If you’re anything like me, you see the words “economic history” and die a little bit inside. It was always my least favorite part of any US history course. I kind of blocked out any mention of the inflation, bonds, or the gold standard, hoping that if I did maybe they would stop existing and I would never need to know what they meant. Modern economics is difficult enough to comprehend without adding in a bunch of defunct institutions. Also, it was boring.
Still, it’s an important part of understanding our country’s development. Economy is woven into everything we have ever done as a nation. For example, the bitter debate over slavery, while definitely a huge moral issue, was largely economically driven–it was integral to southern businesses, which is a big reason why the South refused to give it up or support any measure that would endanger it (even if they wanted to pretend it was for other reasons. Well, I mean, there was also rampant racism, but that’s a discussion for another time).
One thing in particular that always confused me was 1800s economics. Because the country was so young and unstable, the economy was constantly changing. And it was changing FAST. No one felt they could depend on the markets, so the 19th century was rife with “panics,” mass freak-outs which usually lead to recessions. I wanted to break down one specific panic, the Panic of 1819, into bite-sized pieces, because these types of events give us crucial insight into the atmosphere of the era. As you’ll see, that atmosphere was mainly one of “WHERE IS MY MONEY?!”
The Bank of the United States: A Tragedy in Two Parts
Before we jump in, I would be remiss in my duties as your pseudo-history teacher if I did not mention one of the biggest players in the early American economy–the Bank of the United States. It wasn’t involved in all of the panics, but it’s still a key part to understanding why the economy failed at certain times and how that shaped attitudes about money in the 1800s.
The Bank was a highly divisive institution from the very beginning. First proposed by Alexander Hamilton in 1791, it had two purposes: to safely store federal money and to manage the government’s fiscal responsibilities. It was a pretty good idea, since the country was facing some serious debt, and economic collapse was not unreasonable at that point. Without some sort of centralized structure, it was going to be much harder to regulate the young economy.
But, if we know anything about Alexander Hamilton, it’s that Thomas Jefferson hated him with the wrath of a thousand grapes. And whoever TJ hated, his Democratic Republican cronies also hated. They believed that the bank was unfair to farmers and was an unconstitutional constraint on states’ rights. In the end, Congress decided to grant the Bank a twenty-year charter, but the Jeffersonian anti-Bank sentiment would be one that would last until the BUS’s last days.
The First Bank did well, but over time, entrepreneurs and state banks joined the ranks of the Bank’s enemies. They felt that the Bank was stunting growth with its conservative policies towards loans and credit. And you know what they say about Americans and their money…they like it. Congress declined to renew the Bank’s charter in 1811. RIP.
But much like Jason Voorhees, or Michael Myers, or Taylor Swift, the Bank was not one to be ended so easily. After the War of 1812 against Britain, the country began to see the benefits of a central bank. The economy was expanding, but it was incredibly unstable. This was due to money-handling practices that were…suspect, to say the least.
State banks, especially those in the West, were very loose with their loans. Some even occasionally printed money to cause inflation. This lead to serious national concern about the reliability of the US dollar. Color me shocked.
So, in 1816, under President James Madison (ironically, Jefferson’s former right-hand man), Congress established the Second Bank of the US. At that point, though, it was a little too late. The Bank’s new policies were much more restrictive, and many believed that such a drastic change, along with general poor management, was the cause of the Panic of 1819. Sixteen years and one landmark supreme court case later, the Bank was still hated. In 1832, Henry Clay, running against the incumbent Andrew Jackson, convinced the Bank’s president Nicholas Biddle to ask Congress for an early charter renewal. Congress approved it, but Jackson vetoed the bill, and the Bank was again denied reinstatement when its charter expired in 1836. The Bank operated as a private institution in Pennsylvania for a little while before it died a quiet and pitiful death in 1841.
The cause of the first panic of the 19th century was essentially unreliable moneylending policies. When the Bank was re-established in 1816, it became much more conservative with its loans, as the government was disturbed by the wayward policies of state banks. Then, there was an economic meltdown in Europe. Britain suddenly demanded the US pay them upfront on all debts–in hard money (specie), because they knew that the value of paper money was unstable. In light of all of this, the BUS called in its loans and ordered state banks to do the same.
The result was very similar to what would happen in my calculus class in high school. My teacher would have us turn in our homework every week, usually on a Friday. That wasn’t a hard and fast rule, though. Sometimes it would be another day. Sometimes he would just forget altogether. So when he would decide to collect papers from the last few weeks on a Tuesday, there would be a moment when the risk-takers who had hoped to do all their work on Thursday night would share a moment of fear and desperation amongst themselves.
That’s pretty much what happened in 1819. State banks had been giving out money that they didn’t have, and land speculators were using that money to buy land that they couldn’t afford. When the Bank suddenly demanded payment on loans, everyone looked at each other and said a collective “F*ck.” To make matters worse, the inflation caused by state banks caused an over-saturation of cotton in the markets and thus a drop in cotton prices. This meant that it was less profitable to produce cotton, so fewer people did it. Everything started to fall apart, and the circumstances just kept becoming more and more unfortunate. The British started buying from India instead because it was cheaper, which led to even less business; all the hard money was going to repaying our friends across the pond, so most banks didn’t have enough to cover the paper notes they had distributed; and it was even harder to get a hold of silver because of revolutions in South America.
How it Affected Us
The Panic of 1819 hurt the entire country, and lasted for about three years. Less cotton meant fewer cotton products to be made. Fewer cotton products means fewer people needed in manufacturing, so a lot of Northerners lost their jobs. Meanwhile in the South, the value of land and slaves dropped dramatically. Many people had to sell or were even forced off of their land.
It also had a significant effect on the political and social scape of America. First off, the experience convinced a large number of Americans that the banking industry was untrustworthy. They believed the government had dropped the ball, and came to see the Bank (all banks, really) as a symbol of incompetence and greed.
Second, wealthy planters took advantage of the devaluation of farmland/slaves and bought out bankrupt small farmers. The panic was a turning point; for the rest of the century, the South was the most unbalanced area of the country in terms of distribution of wealth. Money was concentrated in the hands of the lucky few, and cotton became a rich man’s game, like lacrosse or wearing pastel shorts.
Third, it intensified sectionalism in the US. Everyone felt the consequences of the broken economy. However, different parts of the country had very different game plans for fixing it. In the North, businessmen promoted higher tariffs to protect and stimulate domestic business. Higher tariffs meant that people were more likely to buy goods from within the country, which would prevent foreign products from flooding the markets again. Southerners, most of whom were farmers, were not so fond of that idea. They depended on their more industrially developed counterparts in the North for all their manufactured goods. If tariffs were raised, they couldn’t turn to European suppliers if things got pricey in the states. This led to increased resentment, mostly from the South directed at the North. Cracks in the union had already begun to form, and the panic made them all the more obvious.
It’s also worth mentioning that Andrew Jackson would not have garnered the support he did without the despair caused by the panic. Distrust of the Bank, and big government in general, contributed greatly to Jackson’s overwhelming popularity among destitute Americans (especially in the South). His battle against the BUS boosted his image as a the defender of the working man.
So that’s it for your first voluntary historical economy lesson. Thanks for bearing with me, and please try to use “specie” in a sentence today.