The Panic of 1819: America’s First Great Depression

By Stephen W. Campbell

S

tudents of economic history in the early American republic often equate the Panic of 1819 with the name Murray Rothbard, the famous libertarian economist who wrote the definitive account of this subject as his 1962 doctoral dissertation. After nearly six decades, we finally have an update in Andrew Browning’s The Panic of 1819: The First Great Depression, the publication of which fell on the 200th anniversary of this watershed event. The panic, Browning argues in this ambitious and lively narrative, “gave the country its first experience of nationwide waves of bankruptcies, business failures, foreclosures, and unemployment,” and became “the first of the series of financial crashes and economic depressions that have since recurred at regular intervals” (p. 3). Earlier crashes had mostly affected the wealthy, he says. By 1819, however, the economy was more connected through interregional and global networks. This depression was noteworthy for afflicting all economic classes and regions (p. 49, 190).

Browning’s telling of this story begins with Napoleon. While Jefferson’s deal with the French emperor for the Louisiana Purchase in 1803 was a steal by any measure, the United States lacked the hard currency to pay up front. To raise this money, the U.S. Treasury borrowed $11.25 million from domestic and foreign investors by issuing bonds bearing six percent interest (p. 20). The U.S. would have to pay the first installment in gold to France by December 1818. As the Treasury Department’s fiscal agent, the Second Bank of the United States (BUS) was tasked with making this transfer, though coming up with this sum on time involved some drama and last-minute negotiating.

The British put an end to Napoleon’s rule in 1815, but soon found themselves mired in a post-war depression. Fears of social and economic unrest rippled throughout the community. To keep their factories operating and prevent further militancy among the ranks of the unemployed, British business leaders started producing and exporting large quantities of manufactured goods, dumping them on American shores.

While American consumers welcomed access to cheap goods, producers sought protection from job losses through higher tariffs. It is here, in New England and the mid-Atlantic states in 1815 and 1816, that Browning identifies some of the first warnings of panic. The post-war slump that struck the Northeast would eventually spread to cities like Pittsburgh and down the Ohio River to Lexington, Kentucky, harming nascent manufacturing sectors in the areas (p. 40-43).

The Land Bubble in the West

In the meantime, a number of different factors were coming together to inflate a land bubble in the West. The massive eruption of a volcano in Indonesia — which was 100 times more violent as the eruption of Mt. St. Helens in 1980 — created a thick atmospheric haze so disruptive to global weather systems that 1816 was remembered as “the year without a summer.” This was further complicated by poor wheat harvests in Europe, which raised prices (p. 75). Repelled by the unusually cold temperatures and attracted by the prospect of profiting from high prices, New England farmers moved West in large numbers to buy land at cheap rates. In the Old Southwest the three mutually intertwined commodities were land, cotton, and slaves, the sales of which were financed by public-private banks in a process that continually expanded so long as the price of cotton in Liverpool remained high.

What generations of historians have described as the creation of a more integrated domestic market and an accompanying revolution in transportation were, according to Browning, enabled by a revolution in corporate charters. More than their British counterparts, Americans in the early republic chartered limited liability corporations for cities, canals, turnpikes, manufacturing companies, and banks (p. 66).

Fueling the land frenzy was an explosion in the number of banks, only some of which were faithfully redeeming their bank notes in specie on demand. Some 200 banks were open for business at the conclusion of the War of 1812 whereas only three existed at the founding of the nation (p. 36). Federal legislation enacted in 1800 allowed farmers to buy land on credit for the first time at the low price of only two dollars per acre. The plan was for farmers to pledge one-quarter of the money they owed up front with the expectation that profits from the sale of commodities at high prices would allow them to comfortably pay back the remainder in four years (p. 93). Of course, this plan could only work if commodity prices remained high and the bank notes farmers used to pay for their land retained their value, neither of which were true. Falling prices made it difficult, if not impossible, for farmers to meet their obligations while land offices and the Treasury Department were stuck with depreciated banknotes issued by western banks.

The Second Bank of the United States

Irresponsible practices at the BUS reinforced to this disorderly state of affairs (p. 109). During the first few years of its existence, the Bank was chronically low on specie, which it needed to pay off the Louisiana Purchase, regulate the lending practices of state banks, and uphold the reliability of the nation’s currency. Its southern and western branches contributed to the land boom through millions of dollars of loans. The BUS notes emanating from these loans eventually worked their way eastward, where merchants exchanged for them for specie. But this only depleted the Bank’s reserves and forced the institution to purchase gold and silver from abroad (p. 150-153).

When the Bank’s senior officers in Philadelphia attempted to remedy this situation by ordering their subordinates at the southern and western branches to curtail lending, their subordinates defied them! Only a painful and controversial policy of contraction, the Bank’s leadership concluded, would restore specie to the Bank’s vaults.

Therefore, the Second Bank stopped renewing long-term loans and called on state banks to redeem their notes in specie, which in turn forced state banks to demand specie from their borrowers. After considerable resistance from below, the Bank eventually acquired more specie, but not without significantly damaging its reputation and not without destabilizing local economies in places like Louisville and Cincinnati. Through foreclosure the Bank ended up owning over half of Cincinnati’s real estate (p. 222-229). The amount of currency in circulation nationwide shrank to half of what it was before the BUS was chartered (p. 158). Deflation ensued. Perhaps a third of the country’s banks failed, a level of economic destruction that would only be matched by the Great Depression of the 1930s (p. 174-178).

While previous scholars like Rothbard have placed considerable blame on the BUS for causing the panic, Browning sees multiple factors at play. There is no question, Browning posits, that the Bank magnified the bubble and subsequent crash, “but it was not responsible for creating either the commercial depression in the Northeast that came with the dumping of imports in 1815 or the swarm of state-chartered (and unchartered) banks that was already flooding the country with unsupported banknotes well before the BUS opened in 1817” (p. 357). Nor did the BUS play a central role in the decline of commodity prices since the Bank was still expanding when the decline began (p. 100).

Browning pays close attention to crop exports because the United States economy was still predominantly agricultural. Wheat prices dropped steadily after 1817. Cotton, too, fell over 50% in 1819 in no small part because Britain received bountiful imports from both the U.S. and India (p. 116-119). The collapse of both commodities helped burst the land and credit bubbles in the West.

The second half of this book deals with the on-the-ground experiences and long-term political consequences of the Panic of 1819. Land sales, almost always linked to commodity prices, plummeted. Merchant banking houses failed, factories went idle, GDP per capita dropped, and perhaps 20% of wage earners nationally became unemployed (statistics from this era are very tentative and imprecise). The prospect of the federal government assuming a major role in supporting unemployed workers would not transpire until the 1930s, and as an example of this, Browning points out that American presidents like James Monroe could remain popular while staying aloof from the economic concerns of ordinary Americans. The prevailing assumption was that almshouses, municipal governments, charities, and non-governmental organizations operating at the local level would address the sufferings of the dispossessed (p. 252).

The Political Consequences of the Panic of 1819

The panic’s political consequences were numerous and widespread. Bankruptcy laws took on a special urgency in a time when debtor’s prison was common. In Boston alone, some 3,500 people were imprisoned for debt between 1820 and 1822 (p. 189). State politics in places like Missouri and Kentucky became focused on debtor relief with loud voices in public meetings decrying the increasing scarcity of money (p. 260). Against these interests were folks like Henry Clay and Daniel Webster, both on retainer for the BUS at various times, and those who sought to uphold the sanctity of contracts and interests of creditors. The relief controversies presaged many of the political battles of the Jacksonian era (p. 218).

1819 was one of those years in which a perfect storm of events came together to alter the nation’s political trajectory irrevocably. Not only did it awaken political activism, but it amplified latent feelings of sectionalism that would eventually culminate in civil war (p. 321). Each region responded differently to economic dislocation. Westerners clamored for more federal funding for internal improvements, while those in mid-Atlantic states like Pennsylvania sought higher tariffs to protect manufacturing (p. 227). Most ominously, southerners became increasingly alarmed.

A series of Supreme Court decisions at this time—the unanimous McColluch v. Maryland decision being the most famous—upheld the National Bank’s constitutionality. Chief Justice John Marshall’s nationalistic jurisprudence seemed to trample upon states’ rights and the compact theory of the Constitution, leading many white southerners to fear for the security and viability of their “peculiar institution” (p. 328).

When one views McColluch within the context of divisive congressional debates over the extension of slavery in Missouri, a bevy of political and financial scandals that flew in the face of republican virtue, and falling cotton prices that led enslavers to feel that the continued expansion of slavery was the only path forward, it is easy to characterize this moment as “the era of bad feelings.”

Conceptualizing the Panic of 1819

How Browning conceptualizes and periodizes the Panic of 1819 is interesting. The panic was not a single event like “Black Tuesday” in 1929, but a multifaceted, nationwide phenomenon whose symptoms could be felt for a decade-long period (p. 4). Browning’s telling is not strictly chronological and there may be good reason for this. Financial and political systems were much more decentralized compared to today. It could take several weeks for news to travel the country — a feature that historian Jessica Lepler also highlighted in her study of how Americans experienced the Panic of 1837. Indeed, it does not always make sense to write history in the strictest chronological sense when life itself is seldom experienced this way.

The fascinating topics explored in this book raise a number of important questions, at least a few of which are cause for careful consideration. Did the panic really shape politics to the degree that the author contends? Was Andrew Jackson really “swept into office on an anti-banking tide” when we know that voters also preferred favorites sons and personalities (p. 131)? To write that “The Second Party System, Whigs and Democrats, was the product of the divide that had grown out of the Panic of 1819” (p. 293) is plausible, and perhaps even mostly true, but it is also to phrase things too strongly when one remembers that the Whigs did not formally organize as a party until 1834 and that there were plenty of pro-bank Jacksonians.

Similarly, Browning interprets the Panic of 1819 as initiating a religiously-inspired movement in which middle classes began to blame poverty not on larger structural forces but on individual choices and inner moral failings — a sentiment that was reinforced by the hardcore individualism of the Second Great Awakening (p. 186). For Browning, Ronald Reagan’s infamous stereotype of the “welfare queen” was a long-term consequence of this discourse (p. 275). In both instances, the author may be overstating the importance of 1819 as a driver of later events.

Research-wise, Browning grounds his arguments in a wide array of contemporary newspapers and legislative reports with added insights from biographies and treatises. Salient passages are culled from the public and private utterances of major political and financial figures of this era with a few nods to archival manuscript collections. It is rare when a book offers both breadth and depth without getting excessively long. Both qualities are observable here, but the emphasis seems to be on the former.

Historiographical Contributions and Questions

Documenting the effects of the Panic of 1819 in virtually every state necessarily requires one to favor breadth at the cost of depth and yet, there are quite a few claims and passages taken from secondary works, perhaps a bit more than one would expect from a monograph founded on archival mastery. It might be fair to characterize this book as combining elements of a monograph and synthesis.

There are abundant citations to secondary works published prior to 1945, which is somewhat understandable given the nature of the topic and subfields. Yet curiously absent from Browning’s lengthy bibliography are a host of relevant scholars with more recent publications. Just a few of them include Peter Austin; Ed Baptist; Ed Balleisen; Hannah Farber; Josh Greenberg; Alejandra Irigoin; Eric Lomazoff; Stephen Mihm; Brian Murphy; Sharon Ann Murphy; Daniel Peart; Gautham Rao; Seth Rockman; Caitlin Rosenthal; Joshua Rothman; Richard Salvucci; Calvin Schermerhorn; and many others.

One has to wonder what Browning thinks of the recent controversies involving the history of capitalism subfield. There is even one scholar in California who has grappled with many of the same issues in Browning’s book. If only I could remember his name (hint, hint). The intent here is not to be nitpicky, nor to fall into the trap of “this isn’t the book I would have written.” Rather, it is to offer a fair-minded assessment that there may have been a missed opportunity in not linking this material to other historiographical conversations and questions.

One theme that stands out in The Panic of 1819 is the ubiquity of corrupt practices within the revolving doors of business and politics that would be manifestly illegal today (p. 299). The shenanigans at the National Bank’s Baltimore branch were illustrative. A few of the branch’s officers and directors approved loans to themselves, using BUS notes to speculate in BUS stock. Such embezzlement and fraud involving unsecured loans totaled several million dollars (p. 165, 314). While it is true that banking theory was primitive and largely unknown to most bank directors at the time, it is also true that bank officers brazenly invented loopholes to concentrate stock ownership in a few hands and otherwise ignored clauses that were clearly stipulated in their banks’ charters (36, 147-154). Quite a few people, it seems, went into banking not to facilitate trade and promote economic growth but to oversee a pot of money from which they could draw funds to finance their own schemes. Much like a criminal who always stays one step ahead of law enforcement, financiers invented schemes faster than state legislatures could regulate them (p. 36).

An impressive amount of historical content and knowledge of the policy positions of the key movers and shakers of the antebellum era went into The Panic of 1819, a quality for which Browning should be commended. He successfully ties together a complex set of domestic and international factors to explain this exciting material with smooth prose and skilled narration. To add, the author has an eye for arresting passages and humorous anecdotes. This book is sure to elicit lively discussions of the political and economic history of the early republic.

About the Author: Stephen Campbell is a historian, author, and lecturer who teaches in the history department at Cal Poly Pomona. He holds a master’s degree in history from CSU Sacramento and a doctorate in history from UC Santa Barbara. A California native and early-19th US scholar who specializes in political and economic history, Campbell has authored several peer reviewed articles and has been teaching college-level history courses since 2007. His book, The Bank War and the Partisan Press: Newspapers, Financial Institutions, and the Post Office, has recently been published by the University Press of Kansas. Stephe also maintains a website at: http://www.historianstevecampbell.com. Follow Stephen on Twitter at @Historian_Steve.