Panic of 1819

The Panic of 1819 is the first major financial crisis in the United States and occurs during the political calm of the Era of Good Feelings, followed by a general collapse of the American economy persisting through 1821.

The Panic announces the transition of the nation from its colonial commercial status with Europe toward an independent economy, increasingly characterized by the financial and industrial imperatives of central bank monetary policy, making it susceptible to boom and bust cycles.

Though driven by global market adjustments in the aftermath of the Napoleonic Wars, the severity of the downturn is compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.

The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the dollar and, perhaps indirectly, to the calls for a Constitutional Convention.

It had also experienced another severe economic downturn in the late 1790s following the Panic of 1797.

In the earlier crises however, the primary cause of economic turmoil originated in foreign trade and the broader Atlantic economy.

These crises and others had resulted from international conflicts such as the Embargo Act and War of 1812 and had caused widespread domestic foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing.

However, things had changed for the US economy after the Second Bank of the United States was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war.

In contrast, the causes of the Panic of 1819 largely originate within the U.S. economy.

The Second Bank of the United States (SBUS), itself deeply enmeshed in these inflationary practices, had sought to compensate for its laxness in regulating the state bank credit market by initiating a sharp curtailment in loans by its western branches, beginning in 1818.

Failing to provide metallic currency when presented with their own bank notes by the SBUS, the state-chartered banks had begun foreclosing on the heavily mortgaged farms and business properties they had financed.

The ensuing financial panic, in conjunction with a sudden recovery in European agricultural production in 1817 leads to widespread bankruptcies and mass unemployment.

The financial disaster and depression provoke popular resentment against banking and business enterprise, and a general belief that federal government economic policy is fundamentally flawed.

Americans, many for the first time, become politically engaged so as to defend their local economic interests.

The New Republicans and their American System—tariff protection, internal improvements, and the BUS—are exposed to sharp criticism, eliciting a vigorous defense.

The panic marks the end of the economic expansion that had followed the War of 1812 and ushers in new financial policies that will shape economic development.

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