The Panic of 1819 was the first widespread and durable financial crisis in the United States that slowed westward expansion in the Cotton Belt and was followed by a general collapse of the American economy that persisted through 1821.
Though the downturn was driven by global market adjustments in the aftermath of the Napoleonic Wars, its severity was compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.
Failing to provide gold specie from their reserves when presented with their own banknotes for redemption by the SBUS, the state-chartered banks began foreclosing on the heavily mortgaged farms and business properties they had financed.
The financial disaster and recession provoked popular resentment against banking and business enterprise, along with a general belief that federal government economic policy was fundamentally flawed.
[4] The British government effectively relinquished its effort to impose mercantilist policies on the United States, preparing the way for the development of free trade and the opening of America's vast western frontier.
[6][7] American manufacturers faced U.S. markets swamped with British products, produced by low-paid workers and priced well below competitive rates and forcing many factories out of business.
[8][9] Continental Europe, its agrarian output crippled by the recent war, offered new markets for American staple crops, particularly cotton, wheat, corn and tobacco.
Credit-friendly Republicans—entrepreneurs, bankers, farmers—adapted laissez-faire financial principles to the precepts of Jeffersonian political libertarianism[17]—equating land speculation with "rugged individualism"[18] and the frontier spirit.
[31] Some of the traditional Jeffersonian agrarian precepts—especially strict construction of the Constitution—had softened due to difficulties during the war arising from a lack of infrastructure, unregulated banking and a shortage of manufactured material, as well as the prospect of developing the vast natural resources with westward expansion.
[8] Advocates of the American System called for a protective tariff to encourage manufacturing, a federally funded program for internal improvements and a revival of the First Bank of the United States to regulate finance.
[34] Financier Stephen Girard, business magnate John Jacob Astor and merchant David Parish bought up these government securities and rescued the nation's credit.
[34][36] Secretary of State James Monroe supported the new bank initiative,[37][38] wishing to bind these highly regarded and pro-Republican business figures to government financial operations.
Pro-SBUS Congressman John C. Calhoun argued forcefully that the federal government had a constitutional obligation to regulate bank credit as part of the national money supply.
[27][21] In order to remain solvent, the state banks would, ideally, constrain their lending of paper money—however profitable—so as not to allow the SBUS to become a significant creditor and deplete their specie reserves.
Failing this, the Second Bank of the United States would, in theory, cease to honor the banknotes of those financial institutions that refused to promptly settle their government accounts with hard money—a recipe for bankruptcy.
[58] His administration of the bank resonated with Secretary Crawford's lenient policy with regard to public land receipts in the form of chartered-bank script when specie was scarce nationally.
[7] Hard money shortages prevailed because U.S. imports exceeded exports[61] and Peruvian and Mexican gold and silver sources failed to replenish specie reserves.
[64] As the February 20 deadline approached to resume convertibility, the private (i.e. state-chartered)[65] banks withheld cooperation from SBUS officials, loath to submit to the regulatory influence of the central bank—and diminish the large profits derived from the issue of unredeemable paper.
[78][79] The onset of the financial panic has been variously described as "triggered", "pricked", or "precipitated"[80][76][81] by the Second Bank of the United States when it initiated a sharp credit contraction beginning in the summer of 1818.
The link between the frontier land boom and overseas markets for staple goods was dramatically revealed in 1817, when Europe finally recovered from its post-war harvest shortages and began producing bumper crops.
Tench Coxe, a Pennsylvanian political economist and delegate to the Continental Congress, warned of the "substantial evil" exhibited in the rivalry created by foreign competition.
[89] State banks in the West and South, unable to provide the required specie, began to call in their loans on the heavily mortgaged lands they had financed.
[92] Among his promoters were U.S. President James Monroe,[93] BUS directors Stephen Girard and Nicholas Biddle and those stockholders who wanted Bank leadership that was fiscally conservative and immune to political influence.
Vocal protectionists, such as Philadelphia printer Mathew Carey, blamed free trade for the depression and argued that tariffs would protect American prosperity.
[110] City and state governments began to more effectively approach the public policy reform issues surrounding the poor; a classification system was also created (able-bodied vs. disabled, temporary vs. long-term, etc.).
[107] The suspension of the obligation to redeem greatly spurred the establishment of new banks and the expansion of banknote issues, and this inflation of money encouraged unsustainable investments to take place.
It soon became clear that 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.
[114] Economists who adhere to Keynesian economic theory suggest that 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 that 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, in which mature market institutions would continue to move cyclically from boom to bust.