73-476 AMERICAN ECONOMIC HISTORY: TOPIC 5

VIII. The Public Lands

1. By 1853 U.S. had Land Area of 48 Contiguous States: 1.3 billion acres
   
   
2. Thomas Jefferson and the 1785 and 1787 Land Ordinances
   
   
   1. Jefferson's Arcadian Vision
      
      
      1. Arcadia -- Region in Ancient Greece known for its Proverbially Simple and Natural Life.
         
         
      2. Farms from Sea to Shining Sea
         
         
   2. How to Dispose of the Public Lands
      
      
      1. Extinguish Indian Land Titles -- Buy Land from Indians
         
         
      2. Survey Lands and Sell at Public Auction
         
         
      3. When Purchased, Issue Deed Granting Title In Fee Simple
         
         
      4. As the Territories are Settled, Organize as States When Population is Large Enough
         
         
3. Survey Method
   
   
   1. 6 mile square Township System From New England
      
      
   2. Township = 36 sq. miles; 640 Acres = 1 sq. mile
      
      
   3. Section 16 For Schools; 4 Sections for Government Use
      
      
4. Reservation Prices for the Public Lands
   
   
   1. 1785 640 Acres Min., $1 per Acre Cash
      
      
   2. 1796 640 Acres Min., $2 per Acre, year to pay
      
      
   3. 1800 320 Acres Min., $2 per Acre, 4 years to pay
      
      
   4. 1804 160 Acres Min., $1.64 Cash or $2.00, 4 Years to pay
      
      
   5. 1820 80 Acres Min., $1.25 Cash
      
      
   6. 1830 80 Acres Min., 160 Acres Max., $1.25 Cash
      
      
   7. 1832 40 Acres Min., 160 Acres Max., $1.25 Cash
      
      
   8. 1841 Preemption Act, 160 Acres Max., $1.25 Cash
      
      
   9. 1862 Homestead Act, 160 Acres Max. for Filing Fee & 5 Years on Land
      
      
5. Bottom Line: By 1880, $201m in Revenue, $322m in Expenses
   
   
6. The Necessity of the Land Speculator -- Free Market Sale was the method of adapting farm size, price, and location to individual demand
   
   
7. Who Were the Speculators
   
   
   1. First Wave of Settlers claimed more land than they would cultivate -- sell surplus to second wave to finance their farm
      
      
   2. Local Businessmen
      
      
   3. Almost anyone with money who lived in the area
      
      
8. Land Warrants
   
   
   1. 1776 - 1855 U.S. Gave Away 73.5m Acres to Veterans
      
      
   2. In 1852 Congress Made Land Warrants Assignable -- Could be traded & Sold
      
      
9. The Iowa Claim Clubs
   
   
   1. Organized to Protect Settlers' Claims Against Squatters & Speculators
      
      
   2. In Fact Many had local Businessmen as Participants & Clubs also engaged in Speculation
      
      
10. The Land Grant Colleges & College Scrip
    
    
    1. Morrill Act of 1862 -- Each State given 30,000 Acres for every Representative and Senator to be used as Endownment for a College emphasizing agriculture, military science, and/or the mechanical arts.
       
       
    2. 27 States Received Scrip because of lack of public lands in their borders
       
       
    3. Market for Scrip quickly developed -- $1.25 Scrip worth $.53 in 1866
       
       
    4. Scrip Price Low because of Market glut -- Esp. Homestead Act of 1862
       
       
    5. Gleason F. Lewis, of Cleveland, Ohio, handled most of the Scrip marketing it through the Old Soldier's Advocate
       
       
    6. Most states sold their scrip and used the cash to build the college
       

IX. The Banking System Before the Civil War

1. 1st U.S. Bank: 1791 - 1811
   
   
   1. Proposed by Hamilton and Modeled on Bank of England
      
      
   2. Purposes
      
      
      1. Supply paper notes for commercial transactions
         
         
      2. Short term loans to Government
         
         
      3. Repository for Government Monies
         
         
      4. Loans to Individuals so they could pay taxes
         
         
   3. Direct Competitor to State (Local) Banks so Political Opposition Increased
      
      
   4. Jeffersonian Republicans and State Banks opposed re-charter
      
      
2. State Banks and Paper Money
   
   
   1. Chartered by States the Banks Issued their own Paper Notes
      
      
   2. Loans were made in the form of Paper Notes and these circulated as money
      
      
   3. Then as Now the Secret of Banking is the Fractional Reserve:
      
      
      1. Banks Lend More than the Cash they have on hand
         
         
      2. This works provided Depositors believe that if they went to the bank they could get their money
         
         
3. Theories About What Banking Should be
   
   
   1. Real Bills/Sound Money Doctrine: Banks should confine themselves to discounting short-term "real" bills of merchants.
      
      
   2. Mercantilist Land Bank Philosophy: Banks should "melt down" property into longer-term loans (loans secured by land)
      
      
   3. State Banks Were Accused by late 19th & early 20th Century historians of following "unsound" practices -- But the economy grew!
      
      
4. The Effects of the Regional Structure of Banking
   
   
   1. The West (Ohio River Valley) ran a trade deficit with East because of the sale of public lands
      
      
   2. Technically, the outflow of money from the West should have produced Deflation in the West and Inflation in the East
      
      
   3. If the money price of land is fixed, then the real price should have increased in the West
      
      
   4. Reality: Prices actually slightly higher in the West -- in effect a hidden subsidy
      
      
5. 2nd U.S. Bank: 1816 - 1836
   
   
   1. Capitalized at $35m -- $7m U.S., $28m Private Investors
      
      
   2. One aim was to establish a uniform national currency
      
      
   3. 1816-1819 effort to establish uniform national currency failed because of the West-East trade deficit. This was compounded by the fact that State Bank notes could be used to purchase public land.
      
      
   4. 1823 Nicholas Biddle takes over the Bank
      
      
   5. Biddle establishes uniform currency by cashing in State Bank Notes at appropriate times to reduce money supply
      
      
   6. Andrew Jackson, a Jeffersonian of the old school, believed the Bank to be unconstitutional because the U.S. had no delegated power to charter Corporations
      
      
   7. Jackson vetoes renewal of charter in July, 1832
      
      
   8. September 1833, Jackson Orders the gradual removal of U.S. Funds from the Bank
      
      
   9. Biddle retaliates by calling in loans rapidly thereby contracting credit
      
      
   10. Spring 1834, Biddle yields to pressure and backs off
       
       
   11. Late 1834, State Banks now unrestrained and greatly expand their note issues
       
       
   12. This touches off speculative boom where land is used as collateral to buy even more land
       
       
   13. Specie Circular issued 11 July 1836 -- A victory for the "hard money" advisors of Jackson. After 15 August 1836 public lands must be purchased with specie. Settlers puchasing less than 320 acres exempted for 4 more months.
       
       
   14. Late 1836 3 large Banks fail in London. Banks had loaned heavily to American speculators -- e.g., buyers of Cotton and other commodoties (speculators betting that prices would continue to increase because of the boom).
       
       
   15. Internal Improvement Boom -- Success of Erie Canal which opened in 1825 lead many states to borrow heavily to finance construction of canals, railroads, and other public works. English investors purchased many of these State Bonds.
       
       
   16. (13) + (14) + (15) Produce Financial Panic and Great Depression of 1837-41
       
       
6. The International Gold Standard
   
   
   1. International Trade all done in Gold
      
      
   2. An importer who needed to pay a bill to a London exporter would go into the money market and buy an English Bill of Exchange
      
      
   3. However, if there was a shortage of English Bills of Exchange, the importer could always ship gold.
      
      
   4. Gold Export Point: Cost of Specie + Shipping + Insurance
      
      
   5. Gold Import Point U.S. = Gold Export Point U.K.
      
      
   6. Gold Standard Self Correcting -- If U.S. runs trade deficit with U.K., gold flows out of U.S. contracting the money supply. Interest rates rise (the price of money increases), the economy slows, trade deficit declines and then reverses. Gold flows in from U.K., interest rates fall, etc.
      
      
      1. One problem with this rosy scenario is that Banks in the U.S. could adjust their Reserve Ratio (K, where M = KR), to keep money supply up. That is, as gold flowed out, the Reserves fall (R declines). But the Banks could increase K thereby keeping M relatively constant. This produces an inherently unstable situation because high-information investors will begin pulling their money out of banks and securities to hedge their bets. Lower information investors will spot this eventually, and a Financial Panic results.
         
         
      2. A second problem is that Gold is a Commodity! It can be dug up out of the ground! Simply by digging up gold (literally!) R can be increased and therefore M can be increased!
         
         
      3. The discovery of Gold in California in 1847 increased Gold production from 43,000 ounces in 1847 to 484,000 ounces in 1848 to 2,000,000 ounces in 1849.
         
         

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