As far as banking went, it was likely that the city banks would have created more credit as deposits. Out at the frontier however, issuing newly printed notes was the order of the day, as these were of more immediate need in day-to-day transactions. It should also be remembered, (as is further explained in the banking chapters that follow), there is absolutely nothing wrong with such banking activities issuing notes and the like; the creation of credit will successfully grease the wheels of commerce, provided two things happen:
1) The credit is created and lent for productive economic activity, and especially not on land value, and
2) Banks are not ever permitted to renege on their contractual obligations; that is, not to renege on their obligation to pay the holder of notes the equivalent value in specie, if so demanded.
Banks creating credit upon land value brings about the real estate cycle.
In 1811, the charter for the Bank of the United States came up for renewal. By one vote, the renewal charter was defeated, showing that congress was still deeply divided over the usefulness of such a federal institution.
War, again, and it's financing.
The US went to war once again with the British in 1812. As always, there is plenty on the net about this event, so we don't need to explain it all here. The site at ohiohistorycentral says, in part: "During the late 1700s and the early 1800s, England was at war with France. England began to face a shortage of skilled sailors. To acquire more men for its navy, Great Britain began to stop American ships and impress (kidnap) sailors off of them. England also tried to prevent United States farmers from trading with the French. Finally, English soldiers occupied territory belonging to the United States, despite Great Britain's promise to remove these soldiers in the Treaty of Paris (1783) at the end of the American Revolution. Most of the men were located along the Great Lakes, providing Indians, like Tecumseh, with support for their battles against American settlers. In 1812, President James Madison could no longer stand for England's actions and asked the United States Congress to declare war."
The war lasted just on two years and by late 1814 both sides signed the Treaty of Ghent (December 24, 1814) bringing a lasting peace between the two sides. The US government paid for the war by issuing treasury notes - paper - in this instance interest bearing, and redeemable in specie in one year; much of the paper being issued in 1814. This action is inflationary. The government also decided to accept its own paper as payment for debts and taxes, so the paper became a sort of legal tender, tradable amongst the citizens.
Rothbard explains the effect of war financing well, page 73: "The war of 1812-15 had momentous consequences for the monetary system. An enormous expansion in the number of banks and in bank notes and deposits was spurred by the dictates of war finance. New England banks were more conservative than in other regions, and the region was strongly opposed to the war with England, so little public debt was purchased in New England. Yet imported goods, textile manufactures, and munitions had to be purchased in that region by the federal government. The government therefore encouraged the formation of new and recklessly inflationary banks in the Mid-Atlantic, Southern and Western states, which printed huge quantities of new notes to purchase government bonds. The federal government thereupon used these notes to purchase manufactured goods in New England."
If you can avoid death on the battlefield, or remain a politician, war can be good for career advancement. Two generals from this time, Generals Jackson and Harrison went on to the Presidency, and the war hawks of the era, Henry Clay and others did not do too badly either. Land greed was as much a factor as any other for the two sides going to war. (Billington, page 37, The Westward Movement in the United States.)
By 1815, the number of banking establishments stood at 212. Most notably, there had also come into existence 35 private unincorporated banks, illegal in most states, but permitted their existence under the needs of war. The reserve ratio of all the banks was at 0.17. (Rothbard's figures, page 73.) In other words, more and more notes and deposits backed by less and less gold and silver. Rothbard continues (page 74): "This monetary situation meant that the United States government was paying for New England manufactured goods with a mass of inflated bank paper outside the region. Soon, as the New England banks called upon the other banks to redeem their notes in specie, the mass of inflating banks faced imminent insolvency." The federal government promptly permitted all such banks to suspend their contractual obligation to honor their note issue in specie. This was in August 1814. (As debtor however, your contract to repay the bank your loan, if you had one, was still requiring payment of course.) It was in 1815 when all the private unincorporated banks sprang into life. (The suspension of obligations continued for two years after the war.) Thus was establlished for coming future American crises, at least until the civil war, the precedent to allow banks to circumvent their obligations and suspend the paying of specie to their customers who wanted to redeem their savings in gold or silver coin. Needless to say, as the decade progressed, the country was increasingly awash with paper: an expansion in the credit of the country.
(Theoretically, in an economy that was justly and more appropriately organized, that is, an economy that does not permit the value of its government granted licenses and privileges to capitalize into tradable commodities, banking would be like any other business; if badly run it is allowed to fail and go bust. However we shall not dwell on this point presently.)
All of the above does not happen in a vacuum. People soon noticed that some banks were issuing far more paper than others. Rothbard explains (page 78): "From the 1814-1817 experience on, the notes of state banks circulated at varying rates of depreciation, depending on public expectations of how long they would be able to keep redeeming their obligations in specie. These expectations, in turn, were heavily influenced by the amount of notes and deposits issued by the bank as compared with the amount of specie held in its vaults. In that era of poor communications and high transportation costs, the tendency for a bank note was to depreciate in proportion to its distance from the home office. One effective, if time consuming, method of enforcing redemption on nominally specie-paying banks was the emergence of a class of professional 'money brokers.' These brokers would buy up a mass of depreciated notes of nominally specie-paying banks, and then travel to the home office of the bank to demand redemption in specie. Merchants, money brokers, bankers, and the general public were aided in evaluating the various state bank notes by the development of monthly journals known as 'bank note detectors'. These 'detectors' were published by money brokers and periodically evaluated the market rate of various bank notes in relation to specie.
'Wildcat' banks were so named because in that age of poor transportation, banks hoping to inflate and not worry about redemption attempted to locate in 'wildcat' country where money brokers would find it difficult to travel…It can be imagined that the advent of the money broker was not precisely welcomed in the town of an errant bank, and it was easy for the townspeople to blame the resulting collapse of bank credit on the sinister stranger rather than on the friendly neighbourhood banker. During the panic of 1819, when banks collapsed after an inflationary boom lasting until 1817, obstacles and intimidation were often the lot of those who attempted to press the banks to fulfil their contractual obligation to pay in specie. " End quote.
This intimidation was not just in 1819 either. In 1808, Windsor County in Vermont sought an injunction against one Jireh Durkee, of Boston, for seeking to 'realize a filthy gain' at the expense of the state by presenting $9000 of Vermont State Bank notes to the Woodstock branch of the bank for redemption, obliging the bank to indeed redeem them. (Hammond, Banks and Politics in America, page 179.)
The actions of people were soon speaking for themselves however; pay your expenses in notes, hoard the gold and silver, which keeps its value in inflationary times. Gresham's law of bad money driving out the good. (A far easier way to defeat a nation's enemy is to simply flood the enemy country with fake notes. But then how would all those poor merchants make extra money without a government contract to supply weapons, armaments, clothing and ammunition…but I digress.)
Once again after a war, the nation's finances emerged, and remained for several years after 1812, as chaotic. The number of banks was continually expanding, each with their own note issue and, to make matters complicated, the value of the respective denominations fluctuated continually against its specie backing. The government treasury would not have been happy having to continually accept the depreciated bank notes from western areas as payment for the land the government was selling, whilst having far more expenses to pay out in less depreciated money in areas closer east. This would give the government two choices if it wanted to change the situation: 1) compel all banks to redeem in specie, and if not, close them, with the result of eliminating all the fiat paper, and eventually the specie would re-emerge from all those hoarding it, putting an end to the inflation, or 2) start a new central bank to oversee existing behavior. Political expediency probably drove the latter course, and so it was that the 2nd Bank of the United States was born in 1816, pushed again by wealthy individuals heavily invested in the war debt. In addition, there were so many influential people interested in the state banks as stockholders, that it was probably not advisable to give offense by demanding payment in specie. And besides, "borrowers were anxious to keep the banks in the humor to lend". (Rothbard page 86.) (Click here for an example.)
Monetary expansion continues, the farmers and settlers buy on credit.
The monetary expansion continued, recovering from the British capture of Washington DC in 1914, recovering also from the initial suspension of specie payments by the banks, and despite what looked like a fragile banking system in the chaos after the war, and return to civility. I am tempted to speculate here, no pun intended, that a feeling of US system invincibility may well have taken hold at this time. They did, after all, thrash the British. Perhaps today one would have labeled it a buy the dips mentality, (or; it's still really cheap, let's buy more), but who knows. A real set up for the fall. Anyway, the monetary expansion went on.
The number of chartered state banks rose to 338 by 1818, most numbers coming from the western states. Quoting more from Rothbard: "Prices rose greatly in real estate, land, farm improvement projects, and slaves, much of it fueled by the use of bank credit for speculation in urban and rural real estate. There was a boom in turnpike construction, furthered by vast federal expenditures on turnpikes. Freight rates rose on steamboats, and shipbuilding shared in the general prosperity. Also, general boom conditions expanded stock trading so rapidly, that traders who had been buying and selling stocks on the curbs on Wall Street for nearly a century, found it necessary to open the first indoor stock exchange in the country, the New York Stock Exchange, in March 1817."
One other item is important to note at this time: that of population, or rather, of population growth. There is no point speculating in land value if there is no population around to increase demand, and hence value. Between 1800 and 1820, the population of the US doubled, to almost ten million, with a flood of immigrants arriving after 1815. In this period, America was achieving birth rates in terms of children reaching adult-hood that were astonishing Europeans. What's more, the offspring were, on average, a good two inches taller. (Evidence of the link between health and freely available land is well documented by George Miller in his book 'On Fairness and Efficiency.') The immigrants after 1815 simply wanted out of Europe, enough of the Battle of Waterloo, the crippling taxes foisted on them by royalty, the dire winter of 1816 (the year without a summer - sleet and snow July and August - and no harvest) and the tales of 'free' land on offer where they were headed. No visas required, no health certificates, not even a passport. You just needed ten quid. In fact if you went to Canada, the British would send you gratis, courtesy of His Majesty, b.y.o. food for the voyage only.
The good times stopped rolling in 1819. It is worth quoting a little from Johnson (A History of the American People, page 285) on this, as our first explanation for the panic:
Start quote "From 1815 the price of American cotton rose rapidly and that in turn fed the land boom. At the time public land was sold primarily to raise revenue rather than to encourage settlers, who needed no encouragement anyway. Each was charged $2 an acre in minimum blocks of 160 acres. But they only had to put 20 percent down, borrowing the rest from the banks on the security of the property. The $2 was a minimum; in the South potential cotton land was sold at $100 an acre in the boom years. The SBUS, fuelling the boom by easy credit, allowed purchasers to pay even the second instalment on credit, again raised on the security of the land, like a second mortgage. Jones, (William Jones, first president of the second BUS) whose only concern seems to have been to pay high dividends, based on the total lent by his bank, ran this federal central bank like a bucket-shop. He actually allowed the SBUS to deal in 'racers,' short for Race Horse Bills. These were bills of exchange paid for by other bills of exchange, which thus raced around rapidly from one debtor to another, accumulating interest charges and yielding less and less of their face value. It was a typical bit of 19th-century ruin-finance, beloved of novelists like Thackeray and Dickens, who used such devices to get their gullible heroes into trouble. This kind of paper explains why needy people actually got so little of the sums they undertook to repay. But then they probably could not repay anyway, which explains why the pyramid was bound to collapse.
Jones' easy-credit policy was further undermined by the activities of the SBUS's branch offices, some of which were run by crooks. In Baltimore the branch was run by two land speculators, James A. Buchanan and James W. McCulloch, who financed their speculations by taking out unsecured loans from their own bank ($429,049 and $244,212. respectively, with the First Teller borrowing a further $50000). In effect, this was to put their hand in the till. Here was a typical example of the general credit expansion Jones encouraged, raising the debt on public land from $ 3 million in 1815 to over five times that amount ($16.8 million) three years later. Some of this went into house purchases - it was the first urban boom in US history too. As many of the Latin American goldmines had been shut by their own war of independence against Spain, which was now raging, the relation of paper to gold was astronomical. Moreover, all the other banks followed Jones' example. Sensible men warned of what would happen. John Jacob Astor, who had now used his fur empire to build up a massive holding in Manhattan real estate, accused the SBUS of provoking runaway inflation. In a letter to Albert Gallatin (Treasury Secretary) March 14, 1818, he said: 'the SBUS had made money so cheap that everything else has become dear, and the result is that our merchants, instead of shipping produce, ship Specie, so that I tell you in confidence that it is not without difficulty that Specie payments are maintained. The different States are going on making more Banks and I shall not be surprised if by and by there be a general Blow Up among them.'
Astor was right about the state banks: Ezekiah Niles (publisher of Niles Register, a newspaper of the time) recorded that in 1815 - 19 all you needed to start a bank issuing paper money were plates, presses, and paper. It was enough to drive genuine counterfeiters out of business, though they still managed (according to Niles) to produce a lot of forged notes too. He said that counterfeit notes from at least 100 banks were freely circulated in 1819. Many of the new banks were in converted forges, inns, or even churches, thus adding blasphemy to gimcrack finance. By 1819 there were at least 391 chartered banks, plus many more unchartered ones, and the debt on public lands had jumped another $6 million to stand at $22 million. Suddenly, the cotton bubble burst, as Liverpool cotton importers, alarmed by the high prices, started shipping in Indian raw cotton in huge quantifies. In December-January 1819 the price of New Orleans cotton halved, and this in turn hit land prices, which fell from 50 to 75 percent. The banks then found themselves with collateral in land worth only a fraction of their loans, which were now irrecoverable. So the banks started to go bust. Jones compounded his earlier errors of inflation by abruptly switching to savage deflation, ordering the branches of the SBUS to accept only its own notes, to insist on immediate repayments of capital as well as interest, and by calling in loans. This immediately doubled and trebled the number of state-chartered banks going bust, and the SBUS, their main creditor, secured their assets - the land deeds of hundreds of thousands of farmers.
Many congressmen, seeing the future of their electors thus put into the power of a wicked central bank they had never wanted anyway, turned with fury on Jones. A Congressional committee soon discovered the Baltimore business. Jones and his entire board were forced to resign and an experienced moneyman, -Langdon Cheves took over in March 1819 to find the SBUS what he called a 'ship without a rudder or sails or mast ... on a stormy sea and far from land.' Cheves decided that the worst of all outcomes was for the SBUS to go bust too, so he intensified the deflationary policy and contrived, with some difficulty, to keep the SBUS's doors open, thus earning his title 'the Hercules of the United States Bank.' But everyone else had to pay for it. 'As one contemporary expert, William Goude, put it, 'The Bank was saved but the people were ruined."
Other writers noted the conditions of 1819 as well. From Simons, page 160: start quote "There were as many explanations of the cause of this crisis as of any of the subsequent ones. Senator Thomas H. Benton was positive that it was caused by the new United States Bank, that had been chartered in 1816. Many others were sure it was caused by the tariff enacted in the same year. It was really but the American phase of an almost universal collapse of industry and finance following the readjustments attendant upon the close of the Napoleonic wars. Unfavorable weather in Europe had almost ruined the crops of 1816-1817 in England, France, and Italy, adding a catastrophe of nature to an industrial collapse. Within the United States the period immediately preceding the crisis had been one of feverish speculation. Although there was still a vast quantity of "no-rent" land, there had been a wild struggle to secure possession of western lands, with all the attendant phenomena of excessively high prices, fraudulent purchases and manipulation that became so familiar in later years. The new manufactures also offered a favorable ground for speculation. Joint stock companies, as corporations were still called, had been organized in great numbers, and their stock floated upon the first battalion of that immense army of "innocent purchasers" who have been absorbing similar issues ever since. These same trusting individuals were given an opportunity to absorb a large quantity of stock in canal and turnpike companies, many of which went bankrupt during the ensuing crisis.
The whole situation was greatly aggravated by a state of financial chaos. The charter of the first Bank of the United States, the one championed by Hamilton, had expired in 1811. At once a multitude of private and state banks sprung up. Frequently the principal asset of these banks consisted of a set of plates from which to print paper money. This money was loaned to prospective purchasers of land, the bank being secured by a mortgage on the land.
Capitalism, scarcely in existence, could hardly be expected to evolve any effective system of banking. It fell back upon individual initiative, and turned over the function of printing money to whatever band of clever men might get together and secure the easily obtained sanction of some state government. The Constitution forbids any state to "emit bills of credit," but by some strange twisting of this phrase it was held that the states were free to confer this right upon individuals. It would be impossible to exaggerate the carnival of swindling that followed. Nearly every legislature was besieged with applicants for bank charters, and those best able to influence such legislation were granted practically unlimited power to print and circulate money." End quote