The Panic of 1819 revealed the consequences of the lack of a national currency system controlled effectively by a federal bank.
The Panic of 1819 had multiple causes, among the most important of which were the opening up for settlement of the public lands in Alabama and Mississippi following the removal of Native Americans from those lands, the emergence of short-staple cotton as a major worldwide commodity, and the resumption of specie payments that had been suspended during the War of 1812. These developments were all manifestations of the conversion of the U.S. economy from one based in subsistence agriculture to one based in marketing commodities.
President Jackson’s battle against the Second Bank of the United States is reflected in this political cartoon, which shows Jackson, with Martin Van Buren hanging on to his discarded coat, fleeing from Nicholas Biddle.
The United States experienced rapid population growth during the years after 1789, limited in the original colonies to a fixed land base east of the Appalachian Mountains.
To serve the needs of this wave of immigrants, the various newly created western states authorized numerous state banks. These, in turn, supplied immigrants with credit in the form of state banknotes. In addition, a number of branches were established in the new states by the inept management of the Second
Existing rules allowed squatters to take up residence on the new public lands even before the land was offered for sale at the various government land offices that were being established in the new areas. Although there was extensive demand for surveyors, it took time for crews to be recruited and for the plots to be established according to the preferred system of rectangular townships with six miles on each side. Purchasers buying directly from the government were required to buy at least 640 acres. Many plots were sold to those with capital, who paid one-fourth down and promised to pay the remainder over the next five years. Land speculators, who bought land they intended merely to resell, abounded.
The land rush into Tennessee, Alabama, and Mississippi was motivated by a soaring demand for cotton. The price of
Additionally, the Second Bank of the United States began calling in its loans to individuals, as well as the funds it had lent to numerous state banks, and demanding that the loans be repaid with specie (gold and silver), not with the deflated state banknotes that circulated widely. As a result, many state banks also were unable to repay the money they had borrowed, and many collapsed. The leaders of the various state and territorial governments did what they could to rescue the state banks, because their operators were often local political leaders, but many failed.
Sales of public lands also collapsed. Many plots that had already been purchased reverted back to the government when their purchasers were unable to make payments on the remainder of their commitment. The huge optimism that had fueled the land boom gave way to a deep pessimism that may have played into the religious revival that occurred in the succeeding years. Where it looked as if the government debt would shortly be extinguished by the sale of public land, that solution was now put off for at least a decade.
The economy slowly recovered during the 1820’s, but the lessons of the Panic of 1819 remained. Conservative leadership of the Second Bank of the United States under Nicholas Biddle kept a rein on easy financing until Andrew Jackson, the seventh president of the United States, refused to countenance its re-authorization. The conversion of the United States to a market-based economy defined by capitalism remained permanent, along with the occasional panics that seemed to be a natural feature of the business cycle.
Kindleberger, Charles, and Robert Aliber. Manias, Panics, and Crashes: A History of Financial Crises. 5th ed. Hoboken, N.J.: John Wiley & Sons, 2005. The classic treatment by longstanding specialists in the field; more analytical than chronological. North, Douglass C. The Economic Growth of the United States, 1790-1860. New York: Norton, 1966. A classic survey by a Nobel Prize-winning economist. Rockoff, Hugh. “Banking and Finance, 1789-1914.” In The Cambridge Economic History of the United States, edited by Stanley Engerman and Robert E. Gallman. Vol. 2. New York: Cambridge University Press, 2000. This comprehensive survey of the history of the American economy treats each of the various sectors in turn. Rohrbaugh, Malcolm. The Land Office Business. London: Oxford University Press, 1968. The most comprehensive treatment of the Land Office. Rothbard, Murray N. The Panic of 1819: Reactions and Policies. New York: Columbia University Press, 1962. Focuses on the development of the panic and the sequence of events; a good starting point. Rothman, Adam. Slave Country: American Expansion and the Origins of the Deep South. Cambridge, Mass.: Harvard University Press, 2005. Provides many details about the emergence of the cotton economy in the American South. Sellers, Charles. The Market Revolution: Jacksonian America, 1815-1846. New York: Oxford University Press, 1991. Masterly account of the conversion of the subsistence economy to one based on markets.
Bank failures
Second Bank of the United States
Business cycles
Currency
Depression of 1808-1809
Federal monetary policy
Panic of 1837
Panic of 1857
Panic of 1873
Panic of 1893
Panic of 1907