Panic of 1819 - Business in United States of America

The Event: American credit collapse resulting from upheavals accompanying the transition to a market-based economy
Date: 1819-1820
Place: United States, primarily the South and Midwest
Significance: The Panic of 1819 revealed the consequences of the lack of a national currency system controlled effectively by a federal bank.
The Panic of 1819 had multiple causes, among the most important of which were the opening up for settlement of the public lands in Alabama and Mississippi following the removal of Native Americans from those lands, the emergence of short-staple cotton as a major worldwide commodity, and the resumption of specie payments that had been suspended during the War of 1812. These developments were all manifestations of the conversion of the U.S. economy from one based in subsistence agriculture to one based in marketing commodities.

Causes and Crises

The United States experienced rapid population growth during the years after 1789, limited in the original colonies to a fixed land base east of the Appalachian Mountains. This situation also affected the panic: The victories of European American settlers over American Indian tribes freed land beyond the Appalachians for settlement. The creation of a public land system, surveyed as rapidly as possible following the end of military activities, induced huge numbers of people to leave their old homes along the eastern seaboard and seek new homesteads, in both the Northwest (Ohio, Indiana, and Illinois) and the Southwest (Tennessee, Alabama, and Mississippi).
To serve the needs of this wave of immigrants, the various newly created western states authorized numerous state banks. These, in turn, supplied immigrants with credit in the form of state banknotes. In addition, a number of branches were established in the new states by the inept management of the Second Bank of the United States, which likewise issued banknotes freely. These notes circulated widely among the immigrants to the newly opened public lands, resulting in significant inflation.
Existing rules allowed squatters to take up residence on the new public lands even before the land was offered for sale at the various government land offices that were being established in the new areas. Although there was extensive demand for surveyors, it took time for crews to be recruited and for the plots to be established according to the preferred system of rectangular townships with six miles on each side. Purchasers buying directly from the government were required to buy at least 640 acres. Many plots were sold to those with capital, who paid one-fourth down and promised to pay the remainder over the next five years. Land speculators, who bought land they intended merely to resell, abounded.
The land rush into Tennessee, Alabama, and Mississippi was motivated by a soaring demand for cotton. The price of cotton rose from a few cents per pound to 33 cents per pound in 1818. As cotton growing areas, Alabama and Mississippi drew settlers expecting to sell cotton at this exorbitant price. In the spring of 1819, world commodity prices collapsed, and cotton prices fell by more than 50 percent. Settlers who had borrowed money on the assumption that in two to three years they would be selling huge quantities of cotton at high prices became unable to pay back the money they had borrowed, so foreclosures rose dramatically.
Additionally, the Second Bank of the United States began calling in its loans to individuals, as well as the funds it had lent to numerous state banks, and demanding that the loans be repaid with specie (gold and silver), not with the deflated state banknotes that circulated widely. As a result, many state banks also were unable to repay the money they had borrowed, and many collapsed. The leaders of the various state and territorial governments did what they could to rescue the state banks, because their operators were often local political leaders, but many failed.
Sales of public lands also collapsed. Many plots that had already been purchased reverted back to the government when their purchasers were unable to make payments on the remainder of their commitment. The huge optimism that had fueled the land boom gave way to a deep pessimism that may have played into the religious revival that occurred in the succeeding years. Where it looked as if the government debt would shortly be extinguished by the sale of public land, that solution was now put off for at least a decade.

Recovery

The economy slowly recovered during the 1820’s, but the lessons of the Panic of 1819 remained. Conservative leadership of the Second Bank of the United States under Nicholas Biddle kept a rein on easy financing until Andrew Jackson, the seventh president of the United States, refused to countenance its re-authorization. The conversion of the United States to a market-based economy defined by capitalism remained permanent, along with the occasional panics that seemed to be a natural feature of the business cycle.