The Panic of 1819

Panic of 1819

The United States' First Financial Crisis

The "Panic of 1819," as it is commonly referred to in the literature, was considered the first financial crisis in the United States. To this day, many of the factors attributed to the cause of the crisis are hotly debated among scholars. The case is especially interesting however because of the contemporary financial crisis that originated in 2008 and is still plaguing the population today. Many, if not all, the factors associated with the financial crises seem remarkably similar. Therefore, it is prudent to study the history of such events in order to better understand the current events that are unfolding before our eyes. This paper will provide a brief analysis of some of the factors that were involved in the Panic of 1819 -- America's very first financial crisis.

Background

The United States experienced rapid population growth during the years after 1789 and were slowly defeating Indian tribes for their land east of the Appalachian Mountains (Gordon 2011). One consequence of the overall trend of western migration was that the new states that were formed also formed many state banks to service their areas. These banks would offer migrants credit for various development activities and were chartered by the Second Bank of the United States (2BUS). It has been argued that the management of the second federal bank was inept and issued banknotes without freely without much regard for repayment (Gordon 2011). As a result of the market being flooded with credit, there was a wave of inflation that worked to devalue the currency and drive prices higher.

The War of 1812 also served as another factor with implications for the economy; especially the dislocation of many young male workers and the effects that had to production (Rothbard 2007). The monetary system of the country was also still not highly developed at the time of the war and most lending was confined to the cities. However, the war also created a surge of manufacturing capabilities in the country that offered a new segment of the economy. Furthermore, in some areas, banks sprung up quickly as there were loose regulations and the federal government had become a leading borrower since they were financing the war. In the Middle Atlantic States, for example, the number of banks increased from twenty five to one hundred eleven in this period (Rothbard 2007).

The role of the Second Bank of the United States is another of the factors that is heavily debated. In some circles, Langdon Cheves's role as president of the bank is one that is cited as the person who saved the bank from eminent failure. However, other state that the bank was in reality already sound and that Cheves was actually irresponsible for accumulating a huge excess in reserves (Perkins 1984). Although there were many economists in the nation at the time, the field was still developing. There were few examples available as to how monetary policy can be used to stimulate the economy. Therefore, criticism of Cheves and his role in setting the reserve amount seem to be conducted purely from the perspective of hindsight.

Discussion

There are many parallels that can be drawn by studying the Panic of 1819 and comparing it to today's economy. For example, state banks were known to flood their local economies with cheap and relatively easy to obtain credit. This led to many people speculating in real estate in the newly settled areas. Settlers could buy huge tracts of land from the government on credit and repay the notes through development or selling sub-parcels to other settlers. However, when the financial crisis emerged, many of these speculators were unable to repay their obligations and the government ultimately reclaimed the land.