Panic of 1819 - Explanations

Explanations

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

Austrian school economists view the nationwide recession resulting from the Panic of 1819 as the first failure of expansionary monetary policy. This explanation is based on the Austrian theory of the business cycle. The US Government borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks’ reserves of specie, leading to a suspension of specie payments in 1814, and then again during the recession of 1819-1821, violating contractual rights of depositors. The suspension of the obligation to redeem greatly spurred the establishment of new banks and the expansion of bank note issues, and this inflation of money encouraged unsustainable investments to take place. It soon became clear the monetary situation was threatening, 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. By 1819, land measures in the U.S. had also reached 3,500,000 acres (14,000 km2), and many Americans did not have enough money to pay off their loans.

Economists who adhere to Keynesian economic theory suggest 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, argues the Panic was partly caused by a decision to call in loans of the Second Bank of the US. Combined with the issue of the depression and overspeculation, the Panic marked the beginning of a new phase of American economic history, where mature market institutions would continue to move cyclically from boom to bust.

The Panic was also partially due to international events. European demand for American foodstuffs was decreased because agriculture in Europe was recovering from the Napoleonic Wars, which had decimated European agriculture. War and revolution in the New World destroyed the supply line of precious metals from Mexico and Peru to Europe. American bankers and businessmen started issuing false banknotes to quickly expand credit. American bankers, who had little experience with corporate charters, promissory notes, bills of exchange, or stocks and bonds, encouraged the speculation boom during the first years of the market revolution. By the end of 1819, the bank would call these loans.

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 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.