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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