Panic of 1819
- For the 1962 economic history book by Murray Rothbard, see The Panic of 1819.
The Panic of 1819 was the first major financial crisis in the United States, after the depression of the late 1780's (which led directly to the establishment of the dollar and, perhaps indirectly, to the calls for a Constitutional Convention).[1] It featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, competition from foreign farm markets, would also cause inflation on farm payment prices as well by 1816[1]
Explanations
Different economic schools of thought have offered explanations for the Panic of 1819.
Economists who adhere to mainstream 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 (Clyde Haulman's Homepage), suggests that the Panic was more complex than some would suggest. It was not primarily a failure of the banking system following the War of 1812. Indeed, rather than being the first failure of the market economy in America, 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 acknowledge that there were broader, institutionally based causes for the events of 1819 and the early 1820's. [citation needed]
Austrian school economists view the nationwide recession that resulted from the Panic of 1819 as the first failure of expansionary monetary policy. The explanation of the Panic of 1819 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 and led inevitably to a suspension of specie payments in 1814. The suspension of the obligation to redeem greatly spurred the establishment of new banks and the expansion of bank note issues. This inflation of money encouraged unsustainable investments to take place. It soon became clear that the monetary situation was in bad shape, 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.
The Panic of 1819 was caused partially by international events. European demand for American foodstuffs was increased because the Napoleonic Wars decimated the agriculture in Europe. War and revolution in the New World destroyed the supply line of precious metals from Mexico and Peru to Europe. Without the base of the international money supply, poor European governments hoarded all the available specie. This caused American bankers and businessmen to start issuing false banknotes and expanding credit. American bankers, who had little experience with corporate charters, promissory notes, bills of exchange, or stocks and bonds, encouraged the speculated boom during the first years of the market revolution.
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 the American city of 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.
Proposed remedies
Proposed remedies included:
- increase of tariffs (largely proposed by Northern 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-usury 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. 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 woul aid the economy with laws like the Land Act of 1820 and the Relief Act of 1821[2].
By 1823, the panic had ended[3]. It was the nation's second experience (the first was in the mid-1780s) with the mysteries and miseries of the business cycle.
See also
References
- ^ See Morris, Richard B. (1987) The forging of the Union, 1781-1789.
Further reading
- Robert Sobel Panic on Wall Street: A Classic History of America's Financial Disasters-With a New Exploration of the Crash of 1987 (E P Dutton; Reprint edition, May 1988) ISBN 0-525-48404-3.
External links