We’ve talked a great deal about money and finance in earlier episodes. Two common themes have emerged. The first is that Americans were always short on cash. There was never enough specie, that is gold or silver money. Americans were always looking for ways to run an economy without it. Second, everyone seemed to see the real wealth potential of America in the western lands that would be settled in the future. The financial crisis that we will cover this week involves both of those.
Financial Situation in America
In 1796, the government was focused on paying down debt from the Revolutionary War. In that year, total government debt was over $83 million. Government revenue was only a little over $8 million, meaning that debt was about ten times revenue.
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| Robert Morris |
Following the adoption of the Constitution, Congress had implemented a financial plan, created by Alexander Hamilton, which had raised taxes to pay down the debt. Many of these taxes were dedicated by law to repayment of debt. Even so, the national debt in 1791 was $75.4 million. By 1796, it had risen to $83.7 million
The burden of taxes did not directly impact many people, unless they were importers. The bulk of taxes were tariffs on imports. Another big chunk came from excise taxes, like the tax on whiskey, which certainly led to some complaints.
While the government was struggling with debt, life for most Americans was pretty good. In an earlier episode, I talked about the financial crisis of 1791-92, which was basically caused by speculators buying up old paper money at a discount to take advantage of the Federal government’s decision to pay the full value of that paper. When it turned out that repayment was going to take longer than many speculators had hoped, the financial bubble burst. I also mentioned that William Duer’s speculation and his bankruptcy in 1792 caused a big part of that financial crisis.
But since then, the economy had been doing pretty well. The Europe between France and most of the rest of Europe created a demand for US food and other goods. By remaining neutral, the US tried to sell to everyone in Europe. Many European investors, unnerved by the war in Europe, tried to park their money in US assets in order to protect them. US exports more than doubled between 1790 and 1794. Profits from overseas merchants quadrupled. Wages for laborers in port cities more than doubled. Many Americans began buying more luxuries such as imported fabrics, china, and carpets, despite import tariffs. The invention of the cotton gin in 1793 created a particular boom in the south.
Investment in western lands also grew during this time, raising land prices. The Jay Treaty assured that Britain would stop interfering in lands in the Ohio Territory, thus increasing land values in those western lands. The importance of the Jay treaty in western land prices came into sharp focus in the spring of 1796 when the House of Representatives tried to block funding for the Jay treaty. The prices on agricultural goods collapsed as merchants were afraid to take their ships to European markets for fear that the British navy would attack them if the US breached the Jay Treaty. Credit began to tighten and things looked bleak. This is part of what convinced the House to go ahead and fund the treaty.
The other side of the problem was that once the US implemented the Jay Treaty, the French Directory took its own actions. In July of 1796, France declared that it would treat neutral vessels (in other words US merchant ships) in the same manner that the British did, that is capturing and confiscating them. While France was not as great a naval threat as Britain, French privateers captured or sank more than 300 US merchant ships over the next year. This led to a doubling of insurance rates, a huge increase in the cost of imported goods, and a decline in US exports. The war in Europe, which had been a boon to US merchants for several years, was now turning into a larger problem for US merchants.
Causes of the Panic
The one persistent problem was a lack of hard cash, gold and silver was still scarce in many parts of the country. Using paper money was still considered speculative. Many parts of the country still relied on barter to obtain goods and services. This shortage was made even worse by the government’s efforts to pay down the war debts. Such payments often involved shifting specie back to Britain and Europe.
Thanks to the Jay Treaty and the increasing hostilities with France, the US economy became more reliant on the British economy. That caused problems when the British economy tanked in late 1796.
To understand the panic, we need to understand how banking worked at this time. For starters, most people never used a bank. It was for rich people only. Prior to 1795, the Bank of England never even issued a bank note below £10 sterling. A typical laborer at this time lived on about two and half pounds per month. So it was only the very wealthy, what we might today call the one-percenters, who ever used a bank or bank notes.
The Bank of England was privately owned and operated. It had been established in the late 1600s because the government found it was a convenient way to borrow money during wartime, when people were unwilling to make loans directly to the government.
The Bank of England circulated its own bank notes with the understanding that anyone holding a note could exchange it at the bank for gold or silver at any time. There was always far more paper money in circulation than there was gold or silver to cover all of it. The system was based on the fact that people trusted that the paper money could be spent just as easily as gold or silver and that not everyone would try to cash in their paper all at once.
Over several years in the 1790’s the Bank saw its specie reserves depleted as the government took more and more loans to support its allies and its own military in the war with France. Britain had also taken in more gold early in the decade when wealthy Frenchmen wanted to get their money out of France during the reign of terror, when it was a crime to hoard gold or silver. But after that passed, these French depositors wanted their money back.
As the bank’s gold and silver dwindled, it began pulling its bank notes from circulation. This caused economic recession, but should have at least maintained the stability of the banknotes. The problem was that the dwindling specie reserves were not the result of distrust in the bank, it was the government demands of war expenses and the demand of foreign investors for the return of their hard money.
Over time, as inflation of paper money value increased, more and more depositors demanded specie from the bank. By late 1796, the Bank’s specie deposits had fallen to about £2 million, less than a third of what it held two years earlier. By early 1797, reserves fell below £1 million.
Problems came to a head after a French fleet was spotted off the coast of Ireland in December. The French were responding to a plea from Wolfe Tone, a leader of the Society of United Irishmen, that sought to challenge British authority in Ireland. A fleet of more than 43 ships and nearly 14,000 French soldiers tried to land and form the basis of a larger Irish rebellion. Unfortunately for the invaders, a hurricane dispersed the fleet and damaged many of the ships. While the ships were on the Irish coast, they never landed.
Despite the failure, the mere presence of a French invasion fleet off the coast of Ireland unnerved many British investors. In times of crisis, wealthy investors wanted to hold onto gold and silver. The Bank of England was already under stress from government withdrawals to fund the war with France. Investors continued to demand withdrawals of gold and silver, as was their right.
The government still needed money from the bank to prosecute the war with France, So In February, 1797, at the Bank’s request, Parliament passed the Bank Restriction Act. This allowed the Bank of England simply to refuse to accept its own banknotes in exchange for gold or silver.
This had only happened one time before. In 1696, only a couple of years after the Bank of England was established, it had suspended specie payments in a similar war-related cash crunch. That created such a financial disaster that it avoided doing so ever since. Apparently, a century later, officials had forgotten just how horrible that experience was and were willing to do it again.
With the inability to exchange their notes, public faith in the Bank of England paper declined and the money devalued. This got worse after the bank simply printed more paper to finance the government’s demands for more loans for the war.
Reaction in US
The crash of the British financial system had a real impact on US markets. Most of the American economy was financed through credit markets in London and Amsterdam. After France invaded the Netherlands, access to credit in Amsterdam became much more difficult. The suspension of specie payments from the Bank of England turned off that credit spigot in Britain. British merchants began demanding more cash from Americans who did not have it. Exports of US goods to Britain crashed as British subjects could not afford to pay for them. On top of all that, US trade in the West Indies also collapsed thanks to the French privateers operating there.
As a result, the boom times of the early 1790s turned to a bust. Imports and exports sank. Port cities saw a collapse of new revenues, and wages for those involved in merchant trades fell again.
Land speculation, which had been a solid area of growth most of the time, also began to collapse. Much of the land’s value was based on hopes that it could be sold to European investors or settlers. With money from those sources gone for the time being, many US land speculators find themselves holding land purchased with borrowed money, and with no one to buy the land, so they could not repay those debts.
Morris in Debtors Prison
One of the most notable casualties in the US was Robert Morris. We all remember him as the Financier of the Revolution, and someone who almost singlehandedly maintained the financial system in America during the war by releasing paper money based on his own personal credit, which was better than the government’s.
After the war, during the confederation period, Morris stayed involved in helping to keep afloat the country’s finances, in part because he was one of the largest creditors for the government. Once the country ratified the Constitution, Morris turned to focusing on his business affairs. He served a term as a US Senator under the Constitution, but was mostly focused on rebuilding his business.
Morris was known for taking chances to make money, such as establishing trade with China after the war. A large portion of his wealth came from serving as a financial agent for wealthy European interests who wanted to invest in currency and land speculation in America. He also established two canal companies, believing that they would not only be profitable but would also increase the value of his western lands.
In 1791, Morris hired William Temple Franklin, Benjamin Franklin’s grandson, to serve as an agent for him in Britain. He partnered with Sir William Johnstone Pulteney to help Europeans invest in western lands, at first in upstate New York. He also bought heavily in western Pennsylvania and land in the new District of Columbia, where the new federal capital was being built.
Within a few years he had become the wealthiest man in America. Most of Morris’ money came from land speculation. His land purchases were always highly leveraged, with lots of debt behind them. But Morris’ credit was good and land prices almost always went up.
In the mid-1790s, the war in Europe caused foreign investment to decline. Land sales began to falter. Morris, always the gambler, saw land prices falling, so he doubled down, borrowed more money and bought even more land. At one point, even Washington suggested he might be taking on too much risk. Morris responded: “My dear general, I can never do things in the small. I must be either a man or a mouse.” During this same time, Morris began a multi-year project to build a large house that took up an entire city block in downtown Philadelphia. He hired Pierre L’Enfant to be the architect.
Others were not as brave as Morris. Amsterdam banks, where Morris had borrowed heavily, were unwilling to continue loans for what looked like increasingly risky land deals. When Morris tried to collect on war debts that the government owed him, Congress turned the tables by going over the books and proclaiming that Morris owed the government nearly $100,000. Morris was continually buying and selling trying to stay ahead of creditors, who he offered shares in his land companies rather than cash. Morris continued to produce his own paper money, but increasingly skeptical creditors would only accept them at pennies on the dollar. Morris’ failure to cover his obligations threatened to stop the building development in DC.
By the summer of 1797, with the financial crisis in London, fully hitting American merchants, Morris found himself in serious trouble. Creditors began showing up at his house daily, demanding past due payments and threatening consequences. Morris actually left the city to stay in his country home to avoid the sheriff. He refused having contact with people for fear of being served with court papers. Much of his land holdings were sold for non-payment of property taxes.
At the end of 1797, Morris and several houseguests had to threaten a constable and his deputies with guns to prevent them from breaking into his house to arrest him. By February, 1798, Morris knew that there was no way he could survive financially. He returned to Philadelphia where he was arrested and put into debtors prison. His remaining assets were seized and sold for his creditors to receive pennies on the dollar.
Senate Expels William Blount
The other prominent casualty of the financial crisis was William Blount. I mentioned a few weeks ago that Blount had been the territorial governor of the southwest territory, and became one of the first US Senators from the new state of Tennessee. I’d also mentioned that Blount was involved in a great many land deals, including the Yazoo land scandal in Georgia.
Over the 1780s and 1790s, Blount and his brothers had acquired over 2.5 million acres of western lands. Like Morris, most of their land was purchased on credit. When the war in Europe caused land prices to crash in 1795, Blount was in danger of heading to debtors prison himself.
Much of Blount’s land was dependent on the Mississippi River remaining open to trade. While the US had a treaty with Spain guaranteeing use of the river, when France started to defeat Spain in the war in Europe, many feared that France might take back Louisiana and shut down American access to the river. This would make Blount’s land holding virtually worthless.
To prevent a French takeover, Blount began conspiring with others to help the British capture Louisiana and the Floridas. With their help, the thankful British would allow them continued access to the Mississippi. In 1797, Blount sent a partner to Britain to sell the idea. In the meantime though, a Knoxville merchant James Carey, provided evidence of the conspiracy to army officials. Secretary of War Timothy Pickering, who hated Blount, took up the issue with President Adams. Adams forwarded the letter to the Senate with a note that he believed that Blount’s actions were criminal.
When Senator Blount walked onto the Senate floor that day, Vice President Jefferson had the Senate clerk read the letter revealing the conspiracy and asked Blount if he had anything to say about it. Blount asked for a day to respond. Instead of returning, Blount hopped on a ship headed to North Carolina. Federal deputies seized the ship and returned him to Congress. The Senate expelled him and the House of Representatives impeached him. Blount posted bail, then fled to Tennessee. One of his partners, however, testified before Congress and confessed to the whole conspiracy to give Britain control of the lands to the south and west of the United States.
In the end, Blount’s lawyers convinced the Senate to dismiss the articles of impeachment, arguing that members of Congress were not subject to impeachment. The Senate had already expelled him, which was the appropriate action. The Senate agreed and dismissed the articles for lack of jurisdiction.
The whole incident caused a ruckus for months among members of Congress and the administration. There was even a full scale brawl in Congress in February, 1798 over the matter.
Despite the universal condemnation in Philadelphia, Tennesseans seemed happy with Blount’s efforts to keep open the Mississippi River, by any means necessary. They elected him to the State Legislature, where he quickly became its leader. Blount was never able to resolve his land speculation debts before he died in an epidemic in 1800.
Next Week: a sex scandal involving Alexander Hamilton goes public.
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Next Episode 400 Maria Reynolds Affair (coming soon)
Previous Episode 398 John Adams Inauguration
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Further Reading
Websites
18th century crises: Panic of 1796-97 https://thefinancialengineer.org/2013/04/01/18th-century-crises-panic-of-1796-97
Federal government revenue, by source: 1789-1939 https://hsus.cambridge.org/HSUSWeb/toc/treeTablePathIdEa588-593.html
“The Bank of England Restriction. 1797-1821.” The North American Review, vol. 105, no. 217, 1867, pp. 393–434. JSTOR, http://www.jstor.org/stable/25108102
Chew, Richard S. “Certain Victims of an International Contagion: The Panic of 1797 and the Hard Times of the Late 1790s in Baltimore.” Journal of the Early Republic, vol. 25, no. 4, 2005, pp. 565–613. JSTOR, http://www.jstor.org/stable/30043365
Glaeser, Edward L. “A Nation of Gamblers: Real Estate Speculation and American History.” The American Economic Review, vol. 103, no. 3, 2013, pp. 1–42. JSTOR, http://www.jstor.org/stable/23469700
SHIN, HIROKI. “PAPER MONEY, THE NATION, AND THE SUSPENSION OF CASH PAYMENTS IN 1797.” The Historical Journal, vol. 58, no. 2, 2015, pp. 415–42. JSTOR, http://www.jstor.org/stable/24531987
Free eBooks
(from archive.org unless noted)
Adams, Charles F. The Life of John Adams, Vol. 2, Philadelphia: J.B. Lippincott & Co. 1871.
Morse, Jr. John T. John Adams, Boston: Houghton, Mifflin and Co. 1884.
Dewey, Davis R. Financial History of the United States, New York: Longman’s Green and Co. 1903.
Wood, John The History of the Administration of John Adams, Esq., Late President of the United States, New York: Barlas and Ward, 1802.
Books Worth Buying
(links to Amazon.com unless otherwise noted)*
Brown, Ralph A. The Presidency of John Adams, Univ. of Kansas Press, 1975.
Chernow, Ron Alexander Hamilton, Penguin Press, 2004.
Chernow, Ron Washington, A Life, Penguin Press, 2010.
Chervinsky, Lindsay M. Making the Presidency John Adams and the Precedents That Forged the Republic, Oxford Univ. Press, 2024.
Chervinsky, Lindsay M. The Cabinet: George Washington and the Creation of an American Institution, Belknap Press, 2020.
Elkins, Stanley M. and Eric McKitrick, The Age of Federalism: The Early American Republic, 1788–1800, Oxford Univ. Press, 1993 (borrow on archive.org).
Kurtz, Stephen G. The Presidency of John Adams: The Collapse of Federalism, 1795-1800, Literary Licensing, LLC, 2011.
Malone, Dumas Jefferson and the Ordeal of Liberty, Little Brown & Co. 1962 (borrow on archive.org).
Staloff, Darren Hamilton, Adams, Jefferson: The Politics of Enlightenment and the American Founding, Hill and Wang, 2005.
Cunningham, Noble E. The Jeffersonian Republicans: The Formation of Party Organization, 1789-1801, Univ. of NC Press, 1957 (borrow on archive.org).
McCullough, David John Adams, Simon & Schuster, 2001.
Meacham, Jon Thomas Jefferson: The Art of Power, Random House, 2012
Miller, John C. Alexander Hamilton and the Growth of the New Nation (or Portrait in Paradox), Harper & Brothers, 1959 (borrow on archive.org)
Nester, William The Hamiltonian Vision, 1789-1800, Potomac Books, 2012.
Pasley, Jeffrey L. The First Presidential Contest: 1796 and the Founding of American Democracy, University Press of Kansas, 2016.
Randall, Willard Sterne Thomas Jefferson: A Life, Henry Holt and Co. 1993.
Sharp, James R. American Politics in the Early Republic: The New Nation in Crisis, Yale Univ. Press, 1993 (relevant chapter on JSTOR).
Shaw Peter The Character of John Adams, Univ. of NC Press, 1976.
Smith, Page John Adams, Vol. 2, Doubleday, 1962 (borrow on archive.org).
Wood, Gordon S. Empire of Liberty: A History of the Early Republic, 1789-1815, Oxford Univ. Press, 2009.
* As an Amazon Associate I earn from qualifying purchases.
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