The Great American Barbecue - Real estate cycle 1793 - 1819

"There was a near approach to a crisis in 1819 as the result of a tremendous contraction of bank circulation. The previous increase of bank issues had prompted speculation, the contraction caused a serious fall in the prices of commodities and real estate."
William Peter Harrison, The Stock Market Barometer, page 25, quoting one of the all- time great stock market observers, Charles Dow.

"A deeper gloom hangs over us than was ever witnessed by the oldest man." A newspaper of the time describing early 1819.
Samuel Rezneck, Business Depressions and Financial Panics, page 56.

Real estate is where we begin. We have noted already that when the existing thirteen states eventually ceded their lands to the newly formed central government throughout the 1780's, the public domain was created. The government of the United States now assumed the position of trustee, holding right of eminent domain and of ownership. The process then began of transferring title to private ownership. This process of dividing and selling off the federal government's newly acquired lands was done under the Ordinance of 1787, providing a legislative means by which new states could be carved out of the western lands and then when ready, be admitted to the Union. Laws were passed to provide for orderly western settlement, specifying that when a territory contained 5,000 male settlers with the ability to vote it could elect a territory legislature, upon reaching a population of 60,000, it could enter the Union. Importantly, the new state's entry was to be on equal standing with the states already admitted. (Not less than three or more than five states could be created out of the region, five were eventually created.)

The Ordinance, whilst notably guaranteeing to all states and future states the ideals fought for during the Revolution - the right to a trial by jury, freedom of worship and habeus corpus - the ordinance also set provisions for the surveying of the public lands. Surveyors were required to measure the lands into thirty-six-mile-square sections, with each township comprising thirty six sections of 640 acres. A section being one mile square. Alternate townships were to be offered in tracts of not less than a section, at $1 per acre, but later increased to $2.

However, no sooner had the ordinance laws been drafted and put into effect than the federal government ignored them and began selling extensive tracts of western lands to eastern speculators at prices way below the minimum levels set by the ordinance. Said historian Alfred Chandler: "The paramount thought of the federal government, as landowner, was to sell land in large tracts for revenue to pay the public debt, rather than for settlement; and the only buyers for large tracts were speculators." (Land Title Origins, page 476)

One such company formed by speculators out of Boston to acquire lands from the government was the Ohio Company, subsequently joined by some members of Congress. Says Chandler, (page 477): "They lobbied through Congress in 1787, a bill authorizing the sale to them of approximately 1,700,000 acres of the public domain, along the Ohio River on both sides of the Muskingham River. The following year, two groups of people, one from Danvers, Massachusetts, and the other from Hartford, Connecticut, founded Marietta, named for Marie-Antoinette, at the junction of these rivers. Each of the first settlers at Marietta received an in lot 90 by 180 feet, and an out lot of 8 acres; the remaining land to be held for sale at a profit to the company." Congress granted to the company a further 100 000 acres in 1792, to put some protective land between the town and the Indians.

Around the same time as the Ohio company grant, Congress granted several million acres to the Scioto company, one of the more prominent company officials being William Duer, and we saw last chapter how this speculation contributed somewhat to his downfall. A third grant was made to John Cleve Symmes, a member of Congress from New Jersey, who, (not to be confused with a later US scientist of the same name who made himself immortal by seeking funds to prove the world was hollow) bought from Congress a million or so acres along the Ohio River between the Miami Rivers, upon which Cincinnati was subsequently founded. Symmes had spent a good deal of his own personal finances supporting the revolutionary war and Continental Army. From such support he had collected plenty of certificates of indebtedness. These he astutely turned into real estate. Apparently though, the purchase was badly managed, particularly the poor surveying, souring somewhat the desire of Congress to continue such large grants like this one. (Reported in A History of the Rectangular Survey System, by C. Albert White.) Symmes did however note to his partners that he foresaw large profits "for the lucky speculators who would buy land from Congress for 5s per acre and sell it to settlers at 20s". Symmes got that right, though perhaps he sold too early. Within the next three decades, the price of the land within his purchased area leveled off at around $8 per acre: a 356% yearly rise. Thus began what came to be called the great American barbecue: the give-away of the government's best asset at knock-me-down, fire-sale prices.

The settlers were most unhappy. All they saw, quite rightly, was huge areas of land being carved off by well connected speculators, hoarded, then resold later at higher prices; land that they believed should have been going to them for farms and homesteads. Eventually, but only after extensive congressional debates, the land sale laws were modified. In 1800, on May 10th, Congress changed the laws pertaining to the sale of the public domain, adopting instead a liberal credit system, reducing the minimum lot size to 320 acres per buyer, (lowered to 160 acres a little later), priced at $2 per acre, with four years to make payment. To put this into effect, local land offices were opened in various western town locations. "With the eighty dollars needed to buy a farm (now) within the reach of most of the indigent, the term 'doing a land office business' entered the nation's vocabulary." (Billington, page 39, The Westward Movement in the United States.) This is relevant for what happened next. The new lot sizes and liberal credit terms increased sales, but it also created the conditions for rampant speculation in land by a far larger number of people, who "bought on those terms with the idea of exacting higher prices of incoming settlers, before the four years of credit expired." (Chandler, page 483.) And purchase by settlers of lands upon which to settle, (if they weren't already illegally squatting), was often made with the assistance of a bank.

An early bank story.

John Kenneth Galbraith noted about banks that they and their money were an even more compelling discovery for the citizens of the young Republic than paper money was for the colonists. (Money: Whence it Came, Where it Went, page 71) You needed a state charter to open a bank, i.e. a license from the state government. Not always easy to procure. The story goes in New York, that to get a bank, one had to start a water company, or so they said…

After the Duer speculation and collapse of 1792, there remained just two banks in New York, the Bank of New York, and the local branch of the Bank of the United States (BUS), both Federalist institutions, with Hamilton in effective control, though he was neither on the board nor a Director of either bank. So any New York merchant that happened to be a Jefferson supporter could find credit hard to come by. And for the merchant, credit is his lifeblood. Jefferson supporters did not want increased federal power, least of all a 'central' bank. Hamilton's supporters wanted sound finance, controlled federally. And for the New York merchant and politician Aaron Burr, matters were intolerably worse since the Federalists controlled the state government as well. How to get a bank loan ?

To shorten a long story, clean water in New York was in very short supply, surrounded as the city is by salt water. Those who could afford it bought water from street sellers who transported it in from elsewhere. Everyone else had to make do. Cholera and typhoid epidemics were always a constant threat, and on the rise. Burr floated (pardon the pun) the idea of a company to supply piped water from upstate, and petitioned Congress to support it. Who could deny the benefit ? After securing approval, Burr presided over the committee drafting the charter bill to go before the State Assembly. With master timing, just prior to the adjournment of final debate, Burr slipped in an additional statement: "And be it further enacted that it shall and may be lawful for the said company to employ all such surplus capital as may belong or accrue to the said company in the purchase of public or other stock, or in any other monied transactions or operations…for the sole benefit of the company." In other words, any activity the directors felt like pursuing. No one noticed, perhaps some had reason not to, and the charter was signed into law April 7 1799. New York never did get the piped water, but they did get a bank. Within three years, Burr, as Director, had borrowed from the bank some $65000, as per his account with it, but decided to step down from the position because his other newly acquired position, as Vice President of the United States, was taking up too much of his time. The bank went on to become Chase Manhattan. Burr went on to his next duel.

Behind the scenes, perhaps secretly, Burr had been hatching plans with senators and other Massachusetts hard-liners to have New England leave the Union. These persons wanted New York to go as well and the plan would be that much easier if Burr could be elected governor of the state. Hamilton perhaps got a whiff of the scheme, and took steps to frustrate it, believing Burr was not a man that could be trusted to govern adequately, which in a round about way must have got into print. Upset, Burr challenged Hamilton to a duel, with pistols. Hamilton was not inclined to such behavior, in fact strongly opposed it, however in this instance reported that he could not, in honor, decline the challenge. Hamilton, not having the conscience to shoot at his opponent, was himself shot dead. Burr went into hiding, eventually ending up facing treason charges, though this may have been a bit of a show because Burr continued in his attempts to have states join what he was trying to found, a new country - his kingdom - way out west.

Early bank history.

Banks and what they do are an important feature of the real estate cycle, so an understanding of their historical development is crucial to an understanding of the cycle and successful forecasting of its future movements. Again, without trying to re-invent the wheel, we can use the web to find a good historical summary, and then make a few observations. This summary is from from

Start quote "Not banks but merchants were the sources of money and credit in the colonial period of American history (1607-1783). It was only after independence that the first commercial bank received a charter of incorporation—the Bank of North America, in 1781. British merchant banking houses stood at one end of a long chain of credit that stretched to the American frontier. They gave short-term (less than a year) credits to American merchants who then extended them to wholesalers of their imports, and the wholesalers passed them on to both urban and rural retailers—country stores and wandering peddlers.

When the Constitution went into effect in 1789 the nation boasted three commercial banks, the Bank of North America, chartered by Congress at the behest of Robert Morris, the superintendent of finance, and two state banks, those of Massachusetts and New York. The primary function of these and later commercial banks was the making of short-term loans, which they did either by issuing their own bank notes or by creating a deposit in the name of the borrower (opening an account to the person's credit) and dispersing checks to draw against it. Since the bank notes were promises to pay specie (gold and silver) to the bearer on demand, banks had to maintain adequate reserves in order to do so. Defining adequacy, however, was no easy task, and numerous banks were forced into bankruptcy because they had overexpanded their loans and discounts.

Conservatism was the hallmark of the earliest commercial banks. The thinking of the time favored the establishment of a single quasi-governmental bank in each state that would operate in the public interest under private management. The overriding fear of political leaders was that excessive numbers of banks or loans too much in excess of specie reserves would hobble the taxing and spending functions of government by swamping the economy in depreciated paper. Political leaders also recalled very well the wild inflation resulting from unrestrained governmental issues of continental and state bills of credit (paper money) during the Revolution, and in the Constitution they barred the states from issuing them. The management of the first Bank of the United States, (BUS) chartered by Congress in 1791, reflected these concerns. Although the BUS was a large commercial bank providing loans to the private sector as well as to government, its board of directors managed the institution in a highly conservative manner. Balance sheets for the years 1792-1800 reveal a generally high degree of success in maintaining the Bank's specie reserves. The ratio between bank notes in circulation and specie holdings was quite small. Growing population and trade, however, created a need for comparable growth in the volume of money and credit—for a policy of accommodation rather than restraint. Sharp increases in the number of state banks and in their authorized capital stock represented a response to this need. During the life of the first BUS (1791-1811) banks chartered by the states increased in number from 5 to 117, and their combined capital stock went from $4.6 million to almost $66.3 million." End quote.

For our purposes, note particularly the meaning of a bank note as legally issued by any bank at this time; a promise to pay to the holder (bearer) the equivalent worth in gold or silver, upon presentation to the bank (on demand). The following chapters on banking explain further the importance of this.

The Federal constitution put a prohibition on state governments issuing notes. A re-run of colonial, State issued fiat paper was not wanted. Banks, granted a charter by the state, were a different matter however, and not against the law. And despite Jefferson's hostility to them, when elected to the Presidency after Washington, (1800), his party did little, if anything, to limit Federal banking, or any banking for that matter. Rothbard (A History of Money and Banking in the United States) reports the chartering of 28 state banks by this year, growing to 117 by 1811. (As previously stated.) He gives some more interesting figures on page 70: "In 1804 there were 64 state banks, of which we have data on 13, or 20% of the banks. These reporting banks had $0.98 million in specie, as against notes and demand deposits outstanding of $2.82 million, a reserve ratio of .35 (or, a notes plus deposits pyramiding on top of specie of 2.88 to 1). By 1811, 26 per cent of the 117 banks reported a total of $2.57 million (specie); but the two and a half fold increase in specie was more than matched by an emission of $10.95 million of notes and deposits, a nearly four fold increase. This constituted a pyramiding of 4.26 to 1 on top of specie, or a reserve ratio of these banks of 0.23. As for the Bank of the United States, which acted in conjunction with the federal government and with the state banks, in January 1811 it had specie assets of $5.01 million, and notes and deposits outstanding of $12.87 million, a pyramid ratio of 2.57 to 1, or a reserve ratio of 0.39."

The chart of bank specie reserves for several Boston banks helps give us an idea of how specie fluctuated at the banks around this time. Note particularly the expansion of bank credit after the war against the English of 1812 - 1815. The data is sourced from Fluctuations in American Business, 1790-1860, Smith and Cole, Harvard University Press, 1935, page 28. The lower the reserves of specie, the more expansionary and accommodating are the banks lending policies.

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." End quote.

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

The sale of the public domain.

Always watch in the economy the relationship between the availability of credit and the level of speculation. Ron Insana, author of Trendwatching, noted (page 134): "John Kenneth Galbraith writes of a real estate bubble that grew wildly in the years after the War of 1812. State chartered banks, with few assets to back their aggressive note printing, made credit cheap and plentiful. The banks were housed in churches, taverns or blacksmith shops. In fact, they were set up in any place that was large enough to do business. The credit boom led to a major bull market in property."

Chandler noted the same thing when writing about the public domain, page 486: "Many state banks were organised in Ohio to facilitate creating credit for speculative purchases of land: during the five years just preceding the financial crash of 1819, about 5,500,000 acres were bought, and the indebtedness of the speculators to the government for land purchased increased from $3,000,000 to $17,000,000."

Another historian, writing about this period, Murray Rothbard, (The Panic of 1819) noted, page 9: "The federal government facilitated large-scale speculation in public lands by opening up for sale large tracts in the Southwest and Northwest, and granting liberal credit terms to purchases. Public land sales, which had averaged $2 million to $4 million per annum in 1815 and 1816, rose to a peak of $13.6 million in 1818. Speculation in urban and rural lands and real estate, using bank credit, was a common phenomenon which sharply raised property values…Federal construction expenditures also helped to further the boom: they rose from $700 thousand in 1816 to over $14 million in 1818." Notably, purchases of the western lands were only required to pay a quarter of the total amount payable, within forty days, the rest over five years. Liberal credit terms indeed. The accompanying chart shows the quantity of land sales by the US government in these years, sourced from Fluctuations in American Business, 1790-1860, Appendix D

The first land price induced downturn.

So there it is, the first serious US economic downturn, led by real estate. Easy credit, speculation in government granted licenses and privileges, boom, sudden shock, (always unforeseen by the many - comes out of left field so to speak - but appears blindingly obvious in hindsight - in this cycle the bursting of the cotton land bubble), contraction of credit, and if, as far as banks are concerned, the land value falls below the value of the credit it created and is now outstanding, loans are hastily called in, bust.

Land sales peaked in 1818, in the 4th quarter. Bank stocks peaked, at least those in the Smith and Cole index, in 1818 also, although the bank stock index peak was within an overall downtrend for the whole decade prior. Statistics and their interpretation must be relevant to the times however. Speculation in stocks was not as active then as it is now; such securities speculation really not getting under way until the advent of railroad stocks - 'the rails' - in the early 1830's. So the interpretation of the bank stock index at this time in measuring the speculative activity may be limited. Similarly, at this early time banks curtailed their loan book not by charging higher interest rates, but by a process that might be likened to 'rationing' (often at Directors discretion). Thus, (responsible) directors kept a close watch on specie levels. For the Boston banks measured, these levels bottomed in the first half of 1819. 1819 bank stock reserves

A specific panic day of highly charged emotion and tension does not appear to have resulted for the severe downturn year 1819.


It remained only for the scandals to come to light, typically exposed as the downturn proceeded. Historians recorded it this way, Simons again, (page 163) writing about the second Bank of the United States: "The earliest beginnings of this bank, that was to be such an important factor in the financial, industrial, and political life of this country, were tainted with fraud. The provisions for a paid-in capital, which had been a part of the law creating it, were evaded. The first subscribers were allowed to borrow money upon their stock with which to purchase more stock, and so on until a most unsteady pyramid was built with no genuine assets at bottom. The operations of the bank were then manipulated to the benefit of the board of directors and stockholders. Among the latter, it was alleged by Niles, who was by no means an enemy of the bank, were forty members of Congress. The scandals were so great that a Congressional committee was appointed to investigate the bank, and when this committee reported, January 16, 1819, the bank stock fell from near 140 (at which point it had been accepted as collateral for loans up to almost its full market value) to 93. Yet the report was largely a whitewash, and its main effect was to frighten the president of the bank into fleeing from the country. Three years later a report was forced from the institution that showed that it was absolutely bankrupt at the time of the Congressional investigation, and that it had been guilty of nearly all the acts of crooked finance that such a still unsophisticated age knew."

The US experienced a new phenomenon in the year 1819, the first of many to follow. Explained Rothbard, A History of Money and Banking in the United States, page 89: "The result of the contraction was a massive rash of defaults, bankruptcies of business and manufactures, and liquidation of unsound investments during the boom. There was a vast drop in real estate values and rents and in the prices of freight rates and slaves. Public land sales dropped greatly as a result of the contraction, declining from $13.6 million to $1.7 million in 1820. Prices in general plummeted…the great fall in prices aggravated the burden of money debts, reinforced by the contraction of credit. Bankruptcies abounded, and one observer estimated that $100 million of mercantile debts to Europe were liquidated by bankruptcy during the crisis. Western areas, shorn of money by the collapse of the previously swollen debt, often returned to barter conditions, and grain and whisky were used as media of exchange."

Real estate speculation funded by bank credit has become a repeating phenomenon, a bankable pattern you might say. Now go back to the beginning of this chapter, and read the description the economic observer and newspaper editor Charles Dow gave to the downturn and his reasons why. What he said should have clearer meaning to you this time.

Further reading:

Galbraith, John Kenneth. Money: Whence it Came, Where it Went, Andre Deutch publishers, 1975

Hammond, Bray. Banks and Politics in America: from the Revolution to the Civil War, Princeton University press, 1957.

Harrison, William Peter. The Stock Market Barometer, John Wiley and Sons, (originally published 1922).

Rezneck, Samuel. Business Depressions and Financial Panics, Greenwood Press, 1969.

Rothbard, Murray N. The Panic of 1819, Columbia University Press, 1962.

Rothbard, Murray N. A History of Money and Banking in the United States; the Colonial Era to World War II, Ludwig von Mises Institute, 2002.

Robbins, Roy M. Our Landed Heritage, The Public Domain 1776 - 1936, University of Nebraska Press, 1962 edition

Smith, W. B. and A. H. Cole, Fluctuations in American Business, 1790-1860, Harvard University Press, 1935.

Copyright: Phil Anderson 2004

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