The Panic of 1819

The panic of 1819 resulted primarily from irresponsible banking practices in the United States and was deepened by the declining overseas demand for American goods, especially cotton. Beginning in 1816, American banks, including the Second Bank of the United States (BUS), loaned out huge sums to settlers seeking land on the frontier and to merchants and manufacturers expanding their businesses. Many of these loans were not backed by sufficient collateral. Banks, meanwhile, issued notes without adequate hard currency as European governments, fearful of growing turmoil in South America, hoarded gold and silver. State and local banks and their clients were betting on continued economic growth to ensure repayment. Western banks were especially reckless in offering discounted loans. Then, as agricultural production in Europe revived with the end of the Napoleonic Wars, the demand for American foodstuffs dropped sharply. Farm income plummeted by roughly one-third in the late 1810s.

In 1818 the directors of the Second Bank, fearing a continued expansion of the money supply, tightened the credit it provided to branch banks. This sudden effort to curtail credit led to economic panic. Some branch banks failed immediately. Others survived by calling in loans to companies and individuals, who in turn demanded repayment from those to whom they had extended credit. The chain of indebtedness pushed more people to the brink of economic ruin just as factory owners cut their workforce and merchants limited orders for new goods. Both individuals and enterprises faced bankruptcy and foreclosures on mortgages. In New York State, property values fell from a total of $315 million in 1818 to $256 million in 1820. In Richmond, Virginia, property values fell by half during the panic.

Bankruptcies, foreclosures, unemployment, and poverty spread like a plague across the country. Cotton farmers were especially hard hit by declining exports and falling prices. Planters who had gone into debt to purchase land in Alabama and Mississippi were unable to pay their mortgages. Many western residents, who had invested all they had in new farms, lost their land or simply stopped paying their mortgages. This put further strains on state banks, some of which simply collapsed, leaving the Second Bank holding mortgages on vast amounts of western territory. At the same time, public land sales plummeted from $13.6 million in 1818 to $1.3 million in 1821.

Many Americans viewed banks as the cause of the panic. Some states defied the Constitution and the Supreme Court by trying to tax BUS branches or printing state banknotes with no specie (gold or silver) to back them. Some Americans called for government relief, but there was no system to provide the kinds of assistance needed. Meanwhile Congress debated how to reignite the nation’s economic engines. Northern manufacturers called for even higher tariffs to protect U.S. products from foreign competition, but southern planters argued that high tariffs raised the price of manufactured goods even as agricultural profits declined. And working men, small farmers, and frontier settlers feared that their economic needs were being ignored by politicians with ties to bankers, planters, manufacturers, and merchants.

By 1823 the panic had largely dissipated, but the prolonged economic crisis had shaken national confidence, and citizens became more skeptical of federal authority and more suspicious of banks. From 1819 until the Civil War, one of the greatest limitations on national expansion remained the cycle of economic expansion and contraction, which was tied ever more closely to unregulated national and international markets. See Document Project 9: The Panic of 1819.