The Opium Trade & The “Jacksonian” Depression of the 1830s

Here’s an exot­ic tale of trade, mon­ey sup­ply and finan­cial reces­sion from the days when sil­ver, not gold, was the numéraire and glob­al trade-finance mar­kets more inte­grat­ed than you might suppose.

The back­sto­ry: In 1832 Pres. Andrew Jack­son, fac­ing re-elec­tion, vetoed the re-char­ter­ing of the wide­ly-branched, Repub­li­can-aligned Bank of the Unit­ed States, re-direct­ing US gov­ern­ment deposits to oth­er pri­vate banks in States that were polit­i­cal­ly aligned with Jack­son; the so-called “pet” banks.

Jack­son’s veto end­ed the effec­tive con­trol that the Bank of the US had exer­cised over the volume/velocity of specie in cir­cu­la­tion; i.e. the mon­ey sup­ply. (The Fed­er­al gov­ern­ment deposits it held were lia­bil­i­ties of State-based banks. By vary­ing the rate at which they called them in, the Bank of the US could affect the rate of cred­it cre­ation by the State banks). In prin­ci­ple, the State banks were able after­wards to expand their credit/deposit ratio with­out restraint. Eco­nom­ic his­to­ri­ans includ­ing Arthur Schlesinger blamed Jack­son’s pol­i­cy for the sub­se­quent infla­tion­ary boom in the USA, the finan­cial pan­ic of 1837 and the severe depres­sion that fol­lowed in 1839–1843.

But in 1969, Peter Temin (now emer­i­tus Pro­fes­sor of eco­nom­ics at MIT), showed that sto­ry was wrong: the credit/deposit ratio of the US bank­ing sys­tem as a whole did not change over the peri­od up to 1837. So what caused the blow-out in the mon­ey sup­ply? On one view: British per­fidy and US inge­nu­ity. The fol­low­ing is from a review of Peter Temin, The Jack­son­ian Econ­o­my (Ama­zon) by Richard Syl­la for the Eco­nom­ic His­to­ry Asso­ci­a­tion (my empha­sis added).

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.

[Richard Sylla] 

There’s more on the polit­i­cal his­to­ry of the Jack­son veto here.

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