Mises Daily Articles
Murder and Inflation: the Kentucky TragedyTags Money and BanksU.S. HistoryInterventionism
Following the Panic of 1819, the state of Kentucky sought to provide relief from the suddenly harsh burden of debt on many of its citizens, by creating the Bank of the Commonwealth, a new kind of bank, one completely owned by the state government and not at all bothered by specie, and by suspending foreclosure for up to two years upon the tender of paper money by debtors.
There followed a period of inflation, a collapse of the economy, political conflict, concern for the preservation of a republican form of government, and murder.
A new history, The Kentucky Tragedy by Dickson Bruce (LSU Press, 2006), tells the story of a particular murder — one of operatic proportion — that occurred during this tumultuous period. The story of this murder, the trial of the murderer and of his execution, is compelling. But, so is the context within which this murder took place.
Prelude to Murder
The Panic of 1819 was precipitated by the effort of the US government, aided by the Bank of the United States, to bring about a resumption of specie payments. During the War of 1812, the banks of the country outside New England suspended specie payments. And, while they were in suspension and awash in US Treasury Notes (which they treated as reserves), they increased their lending and note issuance, and touched off a bubble in land values. It was expected that, following the war, the banks would resume specie payments, but this did not happen on its own and, so, the federal government announced that, as of a certain date, only the paper of specie-paying banks would be acceptable in payment of taxes and other dues to it, and to its fiscal agent, the Bank of the United States. Following this announcement, most of the banks of the country resumed, but for many banks, whose borrowers were unable themselves to repay their debts in specie or bank notes redeemable in specie, this resumption proved abortive, and much of the country south of Virginia and west of Pennsylvania relapsed into suspension.
During the relapse into suspension, many of the state legislatures of the country tried to give relief to debtors through one or both of the following expedients: First, laws postponing or otherwise making more difficult foreclosure sales; and, second, chartering new banks from which borrowers could refinance their loans on easy payment terms (Murray Rothbard, The Panic of 1819. New York, NY: Columbia University Press, 1962, available in PDF). Kentucky and Tennessee may have been the foremost states for debtor-relief legislation.
The state of Kentucky had already tried the new bank scheme. In 1818, it had authorized up to forty-six "independent banks," to go along with the long-established Bank of Kentucky and the two branches of the (Second) Bank of the United States in the state. These new banks did not have to redeem their notes in specie, but could redeem them merely in notes of the Bank of Kentucky. The idea was that the specie in the vaults of the Bank of Kentucky could be used, through these new banks, to support an expanded multiplication of paper money in the state. The new banks were supposed to borrow, in the aggregate, something like $1 million in notes from the Bank of Kentucky, and then issue $2 million of their own notes.
But, instead of increasing the amount of paper money in circulation, the pyramid scheme appears to have disrupted monetary arrangements, with the withdrawal from circulation of the well-known notes of the Bank of Kentucky, and the emission of a variety of notes of unknown value. Apparently, the notes of the new banks were quickly returned to them for redemption, and this "reflux," as it was called, forced many of the new banks into suspension. As a result of the many failures of the independent banks, and of their relationship, via the pyramid scheme, to the Bank of Kentucky, they came to be characterized as "The Forty Thieves," as in "Ali Baba and the Forty Thieves."
In mid-August 1819, two of the new banks were reported as being unable to redeem their notes. The next week, two more were reported to have failed, and eight others were described as "suspicious." By early September, a total of sixteen of the new banks were either known or suspected to have failed. By November, according to one account, seventeen of the new banks had failed, and eight others were suspect or inactive.
With the failure of so many of the independent banks, monetary arrangements apparently became deranged. Change tickets were issued by merchants and gained a degree of currency, indicative of a lack of coins in circulation. And advertisements made barter-like offers for commodities produced in Kentucky for export, e.g., "whiskey at current prices will be taken in payment of debts," and "the subscriber will receive in payment of debts pork, flour and whiskey," indicative of a lack both of paper money redeemable in specie and of coins in circulation.
In February 1820, with the abject failure of its pyramid scheme, the state tried a new tack. It extended its "replevy" law, whereby debtors could redeem their property following a foreclosure sale, to up to two years. Kentucky had long had a replevy law, but the period of redemption had previously been only three months. At about the same time, the Bank of Kentucky suspended specie payments, and its notes fell to a discount of about twenty percent against specie.
Monetary arrangements remained deranged through the year. Notes of the Bank of Kentucky continued to be heavily discounted against specie. And, advertisements continued to make offers such as "intends selling dry goods low for cash, hog's lard or hemp. He will also take the above articles in payment of debts," and, "we offer our groceries at cash prices for the following items of produce: 20,000 wt bacon hams, 20,000 wt hog's lard, tallow, beeswax, whiskey, hemp, tobacco, white beans, peas, etc."
Enter the Bank of the Commonwealth
Toward the end of the year, the state embarked on yet another course. It revoked the charters of the independent banks and organized a new kind of bank, the Bank of the Commonwealth of Kentucky, backed by the full faith and credit of the state (meaning, not backed by anything of intrinsic value), whose stock was completely owned by the state, and whose officers and directors were appointed and paid by the state legislature.
The fact that the Bank of the Commonwealth was completely owned by the state of Kentucky was considered positively by its supporters. Governor John Adair, a "Relief" man, said, "The Bank of the Commonwealth is founded on the wealth and honor of Kentucky, having for its object the general good, and those who predict its downfall, as much undervalue the riches of the state as they discredit her character for fair dealing."
The first emissions of the new paper money were made in April 1821. By October, $2.3 million had been emitted. During this time, the value of the paper money of Kentucky, in terms of specie, collapsed. One newspaper spoke of "…the rapid and continued depreciation of our paper money for some weeks past … the depreciation is already forty-five percent or more…" A few months later, it said, "Specie now command an advance of 57 percent in notes of the Bank of the Commonwealth."
Another newspaper cited a letter from a subscriber to an associate in Tennessee, "Forty-five advance has been given in Kentucky and Commonwealth paper for U.S. funds. Fifty is now asked." Several months later, this newspaper said, "We understand that specie has grown so scarce in Louisville that 2050 dollars in Commonwealth paper has been given for 1000 dollars in specie." Niles Register of Baltimore reported a curious incident of the exchange of money in Kentucky: "A person lately paid $5 to a printer in Kentucky, tendering a ten dollar bill of one the banks of Virginia, and was surprised at obtaining a discharge of his debt and three five dollar notes in the way change for his own."
In Figure 1, I show the value of the paper money of Kentucky relative to specie through the entire period. I have constructed this time series from several sources. The fall in the value of the paper money of Kentucky upon the opening of the Bank of the Commonwealth through 1822 is manifest in Figure 1.
FIGURE 1. Specie-value of Kentucky Banknotes (Frankfort Argus and Commentator, Lexington Gazette, Reporter and Western Monitor, Louisville Focus, Morning Call and Public Advertiser; and, Grotjan's and U.S. Gazette of Philadelphia)
During 1822, newspapers noticed a peculiar asymmetry in the price changes accompanying the fall in the value of the paper money of Kentucky. Namely, prices of local produce and of labor were not rising, only those of imported goods. Consequently, the inflation adversely effected the terms of trade of the state, as well as made repayment of "foreign" debts more burdensome, and, in these two ways, impoverished the state.
Said one newspaper, "We understand that the prices of produce, of the Country, or of labor have not changed in their value in the banks notes of this state or of the commonwealth …" Said another, "such is the moderate price of every article of domestic produce, that the normal value of the currency … is not depreciated … [But] no man can leave Kentucky and travel into other parts of the Union, without paying nearly one-third of his funds for the purpose of converting the remainder into real money." And, "the balance of trade in consequence of our importation and the low price of our produce has been greatly against us."
With the collapse of the value of the paper money of the Bank of the Commonwealth, several proposals were made to shore up its value by reducing the amount in circulation. One proposal was to stop making new loans, and collect some payments on the loans already made. But, this policy (or, we might infer from what follows, the mere announcement of the policy) had little effect in slowing the fall in value of the paper money. Figure 1 shows a strengthening of the value of the paper money in 1822, but the uptick was short-lived. In fact, before the policy was implemented, the lower house of the state legislature passed a resolution disapproving it; and, three days after the policy was implemented, it was rescinded.
Here Comes the Judge
In 1822, two circuit court judges of the state, independently, found that the application of the replevy law to pre-existing contracts violated the US Constitution's "impairment of contracts" clause. And, the next year, the Court of Appeals (the state's Supreme Court) took up the two cases, held three days of hearings on them, and found, 3–0, that the replevy law was indeed an impairment of contract, unconstitutional, and void.
Following this, for the next several years, the politics of the state revolved about the constitutionality of the state's relief laws, and the role of the judiciary relative to the legislative and to the executive branches of government. The underlying issues of debtor relief and paper money gradually receded, as their disastrous consequences were made evident.
Indeed, beginning in 1822, there was a spontaneous rejection of the paper money of the Bank of the Commonwealth, with the recognition of specie and the notes of the branches of the Bank of the United States in the state, which could be redeemed in specie, as the unit of account. When the paper money of the Bank of the Commonwealth was first issued, coin and bank notes redeemable for specie were exported or hoarded, and only the paper money of the Bank of the Commonwealth circulated. But, this soon changed.
Through November 1822, the prices in the Louisville Public Advertiser's price current were given in paper money, then, in December, prices were given in specie. The Kentucky Gazette continued to publish price currents in paper money through 1825, at which time it, too, began quoting prices in specie. Later that year, it published a conversion table facilitating the use of the paper money of the Bank of the Commonwealth as a parallel medium of exchange to coin and bank notes redeemable in specie.
The state legislature protested the decision of the Court of Appeals, describing the court's voiding of the law as a usurpation of legislative power. "The people of Kentucky … have no preference for judicial tyranny … They will not tolerate tyranny under any disguise …" The legislature then attempted to remove the judges of the Court of Appeals on the grounds of bad behavior, but failed to attain the required two-thirds majority by the narrowest of margins, falling one vote short in the lower house and two in the upper. The legislature subsequently passed a law "reorganizing" the Court of Appeals, abolishing the "Old Court" and creating a new state Supreme Court that was staffed with judges sympathetic to the Relief agenda.
The legislature also expressed its view of the nature of the rights of man:
The right of each member of society must, from the nature of government, depend on the will of all, and that will must be displayed by the agency or expression of the majority.
…the will of the people, in civil society, constitutes the sovereignty of the state; that sovereignty is essentially a moral force, of unlimited extent …
In civil society, each of the members enters a double will, the one as a commoner in nature, the other as a member of a corporate body. The first is erratic, impulsive and selfish; the other is social, or rather political, and … pure, enlightened and disinterested.
Instead of seeing the rights of man as inherent, endowed, as it were, by the Creator, and seeing governments as formed by men in order to secure these rights, it sees the rights of man as dependent on something described as the will of the majority. Instead of seeing interest as inevitable, if not as good, and seeking to restrain the excessive pursuit of interest through a system of checks and balances, it denigrates the individual, describing the individual as impulsive and selfish, and glorifies the collective, describing the collective as pure and enlightened.
Murder and the Elections of 1825 and 1826
In late 1824, one of the sons of Governor Joseph Desha, Isaac B. Desha, was arrested for murder and highway robbery, as reported in the Louisville Public Advertiser:
It appears that [Isaac B.] Desha fell in company with Mr. [Francis] Baker at some place near Mayslick. After some conversation, by which he learned that Mr. Baker was traveling eastward, and intended calling on Captain William Beckly, a relation of his living near Washington, he, Desha, offered to accompany him, to show him the way to that gentleman's, which offer was accepted. Nothing more was seen or heard of Mr. Baker until he was found several days afterwards in the woods covered with logs and rubbish, with his throat cut from ear to ear! The back of his head was much bruised, supposed to have been occasioned by the strokes of a large whip in Desha's possession and the thumb of his right hand had been cut — apparently while resisting the knife of the murderer. Desha, we learn, was met near the place where the murder was committed, by a lad, who asserts that his hands and clothes were bloody, and that he was carrying a bridle, which was also bloody. The horse of the deceased was found in the possession of Desha; and a shirt Desha had on, on being compared with Baker's, was found to be of the same quality, with the mark cut out in precisely the same place where Baker's name was written on the other.
After a change of venue favorable to him, Isaac B. Desha, who was defended by a team of prominent Relief lawyers, was tried and found guilty. But, the judge, a Relief man himself, granted Desha a new trial.
The murder, the change of venue, and the declaration of a mistrial by a friend of the Governor dragged down the Relief party in the elections of 1825. In this election, the Old Court party (i.e., those favoring the rule of law and opposing non-redeemable paper money and the relief laws) gained a large majority of twenty-two seats in the 100-seat lower house of the state legislature. As Figure 1 shows, the value of the paper money of the Bank of the Commonwealth rose sharply from early 1825 to early 1826.
With an Old Court majority in the lower house of the state legislature, but with the Governor being a Relief man and the Relief party still in control of the upper house, the state was headed for a period of stalemate tinctured with uncertainty. Governor Desha's post-election annual message to the state legislature was an unapologetic defense of the Relief agenda. "The doctrine of our late court of appeals," he said, "that an opinion of the Supreme Court of the United States on subjects involving the rights of the state, is binding and conclusive upon the state authorities, is believed to be not only erroneous but fatal to the sovereignty of the states." According to Old Court men, the Governor, together with another son, Marcus Brutus Desha, brandishing force of arms, threatened and otherwise attempted to intimidate both the lower house and the judges of the Old Court.
In the election, Solomon Sharp, a Relief man and a former Attorney General of the state, won a seat in the state legislature. And, after the gathering of the new legislature, he was murdered in his home by a man identifying himself as "John A. Covington." A reward for the then enormous sum of $3,000 was offered by the state government for information leading to the arrest and conviction of the murderer. For the reasons listed below by the Morning Post of Louisville, Jereboam Beauchamp came to be suspected:
It is said that he [Beauchamp] had conceived an inveterate hostility to Col. Sharpe … which delicacy forbids us to mention; and that he had under this feeling threatened the life of Col. Sharp.
It is known that he arrived in Frankfort on Saturday evening, before the murder, and departed thence early the next morning.
It is said that he exhibited no curiosity about the affair in the morning before he left town; and that he met the representative of his county a few miles from town on his way to the legislature and conversed with him some time without mentioning this most extraordinary affair.
It is said that he [lodged with Mr. John Scott] on Sunday evening … [and] that during the night he was heard to go out of the house and to return an hour or two after.
It is said that the patrol at half past one o'clock that night passed and observed a man in a cloak such as Beauchamp wears, and whose appearance agrees with his.
It is said that [the bloody handkerchief that was dropped by the assassin was] just such a handkerchief as Beauchamp had tied round his forehead at a tavern and at Mr. Scott's.
A plain track was found in the yard where Mrs. Sharp saw the assassin … [and] that track, it is said, corresponds with Beauchamp's boot.
It is said that when he had got near home he denied ever having been at Frankfort.
It is said that when he was arrested he had about him a dirk, with rather a broad blade made exceedingly sharp, not so broad as the wound in the deceased, but with which it might have been made if drawn out obliquely.
The delicate matter of which the paper did not speak was that Beauchamp's murder of Sharp was an honor killing. Sharp, some years prior, had an affair with the woman whom Beauchamp later married, which affair culminated in a pregnancy and a still-born child. During the election campaign, one of Sharp's people started a rumor that Beauchamp's wife had given birth to a mulatto child, implying that she had an affair with one of her family's servants. Beauchamp was subsequently arrested, tried, convicted, and condemned to death.
While this murder, investigation, and trial were transpiring, the case of Isaac B. Desha was continuing. First, Desha was re-tried, again found guilty, and again granted a new trial. The newspapers of the state were abuzz with discussion of this trial since the judge was temporarily appointed to fill a vacancy by the Governor who knew that this appointee would probably preside over his son's case, and because the new trial was granted on a hyper-technical matter of law (on a post-verdict motion by the defense that the Commonwealth Attorney had not proven that the murder took place in Fleming County, which, the Commonwealth Attorney said, was immaterial since that would only have established Fleming County as the venue of the case and the case had already been removed to another County).
Then, while on bail waiting yet another trial, and apparently keeping himself continuously intoxicated, Desha attempted to commit suicide, and cut his throat badly. The news of this attempted suicide was reported at the same time as that of Beauchamp's execution. The physicians who attended Desha were able to save his life with the aid of a silver tube connecting his severed windpipe, and his case was continued pending his recovery.
Beauchamp's execution was a spectacle. His wife, the woman for whom he had committed his crime, joined him in his prison cell the evening prior to his scheduled execution, and they attempted to commit suicide together by stabbing themselves. She was successful but he was not nearly so. The next morning, when they were discovered, he was bandaged up and then taken to the scaffolding that had been erected. There, after the requisite prayers and hymns, and also after an exchange with a person thought to have been involved in the murder which led eventually to yet another twist in the story, he was hanged. The Beauchamp-Sharp affair would become romanticized as "The Kentucky Tragedy," and gain a life of its own in poetry, literature, and theater.
The Sharp murder dominated the election of 1826. In the election, the Old Court party gained control of the upper house of the state legislature and retained control of the lower house. The new state legislature subsequently repealed the state's replevy law and resolved the court controversy in favor of the "Old Court." And, the notes of the Bank of the Commonwealth lost much of their remaining "moneyness."
Wrapping Things Up
From the standpoint of money and banking, Kentucky's experience with irredeemable paper money led, eventually, to a new majority in the state, one favoring sound money and the upholding of contractual obligations. The support of sound money meant, during the remaining term of the Bank of the United States, that the unit of account and the main medium of exchange in the state were coins and the notes of the branches of the Bank of the United States in the state.
Following President Jackson's veto of the re-chartering of the Bank of the United States, the state chartered three large, well-capitalized banks, the (new) Bank of Kentucky, the Bank of Louisville, and the Northern Bank of Kentucky. These and other banks subsequently chartered by the state were required to maintain a specie reserve. With but a couple exceptions, they were specie-paying banks through the remaining antebellum period except for times of general suspension in the country.
Turning to Isaac B. Desha, he recovered enough so that, in mid 1827, he could again be tried. However, the court was unable to empanel a jury as his lawyers made many preemptory challenges of prospective members. The judge in this trial was going to hold Desha without bail until the next session of the court. But, Governor Desha, who was present in the court house at the time, proceeded to grant his son a pardon, and give a long speech lambasting the judge.
Following his release, Isaac B. Desha next showed up in the newspapers in conjunction with the murder and highway robbery of another person, in Texas, where he was traveling under an alias but recognized by a former Kentuckian by reason of family resemblance and his silver tube. While awaiting trial there, he confessed to both murders, and then apparently committed suicide. A letter from Texas provides the following details:
Last April Desha arrived here on board the schooner Light of Man, from New Orleans, in company of a man by the name of Thomas or John Early, of Brown County, Ohio, who visited this country for the purpose of removing his family here. Desha passed by the name of John Parker. They arrived in this town [San Felipe de Austin] early in May, and remained only a few days here, and left … for San Antonio. When they left, Desha was without funds and Early had a pretty smart sum with him. Desha arrived in San Antonio without Early, and spent the money freely. On his return to this place, I had him arrested, and sent some men today to examine for the body of said Early. The evidence that I have been able to collect, as yet, is very strong against him, and I am very much afraid that he has murdered his companion.
Finally, I will mention that, in the elections of 1828, an Old Court man, Thomas Metcalf, was elected to succeed Governor Desha. In his first annual message to the state legislature, Governor Metcalf spoke to the proper role of government in light of the ordeal through which the state had passed.
The legitimate design of the best government is to preserve to all the citizens equal enjoyment of the absolute rights of personal security and private property, and the relative rights, civil, social and domestic, of rational and virtuous freemen …
Kentucky has unhappily, for years past, been harassed by angry controversy. This conflict has left but little worthy to be remembered …
Public opinion acknowledges no superior … it is the arbiter, in the last resort, of all our rights …
What then are the elements of our political power and safety? The aggregate mind and morals of our freemen. The wise man clings to reason and justice and religion … as the strong anchor[s] of liberty. Without the prevalence of these peaceful guardians, he has no security and no rational hope. Whenever these predominate, there is "no one to make him afraid." So long as they exercise a controlling influence, he knows that his peace will be undisturbed, his rights respected, and his country exalted.
Governor Metcalf expressed the "Old Court" or Constitutionalist view of the rights of man. To be sure, public opinion is acknowledged to be the final arbiter of our rights. But, while this much is admitted, public opinion does not define our rights. Our rights, some of which are absolute, exist independently of public opinion. Accordingly, we need to anchor public opinion in reason, justice, and religion. Otherwise, I will add, our hope is that, when public policies violate our rights to be secure in our persons and our property, public opinion will change upon the demonstration of the disastrous consequences of those policies, in terms, yes, of poor economic performance, but also in terms of political conflict and social upheaval.