Panic of 1819

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PANIC OF 1819

Financial panics have been known since the introduction of modern capitalism in the eighteenth century. Excessive speculation in the stock of a European colonizing company in 1720 led to a panic in France and England. In North America the newly formed United States quickly began experiencing the financial business cycles of booms and crises. A business boom driven by optimism over the nation's future immediately followed victory in the American Revolution (1775–1783), however, economic crises soon followed. Business over-expansion, personal extravagance in spending, the end of military contracts that had inflated prices, and an inability of the United States to establish a treaty regulating trade with Britain, led to widespread debt in the aftermath of the war. British textile products flooded the U.S. market causing domestic agricultural and industrial prices to substantially drop.

Distrust for any form of centralized government activity also pervaded the largely agrarian society. Yet the lack of a centralized government allowed an unsound money system to come into existence which destabilized foreign trade. The stage was set for the financial panic in 1785.

The establishment of a centralized federal government in the 1787 Constitutional Convention brought back optimism for economic prosperity. To institutionalize economic stability in the young country, Congress created the Bank of the United States in 1791. The Bank instantly became not only the largest bank in the nation, but the largest corporation at the time. Functioning as both a commercial and central bank, its chief political objective was to regulate lending practices of state banks. The state banks were issuing their own paper money in the form of bank notes with the promise they could be exchanged for gold or silver coins upon request. The central bank, though effective in achieving its goals, attracted substantial opposition. Western agrarian communities demanded an inflated money system, opposed by the National Bank, to keep agricultural prices high and to pay off debts with cheap money. Responding to public dissatisfaction over the centralized power of the Bank, Congress allowed its charter to expire in 1811. With the National Bank gone, state banks expanded quickly and returned to the practice of issuing paper notes.

The problems associated with the national debt from the War of 1812 (1812–1814) led to chartering of a Second Bank of the United States in 1816. This again attracted the ire of the small farmers. Following victory in the War of 1812 western land speculation rose sharply. State banks and even some branches of the U.S. Bank encouraged the wave of speculation. However, fewer gold coins and silver dollars were in circulation, and currency speculators were hoarding the specie (gold or silver). As a consequence such coin was used primarily for large transactions, bank reserves, and foreign payments. Domestic land and commodity speculation was commonly in the form of paper bank notes printed by wildcat (unregulated) banks. In the South, following invention of the cotton gin in 1793, cotton plantations and exports expanded rapidly, reaping huge profits. The new cotton aristocracy engaged in "conspicuous consumption" and proceeded to spend money lavishly.

The managers of the Second Bank of the United States feared a shortfall in the specie backing up the bank notes, given the unchecked speculation and growth based on a nondescript system of currency. In 1819 the Second Bank decided to initiate a sharp contraction of credit by refusing to make loans. There were "bank runs" where depositors rushed in a panic to banks to have their notes converted to coin. Lacking suitable reserves, many state banks failed. With the banks closing their doors, millions of dollars owed to the federal government for sale of public lands went uncollected. The Second Bank's action led to a severe depression, particularly in the South and West. Prices, such as on the commodity market for cotton, declined sharply. With cotton income down, the South decreased their purchases of manufactured goods from Northern industry. Also, the South was sending much less cotton north to the Northern mills (which had been ultimately exported overseas by Northern shipping companies). The North lost both its Southern and foreign markets.

In the aftermath of the panic, Congress conducted investigations of alleged mismanagement of the federal banking system which, most people thought, had derailed an otherwise booming economy. Manufacturers also lobbied for better protection through tariffs and excise taxes. To the rescue of individual debtors who were victims of the panic, several states passed legislation relieving them of their debts. The depression lasted until 1823 when commodity prices and the economy in general began picking up again and public confidence in the banking system was restored. However, the Panic of 1819 presaged many other financial panics throughout the nineteenth century as the nation sought ways of balancing free market capitalism with economic stability.

Topic Overview

Nicholas Biddle inherited a bank (Second Bank of the United States) whose previous leaders had proved incapable of their tasks. William Jones, the first president, had . . . been a political choice; he was a man who knew nothing of banking, and to make things worse, was venal as well. During his years as president, the bank caused distress in all parts of the country through speculation on the part of its leaders . . . and unwise loan policies. After a Congressional investigation, Jones resigned, and was replaced in 1819 by Langdon Cheves . . . (who) was determined to put the (Bank's) affairs in order, and to do so called in many loans and advances. The result was . . . the abrupt end of a period of wildcatting.

robert sobel, historian, 1969

See also: Panic of 1837, Panic of 1907, Panics of the Late Nineteenth Century