Introduction: The Panic of 1819

The Panic of 1819 was the first major financial crisis in the United States and occurred during the political calm of the "Era of Good Feelings." The new nation had previously faced an economic depression following the War of Independence in the late 1780s and 1790s, but nothing as severe. The Panic marked the end of the economic expansion that had followed the War of 1812 and ushered in new financial policies that would shape economic development.

Causal Factors

The first major economic crisis after the War of 1812 was due, in large measure, to factors in the larger Atlantic economy. It was made worse, however, by land speculation and poor banking practices at home. British textile mills voraciously consumed American cotton, and the devastation of the Napoleonic Wars had made Europe reliant on other American agricultural commodities such as wheat. This drove up both the price of American agricultural products and the value of the land on which staples such as cotton, wheat, corn, and tobacco were grown.

Land Fever

Many Americans were struck with “land fever.” Farmers strove to expand their acreage, but they needed money to purchase land. Small merchants and factory owners, hoping to take advantage of this boom time, also sought to borrow money to expand their businesses. When existing banks refused to lend money to small farmers and others without a credit history, state legislatures chartered new banks to meet the demand. As loans increased, paper money from new state banks flooded the country, creating inflation that drove the price of land and goods still higher. This, in turn, encouraged even more people to borrow money with which to purchase land or to expand or start their own businesses. Speculators took advantage of this boom in the sale of land by purchasing property not to live on, but to buy cheaply and resell at exorbitant prices.

Specie and Bank Notes

The government had borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks' reserves of specie, or “hard money” usually in the form of gold and silver coins. During the war, the Bank of the United States had suspended payments in specie. When the war ended, the bank continued to issue only paper banknotes and to redeem notes issued by state banks with paper only. The newly chartered banks also adopted this practice, issuing banknotes in excess of the amount of specie in their vaults. This shaky economic scheme worked only so long as people were content to conduct business with paper money and refrain from demanding that banks instead give them the gold and silver that was supposed to back it. If large numbers of people, or banks that had loaned money to other banks, began to demand specie payments, the banking system would collapse, because there was no longer enough specie to support the amount of paper money the banks had put into circulation. 

In an effort to bring stability to the nation’s banking system, Congress chartered the Second Bank of the United States (a revival of Alexander Hamilton’s national bank) in 1816. But this new institution only compounded the problem by making risky loans, opening branches in the South and West where land fever was highest, and issuing a steady stream of Bank of the United States notes, a move that increased inflation and speculation.

International Events

The Panic was also partially impacted by international events. After the Napoleonic Wars came to an end, European demand for American foodstuffs decreased as agriculture in Europe began to recover. Prices had already begun falling in 1815 at the end of the Napoleonic Wars, when Britain began to “dump” its surplus manufactured good (the result of wartime overproduction), in American ports, where they were sold for low prices and competed with American-manufactured goods. In 1818, to make the economic situation worse, prices for American agricultural products began to fall both in the United States and in Europe; the overproduction of staples such as wheat and cotton coincided with the recovery of European agriculture, which reduced demand for American crops. Crop prices tumbled by as much 75 percent. In addition, war and revolution in the New World destroyed the supply line of precious metals from Mexico and Peru to Europe.

The Burst

The inflated economic bubble burst in 1819, resulting in the Panic of 1819. Because it was the first economic depression experienced by the nation, the American public panicked as they saw the prices of agricultural products fall and businesses fail. 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 occurred.

This dramatic decrease in the value of agricultural goods left farmers unable to pay their debts. As they defaulted on their loans, banks seized their property. However, because the drastic fall in agricultural prices had greatly reduced the value of land, the banks were left with farms they were unable to sell. Land speculators lost the value of their investments. As the countryside suffered, hard-hit farmers ceased to purchase manufactured goods. Factories responded by cutting wages or firing employees.

Proposed Remedies

Many remedies to the Panic of 1819 were proposed, including the following:

• an increase of tariffs (largely proposed by northern manufacturing interests);
• a 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.

President Monroe, interpreting the economic crisis in narrow monetary terms, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspending specie payments to bank depositors, setting a precedent for the Panics of 1837 and 1857. Although he agreed to the need for improved transportation facilities, he refused to approve appropriations for internal improvements without a prior amendment of the Constitution. 

In an effort to stimulate the economy in the midst of the economic depression, Congress passed several acts modifying land sales. The Land Law of 1820 lowered the price of land to $1.25 per acre and allowed small parcels of eighty acres to be sold. The Relief Act of 1821 allowed people from Ohio to return land to the government if they could not afford to keep it. The money they received in return was credited toward their debt. The act also extended the credit period to eight years. States, too, attempted to aid those faced with economic hard times by passing laws to prevent mortgage foreclosures so buyers could keep their homes. Americans made the best of the opportunities presented in business, in farming, or on the frontier, and by 1823 the Panic of 1819 had ended.