The Atlantic Monthly, Volume 01, No. 04, February, 1858

THE GREAT FAILURE

The crucial fact, in this epoch of commercial catastrophes, is not the stoppage of Smith, Jones, and Robinson,—nor the suspension of specie payments by a greater or less number of banks,—but the paralysis of the trade of the civilized globe. We have had presented to us, within the last quarter, the remarkable, though by no means novel, spectacle of a sudden overthrow of business,—in the United States, in England, in France, and over the greater part of the Continent.

At a period of profound and almost universal peace,—when there had been no marked deficit in the productiveness of industry, when there had been no extraordinary dissipation of its results by waste and extravagance,—when no pestilence or famine or dark rumor of civil revolution had benumbed its energies,—when the needs for its enterprise were seemingly as active and stimulating as ever,—all its habitual functions are arrested, and shocks of disaster run along the ground from Chicago to Constantinople, toppling down innumerable well-built structures, like the shock of some gigantic earthquake.

Everybody is of course struck by these phenomena, and everybody has his own way of accounting for them; it will not, therefore, appear presumptuous in us to offer a word on the common theme. Let it be premised, however, that we do not undertake a scientific solution of the problem, but only a suggestion or two as to what the problem itself really is. In a difficult or complicated case, a great deal is often accomplished when the terms of it are clearly stated.

It is not enough, in considering the effects before us, to say that they are the results of a panic. No doubt there has been a panic, a contagious consternation, spreading itself over the commercial world, and strewing the earth with innumerable wrecks of fortune; but that accounts for nothing, and simply describes a symptom. What is the cause of the panic itself? These daring Yankees, who are in the habit of braving the wildest tempests on every sea, these sturdy English, who march into the mouths of devouring cannon without a throb, these gallant Frenchmen, who laugh as they scale the Malakoff in the midst of belching fires, are not the men to run like sheep before an imaginary terror. When a whole nation of such drop their arms and scatter panic-stricken, there must be something behind the panic; there must be something formidable in it, some real and present danger threatening a very positive evil, and not a mere sympathetic and groundless alarm.

Neither do we conceive it as sufficiently expressing or explaining the whole facts of the case, to say that the currency has been deranged. There has been unquestionably a great derangement of the currency; but this may have been an effect rather than a cause of the more general disturbance; or, again, it may have been only one cause out of many causes. In an article in the first number of this magazine, the financial fluctuations in this country are ascribed to the alternate inflation and collapse of our factitious paper-money. Adopting the prevalent theory, that the universal use of specie in the regulation of the international trade of the world determines for each nation the amount of its metallic treasure, it was there argued that any redundant local circulation of paper must raise the level of local prices above the legitimate specie over exports; which imports can be paid for only in specie,—the very basis of the inordinate local circulation. Of course, then, there is a rapid contraction in the issue of notes, and an inevitable and wide-spread rupture of the usual relations of trade. But although this view is true in principle, and particularly true in its application to the United States, where trade floats almost exclusively upon a paper ocean, it is yet an elementary and local view;—local, as not comprising the state of facts in England and France; and elementary, inasmuch as it omits all reference to the possibility of a great fluctuation of prices being produced by other means than an excess or deficiency of money.1 In France, as we know, the currency is almost entirely metallic, while in England it is metallic so far as the lesser exchanges of commerce are concerned; there is an obvious impropriety, therefore, in extending to the financial difficulties of those nations a theory founded upon a peculiarity in the position of our own.

If, however, it be alleged that the disturbances there are only a reaction from the disturbances here, we must say that that point is not clear, and Brother Jonathan may be exaggerating his commercial importance. The ties of all the maritime nations are growing more and more intimate every year, and the trouble of one is getting to be more and more the trouble of the others in consequence; but as yet any unsettled balance of American trade, compared with the whole trade of those nations, is but as the drop in the bucket. John Bull, with a productive industry of five thousand millions of dollars a year, and Johnny Crapaud, with an industry only less, are not both to be thrown flat on their backs by the failure of a few millions of money remittances from Jonathan. The houses immediately engaged in the American trade will suffer, and others again immediately dependent upon them; but the disturbing shock, as it spreads through the widening circle of the national trade, will very soon be dissipated and lost in its immensity. That is, it will be lost, if trade there is itself sound, and not tottering under the same or similar conditions of weakness which produced the original default in this country; in which event, we submit, our troubles are to be considered as the mere accidental occasion of the more general downfall,—while the real cause is to be sought in the internal state of the foreign nations. Accordingly, let any one read the late exposures of the methods in which business is transacted among the Glasgow banks, the London discount-houses, and the speculators of the French Bourse, and he will see at a glance that we Americans have no right to assume and ought not to be charged with the entire responsibility of this stupendous syncope. Our bankruptcy has aggravated, as our restoration will relieve the general effects; but the vicious currency on this side the water, whatever domestic sins it may have to answer for, cannot properly be made the scapegoat for the offences of the other side of the water. The disasters abroad have occurred under conditions of currency differing in many respects from our own, and we believe that if there had been no troubles in America, there would still have been considerable troubles in England and France, as, indeed, the financial writers of both these countries long ago predicted from the local signs.

The same train of remark may be applied to those who impute the existing embarrassments to our want of a protective tariff; for, granting that to be an adequate explanation of our own difficulties, it is not therefore an adequate explanation of those in Europe. The external characteristics of the phenomena before us are everywhere pretty much the same, namely,—a prosperous trade gradually slackening, an increasing demand for money, depreciation and sacrifice of securities, numerous failures, disappearance of gold, panic, and the complete stagnation of every branch of labor; and it should seem that the cause or causes to be assigned for them ought also to be everywhere pretty much the same. At any rate, no local cause is in itself to be regarded as sufficient, unless it can be shown that such local cause has a universal operation. But who will undertake to contend that the absence of a protective system here is enough to prostrate both Great Britain and France,—the nations which the same theory supposes to have been chiefly benefited by such deficiency? The scheme of free trade is often denounced by its opponents as British free trade; but we respectfully suggest that if its operations lead to so serious a destruction of British interests as is now alleged, the phrase is at least a misnomer. No! as the characteristics of the crisis are common to the United States, England, and France, so the causes of that crisis are to be sought in something which is also common to the United States, England, and France.

Now the one thing common to all these nations, and to all commercial nations, is the universal use of Credit, in the transactions of business. We conceive, therefore, that the existing condition of things may be most correctly and comprehensively described as a suspension of credit, and the consequent pressure for payment of immense masses of outstanding debt. This, we say, is the central fact, common to all the nations; and the solution of it, as a problem, is to be sought in some vice or disturbing element common to the general system, and not in any local incident or cause.

Credit has gained so enormous an extension within the last two centuries, that it may almost be pronounced the distinctive feature of modern times. It existed, undoubtedly, in ancient days,—for its correlative, Debt, existed; and we know, that, among the Jews, Moses enacted a sponging law, which was to be carried into effect every fifty years; that Solon, among the Greeks, began his administration with the Seisachtheia, or relief-laws, designed to rescue the poor borrowers from their overbearing creditors; and that the usurers were a numerous class at Rome, where also the Patrician houses were immense debtor-prisons. But in ancient times, when the chief source of wealth (aside from conquest and confiscation by the State) was the labor of slaves, and the principal exchanges were effected either by direct barter or the coined metals, the system of credit could not have been very complicated or general. As for the lending of money on interest, it appears to have been looked at askance by most of the ancients; and the prejudice against it continued, under the fostering care of the Church, far down into the Middle Ages. With the emancipation of the towns, however, with the splendid development of the Italian republics, with the noble commercial triumphs of the cities of the Hansa, credit was recovered from the hands of the Jews, and began a career of rapid and beneficent expansion. It was in an especial manner promoted by the magnificent prospects unfolded to colonial and mining enterprise in the discovery of the New World, by the stimulus and the facilities afforded to industrial skill by the researches of natural science, and by the emancipation won for all the activities of the human mind through the free principles of the Reformation. Thus, by degrees, credit came to intervene in nearly every operation of commerce and of social exchange, from the small daily dealings of the mechanic at the shop, to the larger wholesale transactions of merchant with merchant, and to the prodigious expenditures and debts of imperial governments. Credit by note of hand, credit by book account, credit by mortgages and hypothecations, credit by bills of exchange, credit by certificates of stock, credit by bank-notes and post-notes, credit by exchequer and treasury drafts, credit, in short, in a thousand ways, enters into trade, filling up all its channels, turning all its wheels, freighting all its ships, coming down from the past, pervading the present, hovering over the future, reaching every nook and affecting every man and woman in the civilized world.

Such is the extent of credit; but let it be remarked in connection, that, in all these innumerable and multifarious forms of it, in all the stupendous interchanges of Mine and Thine, the ultimate reference is to one sole standard of value, which is the value of the precious metals. The civilized world has adopted these as the universal solvent of its vast masses of obligation. It is assumed that some standard is indispensable; it is asserted to be the imperative duty of governments, if they would not make their exactions of taxes arbitrary, unequal, and oppressive,—if they would render the dealings of individuals mutual and just,—if they would preserve the property and labor of their subjects from the merciless caprices of the powerful, and keep society from reverting to a more or less barbarous state,—to supply a fixed and equable money-measure; and the majority of the governments have selected gold and silver as the best. As seemingly less changeable in quantity and value than anything else, as imperishable, as portable, as divisible, as both convenient and safe, the precious metals challenge superiority over every other product; and accordingly every contract and every debt is resolvable into gold and silver. From this fact, the reader will see at once the prodigious significance of those materials in the economy of trade, and the prime necessity that they should be not only uniform in value, but so equally distributed that they may be easily attainable when needed. Every change in their value is a virtual change in the value of the vast variety of obligations which are measured and liquidated by them; and every apprehension of their scarcity or disappearance, by whatever cause excited, is an apprehension of embarrassment on the part of all those who have debts to pay or to receive.

But it happens that this standard is not an accurate standard. It does not stand, while other things alone move, but moves itself; its value is changeable,—fluctuating from time to time according to the relation of supply and demand, and from place to place according to the perturbations of the trade of the world. Moreover, its very preeminence of function—the universality and the durability of its worth—renders it peculiarly sensitive to accidental influences, or to influences outside of the usual workings of trade. A great war or revolution occurring anywhere, the loss by tempests or frosts of an important staple, such as wheat or cotton, the fall and reaction consequent upon some great speculative excitement, are all likely to produce enormous drains or sequestrations of this valuable material. When the revolt of 1848 broke out in Italy, every particle of specie disappeared as effectually as if it had been thrown into the Adriatic or the mouth of Vesuvius; when the corn crop failed in England in 1846, the Bank of England lost ten millions of dollars in gold in less than nine days, and the country five times that in about a month; and in our own late experiences, with three hundred millions of gold among the people, we have seen it so put away, that no charm or bait could allure it from its hiding-places.

Need we go any farther, then, than these simple truths, to lay our finger on the primal fact which underlies all financial embarrassments and panics? The mass of the transactions in commerce rests upon credit; the solvent of that credit is gold; and gold has not only a sliding scale of value, but is apt to disappear when most wanted. While business is moving on in the ordinary way, it is more than ample for every purpose; but the moment any event arises, such as a rapidly falling market, inducing hurried sales, or a drain of specie, disturbing the general confidence, everybody gets apprehensive, everybody calls upon everybody for payment, and everybody puts everybody off,—till a feeling of sauve qui peut becomes universal.

If there were no currency anywhere but a metallic currency, this liability to sudden revulsions would still hang over trade, provided credit and paper tokens of credit continued to be the media of exchanges; and the instinctive or experimental perception of this truth, combined with other motives, is what has led men to their various attempts to provide a money substitute for gold and silver. Lycurgus, in Sparta, found it, as he supposed, in stamped leather; but modern wisdom has preferred paper. The degree of success attained by Lycurgus we do not know; but of the success of the moderns we do know, by some one hundred and fifty years of recurring disaster. There are some steeds that cannot be ridden; they are so fractious and intractable, that, put whom you will upon their back, he is thrown, and invent what snaffle or breaking-bit you may, they will not be held to an equable or moderate pace. And of this sort, judging by the past attempts, is Paper Money. All the ingenuity and efforts of the most skillful trainers of the Old World, and of the most cunning jockeys of the New, have been tasked in vain to devise an effective discipline and curb for this impatient colt. Paper Money either refuses to be ridden, and runs rampant away, or, if any one succeed in mounting him for a time, he performs a journey like that which Don Quixote took on the back of the famous Cavalino, or Winged Horse. In imagination he ascended to the enchanted regions,—but in reality he was only dragged through alternate gusts of fire and of cold winds, to find the horse himself, in the end, a mere depository of squibs and crackers.

Paper money has been issued, for the most part, on the one or the other of two conditions, namely: as irredeemable, when it has been made to rest on the vague obligation of some government to pay it some time or other in property; or as convertible into gold and silver on demand. But under both conditions it seems to have been impossible to preserve it from excess and consequent depreciation. Nothing would appear to be safer and sounder, on the face of it, than a money-obligation backed by all the responsibility and property of a government; and yet we do not recall a single instance in which an irredeemable government-money has been issued, where it did not sooner or later swamp the government beyond all hope of its redemption. No virtue of statesmanship is proof against the temptation of creating money at will. Even where there has been a nominal convertibility on demand of the bills of government banks, they have worked badly in practice. In 1637, for instance, the monarch of Sweden established the Bank of Stockholm; yet in a little while its issues amounted to forty-eight millions of roubles, and their depreciation to ninety-six per cent. In 1736, Denmark created the Bank of Copenhagen; but within nine years from its foundation it suspended redemptions altogether, and its notes were depreciated forty-six per cent. We need not refer to the extraordinary issues of French assignats, or of American continental money,—nor to the deluges of paper which have fallen upon Russia and Austria. During all these experiments, the sufferings of the people, according to the different historians, were absolutely appalling. One of these experiments of paper money, however, begun under the most promising auspices, and on a professed basis of convertibility, was yet so stupendous and awful in its effects, that it has taken its place as a Pharos in History, and is never to be forgotten. We refer, of course, to the banking prodigalities of the Regency of France, undertaken in connection with the scheme known as Law's Mississippi Bubble,—although the Bank and the Bubble were not essentially connected. We presume that our readers are acquainted with the incidents, because all the modern historians have described them, and because the more philosophical impute to them an active agency in the origination of that moral corruption and lack of political principle which hastened the advent of the great Revolution. Louis XIV. having left behind him, as the price of his glory, a debt of about a thousand millions of dollars, the French ministry, with a view to reduce it, ordered a re-coinage of the louis-d'or. An edict was promulgated, calling in the coin at sixteen livres, to be issued again at twenty; but Law, an acute and enterprising Scotchman, suggested that the end might be more happily accomplished by a project for a bank, which he carried in his pocket. He proposed to buy up the old coin at a higher rate than the mint allowed, and to pay for it in bank-notes. This project was so successful that the Regent took it into his own hands, and then began an issue of bills which literally intoxicated the whole of France. No scenes of stock-jobbing, of gambling, of frenzied speculation, of reckless excitement and licentiousness ever surpassed the scenes daily enacted in the Rue Quincampoix; and when the bubble burst, the distress was universal, heartrending, and frightful. With millions in their pockets, says a contemporary memoir, many did not know where to get a dinner; complaints and imprecations resounded on every side; some, utterly ruined, killed themselves in despair; and mysterious rumors of popular risings spread throughout Paris the terror of another expected St. Bartholomew.

In this case the phenomena were the more striking because they were gathered within a short compass of time, and took place among a people proverbial for the versatility and extravagance of their impressions. The French are an excitable race, who carry whatever they do or suffer to the last extreme of theatrical effect; and for that reason it might be supposed that the tremendous revulsions we have alluded to were owing in part to national temperament. But similar effects have been wrought, by similar causes, among the slower and cooler English, with whom commercial disturbances have been as numerous and as disastrous as among the French, only that they have been distributed over wider spaces of time, and controlled by the more sluggish and conservative habits of the nation. Some twenty years before Law made his approaches to the French Regent, another Scotchman, William Patterson, had got the ear of Macaulay's hero, William, and of his ministers, and laid the foundations of the great Bank of England. It was chartered in 1694, on advances made to the government; and gradually, under its auspices, the vast system of English banking, which gives tone to that of the world, grew up. Let us see with what results; they may be expressed in a few words: every ten or fifteen years, a terrific commercial overturn, with intermediate epochs of speculation, panic, and bankruptcy.

We cannot here go into a history of this bank, nor of the various causes of its reverses; but we select from a brief chronological table, in its own words, some of the principal events, which are also the events of British trade and finance.

1694. The Bank went into operation.

1696. Bank suspended specie payments. Panic and failures.

1707. Threatened invasion of the Pretender. Run upon the Bank,—panic. Government helped it through, by guarantying its bills at six per cent.

1714. The Pretender proclaimed in Scotland. Run upon the Bank,—panic.

1718-20. Time of the South-Sea Bubble. Reaction,—demand for money,—Bank of England nearly swept away,—trade suspended,—nation involved in suffering.

1744. Charles Edward sails for Scotland, and marches upon Derby. Panic. Run upon the Bank,—is obliged to pay in sixpences, and to block its doors, in order to gain time.

1772. Extensive failures and a monetary panic. The Bank maintains the convertibility of its notes for several years, at an annual expense of £850,000.

1793. War with France,—drain of gold,—Bank contracts,—panic,—failures throughout the country,—universal hoarding,—one hundred country banks stop,—notes as low as five pounds first issued,—general fall of prices.

1796. An Order in Council suspends specie payment by the Bank.

1799. Numerous failures,—chiefly on the Continent. The pressure in England relieved by an issue of Exchequer bills.

1807-9. Great speculations in flax, hemp, silk, wool, etc.

1810. Recoil of speculation,—extensive failures, and great demand for money.

1811. Parliament adopts a resolution declaring a one-pound note and a shilling legal tender for a guinea.

1814-16. Heavy losses and bankruptcies,—failure of two hundred and forty country banks,—the distress and suffering of the people compared to that in France after the bursting of the Mississippi Scheme.

1819. Law passed for the resumption of specie payments in 1823,—after a suspension of twenty-seven years.

1822. Great commercial depression throughout Europe,—agricultural distress,—famine in Ireland.

1824. Speculations in scrips and shares of foreign loans and new companies, to a fabulous amount.

1825. Recoil of the speculations,—run upon the banks,—seventy banks stop,—a drain of gold exhausts the bullion of the Bank.

1826. Depression of trade,—government advances Exchequer bills to the Bank.

1832. A run for gold,—bullion in the Bank again alarmingly reduced.

1834-7. Jackson vs. Biddle in America produces considerable derangements in England,—drain of gold,—great alternate contractions and expansions,—severe mercantile distress.