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Project 2001: Significant Works in Economic History

Peter Temin, The Jacksonian Economy. New York: W.W. Norton & Company, 1969. 208 pp.

Review Essay by Richard Sylla, Department of Economics, Stern School of Business, New York University.

Jackson and Biddle Exonerated?

Peter Temin’s The Jacksonian Economy represented a major triumph of cliometrics in the heady early years of that quantitative, theory-informed approach to economic history. Before Temin, generations of U.S. historians — whether they admired Andrew Jackson’s presidency or did not — agreed that Jackson’s economic policies engendered the inflationary boom of the mid-1830s, ended it by causing the commercial and financial panic of 1837, and perhaps even had a role in plunging the U.S. economy into a long depression lasting from 1839 to 1843.

Temin argued that each of these elements of the traditional consensus was wrong: “First, the boom did not have its origins in the Bank Wars. Second, the Panic of 1837 was not caused by Jackson’s actions. And third, the depression of the early 1840’s was neither as serious as historians assume nor the fault of Nicholas Biddle” (pp. 22-23). Temin was in 1969 — and he remains today, nearly a third of a century later — most convincing with respect to the first and most important element, namely in denying that Jackson’s “war” against the Bank of the United States (the BUS) set off the inflationary boom, the initiator of a chain of events that led subsequently to panic and depression. In contrast, Temin’s exoneration of Jackson (and Biddle) from complicity in the panic of 1837 and the depression of 1839-1843, both of which happened after Jackson had left the presidency, has proven to be less convincing to subsequent investigators.

What were the reputedly misguided Jacksonian policies? First and foremost was Jackson’s 1832 veto of a bill passed by Congress to recharter the BUS, the twenty-year charter of which would expire in 1836. The Bank’s congressional supporters could not muster enough votes to override the veto. When Jackson was re-elected later in 1832, he took it as a mandate to order removal of government balances from the BUS; government funds were then deposited in state-chartered banks, the “pet banks” politically friendly to the Jacksonians.

The BUS, by far the largest bank in the country and one that unlike any other bank operated a nationwide branch system, was what today would be called a central bank. It served as the bank of the federal government, which owned twenty percent of its capital stock. This special relationship with the government conferred on the BUS a power to regulate the currency and the banking system in the interest of financial and economic stability. The source of the Bank’s regulatory and stabilizing power was quite different from that of the modern-day Federal Reserve, which has caused some confusion as to whether it was really a central bank (see Temin, Chapter 2). The Fed regulates banks essentially by holding their reserves, which it has the power to increase or decrease. In other words, the Fed regulates banks by being in debt to them. The BUS, in contrast, regulated banks by being their creditor. As state bank notes and checks were paid in to the federal government as public revenue, they were deposited in the BUS, which could then restrain or expand credit by varying the speed with which it presented the liabilities of the state banks to them for payment in specie, the monetary base. Although the regulatory mechanisms of the two central banks were different, there is ample evidence that leaders of the BUS, particularly Nicholas Biddle, its president from 1823 through Jackson’s administration, understood their power to regulate the banking system and promote stability as much as Fed leaders would a century later.

The Inflationary Boom, 1832-1837

Given the central-bank nature of the BUS, it is easy to understand why Jackson’s actions could be interpreted for thirteen decades as unleashing the inflationary boom of the 1830s. By removing the government’s balances from the BUS, the Jackson administration undercut its power to regulate and stabilize the currency and banking system. And when those balances were placed in the “pet banks,” these state-chartered banks had the ability to expand their creation of credit without having to fear BUS calls for redemption of their note and deposit liabilities.

There was in fact a rapid expansion of the US money stock and bank credit during 1832-1836, as documented by Temin (Chapter 3) in a careful reconstruction of primary data that has proven of great use to subsequent investigators. During the four years from 1832, the year of the veto, to 1836, the US money stock rose from $150 million to $276 million, and the bank-money component of it (bank notes and deposits) rose from $119 million to $203 million. Fueled by the rapid expansion of money, an index of wholesale commodity prices rose by some 50 percent in these four years. There was an inflationary boom. The prima facie case pointing to Jackson’s destruction of the BUS as the initiator of the boom was strong enough to convince generations of historians.

Temin, however, demonstrated convincingly that this prima facie case was flawed. Following the pioneering study of Milton Friedman and Anna Schwartz (A Monetary History of the United States, 1867-1960, Princeton, 1963), Temin decomposed his estimates of the money stock into its three proximate determinants: specie (the monetary base), the reserve ratio of the banks (the banks’ specie reserves as a percent of bank monetary liabilities), and the public’s currency ratio (the ratio of public’s holdings of base-money specie to its holdings of bank notes and deposits). If history’s indictment of Jackson’s economic policies were well grounded, the money stock should have expanded mainly because state banks, freed from BUS regulation, reduced the banking system’s reserve ratio as they created more and more bank credit in relation to their holdings of specie reserves. In fact, there was no change in the reserve ratio between 1832 and 1836, and indeed, the reserve ratio of the US banking system was as low or lower in 1831 and 1832 — before Jackson’s veto and removal of federal balances from the BUS — as it was in any year from 1820 to 1858, the period of Temin’s annual money stock estimates.

So what generations of historians had believed about economic events of the 1830s turned out to be wrong. I think it was Herbert Spencer who defined a tragedy as a beautiful theory killed by an ugly fact. On that definition, Peter Temin is a master tragedian of cliometrics and economic historiography.

If banking suddenly uninhibited by central bank regulation did not cause the monetary expansion and inflationary boom of the 1830s, then what did? Temin supplied an answer to this question, and the overall story he told is a most interesting one. His data and analysis of the determinants of the money supply showed that expansion of the specie base was more than sufficient to explain all of the monetary expansion. So why did the specie base of the money stock rise so much? The main cause was imports of silver from Mexico, supplemented to an extent by imports of gold from Europe, for example, the payment in 1836 of an indemnity owed by France to the United States for that country’s Napoleonic-era predations on US international commerce.

Of course, the United States for a long time had imported silver from Mexico and other Latin American sources, and almost as quickly had exported it to China and other Asian countries to pay for Asian imports. What changed in Jacksonian era was something largely unrelated to US events. The British, clever merchants that they were, introduced opium produced in their Asian dominions to the Chinese market, and suddenly the Chinese needed a way to pay the British for their new habit. Because the Americans were selling much cotton to the British, they built up claims in the form of bills of exchange, obligations of British cotton importers to pay American cotton producers. With the Chinese, because of their opium imports, now in need of a way to pay the British opium merchants, the Americans quickly realized that they no longer needed to carry silver to China to pay for imports of Chinese goods. They could substitute bills of exchange drawn on British cotton importers for silver, and the Chinese would have a nearly ideal way to pay for their opium — the British opium merchants would receive in payment promises of their own countrymen to pay pounds sterling. The net result of this substitution was that Mexican silver swelled the US monetary base. In what is perhaps the most memorable sentence of his book, Temin wrote (p. 82), “It would not be too misleading to say the Opium War was more closely connected to the American inflation than the Bank War between Jackson and Biddle.”

That could not be the whole story, Temin realized, because ceteris paribus the money-fueled inflation of prices in the United States should have corrected itself as Americans and foreigners bought less of American high-priced goods and more of cheaper foreign goods, leading to an outflow of specie from the US. That did not happen in the 1830s inflationary boom because British and other foreign investors were so attracted to the actual and prospective returns on US bonds, stocks, and other assets that they transferred large amounts of capital to the United States. In essence, foreign investors were willing in the 1830s to underwrite a US trade deficit and keep the American boom going well beyond the time it would have gone on without the capital transfers. In this sense, the 1990s US boom bore some similarity to that of the 1830s.

The Panic of 1837

The 1830s boom did come to an end in 1837, at least temporarily, in a commercial crisis and banking panic that led to a nationwide suspension of the convertibility of bank money into base money (specie) in May of that year. The suspension lasted for approximately a year, and by preventing many banks from closing their doors, as Temin noted (Chapter 4), it likely hastened the economic recovery later in the year and extending through 1838 and into 1839.

What caused the banking panic and suspension of convertibility of 1837? Many US historians since that era have pointed to two policies of the Jackson administration. One was the Specie Circular of August, 1836, requiring that land purchases from the federal government, which had soared to high levels during the boom, be paid for in specie rather than bank money, as had been customary before the Specie Circular went into effect. The other was the distribution of a mounting federal surplus, after the national debt had been entirely paid off by 1836, to the states in 1837, as required in the Deposit Act of June 1836. The surplus-distribution legislation passed by Congress was not strictly a policy measure of Jackson, although his administration went along with and administered it. Proponents of the theory that one (or possibly both) of these measures was the trigger of the financial panic argued that they increased the demand for specie by the public and caused specie reserves of banks to be reallocated around the country in ways that increased the fragility of the banking system, leading to the panic of May 1837.

Continuing on his revisionist bent, Temin examined the two measures and found them wanting as causes of the panic, mostly on grounds that amounts of specie required for land purchases and the movements of specie required to distribute the federal surplus to the states starting on January 1, 1837, were too small to have caused the panic.

However, a recent paper by Peter Rousseau (“Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837,” forthcoming, Journal of Economic History) takes a closer look at the evidence and suggests that Temin may have been too quick to discount the importance of the Jacksonian measures. Rousseau shows that the Specie Circular did not end the land-purchase boom, as Temin supposed, so it therefore most likely did promote a drain of specie from eastern banks to accommodate continued frontier land purchases from the federal government after August 1836.

Even more important, according to Rousseau, preliminary transfers of federal balances among banks in various regions of the country during the last half of 1836, made to prepare for the surplus distributions of 1837, had the same effect. Banks in New York City, already the financial center of the country, lost more than $10 million in federal deposits between August 1836 and July 1837, and saw their specie reserves drop from $5.9 to $3.8 million from August to December 1836, before the first surplus distributions, and from $3.8 to $1.5 million from December 1836 to May 1837, just before they suspended convertibility. Although Temin allowed that the Specie Circular and surplus distribution might have produced banking strains, he did not envision that they were as severe as Rousseau’s data indicate.

Be that as it may, having rejected the Specie Circular and surplus distribution as causes of the 1837 panic, Temin needed another explanation. He found it in the money-tightening policies of the Bank of England, commencing in mid-1836, in response to its declining gold reserves. Tight money in England soon became tight money in the United States, given the extensive commerce between the two countries, and it also caused a drop in the price of cotton by early 1837. The drop in cotton prices threatened the solvency of commercial firms on both sides of the Atlantic, and when they began to fail in 1837, the banks that had lent to them were also threatened, leading to runs on their reserves and the suspension of convertibility in the United States. By finding the source of the US panic of 1837 in Bank of England policies and related cotton-price fluctuations, Temin continued his exoneration of Andrew Jackson’s policies from responsibility for the inflationary boom and its end.

The Crisis of 1839 and Depression of the 1840s

In the penultimate chapter of the book, before the summary and conclusions, Temin discusses the recovery from the panic of 1837, the crisis of 1839, and the long depression that followed. The treatment is more cursory than the previous discussion of events through 1837, but the story is much the same. According to Temin, in response to a loss of reserves, the Bank of England doubled its discount rate from mid-1838 to late 1839, cotton prices fell, and the flow of capital from Britain to America declined even more and for a longer period than it did during and after the 1837 panic. Neither Andrew Jackson nor his successor as US president, Martin Van Buren, had much to do with this.

Nor, Temin contends, did Nicholas Biddle and his new Bank of the United States (chartered by Pennsylvania), the successor institution to the second BUS after its federal charter expired in 1836. Freed from central banking responsibilities, Biddle converted the BUS into a universal bank, doing a commercial business in the United States, speculating in the international cotton market, and acting as an underwriter and marketer of US securities, primarily state bond issues, in Europe. The BUS suspended convertibility in 1839, and it failed in 1841. As with the Jacksonians, international forces beyond their control determined Biddle’s, the Bank’s, and the US economy’s fate. The Bank of England and the world cotton market undid them.

Like Peter Rousseau with respect to the panic of 1837, John Wallis in a recent paper challenges Temin’s exoneration of the Americans (John Joseph Wallis, “What Caused the Crisis of 1839?”, NBER Working Paper Series, Historical Paper 133, April 2001). According to Wallis, the huge federal land sales and the soaring property values of the 1830s boom, which continued in the recovery from the panic of 1837, led frontier states to go on a borrowing binge for banking and transportation improvements, in anticipation of future bank and property tax revenues that would service the state debts. Biddle’s bank and lesser ones like it were heavily involved in marketing the state securities on both sides of the Atlantic, and they overextended themselves. When in 1839 these investment banks could not meet their obligations to borrowing states, the states ceased work on their transportation improvements and their own banks were strained. Property values collapsed, there were runs on frontier-state banks, and ultimately nine states, mostly southern and western, defaulted on their debts.

The pattern of events leading to the crisis of 1839, as documented by Wallis, was thus, contra Temin, quite different from that leading up to the panic of 1837. The banking problems that began in 1839 were in the South and the West, and did not greatly affect banks in the Northeast, apart from Biddle’s bank, whereas in 1837, as Rousseau showed, the problems began in New York City and New Orleans, financial centers, and spread to the rest of the country.

One can interpret the Rousseau and Wallis critiques (or extensions) of Temin’s work as challenging The Jacksonian Economy’s exoneration of the Jacksonians, Biddle, and Americans in general from the inflation, panic, crisis, and depression that beset them in the 1830s. And one can predict that future work will continue to address the relative importance of domestic and international factors in the sequence of events during the 1830s.

Wider Implications

Although Temin convincingly refuted the long-standing idea that Jackson’s destruction of the BUS as a central bank unleashed the inflationary boom of the 1830s, he was perhaps too quick to conclude that the Bank War was irrelevant to the economic instability that followed in its wake. To his credit, Temin (p. 73) did draw attention to an important issue here: “[T]he reserve ratio of the American banking system as a whole did not fall below its 1831 level throughout the 1830s. Banks were enabled to hold low reserves because the Second Bank of the United States was an effective policeman, not because it had vanished. As discounts on notes decreased in the 1820’s, the public increasingly was willing to hold them in place of specie.”

But he did not follow up on this lead. Stanley L. Engerman (“A Note on the Economic Consequences of the Second Bank of the United States,” Journal of Political Economy, Vol. 78, 1970, 725-28) did. Temin’s monetary analysis, Engerman argued (p. 726), showed that the American public’s confidence in the banking system, as indicated by its willingness to hold bank money in relation to specie, declined just as the fate of the BUS as a central bank became sealed: “After 1834 ^? the decline [from 1822 to 1834] in the proportion of specie held as money was reversed. Its rise began before the Panic of 1837, so that declining confidence in banks occurred before, not after, the actual large-scale bank failures.” Americans, Engerman showed, paid a price for getting rid of their central bank; they had to spend real resources amounting to 0.1 to 0.15 percent of GNP in the 1840s and 1850s, to obtain money that might more cheaply have been obtained by engraving paper banknotes and writing checks. Engerman has pointed out to me that William Gouge, a contemporary writer, estimated an even larger saving of 0.5 percent of GNP in 1830, although since Gouge was against banks and bank money he regarded the saving as small (Gouge, A Short History of Paper Money and Banking in the United States, Philadelphia, 1833, pp. 65-66). These savings from using bank money became the long-term costs of having less confidence in a banking system without a central bank. The short-term cost in the 1830s was increased vulnerability to just the sorts of panics and crises that occurred in that decade.

Before Jackson, Americans with their First and Second Banks of the United States had managed to create a superb financial system, one with few banking panics and financial crises between 1790 and 1837. Starting in 1837, panics and crises became more frequent, until at last the Federal Reserve System, which can be thought of as the Third Bank of the United States, appeared in 1914. After the advent of the Fed, US financial panics and crises again became less frequent. Moreover, now that specie has lost its role in our monetary system, the annual saving from using bank money, perhaps 2 to 3 percent of GDP depending on the measure of money selected, is far greater than it was in Jackson’s era. This should serve to remind us that our economic and financial systems might indeed be improved; the Jacksonian era should remind us that they also might get worse.

If the test of an important book is that it changes the way all subsequent visitors to its subject think about it, The Jacksonian Economy is surely an important book. For its explanation of the causes of the inflationary boom of the 1830s, it will stand the test of time. But it is equally important for providing less than convincing answers on the causes of the 1837 panic, the 1839 crisis, and the depression of the 1840s, as well as the wider ramifications of removing a pioneering and pretty good central bank from the scene. Others have been pursuing Peter Temin’s leads for three decades, and they are likely to continue to do so.

Richard Sylla teaches economic and financial history at NYU’s Stern School of Business. He is a research associate of the National Bureau of Economic Research and, in 2000-2001, president of the Economic History Association. His current research is on the development of financial systems and their relationship to economic growth.

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