1837

Transcription

Now through the middle of the 1830s as entrepreneurs had borrowed more and more money, whether they were entrepreneurs in the sense of cotton planters or factory owners or merchants in Illinois or Indiana, all around the country they had borrowed huge amounts of money, expanded their operations, and taken on a lot of debt. Everything was fine as long as the revenue was flowing in. They were able to make their interest payments and maybe even pay a little bit of the principal. But they were also producing much more stuff. In particular, this is true with the cotton plantations. The cotton sector in the South doubled its output between 1830 and 1837. And by early 1836, the cotton price was creeping slowly downward. And people in Britain started to get nervous, specifically people who ran textile factories and even more the people who lent money to those factories. As the amount of cloth and clothes bought by consumers, produced by those factories, but bought by consumers around the world. As that starts to slow down in comparison to the amount of clothes and textiles that are getting pumped out, those factory start to lay off workers. As they lay off workers, the lenders get even more nervous. And eventually they cut off credit. They also cut off credit to the cotton buyers in Liverpool who by the American cotton crop each year. And when they do that, the merchants back in New Orleans lose their credit as well. And when they lose their credit, then they stop being able to make their payments to the local banks. The local banks go to the planters to try to call in the loans to the planters. But the planters aren't getting any money. So the entire financial sector shuts down. Pretty soon this isn't just something in the cotton economy. It's all around the country. The economy has entered a full blown liquidity crisis in which everybody who has lent money wants their money back. So they can pay back the people who have lent them money. But because everybody's in the same situation, nobody is able to pay their money back. The economy shuts down. And we are in what is known as the Panic of 1837. In an advanced complex economy, the liquidity crisis can lead very quickly to deflation, unemployment, massive unemployment, and an even deeper crisis that spirals into worse and worse effects as time goes on. As mass unemployment, for instance, can lead to social and political unrest pretty quickly. This is the situation in which policy makers in Washington, bank officials, cotton merchants, factory owners find themselves in 1837. So how do they get out of it? Well, there's three theories about how to get out of a liquidity crisis. One is to build up enough of a set of financial regulators and institutions that have the capacity put brakes on runaway crises that you never even get to that point in the first place. In other words to maintain confidence. This confidence that eventually the economy will be restarted enables borrowers to wait a little longer to get their money back from their creditors, instead of producing this sort of avalanche effect. Now unfortunately, this was not possible in 1837 because the Bank of United States had been destroyed. But that's the role that the Federal Reserve and other so-called lenders of last resort play in the world economy today. All right. So what's the second possibility? The second possibility is to let the crisis play out, to liquidate bad debts as, for instance, Treasury Secretary Andrew Mellon will say during the Great Depression in the 1930s. Liquidate everything he says. The problem with that is that it produces great suffering, extreme economic suffering. And it's not possible in any case to liquidate all the debts. If, for instance, you have no reliable currency, if nobody will accept the credit of the government or the credit of individual borrowers which was the case again by 1837. Finally a third option might be to prime the pump. This is what happens when a government essentially borrows money to put people back to work. When it puts people back to work, infrastructure projects, things like that which were accomplished during the New Deal are a popular way to do that. When it puts people back to work, the government gets spending started again in the economy. And when spending starts to flow again, then borrowers can start to pay back their debts. This was not an option that Martin Van Buren was interested in taking. But there was one more actor in 1837 who decided he was going to try to accomplish really a couple of these roles at once. So we'll turn to that next. The one actor in the economy, perhaps, if we're looking at all of the different interlocking financial sectors of the Atlantic economy, from Amsterdam to London to New York to New Orleans, the one person who really could do what comes next is Nicholas Biddle. And what he tries to do, he's now the director of a private bank in Philadelphia very large one, is to issue what's essentially his own currency to get the economy started again, a set of IOUs he calls post notes which he and his deputies give in exchange for cotton. The idea is these will start to circulate in the economy like money. And in the year or so when the economy's doing better, he will sell the cotton and repay the IOUs and make a nice profit. And things seem great in late 1837, in 1838. People are encouraged by the fact that these post notes are circulating in the economy. And guess what they do? Planters make a huge amount of cotton. They make so much, in fact, that the cotton market which was recovering crashes again. The price drops. Biddle goes bankrupt. He dies in 1842, disgraced, bankrupt still. And the economy particularly in the South sinks into worse doldrums. It'll recover in the North a little bit faster. But in the South the level of indebtedness is so great that it produces a major policy problem. The banks that had issued the bonds which are backed by the states, the individual states, go bankrupt. And now the creditors of the banks, the bondholders in the financial markets of the world who bought what were essentially securitized slaves, they want their money back. So they come looking to the states of Mississippi and Louisiana and Alabama and so on and ask for repayment. The citizens of those states, most of whom are not slave holders, do not feel that this is just. They feel that this is an example of what we would in the present day call privatizing the gains, because it's the planters and the bankers who made the money, and socializing the risk, spreading the risk out, extending the cost to all of the citizens of the political unit, in this case, the individual states. So they elect new legislatures. And these legislatures repudiate the bonds. They default on the state debts. And what happens is that for the next 20 and, in some cases, 100 years, those states, Mississippi, Alabama, et cetera are going to be unable to borrow on the world financial market. And they get a very, very bad reputation in general that extends beyond the question of their financial reputation. It turns many elites in the North and in London and other places against the planters of the South. And they start to think that even though this process of an expanding cotton based slavery is yielding tremendous revenue, maybe it's actually producing a set of elites, the planters of the South who cannot be trusted. All of these dynamics are part of the development of the conflicts that eventually become the American Civil War. And they start in the financial crisis of the 1830s.