It has to do with the financial crisis that occurred after the expansion of local banks after President Andrew Jackson's successful fight against the Second Bank of the United States, which functioned as a key institution on behalf of concentrated wealth against the interest of labor and farmers. The Money Power is how the Jacksonians referred to it and its wealthy backers.
Baptist's article is on the wonky side, but the topic is a very interesting one to me. He would be reluctant to accept the capsule description of the Bank I just gave. And I'm not so sure I would share his perspective about how reasonable it would have been for the Jackson Administration to propose additional bank regulations in that context. I think his may be indulging in a bit of anachronism there, projecting knowledge from later experience back onto the 1830s.
But his main topic in the article is the fascinating way in which financial instruments that ultimately had slaves, human property, as their physical basis contributed mightily to the Panic of 1837. And it also gives a good sense of how deeply embedded the slave system had become in the national American economic system, not just that of the slave states.
The Panic of 1837 doesn't appear in the National Bureau of Economic Research's list of recessions, which begins with the business cycle trough of December 1854. But Baptist writes, "The Panic of 1837 launched America's biggest and most consequential economic depression before the Civil War."
Peter Rousseau in Jacksonian Monetary Policy, Specie Flows, And The Panic Of 1837 Journal of Economic History 62:2 (June 2002) writes:
The financial panic that gripped the U.S. economy in the Spring of 1837 was among the mostBaptist describes the economic role of slavery this way:
severe in this nation’s history. Failures and loan losses reduced the book assets of the state chartered banks by 45 percent during the five years that followed, while 194 of the 729 banks with charters in 1837 were forced to close their doors. The prices of banking, railroad and industrial securities in the early stock markets plummeted. The effects on the real sector were also substantial. For example, the growth of real investment per capita fell from an annual average of 6.6 percent in the five years preceding the panic to -1.0 percent over the next five years. Among 19th century U.S. financial crises, only that of 1893 posted a larger decline in investment. Similar calculations show the average annual growth of real per capita income falling by 1.4 percent in the decade surrounding 1837, effectively drawing one of the nation’s early growth spurts to an abrupt close. This decline is comparable to that experienced in 1873 and considerably larger than those surrounding the crises of 1857 and 1893. [my emphasis]
By the 1830s, the cotton that enslaved people grew in the new states and territories taken from Native Americans in the early nineteenth century was the most widely traded commodity in the world. Its sale underwrote investments in new forms of enterprise north of slavery. It was also the raw material of the industrial revolution. The creation of textile factories in the British Midlands launched a process of continuous technological innovation, urbanization, and creation of markets that broke the Malthusian traps of traditional agricultural society. First Britain, and then the U.S., and then the rest of Western Europe achieved sustained rates of economic growth never before seen in human history.And he gives this informative description of how cotton was already showing in the 1920s that it could contribute to financial instability:
When rumors of bad news overwhelmed the desire for speculative gain—when the "animal spirits" of the marketplace, to use a term coined by John Maynard Keynes, turned negative—a massive, systemic crash could result. This is what almost happened in 1824-1825, when cotton buyers were initially convinced that the 1824 crop was small. After buying all the bales that they could at rising prices, middlemen discovered that in fact the crop had been very large. Beginning with Adam Smith, utopian economists have argued that the logical outcome of profit-maximizing behavior by all market actors is the maximum collective benefit. In this case, when the price of a pound of cotton plummeted, merchant firms were unable to pay back the short-term commercial loans they had taken, and so they demanded repayment from their fellow firms to whom they had made loans. This individually rational behavior—shoring up liquidity as pressure for payment increased—led to collectively irrational outcomes. Every firm was suddenly moving in the same direction, every firm faced the same crisis, each one responded in the same way.The result was crash and paralysis in the British cotton and credit markets. [my emphasis]And the genius of finance came up with ways to securitize slaves:
For everyone who drew profit in the system, enslaved human beings were the ultimate hedge. Cotton merchants, bankers, slave traders—everybody whose money the planter borrowed and could not pay until the time the cotton was sold at a high enough price to pay off his or her debts—all could expect that eventually enslaved people would either 1) make enough cotton to enable the planter to get clear or 2) be sold in order to generate the liquidity to pay off the debt. ...They did it by mortgaging both land and slaves to banks and the banks floated bonds to finance them. The C.A.P.L. model to which he refers is from an example he's using from the Consolidated Association of the Planters of Louisiana (C.A.P.L.):
The bonds effectively converted enslavers' biggest investment—human beings, or "hands," from Maryland and Virginia and North Carolina and Kentucky—into multiple streams of income, all under their own control, since all borrowers were officially stockholders in the bank. The sale of the bonds created a pool of high-quality credit to be lent back to the planters at a rate significantly lower than the rate of return that they could expect that money to produce. That pool could be used for all sorts of income-generating purposes: buying more slaves (to produce more cotton and sugar and hence more income) or lending to other enslavers. Clever borrowers could pyramid their leverage even higher—by borrowing on the same collateral from multiple lenders, by also getting unsecured short-term commercial loans from the C.A.P.L., by purchasing new slaves with the money they borrowed and borrowing on them too. They had mortgaged their slaves—sometimes multiple times, and sometimes they even mortgaged fictitious slaves—but in contrast to what Walsh had to promise Nolte in 1824, this type of mortgage gave the enslaver tremendous margins, control, and flexibility. It was hard to imagine that such borrowers would be foreclosed, even if they fell behind on their payments. After all, the borrowers owned the bank.This awesomely brilliant system of casino finance, like more brilliant and more awesome ones in more recent years, came crashing down. In 1836, a crash of trading firms in England spread to North America:
Using the C.A.P.L. model, slaveowners were now able to monetize their slaves by securitizing them and then leveraging them multiple times on the international financial market. This also allowed a much wider group of people to profit from the opportunities of slavery's expansion. Perhaps it was no accident that the typical bond issued by the C.A.P.L. and the series of copycat institutions that followed was denominated at $1,000, which was roughly the price of a field hand. For the investor who bought it from the House of Baring Brothers or some other seller, a bond was really the purchase of a completely commodified slave: not a particular individual, but a tiny percentage of each of thousands of slaves. The investor, of course, escaped the risk inherent in owning an individual slave, who might die, run away, or become rebellious.
The tsunami rushed across the ocean to their trading partners in New Orleans. By late March  each of the top ten cotton-buying firms there had collapsed.Baptist includes an interesting reflection on the "magical, fictitious, and strange" aspects of this whole arrangement. Particularly the financial securitization of actual human beings:
Except for planters, who were mostly debtors, almost every market actor—cotton merchants, dry-goods merchants, Southern bankers, Northern bankers — now realized that they were both creditors and debtors. But as they scrambled to collect debts from others so that they could pay off their own, two things were happening. The first was that their individually rational pursuit of liquidity created the collectively irrational outcome of systemic failure. No one was able to pay debts, and so most buying and selling ground to a halt. An attempt to restart the system failed. A second, bigger crash in 1839 finished off many of the survivors of the 1837 panic. During those two years, meanwhile, a second consequence had emerged: the discovery that most of the debt owed by planters and those who dealt with them was "toxic," to use a recent term. It was unpayable. The planters of Mississippi owed New Orleans banks alone $33 million, estimated one expert, and could not hope to net more than $10 million from their 1837 crop to pay off that debt. Nor could they sell off capital to raise cash because prices for slaves and land, the ultimate collateral in the system, had plummeted as the first wave of bankruptcy-driven sales tapped what little cash there was in the system. This meant that the financial system wasn't just frozen, but that many creditors' balance sheets were overwhelmed. [my emphasis]
The securitization of a human is far more offensive still to our moral sensibilities, turning persons into numbers and paper bonds, and so dividing them up and recombining them by legislative fiat that you can carry them across the ocean in suitcases and sell them to people who profess their support for emancipation [i.e., British investors]. If that isn't fiction, then I don't know what is. And yet in the end the reverberations set off by the leveraging of slavery's inequities into further equity for those who exploited them were what brought the structure of real-life slavery crashing down. [my emphasis]Very interesting stuff. Check out the full article.
And this crisis no doubt escalated the fears of the already chronically-fearful planter class in the South that was given to period panics over real and imagined slave rebellions as it was.
Tags: confederate heritage month 2013, slavery, panic of 1837