Financial crises: their causes and effects

Letter First

Dear Sir. — In your recent and liigtly interesting volume, wliich. I have just now read, there is a passage to which, on account of its great importance as regards the progress of man towards an ultimate state of perfect freedom or absolute slavery, I feel disposed to invite your attention. It is as follows : " I am pained to hear such bad news from the United States — such accounts of embarrassments and failures, of sudden poverty falling on the opulent, and thousands left destitute of employment, and perhaps of bread. This is one of the epidemic visitations against which, I fear, no human prudence can provide, so far, at least, as to prevent their recurrence at longer or shorter intervals, any more than it can prevent the scarlet fever or the cholera. A money market always in perfect health and soundness would imply infallible wisdom in those who conduct its operations. I hope to hear news of a better state of things before I write again."

Is this really so ? ■ Can it be, that the frequent recurrence of such calamities is beyond the reach of man's prevention ? To admit that so it certainly was, would be, as it seems to me, to admit that Providence had so adjusted the laws under vfhich we exist, as to produce those "epidemic visitations" of which you speak, and of which the direct eifect, as all must see, is that of placing those who need to sell their labor at the mercy of those who have food and clothing with which to purchase it — increasing steadily the wealth, strength, and power of these latter, while making the former poorer and more enslaved. Look around you, in New York, at the present moment, and study the effects, in this respect, of the still-enduring crisis of 1857. Turn back to those of 1822 and 1842, and see tow strong has been their tendency to compel the transfer of property from the hands of persons of moderate means to those of men who were already rich — reducing the former, with their wives and children, in thousands, if not even hundreds of thousands of cases, to the condition of mere laborers, while largely augmenting the number and the fortunes of "merchant princes" who have no need to live by labor. Look around yon and study the growth in the number of your millionaires, side by side with a pauperism now exceeding in its proportions that of Britain, or even that of Ireland. Look next to the condition of the men who labor throughout the country, deprived as they have been, and yet are, of anything approaching to steadiness of demand for their services, in default of which they have been, for two years past, unable suitably to provide for their wives, their children, or themselves. Study then the condition of the rich money-lenders throughout the country, enabled, as they have been, to demand one, two, three, and even four and five per cent per month, from the miners, manufacturers, and little farmers of the Union, until these latter have been entirely eaten out of house and home. Having done all this, you can scarcely fail to arrive at the conclusion, that unsteadiness in the societary movement tends towards slavery — that steadiness therein, on the contrary, tends towards the emancipation of those who have labor to sell from the domination of those who require to buy it — and that, therefore, the question referred to in the passage I have quoted, is one of the highest interest to all of those who, like yourself, are placed in a position to guide their fellow-men in their search for prosperity, happiness, and freedom.

The larger the diversity in the demand for human powers, the more perfect becomes the division of employments, the larger is the production, the greater the power of accumulation, the more rapid the increase of competition for the purchase of the laborer's services, and the greater the tendency towards the establishment of human freedom. The greater that tendency, the more rapid becomes the societary action — its regularity increasing with every stage of progress. In proof of this, look to that world in miniature, your own printing-office, studying its movements, as compared with those of little country offices, in which a single person not unfrequently combines in himself all the employments that with you are divided among a hundred, from editor-in-chief to newsboy. The less the division of employments, the slower and more unsteady becomes the motion, the less is the power of production and accumulation, the greater is the competition for the sole of labor, and the greater is the tendency towards the enslavement of the laborer, be he black or white.

The nearer the consumer to the producer, the more instant and the more regular become the exchanges of service, whether in the shape of labor for money, or food for cloth. The more distant the producer and consumer, the slower and more irregular do exchanges become, and the greater is the tendency to have the laborer suffer in the absence of the power to obtain wages, and the producer of wool perish of cold in the absence of the power to obtain cloth. That this is so, is proved by an examination of the movements of the various nations of the world, at the present moment. Being so, it is clear, that if we would avoid those crises of which you have spoken — if we would have regularity of the societary movement — and if we would promote the growth of freedom — we must adopt the measures needed for bringing together the producers and consumers of food and wool, and thus augmenting their power to have commerce among themselves.

The essential characteristic of barbarism is found in instability and irregularity of the societary action — evidence of growing civilization being, on the contrary, found in a constantly augmenting growth of that regularity which tends to produce equality, and to promote the growth of freedom. Turn, if you please, to the Wealth of Nations, and mark the extraordinary variations in the prices of wheat in the days of the Plantagenets, from six shillings, in money of the present time, in 1243, to forty-eiyht in 1246, seventy-two in 1257, three hundred and thirty-six in 1270, and tioenty-eight in 1286. That done, see how trivial have been the changes of France and England, from the close of the war in 1815,

THEIR CAUSES AND ErPECTS. 5

to the present time. Next, turn to Russia, and mark the fact, given to us by a recent British traveller, that, in those parts of the country that have no manufactures, the farmer is everywhere " the victim of circumstances " over which he has no control whatsoever — the prices of his products being dependent entirely upon the greater or smaller size of the crops of other lands, and he being ruined at the very moment when the return to his labor has been the most abundant. Look then to the changes throughout our own great West in the present year — wheat having fallen from $1.30 in May to 50 cts. in July — and you will see how nearly the state of things with us approximates to that of Russia. Compare all this with the movements of England, France, and Germany, and you will, most assuredly, be led to arrive at the conclusion, that the stability whose absence you deplore, is to be sought by means of measures looking to the close approximation of the producer and the consumer, and to the extension of domestic commerce.

Five years since, British journals nearly all united in predicting the advent of a great financial crisis, the seat of which would be found in France and Germany. More careful observation might have satisfied them that the tendency towards such crises was always in the direct ratio of the distance of consumers from producers, and that the real places in which to look for that which was then predicted, were those countries which most seemed bent on separating the producers and consumers of the world, Britain and America — the one seeking to drive all its people into the workshops, and the other laboring to compel them all to seek the fields, and both thus acting in direct defiance of the advice of Adam Smith. The crisis came, spending its force upon tliose tioo coun-^ tries — France, Belgium, and Germany escaping almost entirely unharmed, and for the reason, that in all these latter the farm and the workshop were coming daily more near together, and commerce was becoming more rapid, free, and regular.

Russia and Sweden have, however, sufi"ered much — the crisis having become, apparently, as permanent as it is among ourselves. Why should this be so ? Why should they be paralyzed, while France and Germany escape uninjured ? Because, while these latter have persisted in maintaining that protection which is needed for promoting the approximation of producers and consumers, the former have, within the last three years, departed essentially from the system under which they had been so rapidly advancing towards wealth and freedom — adopting the policy advocated by those writers who see in the cheapening of the labor and of the raw materials of other countries, the real British road to wealth and power.

Throughout Northern and Central Europe, there has been, in the last half century, a rapid increase in the steadiness of the societary movement, and in the freedom of man — that increase being the natural consequence of increased rapidity of motion resulting from a growing diversification in the demand for human services, and growing competition for the purchase of labor. In Ireland, India, Spanish America, and Turkey, the reverse of this is seen — producers and consumers becoming more widely separated, and exchanges becoming more fitful and irregular, with growing competition for the sale of labor. Why this difi'erence ? Because the policy of the former has been directed towards protecting the farmer in his efibrts to draw the market nearer to him, and tliTis diminisli the wasting tax of transportation, wtile tte latter have been steadily becoming more and more subjected to the system which seeks to locate in the little island of Britain the single workship of the world.

How it has been among ourselves, is shown in the following brief statement of the facts of the last half century. From the date of the passage of the act of 1816, by which the axe was laid to the root of our then-rapidly-growing manufactures, our foreign trade steadily declined, until, in 1821, the value of our imports was less than half of what it had been six years before. Thenceforward, there was little change until the highly-protective act of 1828 came fairly into operation — the average amount of our importations, from 1822 to 1830, having been but 80 millions — and the variations having been between 96 millions in one year and 70 in another. Under that tariif, the domestic commerce grew with great rapidity — enabling our people promptly to sell their labor, and to become better customers to the people of other lands, as is shown by the following figures, representing the value of goods imported :

1831-32 101,000,000

1832-33 108,000,000

1833-34 126,000,000

Here, my dear sir, is a nearly regular growth — the last of these years being by far the highest, and exceeding, by more than 50 per cent, the average of the eight years from 1822 to 1830. In this period, not only did we contract no foreign debt, but we paid ofi" the whole of that which previously had existed, the legacy of the war of independence ; and it is with nations as with individuals, that '' out of debt is out of danger."

The compromise tariff began now to exert its deleterious influence

— stopping the building of mills and the opening of mines, and thus lessening the power to maintain domestic commerce. How it operated on that with foreign nations, is shown in the facts, that the imports of 1837 went up to ^189,000,000, and those of 1838 down to $113,000,000

— those of 1839 up to $162,000,000, and those of 1840 down to $107,000,000 ; while those of 1842 were less than they had heen ten years before. In this period, we ran in debt to foreigners to the extent of hundreds of millions, and closed with a bankruptcy so universal, as to have embraced individuals, banks, towns, cities. States, and the national treasury itself.

That instability is the essential characteristic of the system called free-trade, will be obvious to you on the most cursory examination of the facts presented by the several periods of that system through which we have thus far passed. From more than $100,000,000, in 1817, our imports fell, in 1821, to $62,000,000. In 1825, they rose to $96,000,000, and then, two years later, they were but $79,000,000. From 1829 to 1834, they grew almost regularly, but no sooner had protection been abandoned, than instability, with its attendant speculation, reappeared — the imports of 1836 having been greater, by 45 per cent, than those of 1834, and those of 1840 little more than half as great as those of 1836.

Once again, in 1842, protection was restored ; and once again do we

THEIR CAUSES AND EErECTS. 7

find a steady and regular growth in the power to maintain intercourse with the outer world, consequent upon the growth of domestic commerce, as is shown in the following figures :

1843-44 $108,000,000

1844-45 117,000,000

1845-46 121,000,000

,1846-47 146,000,000

We have here a constant increase of power to go to foreign markets, accompanied by a constant decrease in the necessity for resorting to them — the domestic production of cotton and woollen goods having doubled in this brief period, while the domestic production of iron had more than trebled. *

Twelve years having elapsed since the tariff of 1846 became fairly operative, we have now another opportunity for contrasting the operation of that policy under which Russia and Sweden are now suffering, with that of the one under which they had made such rapid progress — that one which is still maintained by Germany and by France. Doing this, we find the same instability which characterized the periods which preceded the passage of the protective tariff acts of 1824, 1828, and 1842, and on a larger scale — the imports having been ^178,000,000 in 1850, $304,000,000 in 1854, ^260,000,000 in 1855, $360,000,000 in 1857, $282,000,000 in 1858, and $338,000,000 in 1859 — and our foreign debt, with all its tendency towards producing those crises which you so much deplore, having been augmented probably not less than tJiree hundred millions of dollars.

Ten years since, there was made the great discovery of the Californian gold deposits — a discovery whose effect, we were then assured, was to be that of greatly reducing the rate of interest paid by those who labored to those others who were already rich. Have such results been thus far realized ? Are not, on the contrary, our workingmen — our miners and manufacturers, our laborers and our settlers of the West — now paying thrice the price for the use of money that was paid at the date of the passage of the tariff act of 1846 ? Are not these latter, at this moment, paying three, four, five, and even as high as six per cent per month? Are they not paying moxe per month, than is paid jjer yea/* by the farmers of the protected countries of the European world ? That they are so, is beyond a doubt. Why it is so is, that although we have received from California five hundred millions of gold, we have been compelled to export, in payment for foreign food in the form of iron and lead, cloths and silks, more than four hundred millions — leaving behind little more than has been required for consumption in the arts. Had we made our own iron and our own cloth, thus making a domestic market for the products of our farms, would not much of this gold have remained at home ? Had it so remained, would not our little farmers find it easier to obtain the aid of capital at the rate of six per cent per annum, than they now do at three, four, or five per cent per month ? Would not their power of self-government be far greater than it is now, under a system that, as we see, makes the poor poorer, while the very rich grow richer every day ? Refiect, I pray you, upon these questions and these facts, and then answer to yourself if the crises of which you b FINANCIAL crises:

speak are not the necessary results of an erroneous policy of wliicli, during so long a period, you have been the steady advocate.

The history of the Union for the past half century may now briefly thus be stated : We have had three periods of protection, closing in 1817, 1834, and 1847, each and all of them leaving the country in a state of the highest prosperity — competition for the purcliase of labor then growing daily and rapidly, with constant tendency towards increase in the amount of commerce, in the steadiness of the societary action, and in the freedom of the men who needed to sell their labor.

We have had three periods of that system which looks to the destruction of domestic commerce, and is called free trade — that system which prevails in Ireland and India, Portugal and Turkey, and is advocated by British journalists — each and all of them having led to crises such as you have so well described, to wit, in 1822, 1842, and 1857. In each and every case, they have left the country in a state of paralysis, similar to that which now exists. In all of them, the exchanges have become more and more languid, the societary movement has become more and more irregular, and the men who have needed to sell their labor have become more and more mere instruments in the hands of those who had food and clothing with which to purchase it.

All experience, abroad and at home, tends, thus, to prove that men become more free as the domestic commerce becomes more regular, and less and less free as it becomes more and more fitful and disturbed. Such being the case, the questions as to the causes of crises, and as to how they may be avoided, assume a new importance — one greatly exceeding, as I imagine, that which you felt disposed to attach to them when writing the passage which has above been given. To my apprehension, they are questions of liberty and slavery, and therefore it is that I feel disposed to invite you, as a friend of human freedom, to their discussion through the columns of your own journal, the Evening Post — that discussion to be carried on in the spirit of men who seek for truth, and not for victory. If you can satisfy me that I am in error as to either facts or deductions, I will at once admit it; and you, I feel assured, will do the same. As an inducement to such discussion, I now offer to have all your articles reprinted in protectionist journals, to the extent of 300,000 copies — thereby giving you not less than a million and a lialf of readers, among the most intelligent people of the Union. In return, I ask of you only, that you will publish my replies in your single journal, with its circulation of, as I am told, fifteen or twenty thousand. That this is offering great odds, you must admit.

It may, however, be said, that the replies might be such as would occupy too large a portion of your paper ; and to meet that difficulty, I now stipulate that they shall not exceed the length of the articles to which answers are to be given — thus leaving you entire master of the space to be given to the discussion. Hoping to hear that you assent to this proposition, I remain, very respectfully,

Your obedient servant,

Henry C. Carey.

W. C. Beyant, Esq.

Philadelphia, December 27, 1859.

THEIR CAUSES AND EFFECTS.

LETTEE SECOND.

Dear Sir. — Allow me now to ask you why it is, tliat great speculatioas, followed by crises and by almost total paralyses, such, as you have so well described, alioays occur in free trade times, and never in periods when the policy of the country is being directed towards the creation of domestic markets, and towards the relief of our farmers from the terrific taxes of trade and transportation to which they are now subjected ? That such are the facts, you can readily satisfy yourself by looking back to the great speculations of the four periods of 1817, 1836, 1839, and 1856, followed by the crises of 1822, 1837, 1842, and 1857 — and then comparing them with the remarkable steadiness of movement which characterised those of the protective tariffs of 1828 and 1842. Study our financial history as you may, you will find in its every page new evidence of the soundness of the views of Washington, Jefferson, and Hamilton, Adams, Madison, and Monroe, each and all of whom had full belief in the accuracy of the ideas so well enunciated by General Jackson, when he declared that we "had been too long subject to the policy of British merchants" — that it was " time we should become a little more Americanized" — and that, if we continued longer the policy of feeding "the paupers and laborers of England" in preference to our own, we should " all be rendered paupers ourselves."

Why is all this ? Why must it be so ? Why must, and that inevitahly, speculation, to be followed by crises, paralyses, and daily-growing pauperism, be the invariable attendant upon the policy which looks to the separation of the producer of raw products from the consumer of the finished commodities into which rude materials are converted ? To obtain an answer to all these questions, let us look again, for a moment, to the proceedings connected with the printing and publication of the Evening Post. Dealing directly with your paper-maker, you pay him cash, or give him notes, in exchange for which he readily obtains the money — no artificial credit having been created. Place yourself now, if you please, at a distance of several thousand miles from the manufacturer, and count the many hands through which your paper would have to pass — each and every change giving occasion to the creation of notes and bills, and to the charge of commissions and storage ; and you will, as I think, be disposed to arrive with me at the conclusion, that the tendency towards the creation of artificial credits, and towards speculation, grows with the growth of the power of the middleman to tax the producers and consumers of the world.

Seeking further evidence of this, let me ask you to look at the circumstances which attend the sale of your products. Now, your customers being close at hand, you are paid in cash — ^your whole year's business not giving, as I suppose, occasion for the creation of a single note. Change your position, putting yourself in that of the Manchester manufacturers, at a distance of thousands of miles from your customers, compelled to deal with traders and transporters, and study the quantity of

10 PINANCIAL CRISES :

notes and bills, Avitli their attendant charges, that would be created — the augmentation of price and diminution of consumption that would be the

consequence the power that would be accumulated in the hands of those

who had money to invest, and desired to produce such crises as those which you have so well depicted — and you will, most assuredly, arrive at the conclusion that there is but one road towards steadiness and freedom, and that that road is to be found in the direction of measures having for their object the more close approximation of the producers and consumers of the products of the earth.

Studying next the great facts of our financial history, with a view to ascertain how far they are in accordance with the theory you may thus have formed, you will see that, in those prosperous years of the tariff of 1828, from 1830 to 1833, the quantity of bank notes in circulation was but 80 millions. No sooner, however, had we entered upon the free trade policy, providing for the gradual diminution and ultimate abolition of protection, than we find a rapid growth of speculation, consequent upon the growing power for the creation of artificial credits — the average circulation of the years from 1834 to 1837 having been no less than 149 millions, or nearly twice what it before had been. Under the protective tariff of 1842, the average was but 76 millions ; but no sooner had protection been abandoned, than we find an increase so rapid as to have carried up the average from 1846 to 1849, to 113, and that of 1850 and 1851, to 143 millions. In that period speculation had largely grown, but prosperity had as much declined. When the circulation was small, domestic commerce was great — mines having been opened, furnaces and factories having been built, and labor having found its full reward. When, on the contrary, the circulation had become so great, mines were being closed and miners were being ruined — furnaces and factories were being sold by the sheriff, and our people were unemployed. In the one case, men were becoming more free, while in the other they were gradually losing the power to determine for themselves to whom they would sell their labor, or what should be its reward. In the one, there was a growing competition for the ]^wclia&e of the laborer's services. In the other, there was increasing competition for their sale. Such having invariably been the case, can you, my dear sir, hesitate to believe, that the question to whose discussion I have invited you, is not one of the prices of cotton or woollen cloths, but is, really, that of man's progress towards that perfect freedom of action which we should all desire for ourselves and those around us, on the one hand, or his decline towards slavery, and its attendant barbarism, on the other ? That, as it seems to me, you can scarcely do.

At no period in the history of the Union has competition for the purchase of labor, accompanied by growing tendency towards improvement in the condition of the laborer, been so universal or so great as in 1815, 1834, and 1847, the closing years of the several periods in which the policy of the country was directed towards the approximation of the producers and consumers of the country, by means of measures of protection. At none, has the competition for its sale, with corresponding decline in the laborer's condition, been so great as in the closing years of the free trade periods, to wit, from 1822"to 1824, and from 1840 to 1842.

Grreat as was the prosperity with which we closed the period which had commenced in this latter year, three short years of the tariff of 1846 sufficed for reproducing that competition for the sale of labor, relief from which had been the object of the men who made the tariff of 1842. From the decline with which we then were menaced, we were relieved by the discovery of the Californian mines, and by that alone. Since then, we have thence received more than five hundred millions of gold, and yet at no period has there existed a greater tendency to increase of competition for the sale of labor than at present — the two cities of New York and Philadelphia, alone, presenting to our view hundreds of iliousands of persons wlio are totally unahle to exchange their services for the money with tohich to purchase food and clothing. Is it not clear, from all these facts, that —

First, the nearer the place of consumption to the place of production, tlie smaller must be the power of transporters and other middlemen to tax consumers and producers, and the greater must be the power of the men who labor to profit by the things produced ?

Second, that the more close the approximation of consumers and producers, the smaller must be the power of middlemen to create fictitious credits, to be used in furtherance of their speculations ?

Third, that the greater the power of the men who labor, and the larger their reward, the greater must be the tendency towards that steadiness in the soeietary action, in the perfection of which you yourself would find the proof of " infallible wisdom in those who conduct its operations" ?

Fourth, that all the experiences of continental Europe, and all our own, tend to prove that steadiness is most found in those countries, and at those periods, in which the policy pursued is that protective one advocated in France by the great Colbert, and among ourselves by Washington, Franklin, Hamilton, Adams, Jefferson, and their successors, down to Jackson ; and least in all of those in which the policy pursued is that advocated by the British school, which sees in cheap labor and cheap raw materials the surest road to wealth and power for the British trader ?

Renewing my proposition to cause your answers to these questions to be republished to the extent of not less than 300,000 copies, I remain, my dear sir, with great respect.

Your obedient servant,

Henry C. Carey.

W. C. Bkyant, Esq.