Banking abuses

“Perils of State Banking” (1818)

Describe some of the abuses of state banks. (pages 441-443)

Describe the consequences of those abuses.

Basic Bank Accounting

Assets Liabilities

Specie (gold & silver)

Deposit ticket (gold owed to others)

I.O.U.1 brick

Loans

I.O.U.1 brickI.O.U.1 brick

I.O.U.1 brick

I.O.U.1 brick

I.O.U.1 brickI.O.U.1 brickI.O.U.1 brick

I.O.U.1 brickI.O.U.1 brickI.O.U.1 brick

I.O.U.1 brick

“schemes to get their notes into circulation”Perils of State Banking, 1818

“Six months after date I promise to pay …”

The committee will conclude this general report on the state of the currency, by examining briefly, the foundation on which the present circulating medium is based. The committee believe, the present circulation in the state principally consists of the notes of those banks whose nominal capitals are small, and composed principally of the notes of the individual stockholders, called stock-notes. So that the security of the [444] public consists of the private fortunes of individual stockholders, and those fortunes, in a great measure, consist of the stock of the bank, for which they have given their notes; so that the bank is enriched by holding their notes, and they are enriched by holding the stock of the bank: And as these banks make large dividends, many rapid, and what are considered solid fortunes, are made. Like a boy mounting a summit as the sun is setting, suddenly observes his shadow on the opposite precipice, (regardless of the gulph between,) is astonished to see how tall he has grown; when night ensues, ere he is aware, he is plunged, shadow, substance and all, in the abyss below, covered with darkness and despair. Such the committee extremely apprehend will be the result of many of the present institutions, and bring ruin and distress on the country, unless they change their mode of business . . . .

Panics

2. 1837-41, 1857-58: Financial Panics affecting Chicago, from the Chicago Public Library

3. The Suffolk Bank and the Panic of 1837, by Arthur J. Rolnick, Bruce D. Smith, Warren E. Weber.    Federal Reserve Bank of Minneapolis Quarterly Review Vol. 24, No. 2, Spring 2000, pp. 3–13

Wholesale Prices (1910-14 = 100)

Source: Hughes, American EconomicHistory, p. 217.

End of the First BUS (1811)

Veto of the 2nd BUS (1832)

Apple Computer

Cicso Systems

VerticalNet

STOCK PRICESFEB. 1999-FEB. 2001

Apple Computer

Cicso Systems

VerticalNet

STOCK PRICESFEB. 1999-FEB. 2001

Jackson and the Bank

Order for the Removal of Public Money deposited in the United States Bank. “Major Jack Downing, I must act in this case with energy and decision, you see the downfall of the party engine and corrupt monopoly.”Source: Durant & Durant, Pictorial History of American Presidents, p. 69.

Webster,Clay,Biddle

Jacksonand“Downing”

Jackson v. Webster

Jackson, a Democrat, opposed the re-chartering of the Bank of the U.S., Webster, a Whig, favored it.

Explain the economic arguments that each man gave, and how each man’s argument reflected his political party’s beliefs.

In groups of no more than three, write a response, and post it to the Banking discussion list by the end of today. Be sure to cite all sources (assigned readings and others), and include your names.

Put “Bank Debate” in the subject heading.

Wholesale Prices (1910-14 = 100)

Source: Hughes, American EconomicHistory, p. 217.

End of the First BUS (1811)

Veto of the 2nd BUS (1832) Resumption of

Specie payment

Merchant’s Magazine

Note the long introduction by the editor, followed by a letter from yet another Hamilton.

Timing - just after the end of the second bank

Worth a close reading, because many of the arguments relate to the founding of the Federal Reserve System, 80 years later.

Merchant’s Magazine (1839)

“The door has been thrown wide upon for the issue of a paper currency….

“There are no two institutions having a common interest, and none governed with reference to the public welfare. The polar star of each is profit; this is the guide, aim, and object of private banking, and the legitimate pursuit, when restricted to honorable and honest operations…..

“They should never be entrusted with a power which, if abused, may shake the national prosperity to its foundation.” (218)

Merchant’s Magazine (1839)

“… one of the chief causes of the embarrassment resulting in a suspension of specie payments [in 1837], was the existence of an inconsiderate multitude of currency purveyors...” (218)

“The whole wealth of the community, in money, ingenuity, contrivance, and chicanery, will soon be monopolized by these prolific paper-money creating concerns;

every species of disguise will be resorted to; and some, not less contemptible than the miserable trick of that respectable institution, the Delaware and Hudson, of issuing notes payable on DEMAND, six months after date…” (219)

Merchant’s Magazine (1839)

“This issuing bank is not to be either a bank of discount [loan] or deposite but these sorts of business are to be left to another class of institutions, which are to be in their turn denied the privilege of circulating any paper of their own.

“[Commercial banks] must therefore become the great customers of the issuing bank for its bills.” (216)

Merchant’s Magazine (1839)

Assets Liabilities

Deposits

Notes

Specie

Loans

Existing banks Proposed Bank of Issue

Assets Liabilities

NotesSpecie

Securities (loans bought from banks & government)

DepositsNotes

Loans

Assets Liabilities

Commercial Banks(loan and deposit)

Merchant’s Magazine (1839)

Proposed Bank of Issue

Assets Liabilities

NotesSpecie

Securities (loans bought from banks & government)

DepositsNotes

Loans

Assets Liabilities

Commercial Banks

+10 security +10 Notes -10 Loans+10 Notes

How does the Bank of Issue get now notes into circulation?

OPEN MARKET OPERATION

Merchant’s Magazine (1839)

What is the difference between Hamilton’s plan and the editor’s?

“His letter is addressed to the Legislature of this state only [New York]….

“This appears to us rather to evade the great difficulty of the present question. That difficulty is to be found in the necessity of concurrent legislation on the part of twenty-six separate and independent sources.” (214)

If our view of the matter is correct, then the proper method of executing the author’s plan can only be through the agency of the national power in the first instance.” (215)

Merchant’s Magazine (1839)

2 problems: (page 216)

1. Gaining approval for such a strong central power

2. “The bank of circulation [issue] will almost unavoidable become involved to a considerable extent in the good or bad fortune of other banks…” I.e., bank runs will concentrate themselves on the bank of issue.

Merchant’s Magazine (1839)

Solution to the second problem? (page 217)

Make the notes legal tender.

“A private banker … who deals in those notes, has no longer any anxiety about converting them into coin, inasmuch as they are as good to him as coin….”

Today, how else do we prevent bank runs?

Merchant’s Magazine (1839)

Winners and losers from inflation (page 221)

“In my estimation, the recent resumption of specie payments was an entire fallacy;

“the country was indebted on an expanded and fictitious currency, and should have been allowed gradually to have settled its affairs on the same basis - and not by a violent contraction….

“The whole community has been leeched to sustain the claims of the few.”

Winners and losers from inflation

If there is unexpected inflation

Borrowers pay back debts with dollars worth less

Borrowers win and lenders lose

If there is unexpected deflation

Borrowers pay back debts with scarcer, more valuable dollars

Borrowers lose and lenders win.

Winners and losers from inflation

This pretty much sums up Hamilton’s point, as well as the currency debate of the second half of the 19th Century.

Who were the lenders? What did they want?

Who were the borrowers? What did they want?

Lenders tend to prefer deflationPRICES

($100 repaid later buys more)

PRICESBorrowers tend to prefer inflation($100 repaid later buys buys)

Wholesale Prices (1910-14 = 100)

Source: Hughes, American EconomicHistory, p. 217.

End of the First BUS (1811)

Veto of the 2nd BUS (1832) Resumption of

Specie payment

Deflation, 1860s-1890s

Start of Civil War

Crime of ‘73

Election of ‘96

Value of Greenbacks in GoldPrice of Greenbacks in Gold Dollars, 1862-1878

Mitchell, Wesley C., 1903. A history of the Greenbacks. Chicago: University of Chicago Press.Placed on the Web by Harvey Rosen, Princeton University

http://www.eh.net/ehresources/greenback/

0

10

20

30

40

50

60

70

80

90

100

6201

01

6206

02

6211

01

6304

06

6309

08

6402

12

6407

19

6412

20

6506

02

6511

03

6604

10

6609

11

6702

13

6707

18

6712

18

6805

22

6810

23

6903

30

6909

01

7002

08

7007

15

7012

16

7105

22

7110

24

7204

04

7209

05

7302

08

7307

17

7312

18

7405

23

7410

24

7504

01

7509

02

7602

05

7607

12

7612

13

7705

22

7710

23

7803

29

7809

03

DATE (YYMMDD)

Currency Chronology

1862 Greenbacks1864 National Bank Act1873 Currency Act (“Crime of ‘73”)1878 Bland-Allison Act1890 Sherman Silver Purchase Act1893 Repeal of Sherman Silver Purchase Act1896 McKinley-Bryan election; prices bottom out1900 Currency Act (“Gold Standard”)1907 National Monetary Commission1913 Federal Reserve Act1933 Glass-Steagall Act; SEC; End of Gold Standard1965 End of Silver StandardMay 14, 1998, House votes to repeal Glass-SteagallNov. 5, 1999, Glass-Steagall Act repealed.

Excerpts from Bryan’s “Cross of Gold” speech:

We say to you that you have made the definition of a business man too limited in its application. The man who is employed for wages is as much a business man as his employer

We say in our platform that we believe that the right to coin and issue money is a function of government. We believe it. We believe that it is a part of sovereignty, and can no more with safety be delegated to private individuals than we could afford to delegate to private individuals the power to make penal statutes or levy taxes.

And now, my friends, let me come to the paramount issue. If they ask us why it is that we say more on the money question than we say upon the tariff question, I reply that, if protection has slain its thousands, the gold standard has slain its tens of thousands. If they ask us why we do not embody in our platform all the things that we believe in, we reply that when we have restored the money of the Constitution all other necessary reform will be possible, but that until this is done there is no other reform that can be accomplished.

Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of idle capital" and "the struggling masses, who produce the wealth and pay the taxes of the country," and, my friends, the question we are to decide is, upon which side will the Democratic party fight -- upon the side of "the idle holders of idle capital," or upon the side of "the struggling masses"?

[emphasis added]

There are two ideas of government. There are those who believe that if you will only legislate to make the well-to-do prosperous their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous their prosperity will find its way up through every class which rests upon them.

[Compare this to Reagan’s “trickle down” economics.]

Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them:

You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.

[The Vassar 1896 site offers some cautions about the coded message contained in this metaphor.]

The Major Crises and the Poor

“The depression of the 1890s was very severe - the bread lines were long - and a great change occurred. People began to say that the federal government had responsibility for the country’s economic welfare, and they began to organize on that basis… If the federal power could be used to aid railroad magnates and manufacturers, it could be used also for the poor. In the depression of the 1890s a very different future was beginning to appear.”Hughes, American Economic History, 3rd ed., 375-6.

http://www.goldinstitute.org/average.html