Causes of the Panic of 1819: Part 1

From where did the Panic of 1819 originate? Traditionally, the blame for the panic has been laid at the feet of the Second Bank of the United States and its President Langdon Cheves. In addition, many economists and historians point to the role the mismanaged state banks played in greatly expanding the nation’s money supply as another cause of the Panic.  According to this narrative, the Crash came about as a result of the overindebtedness and inflation caused by reckless lending of the state banks, which was then followed by incredibly harsh contraction of the money supply by the national bank. But while this statement is  basically correct, they ignore a crucial cause of the depression by focusing only upon the United States. The depression of 1819-1822 was not cause solely by the misadventures of the American banks but also by the complexities of the globalized economy.  More specifically, a sharp decline in the value of American export commodities, especially wheat, made the country as a whole much poorer, and exacerbated the monetary problems caused by the banks. In other words, the Panic was caused both by American banks and by economic events outside of the United States. To understand how these two factors helped to cause a major depression, we must first gain an understanding of the post War of 1812 era American Economy.

Prior to the War, the American economy had consisted almost entirely on exporting agricultural products and importing manufactured goods from Europe , with most of the wealth concentrated in port cities like Boston, New York, and Philadelphia.[1] Most of the banks that existed were situated in New England and in Mid-Atlantic cities, where they served to finance the Trans-Atlantic trade.  Currency issued by these early state banks was tightly controlled by Alexander Hamilton’s First Bank of the United States, which demanded redemption of their notes in specie.[2] This entire banking system revolved around serving the relatively tiny coastal elite who controlled the shipping trade, with the Central Bank ensuing that their currency, backed by gold and silver, would be respected outside of the United States. [3]Meanwhile, in the interior, many Americans still used homemade goods and relied upon barter.[4]

Nautical conflicts with England and the War of 1812 would fundamentally change this economy.  As the British Navy blockaded American Ports, imports and exports shrunk from the pre-war highs of $110 million and $117 million, respectively, to a mere $20 million and $11 million.[5] This shortage of imported goods drove prices upwards. In addition, the lack of imports forced Americans to invest in domestic manufacturing.  Textile Factories were established in the parts of the country that had once relied on foreign imports- New England, New York, and Pennsylvania.[6] Meanwhile, in 1811, Congress failed to recharter the First Bank of the United States.[7] This meant that banks were now essentially unregulated and, outside of the conservative institutions in New England, they began to issue bank notes freely, increasing the amount of notes in circulation from  $2.3 million in 1811 to $4.6 million in 1815.  These banks usually began with a very small amount of specie as capital. The In fact, many stockholders paid for bank stock with their own promissory notes- in other words, the bank’s capital was not made up of gold or silver, but was instead made up of “IOUs”. [8] As the war progressed, the Federal Government began to rely heavily on loans from these banks, which further increased their growth (their own attempts to finance the war with normal revenue and the issuing of bonds failed). Thus, the number of state chartered banks after 1811 increased tremendously, doubling between the years 1811 to 1815.[9]

When the War of 1812 ended with the Treaty of Ghent in 1815, the American economy reignited.  Prices were higher than they had been before the war, but Americans also had much more cash on hand due to the all of the bank notes that had been printed.  Now that the war was over they could now purchase the imported British goods that they had been cut off from for years, and British exporters were eager to unload their accumulated stock- imports skyrocketed from $5.3 million at the end of the war to $113 million at the end of 1815.[10] Meanwhile, American exports were once again in demand- a newly rich and industrializing England had need for imported American cotton for its mechanical looms and American flour to feed its factory workers .[11] Equally important was the American export market in the British West Indies-the Caribbean islands relied upon wheat imported from abroad.  The transatlantic trade had returned to the forefront of the American economy: farmers grew crops for export and bought British made clothing that had been purchased at auction by American merchants. Meanwhile, domestic manufacturing, after its brief boom during the war years, suffered terribly. But while Transatlantic Trade returned to its prewar levels, the revolutionary changes that had occurred within the financial system during the war stayed in place.  Credit was suddenly very easy to come by.

[1] Murray Newton Rothbard, The Panic of 1819; Reactions and Policies, Columbia studies in the social sciences no. 605 (New York: Columbia University Press, 1962),2.

[2] Clyde A Haulman, Virginia and the Panic of 1819 : The First Great Depression and the Commonwealth, Financial history (London, England) ; no. 6. (London ;: Pickering & Chatto, 2008), 8.

[3] Charles Grier Sellers, The Market Revolution: Jacksonian America, 1815-1846 (New York: Oxford University Press, 1991), 59.

[4] Rothbard, The Panic of 1819; Reactions and Policies, 3.

[5] Haulman, Virginia and the Panic of 1819,8.

[6] Sellers, The Market Revolution, 2.

[7] Ibid.

[8] Rothbard, The Panic of 1819; Reactions and Policies, 3.

[9] Haulman, Virginia and the Panic of 1819, 8.

[10] Rothbard, The Panic of 1819; Reactions and Policies, 4.

[11] Ibid.