Panic of 1819

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The Panic of 1819 was the first major financial crisis in the United States. 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.

Contents

1 Explanations

1.1 Austrian school

2 Other Views
3 Proposed Remedies
4 See also
5 Further reading
6 External links

Explanations

Different economic schools of thought have offered explanations for the Panic of 1819.

Austrian school

The Austrian school gives the following explanation: Government borrowed heavily to finance the War of 1812. This 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.

The newly issued bank notes misled investors into believing that society's time preference had decreased. In other words, it appeared as though the total supply of investment capital had increased. In response, a post-1812 boom began, fueled by rampant speculation in land, and also projects such as turnpikes and farm improvement vehicles. However, since time preferences had not really changed, these investments were not sustainable.

It soon became clear that the monetary situation was in bad shape, with a return to specie payments becoming increasingly untenable. A nationwide return to specie would not be possible without a massive contraction in credit. Faced with these threatening circumstances, the 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 reduced because the Napoleonic Wars decimated the agriculture. 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. Unemployment reached 75 percent in 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.

Other Views

Many non-Austrian economists would view the nationwide depression that resulted from the Panic of 1819 as the first failure of the market economy.

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
abolition of the national bank (the Second Bank of the United States)

The worst of the crisis was over by 1824, and the rest of the decade saw a gradual recovery of the U.S. economy. It was the nation's first experience with the mysteries and miseries of the business cycle.

External links

[Panic of 1819: Reactions and Policies] - by Murray N. Rothbard (in PDF format).

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