Did the Panic of 1837 Affect the Demise of the Kirtland Safety Society?

Many are aware of the financial panic of 1837 and the failure of the Kirtland Safety Society Anti-Banking Company. In 2009, it was reported that while the panic did not directly cause the dissolution of the Society, it may have “hastened [its] failure.”1

The Kirtland Safety Society was formed in January 1837 as a joint stock association by leaders and members of the LDS Church. One of the purposes of the society, ostensibly, was to assist in liquidity matters, specifically to help turn “long-term assets [i.e. land] into short-term liquidity.”2 To date, a few of the articles about the Society appear to be written from a “traditional interpretation” of President Andrew Jackson’s “Bank War” over the ongoing operation of the Second Bank of the United States.3 This tradition,

. . . asserts that Jackson’s veto of the Bank re-charter and withdrawal of government deposits caused an inflation; Jackson’s Specie Circular and the distribution of the surplus caused a panic and depression.4

The following is a short chronology of events that preceded and coincided with the 1837 panic and the demise of the Kirtland Safety Society from an Austrian economic perspective. From this perspective,

. . . when banks create money, they do so in the form of credit. By increasing the supply of loanable funds, banks artificially lower the interest rate, inducing businessmen and entrepreneurs to make investments they otherwise would not make. Th[is] creates a boom. However, according to Austrian theory, since the interest rate was artificially distorted, the boom consists of malinvestments which are not economically justified. Eventually the malinvestments must be liquidated in a cluster of business failures called a depression. That, in brief, is the Austrian business cycle theory.5

The brief sketch below suggests:

  1. The role of a national, quasi-central bank in America was a cause of political intrigue in the years leading up to the 1837 panic.
  2. The panic was exacerbated by the Bank of England’s sudden action to “throw out all the paper connected with the United States.”
  3. The Kirtland Safety Society operated for a short time during the boom and bust period described by the business cycle theory.
  4. Members of the society held conflicting views of fractional reserve banking.6
  5. A few members of the society acted dishonestly and sought to profit from the venture.

1816 – In the aftermath of the War of 1812, the Second Bank of the United States was created as a privately held banking corporation chartered in 1816 and acted as a quasi-central bank as it invested the federal government’s funds, issued paper money, and regulated the nation’s exchange of bank and commercial paper. It had a privileged status since it held the revenues of the federal government. Its initial capitalization was $35 million – 20% of its capital provided by the U.S. Treasury and 80% privately owned. The primary purpose of the bank was to decrease inflation following the War of 1812 and assist the United States in obtaining credit. William Jones served as the bank’s first president. While it competed with state-chartered banks for private business one of its exclusive privileges included “a congressional pledge to create no competing institution” for which the bank paid the government a $1.5 million bonus.7

1816-1819 – Total money supply in the nation rose from $67.3 million in 1816 to $94.7 million in 1818, a rise of almost 41 percent in two years and largely as a result of the Second Bank’s activities. Shortly thereafter the bank sought to contract the supply of money and credit which caused the panic of 1819 resulting in business bankruptcies, defaults, and liquidation of unsound investments.8

1822 – In 1822, at age 37, Nicholas Biddle became president of the Bank of the United States. He graduated from Princeton as class valedictorian at age 15. “As secretary to John Armstrong, United States minister to France, he went abroad in 1804, was in Paris at the time of Napoleon’s coronation, and afterward, Biddle participated in an audit related to the Louisiana Purchase, acquiring his first experience in financial affairs.”9 In 1811, “as a newly elected member of the Pennsylvania Legislature, [Biddle] spoke in favor of a new federal charter for the First Bank of the United States.”10 As President of the Second Bank, “Biddle continued the chain of control over both Banks of the United States by the Philadelphia financial elite, from Robert Morris and William Bingham, to Stephen Girand and William Jones.”11

1828 – Andrew Jackson, or “Old Hickory” as he was called, was elected as the seventh President of the United States. Of this period, Murray N. Rothbard wrote:

Out of the bitter experiences of the panic of 1819 emerged the beginnings of the Jacksonian movement, dedicated to hard money, the eradication of fractional reserve banking in general, and of the Bank of the United States in particular . . . all [his followers] were converted to hard money and 100-percent reserve banking by the experience of the panic of 1819 . . . Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School.12

1830 to 1837 – Starting in 1830, the Second Bank embarked on a policy of expanding the money supply – a strategy that continued until the 1837 panic. In fact,

Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later, an astonishing rise of 84 percent, or 21 percent per annum.13

“This monetary expansion was spurred by the still-flourishing Bank of the United States, which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent.”14

August 1831 – Unfortunately, these and other events had personal consequences. Major Thomas Biddle, a distinguished veteran of the War of 1812 and brother of Nicholas Biddle, was killed along with Congressman Spencer Pettis in a pistol duel at Bloody Island near St. Louis, Missouri.

The disagreement began when Thomas Biddle took exception to Pettis’ remarks attacking the United States Bank of which Nicholas was the president.15

1832 – In 1832, four years before its charter was set to expire, Biddle sought for a re-charter bill for the Second Bank upon the advice of Senator Henry Clay of Kentucky and Senator Daniel Webster of Massachusetts who acted as legal counsel as well as the Director of the bank’s Boston branch. For many, the 1832 election campaign revolved around the issue of the monopoly privileges of the Second Bank of the United States.

July 1832 – In July 1832, shortly after the Democratic National Convention, Andrew Jackson vetoed the bill and wrote disparagingly of the bank by criticizing:

  • Monopoly privileges “at the expense of the public.”
  • Dangers to American liberties since the bank “has so little to bind it to our country.” In fact, “more than a fourth part of the stock is held by foreigners and the residue is held by a few hundred of our own citizens, chiefly of the richest class.”16
  • “Artificial distinctions” that were granted to the “rich and powerful” at the expense of “the humble members of society the farmers, mechanics, and laborers who have neither the time nor the means of securing like favors to themselves.”17

November to December 1832 – In late 1832, Andrew Jackson was re-elected president. “He polled more than 56 percent of the popular vote and almost five times as many electoral votes as Clay.”18

September 1833 – After two unsuccessful attempts to pull the federal government’s funds out of the Second Bank19, in September 1833 Secretary of the Treasury Roger B. Taney removed $10 million from the bank and placed this money in state banks which were then called “pet banks.”20 According to one financier who was privy to the inside machinations of Wall Street financiers at that time:

The transfer of the Government funds to the State banks created great agitation in political and financial circles. The State banks, under this favorable turn of Government patronage, quickly assumed a thriving condition and began to expand their loans and circulation. This stimulated speculation in all parts of the country, but especially land speculation. Large purchases of land were made from the Government, and payment was made in notes of State banks. With the rapid sales of its lands the Government was soon able to pay off the public debt, and had still a surplus of $50,000,000 in the Treasury. This apparent prosperity continued for the next year or two, money was plenty and speculation was greatly stimulated and values became inflated.21

February 1834 – In early 1834, a group of Philadelphia “men of financial standing” met with President Jackson. After listening to them for over an hour, Jackson is reported to have said,

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.22

April 1834 – In 1834, the House of Representatives voted not to re-charter the bank and also confirmed that federal deposits should remain in the state banks.23

January 1, 1835 – During 1834, Robert and Isaac Phillips, American agents for the House of Rothschild (British and French) under the firm name R. & I. Phillips, “arranged for N. M. Rothschild, London, to become the financial agent of the U.S. federal government (as of January 1, 1835), replacing Baring Brothers.”24 The London House of Rothschild entered the American market and remained active through 1835 in marketing U.S. government securities.

January 30, 1835 – On January 30, 1835 Richard Lawrence sought to kill President Andrew Jackson. Apparently, “Lawrence believed Jackson had conspired to keep him poor and out of work.” In comparison, “Jackson was convinced that Lawrence was hired by his political enemies, the Whigs, to stop his plan to destroy the Bank of the United States.”25

March 27, 1836 – The Kirtland Temple was built and dedicatory services were held amidst a great spiritual outpouring. Some historians and economists estimate the cost of building the temple between $40,000 and $70,000 when the average farmer and family brought in less than $400 a year.26

July 1836 – In 1836, President Jackson issued the Specie Circular executive order which required government land to be paid for by gold or silver. This coinage act is largely blamed for the panic of 1837, but Murray N. Rothbard has shown that an increase in specie – $31 million in 1833 to $73 million at the beginning of 1837, a 142% increase – was largely the result of two factors: “a large influx of silver coin from Mexico, and second, the sharp cut in the usual export of silver to the Orient.”27

July 28, 1836 – On July 28th, shortly after attending his son’s wedding in Frankfurt, Nathan Mayer Rothschild, head of the Rothschild banking family, died due to an infected abscess. Shortly thereafter, the London market experienced “variations of all stocks & their wild fluctuations.”28

November 1836 – Amidst this background, the Kirtland Safety Society was formed on November 2, 1836 and Orson Hyde was sent to Columbus, Ohio, to petition the state legislature for an act of incorporation to allow the group to form a bank.

January 1837 – After being rejected by the Ohio legislature based on “some frivolous excuse”29, the Kirtland Safety Society formed a joint-stock association called an “anti-banking” corporation. Sidney Rigdon served as chairman and president, Warren Parrish as signatory, secretary and teller, and Joseph Smith as cashier. Although Joseph did not relate the revelation he received on the morning of January 6th, Wilford Woodruff recorded:

I also herd President Joseph Smith jr declare in the presence of F Williams. D Whitmer. S. Smith. W. Parrish. & others in the Deposit Office that he had received that morning the Word of the Lord upon the subject of the Kirtland Safety Society he was alone in a room by himself & he had not ownly the voice of the spirit upon the subject but even an audable voice He did not tell us at that time what the LORD said upon the subject but remarked that if we would give heed to the commandments the Lord had given this morning all would be well.30

By January 23, the Safety Society stopped redeeming its notes for specie, or hard-money.31 During its brief operation,

Brigham [Young] was reported to have deposited marked script in the bank and was shocked several days later to receive one of his marked notes as part of a commercial transaction. He apparently thought that banks simply stored deposits and that because [his] notes were circulating, something dishonest was going on in the bank.32

February 1, 1837 – By the first of February, Kirtland Safety Society bills were being exchanged at 12½ cents on the dollar.33 A month after the society opened, Grandison Newell obtained a judgment against,

Joseph Smith, Jr. and Sydney Rigdon for $1,000 each at the fall term of 1838, in Geauga county, for issuing unauthorized bank paper. Samuel E. Rounds, the complainant, I bought off, and gave him $100.34

March 1837 – At a hearing on March 24th, the trial was postponed until the fall session of the court. “At the jury trial in October 1837, Joseph Smith and Sidney Rigdon were found guilty and fined $1,000 each plus some court costs, a fine they appealed.”35

May 1837 – The panic of 1837 is said to have officially started on May 10, 1837 when almost every bank stopped payment in specie even though the seeds of the panic started long before this time. According to one observer, the Bank of England retaliated against President Jackson’s executive order to remove the United States funds from the quasi-central Second Bank:

The panic of 1837 was further aggravated by the action of the Bank of England which, in one day, threw out all the paper connected with the United States. The banks on this side refused to discount paper, and as a retaliatory measure in self-defense the business men and speculators withdrew their deposits from the banks. This had a tendency to cripple business still more, and cause utter prostration.36

Eustace Mullins wrote concerning this event:

Why did the Bank of England in one day “throw out” all paper connected with the United States, that is, refuse to accept or discount any securities, bonds or other financial paper based in the United States? The purpose of this action was to create an immediate financial panic in the United States, cause a complete contraction of credit, halt further issues of stocks and bonds, and ruin those seeking to turn United States securities into cash.37

As a result of these actions,

. . . the banking system of the country suffered a general collapse. Out of eight hundred and fifty banks, three hundred and forty-three closed entirely, sixty-two failed partially, and the system of State banks received a shock from which it never fully recovered.38

Following the 1837 panic and a short-lived rebound, American citizens suffered through the country’s first major depression through 1843.

Summary

The Kirtland Safety Society operated near the end of a speculative bubble largely fueled by the policies of the Second Bank and in the midst of a struggle over control of the quasi-central bank between the Jacksonians and private national, and international banking interests. While one of the proprietors of the society acted dishonestly39, and even though some lost their faith following the outpouring of the spirit at the Kirtland Temple and subsequently turned against Joseph Smith40, these and other events may have led Joseph Smith to reflect:

Some time previous to this41 I resigned my office in the “Kirtland Safety Society,” disposed of my interest therein, and withdrew from the institution; being fully aware, after so long an experiment, that no institution of the kind, established upon just and righteous principles for a blessing not only to the Church but the whole nation, would be suffered to continue its operations in such an age of darkness, speculation and wickedness. Almost all banks throughout the country, one after the other, have suspended specie payment, and gold and silver have risen in value in direct ratio with the depreciation of paper currency. The great pressure of the money market is felt in England as well as America, and bread stuffs are everywhere high.42

Although the foregoing is a brief and incomplete sketch of these events, a more thorough reexamination may refute the notion that the Jacksonians were “ignorant bumpkins” or that their “anti-bank position” was anything but “party politics.”43 In addition, a reevaluation of Joseph Smith’s views on the role of a national central bank may provide additional insight into his statement that under different circumstances, the Kirtland Safety Society could have been a blessing not only to the Church, but “the whole nation.”

Sources:

  1. White, R. McKay. “The Kirtland Safety Society: The Myths, the Facts, and the Prophet’s Good Name”. 6 Aug 2009. The Foundation for Apologetic Information and Research Conference. 25 Apr 2010; hereafter Myths.
  2. Wimmer, Larry T. “Kirtland Economy”. 1992. Encyclopedia of Mormonism. 15 May 2011.
  3. Adams, Dale W. “Chartering the Kirtland Bank”. BYU Studies, Vol. 23, No. 4, 1983. 6; hereafter Chartering; see also the references to the many “moral judgments” cited in Hill, Marvin S.; C. Keith Rooker, and Larry T. Wimmer. “The Kirtland Economy Revisited: A Market Critique of Sectarian Economics”. BYU Studies, Vol. 17, No. 4, 1977. 391-475; hereafter Market Critique. For additional reading, see Sampson, D. Paul, and Larry T. Wimmer. “The Kirtland Safety Society: The Stock Ledger Book and the Bank Failure.” BYU Studies, Vol. 12, No. 4, 1972. 427-36, hereafter Ledger Book; and, Partridge, Scott H. “The Failure of the Kirtland Safety Society”. BYU Studies, Vol. 12, No. 4, 1972.
  4. Hummel, Jeffrey Rogers. “The Jacksonians, Banking, and Economic Theory: A Reinterpretation”. Journal of Libertarian Studies, Vol. 2, No. 2, 1978. 160; hereafter Reinterpretation.
  5. Reinterpretation. 160.
  6. See Brigham Young’s statement below in footnote 32. Although some feel this statement is representative of Brigham Young’s naïveté concerning the practice of fractional reserve banking, in point of fact, his statement is consistent with Joseph Smith’s presidential platform and the proposed role of a National Bank. See also, Monnett, Jack. Awakening to Our Awful Situation. Heber City, Utah: Nauvoo House Publishing, 2006. 90; hereafter Awakening.
  7. Feller, Daniel. “King Andrew and the Bank”. January/February 2009. National Endowment for the Humanities. 15 May 2011.
  8. Rothbard, Murray N. A History of Money and Banking in the United States: The Colonial Era to World War II. Auburn, Alabama: The Ludwig von Mises Institute, 2002. 89-90. Google Book Search. 25 Apr 2010; hereafter A History of Money.
  9. “Nicholas Biddle”. Economic Expert. 25 Apr 2010. The Louisiana Purchase, which gave Biddle some international banking experience, was underwritten by the Baring Brothers, the oldest merchant bank in England, and Hope and Company of Amsterdam.
  10. Davies, Phil. “The Rise and Fall of Nicholas Biddle”. The Federal Reserve Bank of Minneapolis. 11 May 2011.
  11. A History of Money. 92. Footnote #69.
  12. A History of Money. 91. Compare this statement with the comments of Bray Hammond and J. M. Balestier cited in Failure. 4-5. For a refutation of Hammond’s approach, see Trask, H.A. Scott. “A Critique of Bray Hammond’s Banks and Politics in America, from the Revolution to the Civil War.” April 2002. Ludwig von Mises Institute. 11 May 2011; hereafter Critique. The two primary proponents of the “currency school” were Robert Torrens (1780 – 1864) and David Ricardo (1771 – 1823), both of whom advocated that “the base money supply in the form of gold or other state-controlled means of payment has to be limited. Because this means that as the banks have to maintain reserves, they cannot create new money ad infinitum.” Van Suntum, Ulrich. The Invisible Hand: Economic Thought Yesterday and Today. Berlin: Spinger-Verlag, 2005. 75. Google Book Search. Retrieved 15 May 2011.
  13. Rothbard, Murray N. The Mystery of Banking. Auburn, Alabama: The Ludwig von Mises Institute, 2009. 210; hereafter Mystery.
  14. Panic of 1837”. Mises Wiki. 11 May 2011.
  15. Crack of the Pistol: Dueling in 19th Century Missouri”. Missouri Digital Heritage. 11 May 2011.
  16. According to Eustace Mullins, “Although Nicholas Biddle was President of the Bank of the United States, it was well known that Baron James de Rothschild of Paris was the principal investor in this central bank.” The Secrets of the Federal Reserve. 1983. Internet Archive. 15 May 2011; hereafter Secrets. This book was originally titled “Mullins on the Federal Reserve” and was published by Kasper and Horton in New York in 1952. Mr. Mullins does not cite any sources of information for the quote above.
  17. President Jackson’s Veto Message Regarding the Bank of the United States; July 10, 1832”. The Avalon Project – Yale Law School. 15 May 2011.
  18. Andrew Jackson”. The White House. 23 May 2011.
  19. Two of President Jackson’s Secretaries of the Treasury refused to comply or delayed executing the order. “Nicholas Biddle”. Wikipedia. 25 Apr 2010.
  20. Clews, Henry. “Old Time Panics”. Twenty-Eight Years in Wall Street. New York: Irving Publishing Co., 1888. 175-176; hereafter Panics. Although Mr. Clews did not work on Wall Street until following the panic of 1857, he sought to “preserve the leading features of this important episode in the early history of Wall Street, as there will soon be none of those, who took an active part in the exciting events of that period, left to tell the tale” (179).
  21. Panics, 176. This chapter is a recollection of a number of Mr. Clews’ associates who were involved in the panic of 1837. See, for example, his comments on pages 178-179.
  22. Henkels, Stan V. Andrew Jackson and the Bank of the United States: An interesting bit of history concerning “Old Hickory”. Private Printing. 1928.
  23. The Second Bank of the United States: A Chapter in the History of Central Banking”. Dec 2010. Federal Reserve Bank of Philadelphia. 26 May 2011.
  24. Wilkins, Mira. The History of Foreign Investment in the United States to 1914. Boston: Harvard University Press, 1989. 58. Google Book Search. Retrieved 15 May 2011.
  25. “Life and Death in the White House”. Smithsonian. Listed under American History. 11 May 2011.
  26. Walden, Barbara. “Mummies, Lightning, Roller Skating All Part of Kirtland Temple Lore”. 19 Mar 2011. Herald Magazine. 15 May 2011. Compare these figures with those found in Market Critique. 396.
  27. Mystery. 98. See also Reinterpretation. 151-165.
  28. Ferguson, Niall. The House of Rothschild: Money’s Prophets – 1798-1848. Harlow, Essex: Penguin, 1999. 300.
  29. Millennial Star. 823; see also, Chartering. 5.
  30. Jessee, Dean C. “The Kirtland Diary of Wilford Woodruff”. BYU Studies, Vol. 12, No. 4, 1972. 8; hereafter, Woodruff Diary.
  31. The stock ledger book records entries through July 2, 1837. Ledger Book. 429.
  32. Chartering. 7-8. Far from being “less well informed”, Brigham Young’s comments were perhaps more closely akin to the views of Jacksonian hard money Democrats at that time. Compare George A. Smith’s comments in Ledger Book. 432.
  33. Chartering. 3. This was a little more than a “50 percent drop in real value from 26¼ per share, the subscription price paid by the overwhelming majority of owners.” Ledger Book. 429.
  34. Chartering. 3; see also, Hall, Mary A. Thomas Newell and his descendants. 135. Google eBook. Retrieved 28 May 2011.
  35. Chartering. 3.
  36. Panics. 177-178.
  37. Secrets. 50.
  38. The Financial Panic of 1837”. Public Bookshelf. 22 May 2011.
  39. See Whitney, Orson F. Life of Heber C. Kimball. Salt Lake City: Stevens and Wallis, 1945. 100.
  40. See Joseph’s comments in Woodruff Diary. 17. See also Heber C. Kimball’s reflections in Ibid. 25-26.
  41. Probably June 8, 1837. See Ledger Book. 428. Note 1.
  42. Roberts, Brigham H., ed. History of the Church of Jesus Christ of Latter-day Saints. Salt Lake City: Deseret News, 1965. 2:497.
  43. See, Chartering. 6. “Jacksonian understanding of banking was far superior to that shown by politicians today. The war against the national Bank was only the first step in a struggle to eliminate fractional reserve banking entirely. After breaking the alliance between bank and state at the national level, the Jacksonians made a valiant effort to break that alliance at the state level as well. The Jacksonians unfortunately failed, not only because the Whigs with their neo-mercantilist ideology pushed through ‘free banking’ as a means of rearranging and extending the bank-state alliance, but also because the business cycle was an international phenomenon.” Reinterpretation. 161.

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  1. Steven Montgomery’s avatar

    A fine “sketch” Greg. Well done.

  2. Jennifer’s avatar

    This is the best summary I’ve seen on this topic. Thanks, Greg, for all the great research you do…

  3. Greg’s avatar

    Thanks Jennifer!

  4. o.s’s avatar

    what do you think Maj Biddle and congressman Pettis were yelling before they decided to dual?

  5. David Littlefield’s avatar

    Great Overview! – Thanks, David

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