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 1823. The Panic announced the transition of the nation from its colonial commercial status with Europe toward an independent economy, increasingly characterized by the financial and industrial imperatives of central bank monetary policy, making it 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.
Source: Panic of 1819. Wikipedia. Retrieved from http://en.turkcewiki.org/wiki/Panic_of_1819
Financial Panic
The first major economic crisis in the United States after the War of 1812 was due, in large measure, to factors in the larger Atlantic economy. It was made worse, however, by land speculation and poor banking practices at home. British textile mills voraciously consumed American cotton, and the devastation of the Napoleonic Wars made Europe reliant on other American agricultural commodities such as wheat. This drove up both the price of American agricultural products and the value of the land on which staples such as cotton, wheat, corn, and tobacco were grown.
Many Americans were struck with “land fever.” Farmers strove to expand their acreage, and those who lived in areas where unoccupied land was scarce sought holdings in the West. They needed money to purchase this land, however. Small merchants and factory owners, hoping to take advantage of this boom time, also sought to borrow money to expand their businesses. When existing banks refused to lend money to small farmers and others without a credit history, state legislatures chartered new banks to meet the demand. In one legislative session, Kentucky chartered forty-six. As loans increased, paper money from new state banks flooded the country, creating inflation that drove the price of land and goods still higher. This, in turn, encouraged even more people to borrow money with which to purchase land or to expand or start their own businesses. Speculators took advantage of this boom in the sale of land by purchasing property not to live on, but to buy cheaply and resell at exorbitant prices.
During the War of 1812, the Bank of the United States had suspended payments in specie, “hard money” usually in the form of gold and silver coins. When the war ended, the bank continued to issue only paper banknotes and to redeem notes issued by state banks with paper only. The newly chartered banks also adopted this practice, issuing banknotes in excess of the amount of specie in their vaults. This shaky economic scheme worked only so long as people were content to conduct business with paper money and refrain from demanding that banks instead give them the gold and silver that was supposed to back it. If large numbers of people, or banks that had loaned money to other banks, began to demand specie payments, the banking system would collapse, because there was no longer enough specie to support the mount of paper money the banks had put into circulation. So terrified were bankers that customers would demand gold and silver that an irate bank employee in Ohio stabbed a customer who had the audacity to ask for specie in exchange for the banknotes he held.
In an effort to bring stability to the nation’s banking system, Congress chartered the Second Bank of the United States (a revival of Alexander Hamilton’s national bank) in 1816. But this new institution only compounded the problem by making risky loans, opening branches in the South and West where land fever was highest, and issuing a steady stream of Bank of the United States notes, a move that increased inflation and speculation.
The inflated economic bubble burst in 1819, resulting in a prolonged economic depression or severe downturn in the economy called the Panic of 1819. It was the first economic depression experienced by the American public, who panicked as they saw the prices of agricultural products fall and businesses fail. Prices had already begun falling in 1815, at the end of the Napoleonic Wars, when Britain began to “dump” its surplus manufactured goods, the result of wartime overproduction, in American ports, where they were sold for low prices and competed with American-manufactured goods. In 1818, to make the economic situation worse, prices for American agricultural products began to fall both in the United States and in Europe; the overproduction of staples such as wheat and cotton coincided with the recovery of European agriculture, which reduced demand for American crops. Crop prices tumbled by as much 75 percent.
This dramatic decrease in the value of agricultural goods left farmers unable to pay their debts. As they defaulted on their loans, banks seized their property. However, because the drastic fall in agricultural prices had greatly reduced the value of land, the banks were left with farms they were unable to sell. Land speculators lost the value of their investments. As the countryside suffered, hard-hit farmers ceased to purchase manufactured goods. Factories responded by cutting wages or firing employees.
In 1818, the Second Bank of the United States needed specie to pay foreign investors who had loaned money to the United States to enable the country to purchase Louisiana. The bank began to call in the loans it had made and required that state banks pay their debts in gold and silver. State banks that could not collect loan payments from hard-pressed farmers could not, in turn, meet their obligations to the Second Bank of the United States. Severe consequences followed as banks closed their doors and businesses failed. Three-quarters of the work force in Philadelphia was unemployed, and charities were swamped by thousands of newly destitute people needing assistance. In states with imprisonment for debt, the prison population swelled. As a result, many states drafted laws to provide relief for debtors. Even those at the top of the social ladder were affected by the Panic of 1819. Thomas Jefferson, who had co-signed a loan for a friend, nearly lost Monticello when his acquaintance defaulted, leaving Jefferson responsible for the debt.
In an effort to stimulate the economy in the midst of the economic depression, Congress passed several acts modifying land sales. The Land Law of 1820 lowered the price of land to $1.25 per acre and allowed small parcels of eighty acres to be sold. The Relief Act of 1821 allowed Ohioans to return land to the government if they could not afford to keep it. The money they received in return was credited toward their debt. The act also extended the credit period to eight years. States, too, attempted to aid those faced with economic hard times by passing laws to prevent mortgage foreclosures so buyers could keep their homes. Americans made the best of the opportunities presented in business, in farming, or on the frontier, and by 1823 the Panic of 1819 had ended. The recovery provided ample evidence of the vibrant and resilient nature of the American people.
Source: Corbett, P.S., Janssen V., Lund, J., Pfannestiel, T., Vickery, P., & Waskiewicz, S. U.S. History. OpenStax. 30 December 2014.
Financial Panic
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 1823. The Panic announced the transition of the nation from its colonial commercial status with Europe toward an independent economy, increasingly characterized by the financial and industrial imperatives of central bank monetary policy, making it 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.
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. The eighteen branch offices of the BUS in 1817 operated with little oversight from the Philadelphia headquarters, nor from the US Treasury.
The United States government encouraged settlement of these lands by offering public land at $2 per acre, 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. Public land debt ballooned from $3 million in 1815 to $17 million in 1818.
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, but serving to stave off private bank failures.
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 specie 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.
The BUS 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 specie 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 specie fund stood at $2.4 million – a 10:1 ratio.
Panic “precipitated”
The onset of the financial panic has been described as “triggered” by the Second Bank of the United States when it initiated a sharp credit contraction beginning the summer of 1818.
The link between the frontier land boom and overseas markets for staple goods was dramatically revealed when Europe finally recovered from its post-war harvest shortages and began producing bumper crops in 1817. American planters and farmers, who had expanded production to exploit the European demand, discovered agricultural prices declining by half, even as production increased. Southwestern plantations were devastated when Britain began to increase its imports of East India cotton as a means to avoid purchasing the high-priced US cotton. India enjoyed not only a longer growing season and lower cost of freight to Britain, but also more cotton-devoted land than the entire Louisiana Purchase. Cotton value began to waver in 1818 and threaten to burst the speculative bubble. A general contraction in lending was indicated in response to these developments in Europe.
In August 1818, with credit dangerously overextended, BUS branch offices began to reject all state-chartered bank notes. Exceptions were made for notes used as revenue payments to the US Treasury. In October 1818, The US Treasury demanded a transfer of $2 million in specie from the BUS to redeem bonds on the Louisiana Purchase.
State banks in the West and South, unable to provide the required specie, began to call in their loans on the heavily mortgaged lands they had financed. Cash poor farmers and speculators found their land values dropping 50% to 75%. Banks began foreclosing on the properties and transferring them to their creditor: the Second Bank of the United States.
When news arrived in January 1819 that the value of cotton had broke – dropping 25% in a single day – the ensuing panic drove the country into recession. Prominent individuals such as Thomas Jefferson were financially devastated by the crisis; Jefferson almost lost his estate at Monticello.
BUS reaction to the Panic
The tight money policy the BUS implemented – a principled effort to cope with the financial disaster – had the effect of deepening the depression, undermining the recovery that was already underway.
Despite the Second Bank of the United States’ inept management, it was not the causative agent in the Panic of 1819 or its aftermath. The historical processes contributing to the panic and depression were beyond the Bank’s control, including the European market fluctuations, obstruction from the numerous private banks to federal regulations and the widespread ignorance among lenders and borrowers as to the new financial mechanisms that made possible the credit expansion and land boom.
The Bank’s role was properly one of restraint, so as to automatically suppress the volatility in financial markets – but not to prevent these boom-bust episodes.
Responses to the Crisis
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 suspending specie payments to bank depositors, setting a precedent for the Panics of 1837 & 1857. Although Monroe agreed that improved transportation facilities were needed, he refused to approve appropriations for internal improvements without constitutional amendments.
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 part of land they had already paid for and relinquish the remaining amount. It further extended the schedule of payments by several years, with 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. In Tennessee, Kentucky and Illinois, state banks suspended specie payments and issued large amounts of inconvertible notes. However, most other states avoided inflationist policies and enforced the payment of specie. Every state witnessed vigorous debate on the merits of each policy. Treasury Secretary Crawford 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 Mathew Carey, blamed free trade for the depression and argued that tariffs would protect American prosperity.
Source: Panic of 1819. Wikipedia. Retrieved from http://en.turkcewiki.org/wiki/Panic_of_1819
Summary
During the Napoleonic Wars of the early nineteenth century, European demand for American agricultural goods increased dramatically. As a result, the prices of American agricultural goods increased. To take advantage of rising prices, American farmers took out loans from state chartered banks to purchase land and expand production. The Napoleonic Wars came to an end in 1815. From 1816 to 1818, American land speculation continued, fuelled by risky loans made by the Bank of the United States. By 1818, European agriculture had recovered from the war. The global market was flooded with a glut of agricultural goods. The price of American farm products collapsed in 1818 and 1819. A massive recession devastated the economy from 1819 to 1823. Even men of great wealth faced financial ruin. For example, Thomas Jefferson nearly lost his estate at Monticello.
