Financing the Market Revolution
Financing the Market Revolution
Alternative to Cash. Even in the best of times little cash passed through most farmers’ hands. When periodic financial crises hit, like the Panics of 1819 or 1837, circulating gold and silver currency disappeared almost completely, especially in rural areas. To make do, people resgtorted to other forms of currency, such as triangular pieces of coins called “shinplasters,” Printed paper money issued by businesses and termed “scrip,” and Spanish god dollars split into eighths, or “bits” (Which gave rise to the slang phrases “two bit” and “Pieces of eight”). An other alternative was the barter system, in which farmers, mill owners, blacksmiths, and storekeepers exchanged needed goods and services. Rebecca Burlend, an Englishwoman traveling in Illinois in the 1830s, noted that the countruside was filled with what “are termed store keepers, who supply the settlers with articles the most needed, such as food, clothing…medicine and spiritous liquors; for which they receive in exchange the produce of their farme, consisting of wheat, Indian corn, sugar, beef, bacon.” Most village merchants also allowed farmers to buy on credit in participation of the next season’s corp. These transactions, however, were usually marked down in leaders in cash terms, and even neighbors exchanging goods and services (such as help with plowing in return for a quit) often kept accounts that recorded the cash value of the transaction as negotiated by the two parties.
Farm Credit. Barter worked for everyday needs, but farmers generally needed cash or credit to purchase land in equipment6. Between 1800 and 1820 farmers could getr four-year loans from the federal government to buy farms from the public land offices, but these loans did not extend to purchases of privately held land, nor did they help buyers east6 of the Appalachians. Farmers could obtain cash to buy more land if they could get their crops to market, but this was difficult and expensive. The expansion of the rail network in the late 1840s and 1850s revolutionized farm marketing and induced Western farmers to invest heavily in largest farms. With cash more readily avilable, credit expanded as well, and starting around 1850 firms such as the McCormick Reader Company began selling equipment on the installment plan. Before that date, however, farmers in the North and West had to ley on personal and local networks of credit to supply their needs, and local bankers and merchants were not always gracious lenders. Merchants often did not grant farmers the full value of crops they brought in to settle store accounts, and many local bankers were seen as hard-hearted creditors. “Did you ever see a cat Watch a mouse,” one contemporary author asked, “just so will the little country bank director, who has lent cash to a farmer on the mortgage of his place, watch him.”
PANIC IN THE STREETS
By the winter of 1819–1820 the nation’s economic crisis had reached fever pitch. All across the new western states banks foreclosed on thousands of fram mortagages after calling in their loans in a vain effort to recover the specie they needed to pay their depositors. Having ruined their debtors, the banks suspended specie payments and closed their doors, ruining their creditors. In the East land values in New York plummeted in one year from $315 million to $256 million. In Richmond, Virginia, they fell by half. By early 1820 thirteen thousand paupers crowded the streets opf New York while at least a half million People lost their jobs nationwide. One commentator warned of the “prospect of families naked-children freezing in winter’s storm- and the fathers without coasts” to dress properly for work. Witnessing the devastation, John C. Calhoun wrote that “within these two years an immense revelution of fortunes” came of pass “in every part of the union; enormous numbe4rs of persons utterly ruined; mutitudes in deep distress.”
Investment Capital. Merchants and local banks could provide credit for individual farm purchases but were too small to finance large-scale commodity transfers, wholesale dry-goods transactions, Construction of new industries, or the development of roads, canals and railroads that came to characterize the American economy. New York banks, the most dependable and cash-rich institutions in the country, supplied much of the capital for these endeavors. They financed crop transfers from the West and imports from Europe bound for the nation’s interior. They also provided the credit necessary for store owners all over the country to buy goods for retail sale from the “jobbers,” middlemen who bought goods in large lots at auctions or from wholesalers, and they financed the jobbers’ purchases from the wholesale supply
houses located in lower Manhattan. At first, state and local governments paid for canals, roads, and railroads by selling bonds directly to regional bankers, local farmers and merchants, or overseas investors, but starting in the 1840s New York investment banks, and the city’s stock exchange, began to figure prominently in the financing of the nation’s repaid railroad expansion either as purchasers or marketers abroad of state and private railroad bonds and stocks. Consequently, volume on the New York Stock Exchange rose rapidly. Never again would only thirty-one shares change hands in a business day, as happened in March 1830.
Limited Liability. Factories did not required nearly as much capital as railroads and could be built without resorting to public borrowing through the sale of bonds. Manufactures relied largely on the investments of merchants, friends and family, suppliers, and other business associates to finance their new facilities. To make investing more attractive manufacturers began to incorporate their business by obtaining a charter of incorporation from a state or, after several states passed general incorporation laws to ease the process, following a few simple procedures and filing some forms. Corporations held the great advantage of being limited liability organizations, meaning that investors were not individually libel for the entire debt of the company (as members of a partnership were). Investors risked losing whatever they chose to put into a corporation, but that was the limit of their liability. The Supreme Court’s decision in Dartmouth College v. Woodward (1819) helped to establish the security and legal status of corporations. Various state and federal court rulings and legislation on bankruptcy, eminent domain, and damage judgements, together for business to incorporate, promoted economic development by ameliorating some of the dangers of investing in new enterprises.
State Banks. Large as they were, the private banks of the East could not meet all the capital needs of the West, where state government as well as groups of private investors began to organize their own banks. Between 1811 (when Congress refused to recharter the Bank of the United States) and the financial panic of 1819, the number of state banks rose from 88 to 392; a similar expansion occurred in the 1830s. Observing these institutions springing up everywhere induced one humorist to claim that “wherever there is a church, a blacksmith shop, and a tavern seems a proper site for one of them.” The tiny state bureaucracies were unable to keep up with the rapid proliferation and shady practice of the new banks. In theory the directors of a new bank, whether state-run or private, were supposed to sell stock in the bank in return for specie (gold and silver coin), or other dependable financial instruments such as government bonds. Unscrupulous directors enriched themselves by issuing more bank share than allowed, in a sort of pyramid scheme. One contemporary quipped that many Western banks started with no more assets than “a table, a chair, and a keg of nails with a few coins on top.” During the boom business years of 1815 and 1816 banks “with notes issued equal to 20 times specie held” became the order of the day; in this “jubilee of swindlers” and “Saturnalia of non-specie paying banks” it seemed that “throughout the whole country, New England excepted, it required no capital to set up a bank.”
Panic of 1819 . Even honest bankers found it difficult to resist lending more money (in the form of printed banknotes) than their specie reserves warranted since loans constituted a bank’s most important source of profit. As long as land and crop values continued to rise, the notes (secured by farm mortgages) kept value. But when land or crop values feel rapidly, holders of notes would present them for redemption in specie, and the overly speculative banks that had issued them would the overly, bankrupting the note holders and the bank’s shareholders as well. This was exactly what happened during the Panic of 1819, when Americans learned that being the Panic of 1819, when Americans learned that being part of a worldwide market economy fueled by credit meant not just boom times but also the possibility of ruin. In a fit of shame and guilt many Americans swore they would never borrow beyond their means again but would return instead to the old republican values of self-sufficiency, industry, frugality, and restraint. Congress led the way by suspending credit purchases for government land, requiring cash payment at time of sale. Others, however, blamed the banking system (especially the Bank of the United States) and speculators for their economic woes. A Western paper proclaimed, “People of the West—debtors to the government—have we not repeatedly told you that you were imposed upon—that you were preyed upon by sharpers and speculators? What say you now?” Western legislatures passed “stay” laws to delay foreclosures: while many states tried to increase their supply of specie by taxing the Bank of the United States, a policy ruled unconstitutional by the Supreme Court in McCulloch v. Maryland (1819). The Bank of the United States survived public and congressional attack, but not before it was permanently labeled as a corrupt institution, a “monster of iniquity…brought into existence…by a corrupt congress, who trampled on the constitution they had sworn to support in order to gratify their ambition for wealth.”
Bank of the United States. Americans remained angry at the Bank of the United States well into the 1830s, when Jackson’s Bank War reignited the issue. Their anger was not entirely misplaced as the Second Bank of the United States did indeed suffer from mismanagement, indecision, and even corruption in its early years. The Panic of 1819 thoroughly discredited the Bank, which had helped to precipitate the crisis by calling in its loans to overextended state banks, triggering a series of bank failures. In 1823 wealthy Philadelphia businessman Nicholas Biddle took over directorship of the Bank of the United States and immediately set about reforming the institution. To curb the speculative habits of state and private banks, he forced them to keep larger specie reserves. At the same time he expanded the Bank’s lending, though now with the appropriate controls over reserves and collateral that characterized sound financial institutions. By the late 1820s the Bank of the United States was the nation’s largest creditor, with twenty-three branches in the busiest commercial cities and a central role in the nation’s economic growth. By 1830 the Bank held over 30 percent of all national bank deposits and made 20 percent of the nation’s loans. The Bank’s enemies, however, still looked upon the institution with suspicion and waited for the “monster” to make a wrong move so that it could be destroyed once and for all, returning America to its imagined past of hard-money simplicity.
William Cronon, Nature’s Metropolis: Chicago and the Great West (New York: Norton, 1991);