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The Panic of 1819: America's First Great Depression

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The Panic of 1819: America's First Great Depression The Panic of 1819 America’s First Great Depression Museum of American Finance By Clyde A. Haulman credit business done. Confidence in ruined; multitudes in deep distress; each other’s ability to pay is very and a general mass disaffection to Writing from Richmond in May slight. [On Saturday it is said there the government…” In Boston, the 1819, Benjamin Brand told George were 12 notes laid over for protest.]” newspapers reported that “complaints Caskaden, a former retail merchant The decline in business activity left of hard times appear universal” and from the city who had moved to “(m)any store houses … shut up and that what was once a thriving town Alabama, “you have been lucky in written on ‘For Rent’” and took the “presents a dull and uncheery spec- removing from this place.” Caskaden’s bottom out of what had been a specu- tacle — silence reigns in the streets…” good fortune was to avoid the devas- lative boom in property. John Mar- Hezekiel Niles in his Register reported tating impact of the Panic of 1819 shall, putting it more concisely in a that a Philadelphia committee found on merchants in Virginia’s capital. letter two months earlier, said, “We that employment in 30 industries Between 1818 and 1819 the number are in great distress here for money. studied declined “from 9,672 in 1816 of merchant licenses issued in the Many of our merchants stop — a thing to 2,137 in 1819; weekly wages were city dropped almost 40 percent, and which was long unknown and was down from $58,000 to $12,000,” and it took until 1829 for the number of totally unexpected in Richmond.”1 Niles himself estimated that in New merchant licenses issued to reach their Virginia was not alone in its misery York, Philadelphia and Baltimore pre-panic peak. Describing business as contemporary observers across the some 50,000 were “either unemployed conditions Brand wrote, “We have country indicated that the Panic of or irregularly employed.” Niles also gloomy times here — many protests 1819 was a traumatic experience for reported that in Philadelphia “houses [failures] have taken place since I the new republic. For example, John which rented for $1,200, now rent for last saw you, and many more soon C. Calhoun, discussing the situation $450, fuel which costs $12, now costs expected… Many have backed out of with John Quincy Adams in 1820, $4 ½; beef 25¢ now 8¢; other things business.” The financial crisis meant said, “There has been within these in proportion…” From Pittsburgh a that “(a)t this time there is very little two years an immense revolution of citizen’s committee “stated that cer- fortunes in every part of the Union: tain manufacturing and mechanical Above: Second Bank of the United States enormous numbers of persons utterly trades in their city and its vicinity, building in Philadelphia. Financial History ~ Winter 2010 20 www.moaf.org which employed 1,960 persons in foreign markets for commodities that banks, sound by requiring state banks 1815, employed only 672 in 1819.”2 had fueled the American economy in to resume redeeming their notes in spe- With a monetary contraction under- the years following the War of 1812 cie on demand. Facing some reluctance way, the continued retirement of fed- and the rapid repayment of federal by state banks, the Second Bank nego- eral debt, much of it to foreigners, and debt, much of it to foreign bondhold- tiated an agreement whereby it would declines in the overseas markets for ers, that created the country’s first expand loans by $6 million in exchange American staples, the United States modern business cycle. for the resumption of specie convert- economy was headed for disaster. The In the events leading up to the Panic ability. Although the process was not most dramatic aspect of the disaster of 1819, the banking system played a completely successful, the discipline of was a rapid deflation as prices fell critical role. With the end of the War convertability led state banks to restrict 30.6 percent between 1818 and 1821. of 1812, public land sales jumped dra- their notes and deposits from a total Stagnation of real output that for some matically. The Treasury Department of $67.6 million at the end of 1816 to parts of the country lasted well into grew concerned with the losses they $60.4 million a year later. However, the 1820s. Real GNP fell in 1819 and were taking because the revenue from this was more than made up for by the was flat over the period 1818–1821. those sales was mostly in the form of $20.6 million expansion of the Second The young republic’s rude intro- bank notes from the West and South- Bank’s notes and deposits leading to a duction to boom-and-bust capitalism west that were depreciated, or not cir- total expansion of the banking system’s reported by these sources was a com- culating at their face value, while much money supply of almost 20 percent for plex combination of financial market federal spending occurred in the East the year 1817. Attempts by European volatility, swings in international mar- where bank notes were circulating at or countries to return to a specie standard ket demand, and federal government close to their face value. That situation, in the years after 1815 further exac- financial activity. The actions of the combined with a growing federal sur- erbated the monetary problems in the second Bank of the United States, plus from both land sales and customs U.S. These efforts meant nations were along with those of state-chartered revenue, the prospect of a number of all trying to build up gold and silver banks, have received much atten- federal bond issues maturing in the reserves at the same time, thus placing tion. And, the monetary tightening next few years, and the false belief that intense pressure on the world’s specie of 1818–1819 sounded the alarm for the absence of a national bank had supply. an economy rife with speculation and made it difficult to raise funds for the Following this initial action, the brought the economic optimism that war, led Congress to create the Second Second Bank went even further by had fueled the speculation to an end. Bank of the United States in 1816. expanding credit until loans stood at Although changes in money and credit The first order of business for the more than $41 million by mid-1818. were an important component in gen- new Second Bank was to make all the This expansion combined with the erating panic across the nation, ulti- nation’s currency, consisting mainly of dramatic increase in land sales in the mately it was the collapse of the strong bank notes issued by state-chartered West meant that notes of western Museum of American Finance Bank of the U.S. check for $200 lent to Matthew Carey on May 1, 1795 and repaid three days later. www.moaf.org 21 Financial History ~ Winter 2010 and southern branches of the Second Bank, which it had decided to redeem at any office as a means of devel- oping a uniform national currency, began to flood eastward, particularly to New York and Boston. Despite large imports of specie, the bank could not continue to meet the demand for note redemption. Thus, in July 1818, the directors ordered loans reduced at Philadelphia ($2 million), Baltimore ($2 million), Richmond ($700,000) and Norfolk ($300,000). The retirement of 1803’s Loui- siana bonds, scheduled to begin in 1818 and to continue through 1821, further complicated the picture. Such action on top of the greater-than $20 million in federal debt retired during 1817 meant that substantial government revenues did not reenter the economy directly, thus creating a smaller effect than if those revenues had been spent directly by the gov- ernment. Most importantly given the Second Bank’s contraction in the last half of 1818, about $3.5 million of the roughly $4.5 million in Louisiana bonds retired in October 1818 went as payments to foreigners. Of the total $11 million retired of the entire issue, some $6 million went to foreigners. Museum of American Finance This flow of funds out of the domestic Letter from Langdon Cheves to the head of the Bank of the U.S. in New Orleans economy meant that potential domes- directing him to cash drafts on Stephen Girard, dated February 28, 1822. tic spending was lost at a critical time, and it placed additional strains on the during this period with Great Britain president Langdon Cheves and contin- Second Bank. Treasury deposits at making up about half of that total. ued long past the end of the financial the bank dropped approximately $6 Between 1818 and 1819 in America’s crisis, subjected the bank to harsh million between October 1818 and most important foreign market, Great criticism. It was not until after 1823 January 1819 to an ending balance of Britain, the index of business activity and the naming of Nicholas Biddle slightly less than $3 million — a two- fell 12.4 percent, and the value of total as president that the bank began to thirds decline in just three months. imports declined 16.5 percent with the regain public confidence and establish The contraction story’s final ele- importation of American grain declin- control over the nation’s monetary ment was also international. As Europe ing 74.6 percent. affairs. However, much damage had prepared for the resumption of specie The importance of the Panic of been done.
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