Panic of 1819

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PANIC OF 1819

Those living at the time of the Panic of 1819 indicated that it was a traumatic experience for the new Republic. In one representative conversation, John C. Calhoun, discussing the situation with John Quincy Adams in 1820, said, "There has been within these two years an immense revolution of fortunes in every part of the Union: enormous numbers of persons utterly ruined; multitudes in deep distress; and a general mass disaffection to the government" (Rezneck, "The Depression of 1819–1822," p. 29).

What historian Charles Sellers has called the young nation's "traumatic awakening to the capitalist reality of boom-and-bust" was a complex combination of financial market volatility, swings in international market demand, and the financial activity of the federal government (Market Revolution, p. 137). The panic and the following depression saw output stagnate, exports decline 34.5 percent, imports fall 48.9 percent, and a dramatic deflation as prices fell 30.6 percent.

The panic had its origins in the War of 1812 and the boom following the end of hostilities. With the opening of British and European markets in 1815, demand for American commodities soared. As farmers benefited from increased incomes, so did the cities and towns that served them. The only sector not sharing in the boom was the nation's nascent manufacturing firms, which had blossomed during the embargo and the war. The end of the war meant America was open to British manufacturing goods, which flooded the market and drove prices down sharply. Unable to compete, American manufacturing stumbled as factories closed and unemployment in manufacturing areas rose.

In studies of the panic, the actions of the second Bank of the United States, along with those of a number of state chartered banks, has received much attention. And the monetary collapse of 1818–1819 sounded the alarm for an economy rife with speculation and brought the economic optimism that fueled such speculation to an end. Although dramatic monetary changes were an important component in generating panic across the nation and certainly made conditions difficult for businesses and farmers, ultimately two factors were responsible for the downturn. The most important was the collapse of the strong foreign markets for commodities that had fueled the American economy in the years following the War of 1812. To a lesser extent, the repayment of federal debt, much of it to foreign bondholders, was also a proximate cause of the country's first modern business cycle.

The banking system played a critical role in the events leading up to the Panic of 1819. In exchange for a return to specie convertibility by state banks, the newly formed second Bank of the United States proceeded to expand credit dramatically. This expansion, combined with a marked increase in western land sales, created a situation in which, despite large imports of specie, the bank could not continue to meet the demand for redemption of its notes. Thus, in July 1818 the directors ordered credit reduced by a total of $5 million at its Philadelphia, Baltimore, Richmond, and Norfolk offices.

Further complicating the financial picture at the time was the retirement of Louisiana bonds of 1803 scheduled to begin in 1818. Such fiscal action, on top of the over $20 million in federal debt retired during 1817, meant that substantial government revenues did not reenter the economy directly, particularly the more than half of the bond retirement that went to foreigners. This outflow from the domestic economy decreased potential spending at a critical time and placed additional strains on the second bank as Treasury deposits held there dropped significantly.

With a monetary contraction under way, along with the continued retirement of federal debt, much of it to foreigners, the collapse of the markets for American staples meant the U.S. economy was headed for disaster. Led by an economic downturn in Great Britain, reinforced by recession in Europe, and adversely affected by the operations of the British Corn Laws, the demand for American staples dropped significantly beginning in 1819. The combined circumstances of a sharp credit contraction followed by the evaporation of markets for the nation's products created hardships for Americans of all classes as businesses closed, land values plummeted, and farmers were forced to abandon their activities.

The Panic of 1819 affected the nation in a variety of complex ways. Because of its origins in contractions by both state banks and the new Bank of the United States, hostility towards banking in general, and towards the second bank in particular, intensified. Political controversy regarding the bank and its power grew, and many of the anti-bank leaders of the Jacksonian period came to their positions as a result of the panic and subsequent depression.

Also, demands for tariffs to protect American businesses were intensified by the downturn, and while efforts to increase tariffs in 1820 failed by the narrowest of margins, in 1824 protection was increased. The movement for higher tariffs led ultimately to the record high Tariff of Abominations in 1828.

Public policy regarding debtor relief also took center stage, as did concern for the rising cost of poor relief. At the federal level, Congress postponed forfeiture for debt on public lands in 1818, 1819, and 1820 before providing permanent relief in 1821. Debt relief measures were hotly debated in virtually every state as well, with many passing some form of relief. Following the lead of New York, many states also began to review their poor relief systems, which led to substantial changes in most by the 1830s.

In addition, the upheaval of the panic served to strengthen the positions of states' rights advocates and to increase calls for expanding internal improvements. It also sparked a heightened interest in economic thinking, reflected for example in the publication in 1820 of the first American book on economics.