The Half Has Never Been Told

by Edward E. Baptist

  Of course, if everyone was “awake,” it was hard to see how one could continue to buy low and sell high. By 1836, the Alabama and Mississippi relatives of Pendleton County, South Carolina, enslaver Thomas Harrison had been pressing him to move his investments west for years. “Pendleton is a very happy and pleasant country,” they wrote, but for all of its “pleasures and comforts,” it was just the place to miss the chance: “Surely it must be very unprofitable to have money vested in land and negroes there.” Hurry out, they told him, before the “speculators and capitalists” buy all the good cotton land. But Harrison feared that credit on slavery’s frontier was now coming too easy, that “the immense floods of paper money with which the country is inundated if not checked will give a fictitious value to property beyond anything ever known.” In fact, he noted, irrational increases in asset prices were already evident. He sent a group of his enslaved people out to Alabama so that a son located there could sell them off at the current high prices. On the way back from a visit, Thomas Harrison traveled through Kentucky, where people there assured him that the price of their land would “never fall again.” Harrison wrote, “But this I do not believe. That the whole real property of a state so long settled should increase permanently in value 500 per cent in five years is impossible.” Like a North Carolinian who warned his migrating son not to let “the wild extravagant speculating notions of these Southern people lead you astray,” for “a reaction must take place,” Harrison feared a calamity would soon “involve thousands in ruin.”17

  The term “bubble” gets used to describe a situation in which an important asset has become wildly overvalued compared to realistic predictions of future returns. From 1800 onward, the price of slaves—the most important asset in the southern economy—had always tracked that of cotton, or, more specifically, the rate of individual productivity times the price of a pound of cotton. In 1834, however, slave prices detached themselves from that of cotton and soared upward on a new trajectory (see Figure 6.2). By the time Louisiana’s Jacob Bieller bought dozens of slaves on credit from Isaac Franklin and Rice Ballard in 1836, for instance, he paid over $1,500 each for the young men, more than twice the 1830 price, even though cotton prices had declined from a late-1834 peak to 1830 levels.18

  For decades before the financial crisis of 2008, most economists dogmatically insisted that the behavior of the market and its actors was inevitably rational. Yet a few brave souls insisted that the history of bubbles, booms, and crashes showed a clear historical record of mass irrational economic behavior. Throughout history, in fact, when three conditions occur at the same time, an asset bubble—irrationally high prices for some category of asset—usually emerges. Thomas Harrison was observing all three. The first such condition is the elimination of market regulation. By 1836, Jackson’s administration had destroyed the B.U.S., and replaced it with nothing. Nor did states try to control how much money banks printed and lent. Meanwhile, the national Whig Party, once the champion of the B.U.S., now tried to eliminate regulation altogether by passing the Deposit Act of 1836. This act shifted public land revenues from western banks to eastern ones, allowing the latter to increase their lending. The Whigs also doubled the number of pet banks.19

  Lending by US banks had also increased dramatically since 1833 because of the second cause of bubbles: financial innovations that make it easier to expand the leverage of borrowers. C.A.P.L.-style bonds provided distant investors with opportunity to purchase shares in the income flows of thousands of slaves—to speculate, in effect, on future revenues generated by cotton and slaves. These securities drew cash into the southwestern region, inflating the value of all kinds of assets, especially enslaved “hands.”

  But one more factor makes a bubble run wild, and that is the euphoric belief that the rules of economics have changed, that somehow “this time is different” and asset prices will not return to their mean. “We can see nothing in the prospects of the Country to make it likely that [positive forecasts] will be disappointed,” wrote merchants Byrne Hammond and Company in March 1836. “The whole Southern and Western country is in a most prosperous state and its products annually extending in a most extraordinary manner.” Southwestern entrepreneurs, particularly prone to aggressive, risk-taking behavior, suffered an especially bad case of the strain of this-time-is-different thinking called “disaster myopia,” meaning that they underestimated both the likelihood and the probable magnitude of financial corrections. Thus, a white migrant who wrote that the 1836 price of “fifteen hundred dollars [for] ordinary field hands” was “extravagant” assumed in the next breath that prices would rise further, and he hoped to take advantage: “Cuff, for instance, would command sixteen hundred.” Although “negroes are all out of character high,” wrote Henry Draft in 1835, “I see no prospect of their falling. . . . I fully believe negroes will be higher.” He believed it, for he needed to believe it. “I don’t want them to fall at present, for I have Ten on hand,” whom he hoped to resell for a profit.20

  “Everybody is in debt neck over ears,” wrote one young Alabama planter to his Connecticut father. The house of cards built by what Thomas Harrison called “the wild speculating notions of these Southern people” could collapse, and then “those who are making large contracts with all their show of wealth must come down.” Yet in late summer 1836, the editor of the commerce-dedicated newspaper New Orleans Price-Current told his readers not to worry. True, there was a lot of debt hanging over Louisiana entrepreneurs and their banks: bank loans, dry goods “sold on credit to the upper country more than usual,” major infrastructure projects in and around New Orleans (gas-lighting networks, railroads, levees, canals, steam-powered cotton presses), and “lands entered in the upper country and negroes purchased, to be paid out of the ensuing crop” of cotton, “for which the money has already been drawn from New Orleans.” That all added up to $23 million, leveraged on the steelyard beam against the anticipated revenue to be generated from what hands were at that very moment picking in the fields. For “all of this deficit,” insisted the Price-Current, “will soon be covered by the receipt of Cotton, Sugar, and the various products of the Western States, which we may assume with great safety will amount to at least sixty millions of dollars.” Thus, even though a slave trader wrote from Alabama in December that “business seems dull,” he added that “traders are not discouraged.” Cotton was at 16 cents a pound, but “it will bear 25 cents before the crop is in.”21

  There was much more cotton in 1836 than there had been in 1828. Over eight years of seedtime, the US government, the states, banks, private citizens, and foreign entities had collectively invested about $400 million, or one-third of the value of all US economic activity in 1830, into expanding production on slavery’s frontier. This includes the price of 250,000 slaves moved, 48 million new acres of public land sold, the costs of Indian removals and wars, and the massive expansion of the southwestern financial infrastructure. The number of hands on cotton plantations expanded dramatically, and the need to repay loans only accelerated the whipping-machine, collectively forcing the total picking that hands could accomplish just a little higher each day. In 1830, the United States made 732,000 bales. As the harvest kicked into high gear in the fall of 1836, men who made a living by gambling on cotton were predicting a deluge of 1.5 million bales, each one a 400-pound snowy semi-cube wrapped in canvas. This was 600 million pounds of clean cotton—or, expressed in a different way, more than six million person-days of picking under the hot sun.22

  European and North American economies had been expanding and people were buying more, but consumers’ demand for cotton goods simply could not keep up with this vast an increase in supply. In late summer 1834, the price of cotton at New Orleans was 18 cents per pound. After that, it began to decline, reaching 12 cents in early 1836. Unease with the slow downward trend in prices was beginning to shape decisions at the commanding heights of the transatlantic economy. By late 1836, Baring Brothers, the most influential commercial bank in the world, h
ad been quietly restricting new investments for almost twelve months. And as that year’s bumper crop began to reach market, one speculator privately ruminated: “Will prices in Liverpool continue to hold their own? We think not.”23

  The White House was also quietly alarmed, in its case by the dramatic expansion of speculation in public lands. Purchases had reached the figure of $5 million a month in the summer of 1836. In response, Jackson issued the “Specie Circular” in July, declaring that from August onward, only gold and silver would be accepted as payment for most government-owned lands. Jackson’s advisers didn’t want him to issue the Specie Circular. It was based on his old-fashioned misunderstanding of the nature of money and credit in a modernizing economy, and it clogged the economy’s circulatory system. Heavy gold and silver had to be moved from the East Coast to Indiana and Mississippi and then back again. Land sales plummeted. Banks began to charge a premium for gold and silver, making everything else more expensive.

  Still, by winter the flow of money, credit, and goods through the channels of the American economy had begun to adjust to Jackson’s friction-creating policy. All other commodities—cotton, consumer goods, and slaves—continued to move on a paper money basis, helped by commercial banks like Brown Brothers of New York, which kept credit flowing to merchants and importers. And that was important, because the entire Atlantic economy now depended on the ability of the planters to cycle cotton revenues back through the system. Yet British textile mills already held high stocks of raw cotton, and layoffs at factories were increasing. Soon consumers would choose to wear their old clothes into rags rather than replace them. Demand for raw cotton was about to crater. The Bank of England, the source of credit for British cotton-buying firms in Liverpool, began to get nervous. In late 1836, it began denying credit to those firms.24

  It took a while for news of this decision to percolate back across the Atlantic. In February, as Martin Van Buren’s inauguration approached, a few insiders were quietly coming to realize that this time was not, after all, different—unless by “different” one meant especially disastrous. “Against the judgment of others in whom I usually confide, I do not anticipate that the present prices of cotton will be fully maintained,” a Washington correspondent warned John Stevens, a principal at the New York firm Prime, Ward, and King, which held millions in slave-backed securities issued by southwestern states.25

  Even as Jackson lit his celebratory pipe, a dramatic chain reaction had already begun to ignite. In the wake of the Bank of England’s credit-tightening, the annualized price of short-term business loans in Liverpool skyrocketed to 36 percent, making it impossible for cotton brokers to buy even as the full tide of the 1836 crop swept in. Cotton prices began a free fall that only ended in July 1837, when a dead-cat bounce took it to 6 cents a pound. In the meantime, collapsing British merchant firms had pulled each other down as they fell. Three of the top seven Liverpool cotton traders closed their doors by the end of February. And Le Havre, France’s main cotton exchange, shut down completely.26

  Into the hulls of westward-racing ships went bags of letters desperately calling in the mountains of debt owed by American trading partners. As soon as the news reached the Mississippi’s mouth, arrays of interlinked debtors and creditors began to cascade down. One after another in the last week in March, the ten largest cotton buyers in New Orleans announced that they were insolvent. Some allegedly owed $500 for every $1 that they held in cash or collectible debts. The smaller firms were next. On April 20, the New Orleans Picayune wrote that there were “no new failures to announce,” for by then “nearly all [firms] have gone.” Shockwaves fanned out across the southwestern states and the frontier and backwashed over New York, where banks shut their doors to prevent runs on their own reserves of gold and silver. By the first week of May, no one in New York could borrow, collect debts, or carry out business at all.27

  In the two most important trading centers of the United States a state prevailed that venerable former treasury secretary Albert Gallatin called “incalculable confusion.” Yet no economic actors were hit harder by what soon became known as the “Panic of 1837” than the southwestern banks. They had lent far more paper money than their own reserves of cash justified. Their currency now traded for well under its face value. They faced massive upcoming interest payments on bonds sold on worldwide financial markets. The cotton merchants who owed southwestern banks millions in short-term commercial loans had nothing but cotton, which was selling for less than the cost of transportation. On the other hand, the slave owners who owed the banks money did have tangible property. In one folder of the papers of the Citizens’ Bank of Louisiana, which had hurriedly disbursed some $14 million in 1835–1836, are nineteen pages of inventories of mortgaged slaves, listing more than 500 people. And that was only a fraction of those who were mortgaged to southwestern banks, which had lent at least $40 million on mortgaged slaves. At the rate of 1 slave for every $500 of outstanding debt, this meant that 80,000 or more enslaved people were put at risk of another sale by the collapse of commodity prices and the southwestern banks. Thousands more, like the 29 people (“Phillip, Toney, Caesar . . .”) whom Champ Terry of Jefferson County, Mississippi, had put up as collateral for a loan made to him by entrepreneur Nathaniel Jeffries, were privately mortgaged. Working in the fields, sleeping at night, sitting in the quarters while they held a child, every person named on a debt document was under the auctioneer’s hammer.28

  If the worst came, wrote one Mississippi enslaver to his North Carolina relative, then an enslaved woman whom they both knew—“Old Dorcas”—would be “sold to the highest bidder,” because “Duncan McBryde is in a peck of trouble.” Human flesh had proved a liquid resource in times of trouble for many a white person like McBryde. Yet in the present crisis, the highest bid would be uselessly low. “I heard a gentleman say a few days ago,” wrote William Southgate from Alabama, “that he saw a negro fellow sell in Missi. for $60.00 in specie—which negro cost something like $2,000.” Those who tried to “dispose of some negroes to live on,” as one bankrupt North Carolina migrant planned to do, found that “in many instances they are sold at ¼ the sum given or promised and the poor debtor left ¾ the sum to be raised from his other property if such there be.”29

  BY THE SUMMER OF 1837, the sudden shift to impotence left white men all across the South anxious and angry. Men accosted each other in the streets, demanding payment for debts. Accusers insisted that banks should open their books. Cashiers cut their own throats. Old men came out west to try to sort out the messes that their sons had made, but dropped dead of strokes when they saw how bad the messes were. When a zealous sheriff tried to press debt cases in Hinds County, Mississippi, local entrepreneurs chased him away and let everyone know they had “laid up a bowie knife for any man who attempts to execute the office.” Instead of liquidating debts now, wrote one member of the Natchez banking circle to another in late 1837, everyone should play for time: “The debt to the banks in this state must amount to 33 million,” but the crop of cotton now growing in Mississippi “will net probably 10 millions of dollars.” Four crop years like the one now under way would clear Mississippi planters of debt. This calculation convinced the Natchez man that creditors would rather take delayed payment than call on the collateral. Europe would surely soon want all the cotton Mississippi hands could make, and at a high price.30

  Image 8.2. Many of the family relationships built by forced migrants to the southwest—like the ones on this list of mortgaged human “property”—would be smashed by the same mortgages and financial operations that caused those relationships to be recorded on paper in the first place. Louisiana Banking collection, Louisiana Research Collection, Tulane University.

  The closing of both southwestern and New York banks had frozen the financial sector in a kind of induced coma. The temporary shutdown also kept southwestern banks on life support. The merchant firms of port cities such as Mobile and New Orleans, in contrast, were terminal. Most of these firms never reo
pened their doors. And there was another problem: when consumers and investors lack confidence that credit will be available, they save too much, turning their fear of deepening recession into a self-fulfilling prophecy. So during a deflationary crisis, sensible macroeconomic policymakers usually prescribe “priming the pump,” in which the government’s deficit spending encourages private investment. But the federal government had already signaled that it would not take such actions. Martin Van Buren called a special “Panic Session” of Congress in the late summer of 1837. He stood by Jackson’s Specie Circular and argued for an “Independent Treasury” that would make it impossible for a private bank to use federal deposits to create leverage. His administration did issue new federal debt, in the form of “Treasury notes,” to make up for the shortfall in federal revenue, which relied on tariff collections and land sales and thus had declined dramatically with the collapse of trade. But the president refused to underwrite the expansion of credit for the banking system.31

  Yet, “In Missi.[,] there has been no absolute loss of capital,” wrote Stephen Duncan. Enslavers still held the assets—the men, women, and children who produced the commodity around which the entire Atlantic financial economy revolved. But without enough credit to lubricate the circuits of American trade, bales made in 1837 might well sit on the levees and docks until the wind ripped their burlap wrappers into flags. So over the next twelve months, southern entrepreneurs asked investors to sink more long-term capital into their region, and to do so on the basis of slavery-backed securities. States and territories on slavery’s frontier issued at least $25 million in new bank debt, most of it state-backed, between 1837 and 1839. The world financial community responded. Alabama’s state bank attracted massive quantities of capital from the Rothschilds, perhaps the wealthiest family in the world, proprietors of a powerful merchant bank headquartered in London and Paris. The new issues of bank securities, in turn, allowed banks to loan out more money to southwestern borrowers. Which they did. By 1841, the residents of Mississippi would owe twice as much money—$48 million—to the state’s banks as they had at the beginning of 1837.32