Panic of 1819

The Panic of 1819 was the first major peacetime financial crisis in the United States followed by a general collapse of the American economy persisting through 1821. The Panic announced the transition of the nation from its colonial commercial status with Europe toward a dynamic economy, increasingly characterized by the financial and industrial imperatives of laisser-faire capitalism - and susceptible to boom and bust cycles.

Though driven by global market adjustments in the aftermath of the Napoleonic wars, the severity of the downturn was compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.

The Second Bank of the United States (BUS), itself deeply enmeshed in these inflationary practices, sought to compensate for its laxness in regulating the state bank credit market by initiating a sharp curtailment in loans by its western branches, beginning in 1818. Failing to provide metallic currency when presented with their own bank notes by the BUS, the state-chartered banks began foreclosing on the heavily mortgaged farms and business properties they had financed. The ensuing financial panic, in conjunction with a sudden recovery in European agricultural production in 1817 led to widespread bankruptcies and mass unemployment.

The financial disaster and depression provoked popular resentment against banking and business enterprise, and a general belief that federal government economic policy was fundamentally flawed. Americans, many for the first time, became politically engaged so as to defend their local economic interests.

The "New" Republicans and their American System – tariff protection, internal improvements and the BUS – were exposed to sharp criticism, eliciting a vigorous defense.

This widespread discontent would be mobilized by Democratic-Republicans in alliance with "Old" Republicans, and a return to the Jeffersonian principles of limited government, strict construction of the Constitution and Southern preeminence. The Panic of 1819 marked the end of the Era of Good Feelings and the rise of Jacksonian nationalism.

Post-war European “Readjustments” and the American Economy: 1815 - 1818

The United States and Great Britain signed the Treaty of Ghent on December 24, 1814, ending the War of 1812. The British government effectively relinquished its mercantilist policies towards the United States, preparing the way for the development of free trade and the opening of America’s vast western frontier.

Europe was undergoing a period of disorganization as it readjusted to peacetime production and commerce in the aftermath of the Napoleonic Wars. The general effect was a decline in prices throughout the Western world, due to a scarcity of metallic sources of currency (i.e. gold and silver). Britain had advanced its industrial capacity to fully meet its wartime demands, but post-war continental Europe was temporarily too devastated to absorb Britain’s surplus manufactured goods. Moreover, European agriculture production, exhausted by years of warfare, was unable to feed its own population. The economy of the United States was not immune to the chaos that afflicted Europe, and therein lay the roots of the Panic of 1819.

Continental Europe, its agrarian output crippled by the recent war, offered new markets for American staple crops, particularly cotton, wheat, corn and tobacco. As prices soared for agricultural goods, a speculative agrarian land boom ensued in the South and West United States, encouraged by liberal terms for government public land sales. “The entire postwar American economy” observed historian George Dangerfield was “based on a land boom”. The inflationary bubble grew from 1815 to 1818, obscuring the general deflationary trends in world prices.

Unregulated Banking and the Imperatives of Republican Enterprise

With the failure to recharter the First Bank of the United States in 1811, regulatory influence over state banks ceased. Credit-friendly Republicans – entrepreneurs, bankers, farmers – adapted the imperatives of laissez-faire finance to the precepts of Jeffersonian libertarianism - equating land speculation with "rugged individualism" and the frontier spirit. Private banking interests and their allies sought to evade or resist any threat to the profitability of their local enterprises, including the regulatory influence of a government bank limiting easy credit. There followed an enormous expansion in state-chartered banking, with chartered institutions proliferating from 88 in 1811 to 208 in 1815, mostly in the mid-Atlantic states.

During the war with Great Britain (1812 – 1815), the American government turned to these new banks for loans, encouraging a proliferation of paper money. This practice tended to shift specie into the more conservatively lending New England banking apparatus, depleting the newer banks of their hard money reserves. In response, the US government acquiesced in a suspension of specie payments from state banks in order to prolong the wartime lending. The arrangement persisted in the war’s aftermath, allowing old and new banks to profitably lend without regard to their metallic currency reserves. A speculative bubble formed as a result of these inflationary practices threatening the health of the economy.

By 1814, calls for a new central bank and a resumption of its regulatory control were heard from powerful capitalists interests and economic nationalists in the Republican party leadership.

Resurrection of the Bank of the United States

The "American System"

The Republican party found itself in control of the central government with the collapse of the Federalist party at the end of the War of 1812. Some of the traditional Jeffersonian agrarian precepts – especially strict construction of the Constitution – had softened due to difficulties during the war arising from a lack of infrastructure, unregulated banking and a shortage of manufactured materiel, as well as the prospect of developing the vast natural resources with westward expansion. A mild nationalist outlook took hold among the “New Republicans” led by Speaker of the House Henry Clay and Congressman John C. Calhoun. A three-part program dubbed the American System, incorporating some the Hamiltonian projects championed by the Federalists, proposed “to create a stable economy through a centralized banking system, stimulated by an ever widening web of transportation and communication, through which domestic manufactures could eventually reach all parts of the Union.”

Advocates for the American System called for a protective tariff to encourage manufacturing, a federally funded program for internal improvements and a rivival of the First Bank of the United States to regulate finance.

The “Capitalists”: Astor, Girard, Parish

In the crucible of the War of 1812, the Treasury of the United States had been compelled to offer $16 million in government war bonds in order to stave off bankruptcy due to military costs and wartime loss of revenue. Financier Stephen Girard, business magnate John Jacob Astor and merchant David Parish bought up these government securities and rescued the nation’s credit. Through their influence, and in alliance with Republican Congressmen John C. Calhoun and Henry Clay, they sought to augment their investment by proposing that the securities be exchangeable for stock in a new Bank of the United States.

Secretary of State James Monroe supported the Bank’s revival, wishing to bind these highly regarded and pro-Republican business figures to government financial operations. Republicans in the South and West joined with monied interests in the mid-Atlantic states to support Hamiltonian banking mechanisms for the purpose of democratizing a national system of currency and credit.

Pro-BUS Congressman John C. Calhoun argued forcefully that the federal government had a constitutional obligation to regulate bank credit as part of the national money supply. In January 1816, he introduced a bill of incorporation in the House of Representatives for a government bank. The measure was passed by Congress and signed by President James Madison in April 1816.

Opposition to the Bank came from two fronts: the hard money ”Old Republicans” who regarded an augmentation of the central government activity as an assault on personal liberty and a violation of Jeffersonian agrarianism, and state chartered private banking interests, who favored paper money, but considered federal regulation of local banking operations to be anti-Republican. These ideologies and interests would be arrayed against the central bank with the Andrew Jackson administration to destroy the institution in 1833.

The Second Bank of the United States began operations in January 1817.

"New Republican" Expectations for the Central Bank

The revival of the Bank of the United States had two primary objectives: first, to reverse the post-war inflationary practices of state-chartered banks by inducing resumption of convertibility, and second, to expand the opportunities for the common man to acquire bank credit, promoting enterprise and an orderly and profitable westward expansion.

The regulatory mechanism of the BUS resided in its fiscal duties as depository for the US Department of the Treasury. As such, the Bank accepted circulating state bank paper money from individuals, businesses and importers when they paid taxes or custom duty fees. The central bank immediately credited these payments to the US Treasury with its own metallic reserves. The BUS, in turn, anticipated that the state banks which had issued the paper money would, upon demand, redeem their currency with gold and silver – “convertibility” - reimbursing the government bank.

In order to remain solvent, the state banks would, ideally, constrain their lending of paper money – however profitable – so as not allow the BUS to become a significant creditor and deplete their species reserves. Failing this, the Second Bank of the United States would, in theory, cease to honor the bank notes of those financial institutions that refused to promptly settle their government accounts with hard money – a recipe for bankruptcy.

The central bank’s direct influence on inflationary lending was limited to those chartered banks whose paper currency was extensively used to remit funds to the government (i.e. tax and duty payments). The BUS and its branches had little or no direct control over commercial paper emitted by unchartered lending outfits: “All that was necessary to start a bank…was plates, presses and paper; ‘a church, a tavern, a blacksmith shop’ would be a suitable site.” These unregulated credit operations would “to some extent interpenetrate” the regulated banking system, especially in the regions of wildcat banking.

Prelude to Panic: 1816 – 1818

Bank Performance under BUS President William Jones

President of the United States James Madison and Secretary of the Treasury Alexander Dallas fully approved the elevation of William Jones – one of the federally appointed Bank directors – to BUS President in October 1816. Jones, formerly a member of Madison’s cabinet, owed his promotion more to his political acumen than his skills as a banker. Financier and co-director Stephen Girard was troubled at Jones’ promotion, concerned that he could not provide disinterested leadership for the Bank. Businessman John Jacob Astor doubted that Jones would wield the Bank’s regulatory powers effectively.

Early Setbacks and Compromises for the BUS

The Second Bank of the United States began operations in January 1817 as fiscal agent of the United States Treasury. After February 20, 1817, the BUS was scheduled by to begin to receive all government revenue in legal tender as required by its charter.

Hard money shortages prevailed because US exports exceeded imports and Peruvian and Mexican gold and silver sources failed to replenish species reserves. Due to this scarcity, the terms of the Bank’s incorporation provided for private subscribers to invest with a combination of metallic currency and government stock. Further, they were granted an indulgence by Bank directors that effectively waived the species requirement: ultimately, investors were allowed to purchase Bank shares on the security of the stock itself. Under its charter guidelines, the BUS was expected to acquire species totaling $28 million by the time it opened for business; with only $2 million secured when it commenced operations, the Bank was compelled to purchase species at usurious rates from the London financial markets in 1817 and 1818, overburdening BUS credit.

As the February 20 deadline approached to resume convertibility, the private (i.e. state-charterd) banks withheld cooperation from BUS officials, loath to submit to the regulatory influence of the central bank – and diminish the large profits derived from their issue of unredeemable paper. On February 1, 1817, an association of bankers from Pennsylvania, New York, Maryland and Virginia met with the new Secretary of the Treasury William H. Crawford and BUS President William Jones, arranged a compromise which undermined the ability of the central bank to assert its role as creditor to the private banks.

The directors of the BUS, with Secretary Crawford’s imprimatur, promised to refrain from collecting public deposits held in state banks until July 1, 1817. Moreover, they agreed to greatly expand the Bank’s credit – at a discount of $6 million – before proceeding to collect public debt from the state institutions. In effect, the central bank transformed the private banks into its creditors, inviting them to draw species from BUS reserves months before the Bank of the United States assumed its regulatory functions. Under these “ominous terms” the Bank was launched - its operational success already at risk.

BUS Branch Office Lending and the Frontier Land Boom

The eighteen branch offices of the BUS in 1817 operated with little oversight from the Philadelphia headquarters, nor from the US Treasury. This policy stemmed in part from a social philosophy that prevailed among Republicans during the Era of Good Feelings that wished to Republicanize credit practices and encourage westward migration.

The United States government encouraged settlement of these lands by offering public land at $2 per acre (160-acre minimum), though auctioneering tended to retard sales and raised prices slightly. The terms required a down payment of one-fourth of the total cost and the balance in four annual payments. Failure to pay in full in five years meant forfeiture.

The US Treasury accepted land payments in the form of bank notes issued by western and southern state banks. These institutions often lacked sufficient specie reserves to back up their vastly over-extended credit. As long as the land boom continued, the Treasury Department was compelled to accept depreciated bank notes for its public land sales, undermining government efforts to pay down the war debt. As the branch offices in the West and Southwest over-issued their BUS notes to land boom farmers and speculators, they sought to restock their species reserves by redeeming their own notes for hard money at the BUS branch offices in the North and East, to fuel another cycle of excessive lending.

These branch banks, emulating their wildcat counterparts, injected so much of their own paper money into circulation that they cancelled their regulatory capacity: they could not with impunity demand species payments from state banks that held public deposits without being presented with their own script for convertibility in return. These precarious economic conditions - a manifestation of “rapid expansion, speculation and wildcat banking” - prevailed in the South and West prior to the Panic, where the economic collapse would be most severe.

By July 1818, the Second Bank of the United States had demand liabilities exceeding $22.4 million, whereas its species fund stood at $2.4 million – a 10:1 ratio and double the 5:1 ration considered sustainable.

Causes of The Panic

Several factors that became prominent during the War of 1812 contributed to the onset of the first major financial crisis in the United States:

1. With the War of 1812, United States experienced prosperity and economic growth. As the neutral country in the war between Great Britain and France, the United States witnessed an increase demand for export. To meet this higher demand, the United States began to grow its domestic manufacture industries, namely in cotton and textiles; the rise of big-scale, corporate manufacture was largely concentrated in New England states.

2. Greater need for federal government spending during wartime led to greater federal borrowing. As the federal government could not secure loans from New England banks, which held a relatively conservative view on war spending than banks outside the region, the federal government relied heavily on mid-Western and mid-Atlantic banks to borrow money (which led to an increase in the number of banks—from 88 in 1811 to 208 in 1815). Coupled with loose operational policies and the consequent boom of bank branches in non-New England states, the expansion of bank notes (payable with stocks) led to an uneven supply of specie in different regions. For example, Massachusetts banks experienced a $0.4 million increase in bank notes, but a $2 million increase in specie during 1811 – 1815.

3. The United States at this time also experienced an inflation of commodity prices. Both domestic and imported goods prices increased due to increased money supply in the market and blockade of international naval trade. Cotton prices, for example, doubled in price during this period. When the War of 1812 saw its end, the United States was free to start international trade again, especially with Great Britain, the nation’s biggest trading partner. The sudden, post-war influx of imported goods led to a dramatic deflation of goods prices, and domestic manufacturers were faced with harsh foreign competition.

On top of the foreign influence, domestic land issues also presented itself as a factor of the Panic. With the nationwide sales of public lands, speculation in real estate prices was prevalent.

To accommodate the instability of money that state bank branches had created, the charter for the Second Bank of the United States was signed in 1817. The Second Bank’s main objective at the start of its operations was to provide a “sound” and nationwide system of currency.

However, due to the lack of authority over the mid-Western and Southern Bank branches, and the continued expansionary operations, the branches were still freely issuing bank note and generous loans despite the lack of specie in their vaults to back them up. Soon the Second Bank suffered from trade deficit and an outflow of specie to foreign nations.

Under the mismanagement and failed leadership of the Bank’s first President, William Jones, the Second Bank “proceeded to run the economy into the ground by first extending far too much credit, then quickly restricting it. A financial panic ensued, followed by a steep recession that saw interest rates spike, farm produce prices plummet, and unemployment soar."

Jones was removed from his position in 1819, at the onset of economic disaster in the United States.

Role of Langdon Cheves

Langdon Cheves, a South Carolinian lawyer and former Speaker of the House, took over the position of President for the Second Bank in 1819. Cheves is widely credited with instituting better management practices (compared to his predecessor), which eventually helped the nation climb out of the Panic.

Cheves took on a significantly more contractionist role, severely cutting bank loans and credit extensions. Under public land debt relief legislations, Cheves managed to reduce the Bank’s land debt by $6 million within a year of his taking the position of President. Specie drain was also reversed to a great extent, increasing from $2.5 million in 1819 to $3.4 million by 1820. It further rose to $8 million by 1821. As an added consequence, bank notes in circulation was reduced by about $23 million within a span of four years from 1816 – 1820.

The harsh contractions were not without negative consequences. Many state banks went bankrupt and severe deflation in prices of commodities and real estate was longstanding. The negative effects of the Panic lasted until about 1823.

Responses to the Crisis

In the event, President Monroe, interpreting the economic crisis in the narrow monetary terms then current, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspension of specie payments to bank depositors, setting a precedent for the Panics of 1837 & 1857. Although he agreed to the need for improved transportation facilities, he refused the approve appropriations for internal improvements without prior amendment of the Constitution.

In 1821, Congress passed the Relief for Public Land Debtors Act. The bill allowed debtors who owed money on land purchased from the government to keep the proportion of land they had already paid for and relinquish the remaining amount. It further extended the schedule of payments by several years, and offered a discount for quick payment. With the exception of New England states, most of the country strongly supported the measure. Many state legislatures, particularly in rural western states, passed extra relief measures for debtors.

Another response to the panic was monetary expansion, primarily at the state level. Primarily in western states such as Tennessee, Kentucky and Illinois, whose state banks suspended specie payments and issue large amounts of inconvertible notes. Conversely, a majority of states avoided inflationist policies and enforced the payment of specie, and every state witnessed vigorous debate on the merits of each policy.

Treasury Secretary Crawford further advocated restricting bank credit as a measure to prevent a future crisis. Banking regulation was seen as primarily a state responsibility, and several states passed regulations in the years following the panic that required banks to maintain certain fixed ratios of capital to ensure their ability to convert to specie.

A further effect of the Panic of 1819 was increased support for protective tariffs for American industry. Vocal protectionists, such as Philadelphia printer Matthew Carrey, argued that free trade was the root of the depression and tariffs would protect American prosperity. In general, support for tariffs was strongest in the mid-Atlantic states and was opposed by export-heavy southern states.

Long-term Impacts

The Panic brought attention, for the first time, to issues regarding debt relief policy, as well as poor relief. City and state governances began to more effectively approach the public policy reform issues surrounding the poor—a classification system was also created (able-bodied vs. disabled, temporary vs. long-term, etc.). Public attention to solving poverty issues consequently led to public education systems.

Public support was great once again for protective tariffs. However, when the “Tariff of Abominations” was implemented in 1828, regional discontent led to the outbreak of Nullification Crisis. The Crisis is seen as a “critical precedent for democratic action."

On a more contemporary note, many economic historians today agree that the Panic of 1819 marked the United States’ entrance into the modern business cycle.

Economic Interpretations

Different economic schools of thought have offered explanations for the Panic of 1819.

Austrian school economists view the nationwide recession resulting from the Panic of 1819 as the first failure of expansionary monetary policy. This explanation is based on the Austrian theory of the business cycle. The US Government borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks’ reserves of specie, leading to a suspension of specie payments in 1814, and then again during the recession of 1819-1821, violating contractual rights of depositors. The suspension of the obligation to redeem greatly spurred the establishment of new banks and the expansion of bank note issues, and this inflation of money encouraged unsustainable investments to take place. It soon became clear the monetary situation was threatening, and the Second Bank of the United States was forced to call a halt to its expansion and launch a painful process of contraction. There was a wave of bankruptcies, bank failures, and bank runs; prices dropped and wide-scale urban unemployment began. By 1819, land measures in the U.S. had also reached 3,500,000 acres (14,000 km²), and many Americans did not have enough money to pay off their loans.

Economists who adhere to Keynesian economic theory suggest the Panic of 1819 was the early Republic's first experience with the boom-bust cycles common to all modern economies. Clyde Haulman, Professor of Economics at the College of William and Mary, argues^{citation needed} the Panic was partly caused by a decision to call in loans of the Second Bank of the US. Combined with the issue of the depression and overspeculation, the Panic marked the beginning of a new phase of American economic history, where mature market institutions would continue to move cyclically from boom to bust.

References

Cited in footnotes

• Ammon, Harry. 1971. James Monroe: The Quest for National Identity. New York: McGraw-Hill, New York.
• Dangerfield, George. 1965. The Awakening of American Nationalism: 1815-1828. Harper & Row. New York.
• Hammond, Bray. 1947. Jackson, Biddle, and the Bank of the United States. Journal of Economic History, VIII (May 1947), I-23.
• Hammond, Bray. 1956. Jackson’s Fight with the Money Power. American Heritage, June 1956, Volume VII, Number 4. American Heritage Publishing Company.
• Hammond, Bray. 1957. Banks and Politics in America, from the Revolution to the Civil War. Princeton, Princeton University Press
• Hofstadter, Richard. 1948. The American Political Tradition and the Men Who Made It. New York: A. A. Knopf.
• Malone, Dumas and Rauch, Basil. 1960. Empire for Liberty: The Genesis and Growth of the United States of America. Appleton-Century Crofts, Inc. New York.
• Meyers, Marvin. 1953. The Jacksonian Persuasion. American Quarterly Vol. 5 No. 1 (Spring, 1953) in Essays on Jacksonian America, Ed. Frank Otto Gatell. Holt, Rinehart and Winston, Inc. New York.
• Miller, John C. 1960. The Federalists: 1789-1801. Harper & Row, New York. ISBN 13- 9781577660316
• Remini, Robert V. 1981. Andrew Jackson and the Course of American Freedom, 1822-1832. Harper & Row, New York.
• Remini, Robert V. 1984. Andrew Jackson and the Course of American Freedom, 1833-1845. Harper & Row, New York.
• Remini, Robert. V. 1993. Henry Clay: Statesman for the Union. W. W. Norton & Company, New York.
• Rothbard, Murray. 1962. The Panic of 1819: Reactions and Policies. Columbia University Press, New York. [1]
• Schlesinger, Arthur M. 1945. The Age of Jackson. Little, Brown and Company (1953). Boston, Massachusetts.
• Wilentz, Sean. 2008. The Rise of American Democracy: Jefferson to Lincoln. W.W. Horton and Company. New York.

Further reading

• Cayton, Andrew R. L. (1982). "The Fragmentation of 'A Great Family': The Panic of 1819 and the Rise of the Middling Interest in Boston, 1818-1822". Journal of the Early Republic (Journal of the Early Republic, Vol. 2, No. 2) 2 (2): 143–167. doi:10.2307/3122690. JSTOR 3122690. 
• Blackson, Robert M. (1989). "Pennsylvania Banks and the Panic of 1819: A Reinterpretation". Journal of the Early Republic (Journal of the Early Republic, Vol. 9, No. 3) 9 (3): 335–358. doi:10.2307/3123593. JSTOR 3123593. 
• Rothbard, Murray (1962). The Panic of 1819. Ams Pr Inc. ISBN 0-404-51605-X. 
• Sobel, Robert (1988). Panic on Wall Street: A Classic History of America's Financial Disasters. New York: Dutton. ISBN 0-525-48404-3. 

See also

• Panic of 1857
• Business cycle
• Keynesian economics
• Monetary policy
• Austrian business cycle theory
• List of recessions in the United States

External links

• Murray N. Rothbard. Panic of 1819: Reactions and Policies