Panic of 1819

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The Panic of 1819 was the first major financial crisis in the United States. It featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812.

The primary cause of the Panic of 1819 was likely the credit tightening instituted by the directors of the Second Bank of the United States, who were skeptical of the risky lending policies practiced by the new wildcat banks in the West. When the Bank called in its loans, state banks had to follow suit. Loans made to land speculators and similar high-risk debtors typically defaulted, which bankrupted their lenders. These failed banks in turn pulled other banks down with them, along with the fortunes of their depositors. These problems were compounded by the strong price competition which domestic manufacturing faced from foreign goods, as well as a downturn in exports, in particular cotton. The factory and farm failures resulting from bank failures and low prices caused rampant unemployment.

Proposed remedies included:

  • increase of tariffs (largely proposed by Northern manufacturing interests)
  • reduction of tariffs (largely proposed by Southerners, who believed free trade would stimulate the economy and increase demand)
  • monetary expansion; i.e., restriction or suspension of specie payment
  • rigid enforcement of specie payment
  • restriction of bank credit
  • direct relief of debtors
  • public works proposals
  • stricter enforcement of anti-usury laws
  • abolition of the national bank (the Second Bank of the United States)

The worst of the crisis was over by 1824, and the rest of the decade saw a gradual recovery of the U.S. economy. It was the nation's first experience with the mysteries and miseries of the business cycle.

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