By Professor Allen C. Guelzo, Ph.D.,Gettysburg College
On May 27 1819, John Quincy Adams wrote, “The banking bubbles are breaking; the manufacturers are perishing, agriculture stagnating, and distress universal in every part of the country.” As the United States was to commit itself to the world market system, it paid a price in the form of an unpredictable cycle of expansion and contraction. What were the reasons behind this panic of 1819 and how did it affect the citizens of America? Read on to find more.
The Panic of 1819 was the first great economic depression of the United States. The country witnessed robust economic activity during the post war period and the rigorous developmental activity spurred the American economy. Some of the changes witnessed included the increase in agricultural productivity, development of a new banking system, congressional road building, internal improvements, and the gradual movement of the United States into the cash economy of international commercial capitalism.
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National Republican Vision
Henry Clay, one of the influential American statesmen in the early 19th century was aware of the risks involved while pushing the United States to the network of world markets. However, he envisioned a diversified American economy and wanted to implement tariffs that would protect American manufacturers from foreign competition. Clay backed the construction of canals, roads, and turnpikes to spur economic growth. He was also a nationalist who endorsed the new military program to fend off foreign encroachments and preserve the nation.
Another Republican who was a supporter of the War of 1812 was John Calhoun. He was the son of a hill country farmer in South Carolina and was elected to the House of Representatives in 1811. Calhoun too realized the follies of the war and decided to tread the path of development. Further, he recognized that too much individualism and sectionalism were greater threats to American liberty and that sometimes the greater good may be opposed to the interests of particular sections.
However, in the year 1819, the first economic slump happened where the second Bank of United States was one of the main culprits of a vicious cycle of events that would result in the panic of 1819. Yet, it was not as if the fall was unforeseen; a skeptical editorial writer for the Richmond Virginia Enquirer had warned about the impending mayhem—“Beware, by degrees it grows upon us from little to little, until at length we become intoxicated by its influence and indulge in all its vices insensible to our real situation.” the editorial had predicted.
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The Banking Crisis of 1819
In the early nineteenth century, there was no standardized currency and almost all the banks were free to issue their own paper bank notes. These bank notes were the IOUs that promised to pay back in gold or silver on demand. The federal government had retained its constitutional monopoly on minting official gold and silver coins. The banks were supposed to have gold and silver specie in their vaults against the security issued in the form paper money. But in the post-War developmental spree, the banks extended credit or bank notes far greater than their reserves of specie. Thus, if large creditors demanded for payment in hard coins at the same time, it would lead to the bank’s failure. The panic of 1819 was the result of many such banks failing at the same time. The panic snowballed into a hurricane, the classic example being the British cotton market.
The British cotton market flourished for more than ten years due to its imperial connections. Nonetheless, when the high intensity cotton exports from India lost its vigor, cotton prices had a colossal fall of over 50 percent from a high of 33 cents to 14 cents; the southern merchants could pay their debts only with paper money. The British merchants, however, refused to accept anything but specie or the hard coin. Naturally, all the American traders turned in large numbers to their friendly local banks for the specie in exchange for their bank notes. The banks tried to manage the crisis by foreclosing mortgages and demanding loan repayment in specie. While many of the smaller state banks themselves were going through the pain, the second Bank of the United States itself was plagued by similar problems and aggressively pursued the state banks for loan repayment in specie to itself.
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The Impact of the Great Depression
During the great depression of 1819, there was distress in every part of the country. While agriculture stagnated, manufacturers disappeared, mortgages were foreclosed and investment in real estate collapsed.
In the East, families in small towns were rendered homeless and children were freezing in the winter storm. There were nearly 13,000 paupers roaming in the streets of New York City and over 1,800 people were imprisoned for default on their loans. Nearly seventy five percent of the wage earners of Philadelphia lost their jobs. In the West, the second Bank of the United States was in deep trouble and had sold off the titles owned in Cincinnati, selling off land at less than half its pre-1819 value in order to get specie. There were also fifteen thousand lawsuits for debt in Pennsylvania and five hundred in a single term of the county court in Nashville, Tennessee.
Common Questions about The Panic and Banking Crisis of 1819: America’s Economic Depression
The panic of 1819 had several causes, such as a drastic fall in the cotton. The policies of the second Bank of United States were also blamed for the economic crisis of 1819.
The remarkable economic expansion post the war of 1812 came to an end in 1819. Mortgages were foreclosed, people were rendered homeless, unemployment was at a high, and fall in prices negatively impacted both agriculture and manufacturing.
In 1819, the banks issued paper money printed with a promise to pay in gold or silver on demand. This action of delivery of a financial asset in its current form rather than an equivalent amount of gold or cash is known as specie in the financial markets.
The federal government alleviated some of the sufferings with the Land Act of 1820 and the Relief Act of 1821, but many farmers, including the Ohioans lost everything. The government also took several other steps to find a solution.