Charles Franklin Dunbar.

Economic essays online

. (page 29 of 40)
Online LibraryCharles Franklin DunbarEconomic essays → online text (page 29 of 40)
Font size
QR-code for this ebook


but in the same year exports of merchandise increased in a much
higher ratio in consequence of an unprecedented export of bread-
stuffs ; and even in the year ending with June, 1857, when net im-

1 This and the following paper on the crisis of i860 were clearly not intended by the
author for publication. With some omissions they are the substance of a series of lectures
prepared about 1875, which, though it was not his custom, were completely written
out. They present so clear and comprehensive a narrative of an important period in our
economic history that it has seemed fitting to include them in the present volume.

266



THE CRISIS OF 1857 267

ports rose to 1^333,000,000, the highest point they had ever reached,
exports of merchandise in Hke manner rose to over $278,000,000.

This enormous increase in the ability of the country to satisfy
its demand for foreign productions by the sale of its own great
staples of trade still left an annual balance, small at the beginning
of the period, but rising at the close in some years to the neighbor-
hood of $70,000,000, to be liquidated in some other way. The sum
of these annual balances for the period 1850-185 5 amounted to
nearly $221,000,000, and to cover this amount there was an addi-
tional export of coin and bullion amounting to nearly $205,000,000.
It is no doubt this visible flow of the precious metals which, at the
time and since, gave tht impression of a vastly overdone foreign
trade, draining our resources and leading us to some inevitable
catastrophe. But there is plainly nothing in the export of the pre-
cious metals which should confirm this impression if fairly con-
sidered. The productive mines of California had made gold one
of our regular staples of commerce, for which we must seek an
outlet, as for cotton or for corn, and which would as certainly
depreciate if it were entirely retained in the country. From the
year 1849, then, gold became one of our ordinary articles of export,
and formed a large part in the immense increase of purchasing
power which led to the rapid growth of our imports. Nor had this
steady sale of a constantly accruing surplus stock of gold left the
people of the United States scantily supplied, since it appears that
there was a steady increase of the stock held in this country,
roughly estimated for the entire period at $140,000,000.

1 849-1 857. American gold received at the mint of

the United States . . . $402,000,000

1 849-1 857. Specie and bullion imported . . 50,000,000

$452,000,000
1849-1857. Deduct amount exported . . . 312,000,000

Added to the stocl< .... $140,000,000

Reckoning gold then as a domestic product and a legitimate
and profitable subject of exchange with other nations for their
products, our total exports for the years 1850-1855 fell short of our
imports by only $77,000,000; in the year 1856 there was a balance
of over $12,000,000 in our favor, and in the year ending with June,



268 ESSAYS

1857, a balance of but 52,000,000 against us ; so that from 1850
down to the beginning of the crisis there was an unfavorable
balance, according to the usual way of estimating the balance of
trade for the whole period, of only $67,000,000.

In connection with this comparatively moderate sum, we must
take into account some things which enter into the real balance
of trade, which do not appear in the custom-house returns. The
tonnage of the United States increased by forty per cent during the
years 18 50-1 85 5, and of the immense foreign trade which had grown
up, by far the larger part was carried on by American ships and
with American capital. In some years ^e trade in foreign ships
was not much above one-fifth ; even in our trade with England
two-thirds of the freight was earned by American ships, and it was
only in our trade with Canada that any considerable amount of
freighting was so divided as to give to foreign tonnage an approach
to equality of employment. The freights earned by American
ships, therefore, and the profit on a large share of foreign trade
carried on with American capital, must be included as an impor-
tant addition to the purchasing power of the country. It must
also be remembered that considerable amounts of capital had been
borrowed from abroad for purposes of internal improvements,
especially for the building of railroads, and that this capital, pass-
ing through the usual channels of exchange, would tend to pro-
duce a temporary preponderance of imports. Making allowance,
on the other hand, for the probable undervaluation of imports
under the purely ad valorem system of the tariff of 1846, which
would make the real balance against the United States larger than
that shown by the custom-house returns, it seems certain that the
apparent balance against the United States for the period 1850-1857
is fully offset by freights and profits, and that therefore the for-
eign trade of that period, although large, was not beyond the
means of the country. Its rapidity of increase, which was also
thought by many to be alarming, was due to the addition of gold to
our list of exports, to the immense extension of cotton growing with
an ever widening market, to the fresh impulse lately given to indus-
trial interests in all parts of the world by the gold discoveries, and,
more than all, to the rapid increase of the United States in popu-
lation, and hence in productive power.

In conclusion it may be observed that the increase of our for-



THE CRISIS OF 1857 269

eign trade was compatible with either safe or unsound develop-
ment of the country, and in itself affords no clear indication of the
condition of affairs. If the countries which purchased the bulk of
our exports were advancing along unhealthy lines, then our pro-
ducers for those markets were engaged in occupations subject to
serious check at any moment. Similarly, if our own domestic
development was in large measure unsound, the increased pur-
chasing power of the people, which was reflected in greater imports,
was certain sooner or later to be seriously diminished.

While for these reasons we may fairly doubt the commonly
received statement that in the years from 1850 to 1857 the foreign
imports of the country had risen to a dangerous point, it is
beyond question that in other respects business affairs exhibited an
unhealthy expansion, which fully accounts for the state of things
which followed. Aside from all stimulating influences of a special
and local character, the people of the United States felt the im-
pulse given both to production and to speculation in all parts of
the world by the progressive depreciation of gold. The general
rise in prices was a new spur to enterprise and a new incentive to
the anticipation of gains likely to accrue in the future. In spite
of the partial revulsion of 1854 and 1855, nearly every branch of
domestic business was driven to the extreme point to which the
competition of a singularly active and pushing class of men could
force it, and this process was accompanied by an extension of mer-
cantile credits in length as well as in amount. For more than a
generation the temptation to this kind of expansion had been almost
constantly present in the United States, especially in all branches of
business connected, even remotely, with the supply of commodities
in the South and West, — regions poorly supplied with capital, in
which, either from the prevailing habits of the people or from the
necessities of a rapid development, the crop of the year was apt to be
heavily mortgaged for the expenses of its production. The credits
given to Southern and Western buyers were necessarily long at any
time, and there is ample evidence that in the few years before 1857
they had seriously increased, and that the lengthening of the credit
given to the consumer had brought in its train a longer credit given to
the merchant who supplied him, a longer credit by the jobber to the
merchant, and by the manufacturer or commission merchant to the
jobber, and so on through the whole chain of intermediate dealers



270 ESSAYS

from the consumer to the producer or importer. The terms of
credit given varied with the branch of trade, but in all the ten-
dency to longer time was strong.

This vast mass of credit was managed by means of upwards of
fourteen hundred banks, with an aggregate capital of $371,000,-
000, estabUshed under the laws of the several states and therefore
acting under no general superintendence or control. The systems
of legislation on this subject, adopted by the states, often differed
from each other radically, and were in many cases inadequate and
even of questionable soundness ; but nevertheless, the entire paper
currency of the country for many years had been furnished by
these banks. Gold was the only legal tender (except for sums
under $s), and was also the currency of the government, since the
Treasury of the United States, under the Independent Treasury
law of 1846, was not permitted either to receive or to pay except
in coin. For the purpose of everyday life gold was little used by
the people except in the Southwest and on the Pacific coast ; the
silver coinage, debased and limited in amount under the act of
1853, supplied the small change, and bank-notes were the ordi-
nary currency throughout the greater part of the country. The
safety and currency of these notes varied as materially as the sys-
tems on which the banks were established. The New England
banks had entered into a voluntary combination to secure the daily
redemption of their circulation, and this, together with the general
soundness of their assets, maintained their notes in good credit.
The greater number of the New York banks were established
under a general law which required a deposit of public stocks with
the state government as security for the redemption of their cir-
culation. But this provision for ultimate payment did not answer
the same purpose as the New England system of securing the
immediate convertibility of the circulation, and it was accordingly
only by the voluntary adoption of a similar system that the New
York banks secured for their currency full confidence. In some
of the Middle states, and in a large part of the West, the New York
system of a secured circulation had been adopted, but vfhh great
looseness of detail, and currency had been poured out based upon
stocks of uncertain value and without provision for its prompt re-
demption. In the South, three states, Florida, Arkansas, and Texas,
forbade the establishment of banks within their limits, others had



THE CRISIS OF 1857



271



followed the New York system, while Louisiana, availing herself
of the pecuhar course of Southwestern trade which then made
New Orleans a natural entrepot for specie, had established her
banks on a more solid foundation of coin than any others in the
United States.

The loans of these banks had been rapidly extended during
the years 1855 and 1856, except in the Eastern states, where the
increase had been moderate, and in the aggregate had risen at
the beginning of 1857 to $684,000,000, an increase of nearly
twenty per cent. Their deposits had increased in similar
ratio, and amounted to $230,000,000 ; while their circulation, in-
creasing more slowly, amounted to $214,000,000. Against this
immediate liability for deposits and circulation, amounting to
$445,000,000, the banks held an aggregate of $58,000,000 in
specie, divided very unequally between the different sections.^
Specie holdings were but thirteen per cent of demand liabihties,
contrasting with nineteen per cent in 1855. The proportion of
J specie, however, was not the measure of the confidence which the
public felt in the banks of the several sections, for the notes
of the Eastern banks which were most poorly provided with coin
enjoyed a wide circulation in the other sections, while those of a
large part of the banks of the Middle and Western states had
only a local circulation. And of the whole mass of paper cur-
rency, we may fairly say that it was for the time, and so long as no
reverse occurred, practically convertible, and really at a par with
specie when not too far removed from the place of issue, but that
the banks were nowhere, except in Louisiana, in a condition to
resist a long-continued demand for specie. The paper currency
was then eminently a currency resting upon credit and represented,



1 The following table, from data collected by the Treasury Department, shows ap-
proximately the condition of the banks in January, 1857 : —



States


Specie


Circulation


Deposits


Percentage of
Liabilities in Specie


Eastern . .


^7,000,000


^53,000,000


^35,000,000


.o8i


Middle . .


23,000,000


62,000,000


140,000,000


.11^


Southern . .


7,000,000


39,000,000


15,000,000


.13


Southwestern .


16,000,000


38,000,000


26,000,000


•24t^


Western . .


. . 5,000,000


22,000,000


14,000,000


.13



158,000,000 ^214,000,000 ^230,000,000



.i3iV



2/2 ESSAYS

not so much money, as the beheved ability of the banks to ulti*
mately pay money if required.^

• The general tendency to expansion by means of credit had
shown itself also in a marked degree in the development of the
railway system of the United States. At the beginning of the
year 1850 the number of miles of railway in the United States
was but 7355. Under the pressure of urgent need of improved
means of transportation and the general stimulus to all enterprises
already referred to, the extension of the roads into districts not yet
provided and not even settled, was undertaken on a great scale,
and in January, 1857, the mileage had increased to 24,476 miles.
That a large part of this increase was in anticipation of the actual
wants of the country, and to a considerable degree of a speculative
character, might be inferred from the fact that of the 3400 miles
built in the year 1856, nearly one-half were in the seven sparsely
inhabited Northwestern states, even if the notorious embarrass-
ments of many of the newer roads had not made the fact certain.
To this rapid investment of capital in a form in which its returns
must be slow and uncertain, the policy of Congress in making
liberal grants of public lands in aid of new railways had given no
small encouragement. It is estimated that by acts of Congress
from 1850 to August, 1856, upwards of 20,000,000 acres of lands
were granted as subsidies for the opening of new lines in the West
and South. That the assistance thus given to the extension of
railways in advance of population has quickened the growth of
the states interested and has caused an immense and general in-
crease of wealth, is beyond any serious question ; but its immediate
effect was to encourage hazardous undertakings, to lead to the pro-
jection and opening of many lines of which the chief purpose was
to secure the land grants for the projector, and to foster specu-
lation in lands. To what a height this last form of speculation
had run is apparent from the sudden increase in the receipts of

^ We have then the following elements entering into the composition of the currency
of the United States at the beginning of 1857 : —

Bank-notes ^214,778,822

Bank deposits 230,351,352

Specie in the Treasury ..... 22,751,476

Specie in the banks 58,349,838

Specie in circulation (estimated) . . . 160,000,000



THE CRISIS OF 1857 273

the Treasury from the sale of lands, from an average of little over
;^2, 000,000 a year to nearly $11,500,000 in the year 1854-1855, and
nearly $9,000,000 in 185 5-1 856. The railroads had been built, more-
over, and lands bought, to a great extent, not by the use of funjis
belonging to the projectors and speculators, but by a lavish use of
credit in the shape of mortgage bonds which offered a form of in-
vestment attractive in all respects save in security for regular
returns. A chill came over these enterprises several months
before the close of 1856, and declining prices marked the general
diminution of public confidence. Some companies hitherto in good
credit found their returns insufficient for the payment of their
interest, the impression gained ground that the calculations on
which most of the new railroad enterprises were founded were
extravagant; and finally, when, under a domestic pressure for
money, and a sudden rise of the rate of discount at the Bank of
England, the prices of stocks underwent a sharp decline in Sep-
tember and October, 1856, the markets in New York exhibited
some of the symptoms of panic. Returning ease in affairs par-
tially restored confidence for the time, but the buoyancy of rail-
road securities and land operations was lost, and to engage capital
for any fresh enterprise had become a matter of serious difficulty.
The consequences, however, had still to be met of the investment
of an average of $60,000,000 a year in fixed capital in railroads,
and of vast additional amounts required to complete construction
already entered upon and to fund floating indebtedness. No small
part of the bonds by which these debts were represented now de-
pended largely upon the credit of individuals, and not upon their
own real solidity, for the estimation which they still enjoyed in
the markets, and thus added in no small degree to the increase of
that general system of mutually dependent credit, in which the
fall of a part may cause the fall of the whole fabric.

This, then, was in general the condition of the United States at
the beginning of the year 1857 : — the foreign trade of the country,
which for some years had rapidly increased, but, as is probable,
without being overdone, was stimulated to a high degree of activity.
Internal trade had been pushed forward with a great expansion and
lengthening of credits ; the railroad system in its rapid growth had
absorbed much circulating capital and had also contributed a large
share toward the increase of the vast system of credit on which



274 ESSAYS

our domestic affairs rested. And finally, this mass of credit was
managed by the aid of a great number of banks established upon
unlike and often insecure systems, acting upon no common princi-
ple, and with no important guaranty for the faithful and prudent
discharge of their functions.

In Europe the state of things was in few respects different from
that seen here, and it may be said that throughout the commercial
world the materials for a crisis were prepared and the consumma-
tion fast approaching. It is too much to say that in such a state
of affairs an explosion is inevitable, for a crisis may be reached
and passed without panic, and be followed by stagnation instead
of revulsion. But it is important to observe that the circumstances
were such that whatever should produce an explosion in one country
might easily lead to a general crash. Speculations may be local
in their character, but the credit of merchants and bankers is a
comphcated bond uniting nations too closely to allow any one to
escape from its share of the burden which disaster brings upon
any other.

At the beginning of the year 1857 the tone of general business
in the United States was much less animated than it had been
some months before. The year opened with but a moderately
good domestic trade, some pressure for money being felt in all
parts of the country, and it seems probable that some reaction had
even then begun to be felt among consumers. The mercantile
community, however, still had great confidence in the future, based
on the knowledge that the crop of cotton then gathered, though
smaller than that of the preceding year, was in quick demand
abroad at advancing rates ; that the foreign demand for breadstuffs
and provisions was large, and that in spite of an immense harvest,
prices were firmly maintained ; while tobacco, then one of our chief
articles of export, was higher than it had been for several years,
and in strong demand. The importations made near the close of
the preceding year had shown some falling off, and under these
circumstances foreign exchange had suffered a little decline, show-
ing that the real balance of trade at the opening of the year was
on the whole inclining in favor of the United States. Shipments
of gold continued, as was inevitable after the extraordinary impor-
tation for the fall trade of 1856, but not at any unusual rate. In



THE CRISIS OF 1857 275

this state of things importers felt encouraged to increase their
imports for the spring trade beyond any previous example.

The spring trade, however, did not meet the expectation which
had been formed. The money market remained close in all parts
of the country, and merchants everywhere found their collections
slow. Especially was this the case in the West, where the chronic
deficiency of floating capital felt in that swiftly developing region
had been aggravated by the collapse of land speculation and by the
absorption of capital in railroad enterprises. The sales of the spring,
therefore, were unsatisfactory, and importers found it necessary
to force off their merchandise by auction to an unusual extent, and
with heavy loss. Large stocks were also held over in bond by
those who deemed themselves in position to do so, in the hope of
an improved demand for the fall trade. It should be observed
also that the heavy importations which were pressing upon the
market at this time were largely swollen by a speculative move-
ment in sugar, caused by the almost complete failure of the crop
in Louisiana in 1856. This cause led to an immense increase of
imports of sugar from an average of about 1^13,000,000 per annum,
to nearly ^42,000,000 in the year ending with June, 1857, so that
on the latter date it was estimated that nearly 70,000 tons were held
in New York alone, and at high prices, in the expectation of a still
further advance. The effort required to carry this enormous stock
in a market where existing business conditions were tending to lock
up a large amount of capital in unsalable imports, was evidently a
considerable aggravation of the situation.

The state of affairs which can be so clearly traced in the move-
ments of the import trade, also made itself felt in most depart-
ments of domestic business. There was everywhere what may
be called a premonitory chill, and some exhibition of uncertainty,
if not of doubt, respecting the future, — the unfailing symptoms
that although prices might often be maintained in many branches
of business, speculation had reached its limit. It appears from
the periodicals of the day that early in the year fears began to be
expressed here and there that a crisis was approaching. Predic-
tions of this sort, however, are unpopular, and are apt to be
timidly expressed, except by those whose habitual fondness for
the dark side of things deprives their foresight of all current
value, and the mercantile world, in its calculations as to possible



2^6 ESSAYS

disaster, is generally ready to give more weight to the chances
of escape than to the chances of failure. It would seem, how-
ever, that the banks of the city of New York were sensible, as
early as February, that the condition of affairs was unsafe, and
that the expansion of their liabilities had gone too far, for in three
weeks after the 7th of February, when their loans stood at $112-
876,000, the highest point then known, they contracted them to
$111,137,000 at the season when an increase instead of a contrac-
tion was usual. Deposits which had for some time been irregular
fell off by about $4,000,000, but in the first week in March the
contraction was abandoned, and the expansion resumed. With
the exception of a short reaction in April, the increase of loans
then went on with tolerable regularity until the 8th of August,
when they reached the extreme point for the year, and stood
at $122,077,000. Although a large part of this expansion was
offset by the creation of new bank capital, its effect in encour-
aging dependence on an already over-stimulated credit is mani-
fest. It is important to observe, however, that so far as their
own position was concerned, the banks of New York had gained
a little in strength since the beginning of the year. Comparing
their returns in January with those for the last half of July and
the first half of August, it appears that in the former month they
held an average of eleven and one-half per cent of their liabilities
in specie, and in the latter an average of twelve and one-half.
This was a narrow basis for a business so vast as that indicated
by the point reached by their loans, and shows that whatever
caution their position in August required was equally needed in



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 29 of 40)