The first major economic crisis in the United States after the War of 1812 was due, in large measure, to factors in the larger Atlantic economy. It was made worse by land speculation and poor banking practices at home. British textile mills voraciously consumed American cotton, and the devastation of the Napoleonic Wars made Europe reliant on other American agricultural commodities such as wheat. This drove up both the price of American agricultural products and the value of the land on which staples such as cotton, wheat, corn, and tobacco were grown.

Speculation and Inflation

Many Americans were struck with “land fever.” Farmers strove to expand their acreage, and those who lived in areas where unoccupied land was scarce sought holdings in the West. They needed money to purchase this land, however. Small merchants and factory owners, hoping to take advantage of this boom time, also sought to borrow money to expand their businesses. When existing banks refused to lend money to small farmers and others without a credit history, state legislatures chartered new banks to meet the demand. In one legislative session, Kentucky chartered forty-six banks. As the number of loans being given out increased, paper money from new state banks flooded the country, creating inflation that drove the price of land and goods still higher. This inflation encouraged even more speculation, causing people to borrow money with which to purchase land or expand their businesses. Speculators took advantage of this boom by purchasing cheap properties that they could later resell at exorbitant prices.

During the War of 1812, the Bank of the United States had suspended payments in specie, “hard money” usually in the form of gold and silver coins which were kept by the bank. When the war ended, the bank continued to issue only paper notes and to redeem notes issued by state banks with paper only. The newly chartered banks also adopted this practice, issuing banknotes in excess of the amount of specie in their vaults. This shaky economic scheme worked only so long as people were content to conduct business with paper money and refrain from demanding that banks instead give them the gold and silver that was supposed to back it. If large numbers of people, or banks that had loaned money to other banks, began to demand specie payments, the banking system would collapse because there was no longer enough specie to support the amount of paper money the banks had in circulation. So terrified were bankers that customers might demand payments in gold or silver, that an irate bank employee in Ohio stabbed a customer who had the audacity to ask for specie in exchange for the banknotes he held.

In an effort to bring stability to the nation’s banking system, Congress chartered the Second Bank of the United States (a revival of Alexander Hamilton’s National Bank) in 1816. But this new institution only compounded the problem by making risky loans, opening branches in the South and West where land fever was highest, and issuing a steady stream of paper notes, a move that increased inflation and speculation.

The Panic of 1819

The bubble burst in 1819, resulting in a prolonged downturn in the economy called the Panic of 1819. It was the first economic depression experienced by the American public, who panicked as they saw the prices of agricultural products fall and businesses fail. Prices had already begun tumbling in 1815, at the end of the Napoleonic Wars, when Britain began to dump its wartime surplus of manufactured goods at American ports, where they were sold for low prices alongside pricier American manufactured goods. In 1818, to make the economic situation worse, prices for American agricultural products began to fall both in the United States and in Europe; the overproduction of staples such as wheat and cotton coincided with the recovery of European agriculture, which reduced demand for American crops. Ultimately, crop prices declined by as much as 75%.

This dramatic decrease in the value of agricultural goods left farmers without income and thus unable to pay the debts they had accrued in purchasing their land. As they defaulted on their loans, banks seized their property. However, because the value of land had also decreased so drastically, the banks were left with farms they were unable to sell. Land speculators lost the value of their investments because they could not sell them for a profit. As the countryside suffered, hard-hit farmers ceased to purchase manufactured goods and factories responded by cutting wages or firing employees. This in turn caused urban industrial workers to also stop buying goods and to reduce their consumption of essential goods like food, which cycled back in a vicious loop to the newly bankrupt farmers.

In 1818, the Second Bank of the United States needed specie to pay foreign investors who had loaned money to the United States for the Louisiana Purchase (President Jefferson’s purchase from France of much of the last west of the Mississippi River in 1803). The bank began to call in the loans it had made to state banks and required them to pay in gold and silver. State banks that could not collect loan payments from hard-pressed farmers could not, in turn, meet their obligations to the Second Bank of the United States. Severe consequences followed as banks closed their doors and businesses failed. Three-quarters of the work force in Philadelphia was unemployed, and charities were swamped by thousands of newly destitute people needing assistance. In states with debtors’ prisons, the incarcerated population swelled. As a result, many states drafted laws to provide relief for debtors. Even those at the top of the social ladder were affected by the Panic of 1819. Thomas Jefferson, who had cosigned a loan for a friend, nearly lost Monticello when his acquaintance defaulted, leaving Jefferson responsible for the debt.

In an effort to stimulate the economy in the midst of the economic depression, Congress passed several acts modifying land sales. The Land Law of 1820 lowered the price of land to $1.25 per acre and allowed small parcels of eighty acres to be sold, making it easier for ordinary citizens to become property owners. The Relief Act of 1821 allowed Ohioans to return land to the government if they could not afford to keep it. The money they received in return was credited toward their debt. The Relief Act also extended the credit period to eight years. States, too, attempted to aid those faced with economic hard times by passing laws to prevent mortgage foreclosures so buyers could keep their homes.

As a result of the 1819 Panic, many states passed laws that regulated banking practices and required banks to balance the amount of paper notes they issued with the amount of specie they kept. These were some of the first banking regulations in the US. The Panic of 1819 precipitated an era of “free banking” in the mid-1800s, culminating in the National Banking Acts of 1863 and 1864, which were an early attempt at federal banking oversight. Along with the new regulations on banks, Americans made the best of the opportunities presented in business, in farming, or on the frontier, and by 1823 the Panic had ended. The recovery provided ample evidence of the vibrant and resilient nature of the American people.