Economic History of the US
Revolution to Civil War,1776-1860
Lecture #6
Peter Allen
Econ 120
First Bank of the U.S., 1791-1811
 Successful
 Stable monetary conditions
 Prevented banks from over-expanding note issuance & credit
 no banking crises…but…
 …Congress terminated it 1811
 First major banking crisis straight away
 War of 1812 (1812-15),
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
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War financing
1814-17, banks allowed to suspend specie payments on notes
Over-issue (fiat), inflation
“Panic of 1819,” depression of 1819-21
Sentiment: “No paper currency, no fractional reserve”
Bank Holdings ($ million)
Specie
Bank notes
Reserve Ratio
1811
14.9
42.2
0.35
US Treasury Bonds
Reserve Ratio
1815
13.5
79
0.17
1818
20
94.7
15
0.36
▲
Jan.1811
end of
First Bank
▲
Jan.1817
start of
Second Bank
1819
25
74.2
Financing, War of 1812
 1812 - 1815
 No national bank
 …Treasury Dept. “stuffed” ≈ $80 million of T-bonds to
banks
 Raised approx. $34 million in specie
 Banks paid the Treasury with notes backed by US debt…
 …though all still backed by specie
 i.e. “dilution” of specie convertibility
 …vast currency over-issue, inflation
 Inflation, 35% per year 1811-15
“Panic of 1819”
 Dilution to pay for War…
 Aug. 1814 - Feb. 1817, banks allowed to suspend
specie payments on their notes…
 … but remain open
 …de facto fiat currency
 Precedent for wartime public finance
 By 1819, public had enough




System-wide run on banks
Reversal, collapse of money supply
Depression of 1819-21
Sentiment: “No paper currency, no fractional reserve”
Second Bank of the US, 1816-36
 Congress chartered “Second Bank” in 1816 for another
20 years


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How to restore specie convertibility with huge excess of paper
currency over specie??
Options: deflation or devaluation
…February 1817, resumption of specie convertibility – chose
neither option
Economy growing fast; Bank allowed rapid note issuance to
continue
March 1817, NYSE established
 “Panic of 1819,” depression of 1819-21


3 years-old, politically the game was lost
Populous opposed to the Second Bank
Demise of the Second Bank, 1832-36
 1823, Nicholas Biddle became
President of the Second Bank
 …saw benefit and tried to save
 Brought state bank issuance under control
 …presenting notes for specie regularly
 Succeeded in regaining control of issue
of notes and bank credit
 Too late politically
 1832 Fierce opposition from…
 West/Southern/agrarian/populist
 “Restricted” by Pres. Andrew Jackson, 1832
 No central bank until Federal Reserve Act, 1913
Immediately after the Second Bank…
300
Price Level
200
150
100
Specie
50
18
44
18
42
18
40
18
38
18
36
18
34
18
32
18
30
18
28
18
26
18
24
0
18
22
money, specie, price index
Money
250
18
20
Banks over issue notes, 1835-36…

loss of discipline from Second
Bank,

influx of specie influx from
Mexico, 1833-37 ($31 mm →
$73 mm.)
…note issuance way too fast for the
economy (MV = PY)
Panic of 1837…bank run

banks allowed to suspend
specie payments…

…but only for 18 months

Had to reduce notes
People lost all confidence in paper money
Money, -15.6%; Prices, -30%
“Great Depression of 1837-39”
Free banking, 1837-57


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
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Currency Act of 1834…gold became
dominant specie
Era of “Jacksonian Democrats,”
1828-36
 Agrarian populism, manifest
destiny, strict construction, laissezfaire
Decentralized banking, 1837-57
 State, “free banking”
 No regulation
 No lender of last resort
 No suspension of specie
convertibility
 Note issuance backed by state
bonds
Hard currency, no fractional reserve
Fiction
First 3 US Financial Crises
 Phenomenon of modern economies…



…industrialization
Banks, issue $$ and intermediate saving and investment
Borrowing and lending for scale production
 1793-1860 crises had a central cause…


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Fractional reserve banking and leverage
Excessive expansion of money, bank notes or loans…
…beyond the need of the economy
Resulting in panic…”flight to safety”…specie
 Politically unsettled, two schools of thought



Central (national) bank, regulate, let banks suspend specie,
“Federalist”
State-centered, “free banking,” hard currency, no regulation
Jacksonian (Jeffersonian)
backing: pure specie v. gov. bonds = fixed v. flexible money
Second Bank of the US, 1816-36
 “Second Bank” chartered by Congress in 1816
for another 20 years
 Succeeded in keeping over-issue of notes and
bank credit under control
 Fierce political opposition (“Bank War”) from…
 West/Southern/agrarian/populist
 “Restricted” by Pres. Andrew Jackson, 1832
 No central bank until Federal Reserve Act, 1913
After the Second Bank…

Price Level
200
150
100
Specie
50
18
44
18
42
18
40
18
38
18
36
18
34
18
32
18
30
18
28
18
26
0
18
24

Money
250
18
22
3.
4.

300
money, specie, price index
2.
First financial bubble, 1835-36
3 factors:
Growth of money supply was too
fast for the economy,
(MV = PY)
Inflows of specie from Mexico,
1833-37
Specie Circular, 1836
Loss of Second Bank
May 1837 banks allowed to
suspend specie payments
People again lost confidence in
paper money for awhile
Panic of 1837
“Great Depression of 1837-39”
18
20


1.
Impact of Calif. Gold Rush
 Sharp rise in gold supply
increased money supply
190
 …8.5% p.a., 1849-56
price indices, 1849=100
180
Money Supply
 Result, economic boom…
170
 4.3% p.a. rise of real
GDP…but also…
 4.4% p.a. rise of
inflation
 Financial speculation,
canals, railroads
160
GDP
150
140
130
Commodity Prices
120
110
100
90
1849
1850
1851
1852
1853
1854
1855
1856
1857
1858
1859
 Crisis of 1857
First US Financial Crises
 Financial crises phenomenon of modern
economies…
 …f(industrialization, banking, borrowing/lending,
abrupt change of money supply…)
 1793-1860 crises, conditions different, but…
 One basic cause
 Excessive expansion of money, bank notes or
loans…
 …beyond the need of the economy
 Resulting in panic, “collapse”…
 Flight to safety…specie
So: Taxes 13%, Borrowing 29% (=.33*87)and Money Creation 58% (=.67*87)
Quantity Theory? MV=PQ? Prices rise 20,946% but money 7,143%?
Estimated Issuance of
Continentals
Revenue from Money Creation
25
20
$ millions
15
10
5
0
1774
1775
1776
1777
1778
1779
1780