America’s Long Journey: The Panic of 1819

Things change, but human nature changes slowly, if at all. In 1819, the Internet and TV “news” commentators were far, far in the future, but America’s first experience of boom-and-bust resulted in conspiracy theories, designated villains, and decades of political strife based on contradictory opinions about what had happened and why, just like now. Today, economists and historians agree that the root cause was the economic readjustments stemming from the end of the Napoleonic Wars and the War of 1812. But agreement ends there. As to whose efforts made things worse or better – well, here’s the story.

In Europe, what are called the Napoleonic Wars extended, with one 18-month intermission, from 1793 to 1814, followed by Napoleon’s 100-day return and final defeat in 1815. As a sort of side-show, America and England got involved in the two-and-a-half year War of 1812, as we shall see. In 1815, Europe was faced with a monumental job of reconstructing ordinary life, and this had consequences for America.

Wars always reorganize (or disorganize) economies, because above all else, armies have to be fed and supplied. The longer and more extensive the war, the more its needs change things. When the war is over, win or lose, a corresponding economic readjustment is going to follow, and the more advanced the economy, the greater the adjustment required (for retooling and reestablishment of markets, for instance). The American economy of 1819 was still primitive, but it was beginning to be quite different from what it had been, and so it was following different, invisible, rules, which meant that few people really understood what was going on – few even among those in positions of political or economic power.

Europe’s postwar reorganization had several effects:

• Initially, it caused a widespread decline in prices, due to a scarcity of gold and silver.
• Britain’s surplus manufactured goods, priced well below competitive rates, flooded American markets and put many American factories out of business.
• Food shortages in Europe sent agricultural demand, and prices, soaring, especially cotton, wheat, corn and tobacco. In response, American planters and farmers expanded production as fast and as much as they could, seeing the situation as a golden opportunity.

But in 1817 European farmers produced a great crop, which American farmers apparently never anticipated. Many farmers and planters in the South and West had bought new lands on credit, figuring to pay for them out of the profits they would make from exporting to Europe as postwar high prices. Instead, crop prices suddenly were half what they had been, and British weavers began substituting cotton from India for higher-price American cotton. Beginning in 1818, Southwestern planters watched cotton value fall. Their mortgages depended on the value of their crops, and that value was diminishing by the day.

No villains yet, really, just the laws of supply and demand. But then in the summer of 1818, the two-year-old Second Bank of the United States (which Jackson would kill in 1836) began contracting credit, and the whole postwar house of cards came tumbling in a heap. Was this a mistake? A necessity? A necessary but bungled response? Well –.

By August, 1818, the Bank of the United States was dangerously overextended, and of course its officers knew it. The bank’s president ordered its branches to reject bank notes from state-chartered banks, insisting on hard money. But that meant there was no way for the bank’s customers to repay it, because there wasn’t enough specie in circulation. In October, when the Treasury Department demanded that the bank transfer $2 million in specie to redeem bonds, it didn’t have it and its customers didn’t have it.

The bank squeezed. State banks in the West and South started calling the loans they had made to farmers and speculators, the loans that had enabled them to buy more land. When the money wasn’t there to repay the loans, land values dropped by up to 75% (which of course meant that the landowners had that much less security on their loans), and banks began foreclosing. When they did, they transferred the mortgages to their creditor — the Second Bank of the United States.

In January, 1819, the value of cotton broke — dropping 25% in a single day – and the ensuing panic drove the country into recession. This first major peacetime financial crisis was followed by a general economic collapse – featuring widespread bankruptcies and mass unemployment — that lasted through 1821.

These economic dislocations, for all the misery they produced, might be looked at as growing pains. America was no longer a colonial economy, shipping raw materials to Europe in return for finished goods. From now on, it would have to deal with the more complicated economic problems of the modern business cycle. But that was cold comfort.

The political wisdom of the day offered few solutions. President Monroe concentrated on governmental economizing. Congress passed a bill allowing debtors who owed money on land purchased from the government to keep the part of land they had already paid for. And for the first time, city and state governances began to turn their attention to policies aimed at poor relief.

From our vantage point, it seems simple enough. Global market dislocations, aggravated by land speculation and inflationary over-issuance of bank notes inadequately backed by specie. But it was all new to most of the country, and it was easy for people to jump to conclusions.

• The Bank of the United States, for instance. It wound up taking ownership of all that mortgaged and foreclosed land – maybe the whole crisis was part of a banker’s plot?
• The American System of tariff protection, internal improvements and, again, the bank – didn’t the collapse demonstrate the superiority of the old Jeffersonian ideal of an agrarian republic with strictly limited government?

But it was just as easy for others to come to opposite conclusions.

• Certain protectionists blamed the panic on free trade and argued for tariffs to protect prosperity.
• Once the charter of the First Bank of the United States lapsed in 1811, state-chartered banks sprang up, evading any real regulation, resulting in an inflationary expansion based upon easy credit. Didn’t this show that a central bank was needed if there was to be economic stability?
• During the war, the government encouraged a proliferation of paper money, because in its need it turned to these new banks for loans. The older banks with more conservative lending practices accumulated specie, and the newer ones were starved for it, so the government allowed them to suspend specie payments. Wartime necessity, to prolong wartime lending, but it persisted after the war ended. Wasn’t the resulting mess largely due to banks being allowed to lend without having sufficient reserves?

The financial disaster and depression provoked popular bafflement, spiced by resentment against banks and bankers and federal economic policy. Anything new in that?