Panic of 1819
From Freepedia
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.
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Explanations
Different economic schools of thought have offered explanations for the Panic of 1819.
Monetarism
According to monetarism, the primary cause of the Panic of 1819 was likely the credit tightening instituted by the directors of the Second Bank of the United States, who were skeptical of the risky lending policies practiced by the new wildcat banks in the West. When the Bank called in its loans, state banks had to follow suit. Loans made to land speculators and similar high-risk debtors typically defaulted, which bankrupted their lenders. These failed banks in turn pulled other banks down with them, along with the fortunes of their depositors. These problems were compounded by the strong price competition which domestic manufacturing faced from foreign goods, as well as a downturn in exports, in particular cotton. The factory and farm failures resulting from bank failures and low prices caused rampant unemployment.
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.
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.
See also
External links
- Panic of 1819: Reactions and Policies - by Murray N. Rothbard (in PDF format).
