The Forgotten Man, and Other Essays

by William Graham Sumner

The first resort for help was to Mr. Biddle. The calamity most apprehended was a shipment of specie, and the effort was to gain an extension of credit or the substitution of a better for a less known credit. The Bank of the United States had high credit in Europe, and indeed all over the world. Ultimately payment must be made by crops yet to be produced or forwarded. Biddle entered into an agreement with the New York banks which seems to have been only partially carried out, but he sold post notes payable one year from date at Barny’s in London. He received one hundred and twelve and one-half for these, specie being at one hundred and seven. The bonds were discounted in England at five per cent. United States Bank stock was at one hundred and twenty.

The situation in England was so serious that all seemed to depend on remittances from the United States. The Bank of England extended aid to “the three W’s” to the extent of five hundred thousand pounds on a guarantee made up in the city, and opened a credit of two million pounds for the United States Bank, if one-half the amount should be shipped in specie. To this condition the United States Bank would not agree. The proposition attributed to the Bank of the United States a strength which it did not possess. The management of the Bank of England in this and the two following years was bad, and did much to enhance the mischief in both countries. France participated in the distress although there had been no speculation there.

A delegation of New York merchants was sent to Washington on May 3 to ask the President to recall the specie circular, to defer the collection of duty bonds, and to call an extra session of Congress. In their address to him they sum up the situation: in six months at New York, real estate had shrunk forty millions; in two months two hundred and fifty firms had failed, and stocks had shrunk twenty millions; merchandise had fallen thirty per cent, and within a few weeks twenty thousand persons had been thrown out of employment.

Early in May three banks at Buffalo failed. On May 8, the Dry Dock Bank (New York) failed. On the tenth all the New York City banks suspended. The militia were under arms and there were fears of a riot. On the eleventh the Philadelphia banks suspended, because the New York banks had, and because, although they had plenty of specie for themselves, they had not enough for the whole “Atlantic seaboard.” They said, however, that they were debtors, on balance, to New York. As the news spread through the country, the banks, with few exceptions, suspended. It was one of the notions born of the bank war that the United States Bank was guilty of oppression when it called on state banks for their balances, and the state banks had practiced “leniency” towards each other. Bank statements of the period show enormous sums as due to and from other banks. This was what carried them all down together, for one could not stand alone unless its debits and credits were with the same banks.

During the summer the governors of several states called extra sessions of the legislatures. The President had refused to recall the specie circular, or to call an extra session of Congress, but the embarrassments of the Treasury forced him to do the latter. The collection of duty bonds was deferred and the revenue thereby cut off. The public money was in the suspended banks, and the Treasury, nominally possessed of forty millions, at the very time when part of this sum was being paid to the states, had to drag along from day to day by the use of drafts on its collectors for the small sums received or by chance left over in their hands since the suspension. As notes under five dollars had been forbidden by nearly all the states, and as specie was at ten per cent premium, all small change disappeared, and the towns were flooded with notes and tickets for small sums, issued by municipalities, corporations, and individuals.

The most interesting fact connected with this commercial credit is that New York and Philadelphia took opposite policies in regard to it, and thus offered, in their differing experience, an experimental test of those policies. The New York legislature passed an act allowing suspension for one year. The New York policy then was to contract liabilities and prepare for resumption at the date fixed. The Philadelphia policy, in which Mr. Biddle was the leader, was to wait without active exertions for things to get better. In his letter of May 13 to Adams, Biddle said that the Bank could have gone on without trouble, but that consideration for the rest forced him to go with them. What especially moved him was that, if the Pennsylvania banks had not suspended, Pennsylvanians would have had to do business with a better currency than the New Yorkers, which would have been unfair. Mr. Biddle knew perfectly well that the exchanges would arrange all that. He was an adept at writing plausible letters. The truth, which was not known until four years later, was that the capital of the Bank had never been withdrawn from the stock loans, that the chief officers of the Bank were plundering it, and that suspension was not more welcome to any institution in the country than to the great Bank. The jealousy between New York and Philadelphia was very great at this time. Mr. Biddle’s personal vanity seems to have been greatly flattered when, in March, he was called on by the New Yorkers to help them. He was still the leading financier of the country. The business men could not spare him, even if the government had thrown him off. There seems also to be some evidence that he hoped that a great and universal revulsion would force the general government to re-charter his Bank. The success of his post notes in England and France was another source of gratified vanity to him. In his theory of banking he was one of those who believe that the redemption of the bank note is effected by the merchandise. Hence banking was, for him, an art by which the banker regulated commerce through expansions and contractions of the circulation according to the circumstances which he might observe in the market.

The first effect of the opposite courses taken by New York and Philadelphia was very favorable to his views. The southern trade was transferred from New York to Philadelphia. Southern notes were at a discount of twenty or twenty-five per cent. Receiving these notes from the merchants, the Bank employed them through Bevan and Humphreys in buying cotton. This operation began in July and was intended to move the cotton to Europe in order to meet the post notes of the Bank when they should become due. The firm of Biddle and Humphreys was also formed and established at Liverpool as the agent of this operation. In the extension of the transaction cotton was bought and paid for by drafts on Bevan and Humphreys of Philadelphia, which drafts were discounted by the Bank. Biddle and Humphreys, having sold the cotton, remitted the proceeds to Mr. Jandon, former cashier of the Bank, sent to England as its agent in July. To all this it must be added that the Bank assumed the function of securing, for its producers, a good or fair price for cotton. Jandon’s instructions were to protect the interests of the bank, and “of the country at large.”

If the Bank had simply been a strong, sound bank, intent on earning profits, it would have sent two or three millions to Europe, selling exchange at one hundred and twelve, and would not have suspended. The rest of the story would then have been very different for all concerned. The arrival in June of a ship in England with one hundred thousand dollars specie sufficed to sustain American credit and to revive American securities. When the credit of a debtor is tainted, nothing revives it like payment.

The extra session of Congress met on September 4. The fourth installment of the State Deposit Fund was postponed until January 1, 1839, but it was locked up in the suspended banks and, as the former installments had been drawn from the better banks, the balance due was all in the worst banks of the country, those of the southwestern states. As they had loaned it to their customers, it was, in fact, amongst the people of those states. A law was passed to institute suit against these banks unless they paid on demand, or gave bonds to do so in three installments before July 1, 1839. There were only six deposit banks then paying specie; one was new, four had not suspended, and one had resumed. Power to call on the states for the funds “deposited” with them was taken from the Secretary of the Treasury and held by Congress. Interest-bearing Treasury notes were provided for one year, to meet expenses, and an extension of nine months was given on duty bonds. At this session the sub-treasury system was brought forward as an administration measure. It split the party. The “bank democrats” (state bank interest which joined the Jackson party in 1832 to break down the United States Bank) went into opposition. The advocates of the “credit system” said the sub-treasury scheme, by giving the government control of the specie in the country, would give it control of all credit. Meanwhile Benton said that the eighty million specie in the country was its bulwark against adversity, and the Locofocos said that any one who exported specie was a British hireling. So that there was a fine confusion of financial notions.

In the fall the English money market became much easier, and the same tendency appeared here. Specie at New York was at about seven per cent premium, but steadily declining. Prices of breadstuffs remained very high (flour nine dollars to nine dollars and a half at New York) and the stagnation of industry was complete. Migration to the West was large.