The Panic of 1819 was the first widespread and durable financial crisis in the United States; it slowed westward expansion in the Cotton Belt and was followed by a general collapse of the American economy that persisted through 1821. The Panic heralded the transition of the nation from its colonial commercial status with Europe toward an independent economy. Though the downturn was driven by global market adjustments in the aftermath of the Napoleonic Wars, its severity was compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.
The Second Bank of the United States (SBUS), itself deeply enmeshed in these inflationary practices, 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 gold specie from their reserves when presented with their own banknotes for redemption by the SBUS, the state-chartered banks began 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, led to widespread bankruptcies and mass unemployment. The financial disaster and recession provoked popular resentment against banking and business enterprise, along with a general belief that federal government economic policy was fundamentally flawed. Americans, many for the first time, became politically engaged so as to defend their local economic interests. The New Republicans and their American System—tariff protection, internal improvements, and the SBUS—were exposed to sharp criticism, eliciting a vigorous defense.
Post-war European readjustments and the American economy: 1815–1818
The United States and Britain signed the Treaty of Ghent on December 24, 1814, ending the War of 1812. The British government gradually reversed previous mercantilist policies regarding trade with the United States in favor of free trade, which provided enormous economic benefits to both nations and stimulated the opening of America's vast western frontier. Europe was undergoing a period of disorganization as it readjusted to peacetime production and commerce in the aftermath of the Napoleonic Wars. The general effect was a decline in prices throughout the Western world, due to a scarcity of gold and silver specie. Britain had advanced its industrial capacity to fully meet its wartime demands, but post-war continental Europe was temporarily too devastated to absorb Britain's surplus manufactured goods. Moreover, European agriculture production, exhausted by years of warfare, was unable to feed its own population.
The economy of the United States was not immune to the chaos that afflicted Europe, which contributed to the Panic of 1819. As Anglo-American trade resumed in 1815, British manufactured goods started once again being sold in American markets. These goods, which were produced at much lower labor costs and priced at well below competitive rates compared to their American counterparts, led to many US manufacturers and factories going out of business. Continental Europe, its agrarian output crippled by the recent war, offered new markets for American staple crops, particularly cotton, wheat, corn and tobacco. As prices soared for agricultural goods, a speculative agrarian land boom ensued in the South and West United States, encouraged by liberal terms for government public land sales. "The entire postwar American economy", observed historian George Dangerfield, was "based on a land boom". The inflationary bubble grew from 1815 to 1818, obscuring the general deflationary trends in world prices.
Unregulated banking and the imperatives of Republican enterprise With the failure to recharter the First Bank of the United States in 1811, regulatory influence over state banks ceased. Credit-friendly Republicans—entrepreneurs, bankers, farmers—adapted laissez-faire financial principles to the precepts of Jeffersonian political libertarianism—equating land speculation with "rugged individualism" and the frontier spirit. Private banking interests and their allies sought to evade or resist any threat to the profitability of their local enterprises, including the regulatory influence of a government bank limiting easy credit. There followed an enormous expansion in state-chartered banking, with chartered institutions increasing from 88 in 1811 to 208 in 1815, mostly in the mid-Atlantic states.
During the War of 1812 (1812–1815) with the United Kingdom, the American government turned to these new banks for loans, encouraging a proliferation of paper money. This practice tended to shift specie into the more conservatively lending New England banking apparatus, depleting the newer banks of their hard money reserves. In response, the U.S. government acquiesced in a suspension of specie payments from state banks in order to prolong the liberal wartime lending. The arrangement persisted in the war's aftermath, allowing old and new banks to profitably lend without regard to their hard money currency reserves. A speculative bubble formed as a result of these inflationary practices, threatening the health of the economy.
By 1814, calls for a new central bank and a resumption of regulatory controls were heard from powerful capitalists and economic nationalists in the Republican party leadership.
Resurrection of the Bank of the United States
The "American System"
The Democratic-Republican party found itself in control of the national government with the collapse of the Federalist Party at the end of the War of 1812. Some of the traditional Jeffersonian agrarian precepts—especially strict construction of the Constitution—had softened due to difficulties during the war arising from a lack of infrastructure, unregulated banking and a shortage of manufactured material, as well as the prospect of developing the vast natural resources with westward expansion. A mild nationalist outlook took hold among the "New Republicans", neofederalists led by Speaker of the House Henry Clay and Congressman John C. Calhoun. A three-part program dubbed the American System, incorporating some of the Hamiltonian projects championed by the Federalists, proposed "to create a stable economy through a centralized banking system, stimulated by an ever widening web of transportation and communication, through which domestic manufactures could eventually reach all parts of the Union".
Advocates of the American System called for a protective tariff to encourage manufacturing, a federally funded program for internal improvements and a revival of the First Bank of the United States to regulate finance.
Astor, Girard, Parish
In the crucible of the War of 1812, the Treasury of the United States had been compelled to offer $16 million in government war bonds in order to stave off bankruptcy due to military costs and wartime loss of revenue. Financier Stephen Girard, business magnate John Jacob Astor and merchant David Parish bought up these government securities and rescued the nation's credit. Through their influence, and in alliance with Republican Congressmen John C. Calhoun and Henry Clay, they sought to augment their investment by proposing that the securities be exchangeable for stock in a new central bank, the Second Bank of the United States (SBUS).
Secretary of State James Monroe supported the new bank initiative, wishing to bind these highly regarded and pro-Republican business figures to government financial operations. Republicans in the South and West joined with monied interests in the mid-Atlantic states. Pro-SBUS Congressman John C. Calhoun argued forcefully that the federal government had a constitutional obligation to regulate bank credit as part of the national money supply. In January 1816, he introduced a bill of incorporation in the House of Representatives for a government bank (which would become the Second Bank of the United States). The measure was passed by Congress and signed by President James Madison in April 1816.
Opposition to the Bank came from two fronts: the orthodox Tertium quids (or "Old Republicans") who reflexively regarded an enlargement of the central government as an assault on personal liberty and a violation of Jeffersonian agrarianism, and state-chartered private banking interests, who favored paper money but considered federal regulation of local banking operations to be anti-Republican. These ideologies and interests would be arrayed against the central bank during the Andrew Jackson administration (1829–1837), erupting in a Bank War that would destroy the institution by 1833.
The Second Bank of the United States began operations in January 1817 under a twenty-year charter.
Neofederalist expectations for the central bank The revival of the Bank of the United States had two primary objectives: first, to reverse the post-war inflationary practices of state-chartered banks by inducing resumption of convertibility, and second, to expand the opportunities for the common man to acquire bank credit, promoting enterprise and an orderly and profitable westward expansion.
The regulatory mechanism of the SBUS resided in its fiscal duties as depository for the U.S. Department of the Treasury. As such, the bank accepted circulating state bank paper money from individuals, businesses and importers when they paid taxes or custom duty fees. The central bank immediately credited these payments to the U.S. Treasury with its own metallic reserves. The SBUS, in turn, anticipated that the state banks which had issued the paper money would, upon demand, redeem their currency with gold and silver—"convertibility"—reimbursing the government bank.
In order to remain solvent, the state banks would, ideally, constrain their lending of paper money—however profitable—so as not to allow the SBUS to become a significant creditor and deplete their specie reserves. Failing this, the Second Bank of the United States would, in theory, cease to honor the banknotes of those financial institutions that refused to promptly settle their government accounts with hard money—a recipe for bankruptcy.
The central bank's direct influence on inflationary lending was limited to those chartered banks whose paper currency was extensively used to remit funds to the government (i.e. tax and duty payments). The SBUS and its branches had little or no direct control over commercial paper emitted by unchartered lending outfits: "All that was necessary to start a bank... was plates, presses and paper; 'a church, a tavern, a blacksmith shop' would be a suitable site." These unregulated credit operations would "to some extent interpenetrate" the regulated banking system, especially in the regions of wildcat banking.
Prelude to panic: 1816–1818
President of the United States James Madison and Secretary of the Treasury Alexander Dallas fully approved the elevation of William Jones—one of the federally appointed Bank directors—to SBUS President in October 1816. Jones, formerly a member of Madison's cabinet, owed his promotion more to his political acumen than his skills as a banker. Financier and co-director Stephen Girard was troubled at Jones's promotion, concerned that he could never provide disinterested leadership for the bank, and businessman John Jacob Astor doubted Jones's ability to wield the bank's regulatory powers effectively.
Jones extended the institution's resources liberally in accordance with the post-war "national exuberance", generating large dividends for its stockholders. His administration of the bank resonated with Secretary Crawford's lenient policy with regard to public land receipts in the form of chartered-bank scrip when specie was scarce nationally.
Setbacks and compromises for the Second Bank of the United States