Tuesday, February 3, 2009

Henry Clay and the Panic of 1819

Henry Clay was the founder of the Whig Party and Abraham Lincoln's mentor. The Whig Party was antecedent to today's Republican Party. Born in Virginia, his family moved to Kentucky when he was 14 in 1791. Clay became a lawyer and was a Democratic Republican, that is, a follower of Jefferson. Although the Democratic Republicans opposed the Federalists' plan to support business at the federal level, some Democratic Republicans favored government support for manufacturing and banking at the state level:

"Though Republicans generally rejected federal assistance to economic development, they debated whether state governments should establish or subsidize banks, transportation companies, or other corporations. Henry Clay's first major effort in the Kentucky state legislature was to come to the defense of just such a corporation, the embattled Kentucky Insurance Company."*

The Kentucky Insurance Company was given a monopoly to insure all Mississippi River cargoes in the state of Kentucky but it was also given the power to make loans and issue notes, i.e., paper money. Many Kentuckians opposed this proposal. However, Henry Clay, who had been elected to the state legislature in 1803 favored paper money because, according to Watson**:

"men like Clay were convinced that the availability of credit for new investments and a plentiful currency that could expand in volume with the needs of local business were absolutely essential for regional prosperity. When an effort began in 1804 to repeal the company's banking privileges, Clay leaped to its defense."

The opponents of the Kentucky Insurance Company won a Pyrrhic victory in that the monopoly of paper money issuance was withdrawn from the Kentucky Insurance Company but it was granted to several other banks. Paper money issuance proceeded handsomely in Kentucky.

Clay was elected to the House of Representatives in 1811. He was an advocate of aggressive military action against the British in 1812 and a mild opponent of slavery (he himself owned slaves). Participating with John Quincy Adams in the peace negotiation with the British in Ghent in 1814, Clay returned to Congress at a time when the Federalist Party gasped its final breath due to its opposition to the War of 1812. Watson notes that***:

"the lessons of the war had persuaded many leading Republicans that some of the Federalists' favorite measures had merit after all, including a national bank, a protective tariff and federal aid to internal improvements. The new policies appealed strongly to Henry Clay, and the congressman from Kentucky was in the forefront of efforts to adopt them."

The First Bank of the United States's charter had expired in 1811, but the War of 1812 motivated support for a Second Bank. The war also increased support for federal subsidies to manufacturing because many felt that military strategy required manufactures. Difficulties in transporting troops and men led to support among future Whigs for road building. John C. Calhoun, later the advocate of state veto power and state's rights (over slavery), argued that improved transportation would make the Republic smaller and so overcome Montesquieu's and others' concern that republics in large areas cannot survive. "Let us then...bind the Republic together with a perfect system of roads and canals."+ However, many Americans were++:

"worried about the corrupting power of monopolies and feared that the creation of a new class of moneyed capitalists based on paper wealth would undermine the moral and political fiber of the republic."

After the War of 1812 American trade with Europe grew rapidly, in part because of a famine in Europe+++:

"Inexperienced in the fluctuations of an unregulated market economy, government officials and officers of the newly chartered Second Bank of the United States cooperated merrily in feeding the boom, often profiting from banking and land speculation on their personal accounts.

"The party ended abruptly, however, when the BUS had to collect enough specie to make the final payment on the Louisiana Purchase.++++ Loans were suddenly called in, and the Bank demanded specie in exchange for its holdings of state bank notes. Suddenly deprived of credit, numerous urban businesses collapsed and discharged their employees. Thousand of borrowers could not pay their loans and lost homes, farms and businesses to the sheriff's auction. Coincidentally, a bumper crop in Europe cut demand for American foodstuffs and drove farm prices even lower. From a heyday of prosperity and expansion, the American economy was plunged into the rigors of high unemployment, widespread bankruptcy and the suspension of specie payments by banks.

"The panic struck in 1819, and parts of the economy continued to be affected throughout the first half of the 1820s. Fortunately, most Americans still lived on subsistence farms that provided food for their tables, regardless of the level of commodity prices or the prospects for waged labor...Banks demanded strict repayment of their loans but refused to honor their own obligations to pay specie...At the center of everything, the Bank of the United States was the strictest creditor of all, seeking to pay its own debts by pressing state banks and private customers with equal severity. Among the many lawyers who did a handsome business suing delinquent borrowers and foreclosing lands for the BUS, Henry Clay was one of the most active, with a heavy case load all over Kentucky and Ohio."

*Harry L. Watson. Andrew Jackson versus Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin's, 1998. p. 46.
**Ibid., p. 48.
***Ibid., p. 52
+John C. Calhoun, "Speech on Internal Improvements", February 4, 1817, in Robert L. Meriwether, ed., The Papers of John C. Calhoun, vol 1, 1807-1817, 23 vols, p. 401.
++Ibid., p. 55
+++Ibid., p. 56
++++Note that this government policy of Jefferson's precipitated the panic, as did the excessive paper money issuance which would not have been possible without government legalization and support of fractional reserve banking and banking monopolies.

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