With the issuance of fiat money by disparate groups of individual banks. It was clear that there were two paths out of the problem: the hard-money approach, which was advocated by the Old Republicans and, for their own reasons, the Federalists; and the soft-money path, which was advocated by the Old Republicans and, for their own purposes, the The federal and state governments would have pressed the raging banks to redeem in specie as soon as possible, and, if they couldn't, they would have forced them to liquidate. The amount of depreciated and inflated notes and deposits would have been quickly liquidated, and specie would have poured back into the country from hoards to provide a circulating medium. The inflationary period would have come to an end.
Instead, in 1816, the Democratic-Republican elite followed the old Federalist course of creating a new central bank, the Second Bank of the United States. The Second Bank, a private business with one-fifth of the shares owned by the federal government, was created to establish a national paper currency, purchase a major portion of the public debt, and receive Treasury money deposits. The notes and deposits of the Second Bank of the United States were to be redeemable in specie, and the federal government taking them in payment of taxes gave them quasi–legal tender status. The terrible arrangement that the Second Bank struck with the state banks as soon as it opened its doors in January 1817 shows that the objective of establishing the Second Bank of the United States was to help the state banks in their inflationary course rather than to crack down on them. In April 1816, Congress passed a resolution sponsored by Daniel Webster, a Federalist champion of hard money at the time, requiring the United States to accept only specie, Treasury notes, Bank of the United States notes, or state bank notes redeemable in specie on demand as payment for debts or taxes after February 20, 1817.In short, no
irredeemable state bank notes would be accepted after that date. Instead of using the opportunity to compel the banks to redeem, the Second Bank of the United States agreed to issue $6 million in credit in New York, Philadelphia, Baltimore, and Virginia before demanding specie payments from the state banks in a meeting with representatives from the leading urban banks, excluding Boston. The state banks gladly agreed to resume specie payments in exchange for the agreed-upon huge inflation. 55
Furthermore, the Second Bank and the state banks promised to help one another in the event of an emergency, which meant that the far stronger Bank of the United States was committed to bailing out the smaller state banks. The Madison administration, particularly Secretary of the Treasury Alexander J. Dallas, whose appointment was advocated for, pushed the Second Bank of the United States through Congress. Dallas, a wealthy Philadelphia lawyer, was a personal friend, advisor, and financial colleague of Philadelphia merchant and banker Stephen Girard, rumoured to be one of the country's two wealthiest men. Girard was the largest stakeholder in the First Bank of the United States at the end of its term, and during the War of 1812, he became a major investment in the federal government's war debt. Girard began lobbying for a new Bank as both a potential significant stockholder and a mechanism to offload his public debt. One issue is that the Federal Reserve Bank of New York lacked the confidence to demand payment of its notes from state banks.
As a result, state banks accumulated enormous balances at the Bank of the United States, reaching over $2.4 million in 1817 and 1818, which remained on the books as interest-free loans. "So many powerful people were engaged in the [state banks] as stockholders," Catterall explains, "that it was not wise to give offence by demanding payment in cash, and borrowers were anxious to keep the banks in the humour to lend." When the Bank of the United States attempted to collect in specie on state bank notes, according to bank President Jones," The banks, our debtors, claim inability, demand unreasonable indulgence, or just ignore our repeated demands and expostulations."
The Second Bank initiated a tremendous money and credit inflation from the start. The bank, which was lax in requiring the payment of its capital in specie, failed to raise the $7 million that was legally necessary; instead, its specie held never rose above $2.5 million between 1817 and 1818. The Bank of the United States had $2.36 million in specie and $21.8 million in notes and deposits at the zenith of its initial expansion in July 1818. The Second Bank of the United States had thus added a net of $19.2 million to the nation's money supply in just over a year and a half of operation, for a pyramid ratio of 9.24, or a reserve ratio of 0.11.
At the Second Bank of the United States, outright fraud was rampant, notably at the Philadelphia and Baltimore offices. It's no coincidence that these two branches accounted for three-fifths of the bank's total loans. 60 Furthermore, the bank's attempt to provide a uniform currency across the country was thwarted by the fact that the bank's western and southern branches could inflate credit and bank notes, which would then make their way to the more conservative branches in New York and Boston, which would be obligated to redeem the inflated notes at par. The conservative branches were therefore stripped of their specie, while the western branches were free to expand unabated. On top of the remarkable enlargement of the central bank, the Second Bank of the United States' expansionary actions, along with its leniency in insisting on specie payment by state banks, prompted a further inflationary expansion of state banks. As a result, the number of state banks incorporated increased from 232 in 1816 to 338 in 1818. During the 1817–18 legislative session, Kentucky alone chartered 40 new banks. The estimated total money supply in the country increased by 40.7 percent in two years, from $67.3 million in 1816 to $94.7 million in 1818. The Bank of the United States provided the majority of this increase .The massive increase of money and credit triggered a full-fledged inflationary craze across the country. Import costs had dropped in 1815 as overseas trade resumed after the war, but domestic prices were a different story. Thus, the index of export staples in Charleston increased from 102 in 1815 to 160 in 1818, while Louisiana staple prices in New Orleans increased from 178 to 224 during the same time period. Other sectors of the economy grew rapidly, with exports rising from $81 million in 1815 to $116 million in 1818. Real estate, land, farm improvement projects, and slaves all saw significant price increases, spurred in part by the use of bank credit for urban and rural real estate speculation. There was a surge in turnpike construction, aided by massive government turnpike spending. Steamboat freight rates increased, and shipbuilding benefited from the general boom. Traders who had been buying and selling stocks on the curbs on Wall Street for about a century found it necessary to open the first indoor stock exchange in the country, the New York Stock Exchange, in March 1817, due to the general boom conditions. Also at this time, investment banking began in the United States. Beginning in July 1818, the government and the Second Bank realised they were in serious trouble; huge money and credit inflation, exacerbated by vast fraud, had put the Bank of the United States in genuine danger of becoming bankrupt and illegally failing to maintain specie payments. The bank began a series of heroic contractions over the next year, including forced loan curtailment, credit contractions in the south and west, refusal to provide uniform national currency by redeeming its shaky branch notes at par, and strictly enforcing the requirement that its debtor banks redeem in specie. It also bought millions of dollars' worth of foreign currency. The Bank of the United States was saved thanks to these heroic measures and the removal of bank President William Jones, but the tremendous contraction of money and credit quickly pushed the United States into its first widespread economic and financial crisis.
In the United States, the first nationwide "boom-bust" cycle had come, propelled by rapid and huge inflation, followed by a rapid contraction of money and credit. Banks faltered, and private banks in most sections of the country limited their credit and liabilities while suspending specie payments.
The Bank of the United States' contraction of money and credit was almost astonishing, with total notes and deposits decreasing from $21.9 million in June 1818 to $11.5 million a year later. The money supply contributed by the Bank of the United States was thus reduced by 47.2 percent in a single year. The number of incorporated banks was constant at first, but rapidly declined from 1819 to 1822, dropping from 341 in mid-1819 to 267 three years later. State bank total notes and deposits plummeted from $72 million in mid-1818 to $62.7 million a year later, a 14 percent drop in a year. When we factor in the fact that the US Treasury reduced total Treasury notes from $8.81 million to zero during this time, the total money supply is calculated to be: $103.5 million in 1818; $74.2 million in 1819, a 28.3% decrease in one year. During the boom, the contraction resulted in a major epidemic of defaults, commercial and factory bankruptcies, and the liquidation of unsound assets. Real estate values and rentals, as well as freight rates and slave costs, all plummeted. As a result of the shrinkage, public land sales fell dramatically, from $13.6 million in 1818 to $1.7 million in 1820. 65 In general, prices have dropped: The export staples index decreased from 158 in November 1818 to 77 in June 1819, a drop of 87.9% on an annualised basis in those seven months. Between 1818 and 1819, South Carolina export staples fell from 160 to 96, and commodity prices in New Orleans fell from 200 in 1818 to 119 two years later. Imports dropped from $122 million in 1818 to $87 million the following year, owing to falling money revenues.
Imports from the United Kingdom plummeted from $43 million in 1818 to $14 million in 1820, and cotton and woollen imports from the United Kingdom fell from over $14 million in 1818 to under $5 million in 1820.The massive drop in prices exacerbated the weight of money debts, which was exacerbated by credit contraction. Bankruptcies were common, with one observer estimating that the crisis liquidated $100 million in mercantile debts to Europe. After the collapse of the formerly bloated paper and debt markets, western areas generally reverted to barter, with grain and whiskey serving as mediums of trade. 66
By its sudden and rapid shrinkage, "the Bank was rescued, and the people were wrecked," as hard-money economist and historian William Gouge put it.
1 Comments
Mr khan also write about current economic scinario of Pakistan
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