Panic of 1819
Encyclopedia
The Panic of 1819 was the first major financial crisis
in the United States
, and had occurred during the political calm of the Era of Good Feelings
. The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the dollar
and, perhaps indirectly, to the calls for a Constitutional Convention. It had also experienced another severe economic downturn in the late 1790s following the Panic of 1797
. In the earlier crises however, the primary cause of economic turmoil originated in foreign trade and the broader Atlantic economy. These crises and others had resulted from international conflicts such as the Embargo Act and War of 1812 and had caused widespread domestic foreclosure
s, bank failure
s, unemployment
, and a slump in agriculture
and manufacturing
. However, things would change for the US economy after the Second Bank of the United States
was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war. In contrast, the causes of the Panic of 1819 largely originated within the U.S. economy. The panic marked the end of the economic
expansion that had followed the War of 1812
and ushered in new financial policies that would shape economic development.
Economists who adhere to Keynesian economic theory suggest that 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 that the Panic was partly caused by a decision to close the Second Bank of the US. Combined with the issue of the depression and overspeculation, the Panic of 1819 marked the beginning of a new phase of American economic history, where mature market institutions would continue to move cyclically from boom to bust. These explanations are not intended to discount the importance of war-time public finance as a cause of the Panic. They simply assert that the closure of the Second Bank of the US were also to blame.
Austrian school
economists view the nationwide recession
that resulted 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
. 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 3500000 acres (14,164 km²), and many Americans did not have enough money to pay off their loans.
The Panic was also partially due to international events. European demand for American foodstuffs was decreased because agriculture in Europe was recovering from the Napoleonic Wars
, which had decimated European agriculture. War and revolution
in the New World
destroyed the supply line of precious metals from Mexico and Peru to Europe. American bankers and businessmen started issuing false banknotes to quickly expand credit. American bankers, who had little experience with corporate charters, promissory note
s, bills of exchange, or stock
s and bonds
, encouraged the speculation boom during the first years of the market revolution
. By the end of 1819, the bank would call these loans.
Small, local ups and downs had occurred in the market since the 1790s, but never to this magnitude. Businesses went bankrupt when they could not meet their debts, and hundreds of thousands of wage workers lost their jobs. For example, unemployment reached 75 percent in Philadelphia
, and 1,800 workers were imprisoned for debt
. In Baltimore, the unemployed set up a city of tents on the outskirts of the city.
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 to approve appropriations for internal improvements
without prior amendment of the Constitution. Monroe would aid the economy with laws like the Land Act of 1820 and the Relief Act of 1821.
By 1823, the panic had ended.
Currency crisis
A currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and had occurred during the political calm of the Era of Good Feelings
Era of Good Feelings
The Era of Good Feelings was a period in United States political history in which partisan bitterness abated. It lasted approximately from 1815 to 1825, during the administration of U.S...
. The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
and, perhaps indirectly, to the calls for a Constitutional Convention. It had also experienced another severe economic downturn in the late 1790s following the Panic of 1797
Panic of 1797
The Panic of 1796–1797 was a series of downturns in Atlantic credit markets that led to broader commercial downturns in both Britain and the United States. In the U.S., problems first emerged when the Bubble of land speculation burst in 1796...
. In the earlier crises however, the primary cause of economic turmoil originated in foreign trade and the broader Atlantic economy. These crises and others had resulted from international conflicts such as the Embargo Act and War of 1812 and had caused widespread domestic foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
s, bank failure
Bank failure
A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. More specifically, a bank usually fails economically when the market value of its assets declines to a value that is...
s, unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
, and a slump in agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
and manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
. However, things would change for the US economy after the Second Bank of the United States
Second Bank of the United States
The Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...
was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war. In contrast, the causes of the Panic of 1819 largely originated within the U.S. economy. The panic marked the end of the economic
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
expansion that had followed the War of 1812
War of 1812
The War of 1812 was a military conflict fought between the forces of the United States of America and those of the British Empire. The Americans declared war in 1812 for several reasons, including trade restrictions because of Britain's ongoing war with France, impressment of American merchant...
and ushered in new financial policies that would shape economic development.
Explanations
Different economic schools of thought have offered explanations for the Panic of 1819.Economists who adhere to Keynesian economic theory suggest that 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 that the Panic was partly caused by a decision to close the Second Bank of the US. Combined with the issue of the depression and overspeculation, the Panic of 1819 marked the beginning of a new phase of American economic history, where mature market institutions would continue to move cyclically from boom to bust. These explanations are not intended to discount the importance of war-time public finance as a cause of the Panic. They simply assert that the closure of the Second Bank of the US were also to blame.
Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economists view the nationwide recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
that resulted from the Panic of 1819 as the first failure of expansionary monetary policy
Expansionary monetary policy
In economics, expansionary policies are fiscal policies, like higher spending and tax cuts, that encourage economic growth. In turn, an expansionary monetary policy is monetary policy that seeks to increase the size of the money supply...
. This explanation is based on the Austrian theory of the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
. Government borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks’ reserves of specie
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
, 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
Obligation
An obligation is a requirement to take some course of action, whether legal or moral. There are also obligations in other normative contexts, such as obligations of etiquette, social obligations, and possibly...
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
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, bank failures, and bank runs; prices dropped and wide-scale urban unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
began. By 1819, land measures in the U.S. had also reached 3500000 acres (14,164 km²), and many Americans did not have enough money to pay off their loans.
The Panic was also partially due to international events. European demand for American foodstuffs was decreased because agriculture in Europe was recovering from the Napoleonic Wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
, which had decimated European agriculture. War and revolution
Revolution
A revolution is a fundamental change in power or organizational structures that takes place in a relatively short period of time.Aristotle described two types of political revolution:...
in the New World
New World
The New World is one of the names used for the Western Hemisphere, specifically America and sometimes Oceania . The term originated in the late 15th century, when America had been recently discovered by European explorers, expanding the geographical horizon of the people of the European middle...
destroyed the supply line of precious metals from Mexico and Peru to Europe. American bankers and businessmen started issuing false banknotes to quickly expand credit. American bankers, who had little experience with corporate charters, promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
s, bills of exchange, or stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s and bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, encouraged the speculation boom during the first years of the market revolution
Market Revolution
The Market Revolution in the United States was a drastic change in the manual labor system originating in south and later spread to the entire world. Traditional commerce was made obsolete by improvements in transportation and communication. This change prompted the reincarnation of the...
. By the end of 1819, the bank would call these loans.
Small, local ups and downs had occurred in the market since the 1790s, but never to this magnitude. Businesses went bankrupt when they could not meet their debts, and hundreds of thousands of wage workers lost their jobs. For example, unemployment reached 75 percent in Philadelphia
Philadelphia, Pennsylvania
Philadelphia is the largest city in the Commonwealth of Pennsylvania and the county seat of Philadelphia County, with which it is coterminous. The city is located in the Northeastern United States along the Delaware and Schuylkill rivers. It is the fifth-most-populous city in the United States,...
, and 1,800 workers were imprisoned for debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
. In Baltimore, the unemployed set up a city of tents on the outskirts of the city.
Proposed remedies
Proposed remedies included:- increase of tariffTariffA tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s (largely proposed by NorthernMid-Atlantic StatesThe Mid-Atlantic states, also called middle Atlantic states or simply the mid Atlantic, form a region of the United States generally located between New England and the South...
manufacturing interests). - reduction of tariffs (largely proposed by Southerners, who believed free trade would stimulate the economy and increase demand).
- monetary expansion; i.e., restriction or suspension of specie payment.
- rigid enforcement of specie payment.
- restriction of bank credit.
- direct relief of debtors.
- public works proposals.
- stricter enforcement of anti-usuryUsuryUsury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
laws.
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 to approve appropriations for internal improvements
Internal improvements
Internal improvements is the term used historically in the United States for public works from the end of the American Revolution through much of the 19th century, mainly for the creation of a transportation infrastructure: roads, turnpikes, canals, harbors and navigation improvements...
without prior amendment of the Constitution. Monroe would aid the economy with laws like the Land Act of 1820 and the Relief Act of 1821.
By 1823, the panic had ended.
See also
- Crisis of 1857
- Business cycleBusiness cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
- Keynesian economicsKeynesian economicsKeynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
- Monetary policyMonetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
- Austrian Theory of the Business CycleAustrian Theory of the Business CycleThe Austrian business cycle theory attempts to explain business cycles through a set of ideas held by the heterodox Austrian School of economics...
- List of recessions in the United States