King Cotton

I was reading through an academic paper by Kathryn Boodry, then at Harvard University, on the early 1800s trans-Atlantic cotton trade, and the following caught my attention (I took out the citation numbers and bolded certain parts):

As cotton continued to rise in price and become more widely available banking practices, most notably credit mechanisms, were increasingly developed in accordance with the dictates of commercial production and marketing of the commodity. Cotton not only served as security for advances; when specie was scarce it also served as a reserve for the issue of notes, and as collateral for the issuing of stock by property or plantation banks. However they were ultimately financed, whether privately or capitalized by states, property banks sold bonds to planters, who paid for their stock with mortgages on their estates for up to two-thirds of their market value. The banks, or in some cases, states, then issued bonds backed by this mortgage pool and typically sold them for working capital in the money markets of the northeast, or in London. Subscribing planters could then borrow from the fund thus created, pledging their crops as security. So long as commodity prices held reasonably steady – and this was the key - the land bank system in the South provided capital and credit to a region chronically short of both. Cotton planters needed it and the banks provided one way they could convert cotton into cash, often employing British and Northern capital to do so.

Historically speaking, agriculture commodities have been used as money - such as tobacco currency.  Bonds backed by mortgages on southern plantation estates gave cotton producers access to credit.  So when commodity prices were rising it became easier to obtain credit (and to roll-over loans) than when prices were stagnant, or worse yet, falling.

The extension of credit on the assumption of rising commodity prices and expanding supply is not new - in 1500s and 1600s Spain, credit advancements were made on the expectations of continued and increasing imports of silver from the Americas.