Internet Banking with Speedy Loans and Its Pros and Cons: Domestic Triggers of the Panic

business interestsBarely evading financial collapse in November of 1836, the U.S. economy entered 1837 with optimistic sentiments among policymakers and business interests alike that the marketing of the 183637 cotton crop, which had proceeded as expected for the first half of the selling season, would provide the foreign credits needed to ease the monetary pressure. Nevertheless, when the next set of supplemental interstate transfers, many of which had been delayed from November and December, came due in January along with the first installment of the official distribution, the pressure immediately resumed. New York met its largest interstate orders in January – $2.3 million in total (see Table 3) — most of which were again directed to the Southeast, and then braced to make the additional $1.7 million in interstate transfers ordered for February, March, and April.

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The Treasury also appears to have abandoned its interest in retrieving specie from the West in early 1837. It instead called upon banks in Louisiana and Mississippi to restore primarily mid-Atlantic balances. For example, the New Orleans banks sent $1.65 million to the Northeast between January and April, while the Natchez banks sent $0.5 million to the Northeast and an additional $0.55 million to Nashville. Timberlake (1978, p. 59) downplays the role of interstate transfers in the pressure that came to bear upon Natchez in the Spring, citing a successful attempt by the Agricultural Bank to divert a specie call by the State of Tennessee (part of the second installment) to banks in Kentucky, Ohio and New York. But supplemental transfers from the Agricultural Bank to the Tennessee deposit banks in January and February had already created pressure, and given the specie call in April and the Treasury’s unusual forbearance, it is likely that the earlier calls had also been for specie.

Both Louisiana and Mississippi were states in which land purchases remained active through early 1837. Indeed, accounts abound which suggest that the profitability of the cotton trade had driven purchases of both public and private lands to unprecedented levels, which continued to divert specie from commercial channels. It also appears that specie was accumulating in the land offices of Arkansas, where receivers delayed deposits in the Southwestern pet banks for an average of three months between October, 1836 and May, 1837. On April 1, for example, about $130,000 was “locked up” there.

As pressure mounted in the South, the New York newspapers offered increasing attention in February and March to the city’s loss of specie. On February 6, Philadelphia called upon New York for $500,000 in specie, which was attributed to the Treasury operations of January. A sharp bank capitalexpansion of bank capital in the Southeast over the Winter also suggests that many of the January calls on New York from this region (see Table 3) were for specie. Both the data and contemporary accounts agree that the specie reserves of the New York City banks had fallen to crisis levels.

It was widely believed that repeal of the Specie Circular would return much of the diverted coin to the East, and by the end of February both Houses of Congress had passed a measure that would make the notes of specie-paying banks again acceptable for public land purchases. President Jackson refused to act on the legislation during his final days in office, however, finally writing on March 3 that the Attorney General had found the language with respect to the use of bank notes so diffuse as to become “a subject of much perplexity and doubt” (Niles’ Weekly Register, March 11, 1837, p. 26).

The next day, attention turned to the new President, whose earlier positions offered hope that he might reverse some of the more controversial monetary policies of his predecessor. Van Buren’s expected signing of the repeal may have even delayed the panic despite reports that Western land sales were slowing and rumors that the resale values of both public and private lands had begun to fall. To many observers, a repeal meant yet another expansion of circulation among interior banks, a resumption of active speculation in the public lands, and the maintenance of high land values. By mid-March, however, it became clear that Van Buren was hesitant to sign and land values began to fall. No repeal of the Specie Circular meant that the monetary pressure in New York City would not soon be relieved by a flow of specie to the East. May you envision such a situation? You live centuries ago and do know something about future. Future is unpredictable for you. But you have no money at all and know that speedy loans online could have saved your life. the idea is incredible but imagine it to understand all the situation.

Van Buren’s inaction marks the start of the tailspin that ended in the general suspension of specie payments. The banking and merchant communities, as well as the press, continued to call for repeal, and a group of New York merchants even traveled to Washington in late April in an ineffective attempt to “ruminate” with the President. Of course, it was already too late. The “shaving” of country bank notes by speculators in New York became increasingly common and lowered public confidence in paper currency. The city’s merchants would not accept bills issued by Southern and Western banks as the demand generated by land purchases limited the specie on hand to send as remittances. Internal balances were not paid, and merchants, farmers, and bankers alike all called upon each other for specie in settling debts.

In the midst of the decline in land values and a shortage of specie in the money centers, news of a fall in the British price for U.S. cotton appeared in the New Orleans newspapers on March 22. This confirmed earlier rumors of reductions in foreign demand. The 17 percent drop in price which ensued between then and the end of April, or from 13.8 cents to 11.5 cents per pound (Gray 1933, p. 1027), paymentsappears to have been a result of overproduction in the U.S. and heightened competition in the British market from India, whose cotton exports underwent a rapid expansion at precisely this time. Southern merchants and bankers (as well as their Northeastern correspondents) had grown accustomed to making time bargains on cotton crops, often purchasing as much as two seasons ahead, and the fall in price raised doubts about the ability of cotton factors to meet their current obligations.

The stoppage of payments by one New Orleans cotton factor in particular, Herman, Briggs, and Co., generated considerable excitement in early March. Since the house of J. L. & S. Joseph of New York was under acceptances from Herman-Briggs for several millions, the pressure was transmitted to that city as well. It turns out, however, that the suspension of the Josephs on March 21, more than six weeks before the bank runs and general suspension, was due as much to the declining value of their other assets, which included Eastern real estate and large share holdings in the Lafayette Bank, as to cotton prices.

Though the fall in the price of cotton contributed to the existing financial strain in the Spring of 1837, it was not the fundamental cause of the May panic. Most telling is that the decline came at the end of the annual selling cycle, lowering the total value of real cotton exports in 1836-37 by only $8 million from the $71 million that had been received from an 1835-36 crop of roughly the same size. It is possible that the fall in price changed expectations of the future profitability of the cotton trade, but the historical course of cotton prices in the antebellum United States (Figure 4) indicates that declines of this magnitude were hardly uncommon. Although it is not possible to separate completely the fall in the value of Southern lands from the condition of the cotton market, speculators in the public lands usually did not intend to cultivate in the near future, and contemporary observers had little reason to believe that the decline in cotton was anything other than temporary. Unless Southwestern farmers and speculators maintained implausibly high time discounts, the fall in price of cotton could not have caused the suspensions.

The domestic tensions in the U.S. economy raised concern in England that the American propensity to import would combine with the decline in cotton prices to leave the value of U.S. exports insufficient for settling foreign balances. News of the drain of specie to the West also raised suspicions in England that the U.S. merchants might be hard-pressed to settle their accounts in specie and lowered confidence in the quality of American bills of exchange. When the prospect of a specie call became clear in early April, several New York City bankers, with specie reserves in the deposit banks of that city already less than $2 million, traveled to Philadelphia to confer with Nicholas Biddle, President of the by then state-chartered Pennsylvania Second Bank of the United States. Biddle’s bank had removed more than $1 million in specie from the New York banks in March (New economyYork Herald, April 1, 1837), yet the delegation knew that Biddle was one of few U.S. bankers in whom the British had confidence.

Niles’ Weekly Register, in a preliminary report of the meeting which appeared in the April 1 edition, indicated that Biddle’s solution would involve the export of $2 million in specie — $1 million each from the Second Bank and the New York City banks. This was clearly implausible given the level of reserves in New York. In fact, the next issue of Niles’ Weekly Register (April 8), which details the plan more precisely, does not even mention a specie export from New York. In the end, even the specie export from Biddle’s bank was abandoned in favor of issuing paper payable in London with a face value of $5 million. The New York Herald, in documenting the road to agreement on a daily basis, never mentions a specie shipment from New York. Nevertheless, Temin (1969, p. 133) interprets the ability of New York banks to contemplate such a shipment as key evidence that they were not short of specie. The evidence in Table 2, however, shows clearly that the New York banks could not seriously plan a $1 million dollar shipment of specie to England in April. Rather, Biddle’s threat placed the New York banks in a position to support his bond proposal more readily.

On May 4, 1836, suspension of specie payments by the Natchez banks, which had been considered inevitable for weeks, became a reality. Contemporary accounts imply that the drain of specie for land purchases in Mississippi had prompted the banks to suspend payments in order to preserve their dwindling but still adequate specie reserves. The Agricultural Bank, which was the first to suspend, began the next day to issue two and three dollar notes — the first of this kind issued by any bank in that state (New York Herald, May 13, 1837).

The turning point in the crisis, however, occurred in New York. On the morning of May 4, 1836, and amidst rumors of mismanagement at the Mechanics’ Bank, the death of the bank’s president by cardiac arrest triggered a well-publicized run by note holders and smaller depositors (i.e., those with the least information and sophistication). Though the Mechanics’ Bank was able to meet all requests in specie, the run represented a ominous loss of public confidence in banks generally. Runs on the Dry Dock Bank on May 8 and 9 reduced its specie reserves to a mere $15,000. In total, more than $600,000 in specie was removed from the city’s banks on May 8, and an additional $700,000 on May 9 (Martin, 1871, p. 30). Since Table 2 shows the city’s pet banks with only $1.5 million in specie on May 1, Martin’s figures indicate that the system could not withstand another day of runs. Most of the city’s banks suspended on the evening of May 9, and the remainder on the morning of May 10.

The New Orleans banks suspended specie payments on the morning of May 13 after a Friday night meeting of the city’s bank directors. News of the New York suspensions had not yet reached New Orleans, but news of the May 4 run on the Mechanics’ bank had arrived on May 12 and probably prompted the evening meeting. The nature of the Mechanics’ run, which symbolized the transmission of the panic to the working classes, was all the motivation that the wavering New Orleans bankers needed to take action.

Fig. 4.- Monthly prices of short staple cotton at New Orleans, 1803-1860. Source: Gray (1933, p. 1027).

Fig. 4.- Monthly prices of short staple cotton at New Orleans, 1803-1860. Source: Gray (1933, p. 1027).

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