decided against it.

In September, 1833, he removed the deposits from the National Bank on his own responsibility, and placed them in selected state banks which would agree to keep one-third of their note circulation in coin, redeem all notes on demand, and issue no notes under a five-dollar denomination. This was to be an experiment. In the meantime the administration was eagerly pressing on the extinction of the public debt. The consequences were such as to prove that, however popular such a policy may be, it may easily be carried too far. The public deposits were loaned by the Bank to merchants, then recalled and paid to the public creditors, and then reinvested by them, so that the money market was subjected to recurrent and sudden shocks. The withdrawal and transfer of the deposits constituted another and more violent operation of the same kind, so that there was a crisis and panic in the spring of 1834. The eight or nine millions of public deposits were a continual source of mischief to the money market. By the contraction of the Bank of the United States to pay the deposits, and the contraction of the state banks to put themselves within the rule for receiving the same, the currency, in the summer of 1834, was perhaps better than ever before. The coinage act of June, 1834, turned the standard over from silver to gold.

The deposit banks were urged to discount freely so as to satisfy the public with the change. Banks were organized in great numbers all over the country to take the place of the great Bank and to get a share in the profits of handling the public money. On January 1, 1835, the debt was all paid and the government had no further use for its surplus revenue. There was but one correct and straightforward course to pursue in such a case and that was to lower taxes so as not to collect any surplus, but this the Compromise Act forbade. The surplus revenue was the greatest annoyance to the protectionists who wanted to keep duties high for “incidental protection,” and they proposed scheme after scheme for distributing the lands, or the proceeds of the lands, or, finally, the surplus revenue itself, so as to cut down the revenue without reducing the import duties.

With the increase of banks and bank issues speculation began. It became marked in the spring of 1835 and went on increasing for two years. Cotton was rising in price, for the new machinery, and new means of transportation in England, together with the extension of joint stock banks there, had given a great stimulus to the cotton manufacturer. There was an increasing demand for the raw material. It followed that the cities in which the exchange and banking of all this industry were carried on also enjoyed great prosperity. Railroads were just being introduced and ships were needed to transport the products. Thus from natural causes the period was one of immense industrial development. The great need for carrying it on was capital, and the political incidents which brought about or encouraged the bank expansion may be regarded as accidental. The combination of the two in fact, however, produced a wild speculation. The banks furnished credit, not capital, and being restrained by usury laws from exerting through the rate of discount the proper check upon an inflated or speculative market they embarked with the business community on a course where all landmarks were soon lost.

No sooner, however, was this condition of the commercial and banking community well established than a new shock was given by another political interference. The administration had now advanced to the point of desiring to establish a specie currency for the country. The object was laudable and the means taken were proper, but, following as they did in the train of the events already mentioned, they produced new confusion. In 1836 various acts were passed to bring about a specie currency, and in July of that year the Secretary of the Treasury ordered the receivers of public money to take only gold and silver for lands. The circumstances warranted this order. The sales of lands had risen from two or three to twenty-four million dollars in a year, and the amount was paid in the notes of “banks”[57] which deserved no credit. If the nation was not to be swindled out of the lands the measure was necessary. It then became necessary for the purchasers of land to carry specie to the West and vast amounts of it accumulated in the offices of the receivers, or were transferred at great trouble and expense to deposit banks. The specie was obtained from the eastern banks, and inasmuch as the whole existing system had pushed them to the utmost limit of expansion, these demands for specie were embarrassing. Two points here deserve notice. It is strange to see what a superstition about “specie” had taken possession of the public mind. It was regarded as a good thing to have, but too good to use. A specie dollar was regarded as an excuse for its owner to print and circulate from three to twenty paper ones, but it was not regarded as having any other use. The withdrawal of the specie basis from an inflated paper was no doubt a serious blow to the whole fabric, but, if the paper had not been redundant the transfer of specie to the West could only have forced an importation of so much more. This superstition about specie also prevented any demand upon the banks for specie for any purpose. Such a demand was regarded as a kind of social or business crime. Hence the “convertibility” of the notes was a polite fiction. The second point worth noticing is that the bank advocates continually talked about “the credit system” when they meant the system of issuing credit bank notes; and they grew eloquent about the advantages of credit, as if those advantages could only be won by using worthless bank notes and not by lending gold or silver or capital in any form.

We are not yet, however, at the end of the political acts which threw the money market into convulsions. The opposition succeeded, in the summer of the presidential election year, 1836, in passing an act to deposit with the states the surplus over a balance of five millions in the Treasury on January 1, 1837. The amount was thirty-seven millions. This sum was scattered in eighty-nine deposit banks all over the country. Its distribution was, therefore, controlled by local pressure and political favoritism, not by the needs of the government (for it did not need the money at all) or by the demand and supply of capital. The banks had regarded it as a permanent deposit and had loaned it in aid of the various public and private enterprises which were being pushed on every hand at such a rate that labor was said to be drawn away from agriculture so that the country was importing bread stuffs. It was now to be withdrawn and transferred once more, and this time it was said that, if these “deposits” were such an advantage, the states ought to have it, and could then, as well as the banks, be called on to give back the money whenever it might be needed. The deposit took place in 1837, in three installments, January, April, and July, and amounted to twenty-eight millions. The fourth installment was never paid. The money was all squandered or worse.

The charter of the Bank of the United States was to expire on the 3d of March, 1836. One year before that time the directors ordered the “exchange committee” to loan the capital, as fast as it should be released, on stocks, so as to prepare for winding up. From this resolution dates the subsequent history of the Bank, for the exchange committee consisted of the President and two directors selected by him, to whose hands the whole business of the Bank was hereby entrusted. The branches were sold and the capital gradually released throughout 1835, but in February, 1836, an act was suddenly passed by the Pennsylvania legislature to charter the United States Bank of Pennsylvania, continuing the old Bank. The act was said to have been obtained by bribery, but investigation failed to prove it. The most open bribery was on the face of it, for it provided for several pet local schemes of public improvement, for a bonus and loans to the state by the Bank, and for abolishing taxes—provisions which secured the necessary support to carry it.

During the year 1836 the money market was very stringent. The enterprises, speculations, and internal improvements demanded continual new supplies of capital. The amount of securities exported grew greater and greater and kept the foreign exchanges depressed. American importing houses contracted larger and longer debts to foreign agents. The money market in England became very stringent likewise, and these long credits became harder and harder to carry. Three English houses, Willson, Wildes, and Wiggins, had become especially engaged in these American credits which they found it necessary to curtail. The winter was one of continual stringency, aggravated by popular discontent, riots, and trades-union disturbances, arising from high prices and high rents. The failures commenced on the fourth of March, 1837, the day that Van Buren was inaugurated, in Mississippi and Louisiana. Hermann, Briggs & Co., of New Orleans, failed, with liabilities said to be from four to eight millions. As soon as this was known in New York, their correspondents, J. L. & S. Joseph & Co. failed. The first break in the expanded fabric of credit therefore came in connection with cotton. The price had advanced so much during the last three or four years as to draw many thousands of persons who had no capital into cotton production, but the profits were so great that a good crop or two would pay for all the capital. The planters of Mississippi especially had accordingly organized themselves into banking corporations and issued notes as the easiest way to borrow the capital they wanted. From 1830 to 1839 the banking capital of Mississippi increased from three to seventy-five millions, which of course represented one credit built upon another, on renewed and extended debt, as the old planters bought more slaves and took up more land instead of paying for the old, or as new settlers came in. Mississippi was therefore indebted to the Northeast for the redemption of their immense bank debt, or for the capital bought with it. The high rates for money in England and this country at last checked the rise in cotton in 1836. Bad harvests and high prices for food fell in with a glut of manufactured cotton, and when cotton began to fall ruin was certain. As soon as the revulsion came it ran through the whole speculative system. The new suburbs which had been laid out in every city and village never came to anything. Western lands lost all speculative value, and railroad and canal stock fell with rapidity.