How did the government fix the Panic of 1819?

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.

There were three key causes of the Panic of 1819 - inflation, public debt from the War of 1812, and the Louisiana Purchase in 1803 by President Thomas Jefferosn. The Panic had a lasting affect on the American banking system and directed attention to the crucial 1819-1821 session of the U.S. Congress. Many of the changes and attempted changes to American financial policies during this economic crises would feed Southern sectionalism that led to the American Civil War.

The War of 1812 altered the economic pattern of production in a way very different from what would have evolved in the absence of war, and thus it placed the economy on a sandy foundation, vulnerable to distress when the war ended. Indeed, it was in this boom phase that the New York Stock Exchange was founded in 1817 - born in a bubble.

So, when peace did come, the revival of foreign trade began to reverse some of the trends started during the war. Swelling imports led to falling commodity prices. The influx of imports spelled trouble for war-grown manufacturers, especially textiles, which suddenly had to face the onrush of foreign competition.

Prices throughout the United States had been rising dramatically since shortly after the end of the War of 1812, mostly caused by the United States government's attempt to pay off the war debt. Since the war debt was mostly held by Americans, payment in currency, now deflated in value, was legal. In 1816, the Second Bank of the United States was formed, but it continued to feed the expansion by having significantly more money in circulation than it had in gold reserves.

Beginning in 1818, the bank moved from an expansionary stance to a deflationary stance to combat the rampant inflation and to pay off the nearly four million dollar debt associated with the Louisiana Purchase. Since this debt was mostly held by people outside the United States it could not be paid by inflated currency. It had to be paid out of the species reserves, which were very low in relationship to the currency outstanding. To increase its specie reserves, the bank switched from what is generally characterized as a pro-inflation stance to a pro-deflation mode in July of 1818, although the managers did not foresee the massive contraction their movement from paper currency to hard currency would create. By curtailing the outflow of hard currency in 1818, the Second Bank of the United States significantly reduced the ability of the state banks to stay solvent.

In essence this movement curtailed expansion over the next year and put pressure on the state banks. First in the system to have problems was the State Bank of Kentucky, probably the weakest bank in the system. Other banks, mostly in the West and South also had problems. Anti-bank sentiment rose throughout the United States. Future president William Henry Harrison, then a Ohio state congressman, declared "I hate all banks..."

One of the ways the United States raised money before the American Civil War was the sale of public land, making voters debtors. There were so many of these debtors that they could influence politicians, who in turn proposed debtor relief bills in Congress. In his 1820 address to Congress, President James Monroe got on the bandwagon, endorsing the third, and most substantial debt relief package. A month later, Secretary of the Treasury William Crawford laid out the details for relief of the debtors. Two months later the bills were passed and signed by the president. The result was chaos.

Suddenly debtors realized their political power and set about on a state level to relieve more of their debt. One of the problems, though, was who got the relief. In many cases the original land owner had sold all or a portion of the land without paying off the original debt. Should the debt relief be paid to the original owner or current owner? In general, states in the South and West passed debt relief measures while northern states held back some or all of these laws. In the end the non-speculative public was forced to foot the bill for the debt-laden speculators.

As land was sold to pay debts the price began to fall, precipitating a drop in general prices. The South, a one-crop economy, was devastated as cotton prices were cut in half in two years (1818-1820). Western expansion was curtailed when the U.S. government halted work on the National Road.

The National Road

With the price of land depressed and the United States government in need of cash, it sought more land to sell. One of the ways to get this land was through the annexation of states. When a territory became a state it would normally turn over an agreed on number of acres to the United States government, who in turn would sell the land to raise cash. In 1820, the U.S. annexed Missouri and Maine under the Missouri Compromise. For two years the economy was in a recession. In 1821, it began to grow again, although it would be until 1823 before this growth could be considered healthy.

In 1818, cotton commanded 30.8 cents per pound, but dropped to 12 cents per pound in 1823. From 1826 to 1832, it averaged about 9 cents per pound. Those who had purchased land and slaves at inflated prices found themselves in financial trouble. Deflation doubled the real dollar value of debts. Ezekiel Noble of the Abbeville District was forced to sell much of what he owned, including his household furnishings, to settle his debts. All he was left with was "a fine house... and nothing it it."

After the Panic of 1819, the U.S. Congress became more ecomomy minded. In 1824, they passed a new tariff law. The Tariff of 1824 was a protective tariff in the United States designed to protect American industry in the face of cheaper British commodities, especially iron products, wool and cotton textiles, and agricultural goods. The second protective tariff of the nineteenth century, the Tariff of 1824 was the first in which the sectional interests of the North and the South truly came into conflict.

The Tariff of 1816 eight years before had passed into law upon a wave of nationalism that followed the War of 1812. But by 1824, this nationalism was transforming into strong sectionalism. Henry Clay advocated his three-point "American System," a philosophy that was responsible for the Tariff of 1816, the Second Bank of the United States, and a number of internal improvements. John C. Calhoun embodied the Southern position, having once favored Clay's tariffs and roads, but by 1824 opposed to both.

He saw the protective tariff as a device that benefited the North at the expense of the South, which relied on foreign manufactured goods and open foreign markets for its cotton. And a program of turnpikes built at federal expense, which Henry Clay advocated, would burden the South with taxes without bringing it substantial benefits. Nonetheless, northern and western representatives, whose constituencies produced largely for the domestic market and were thus mostly immune to the effects of a protective tariff, joined together to pass the tariff through Congress, beginning the tradition of antagonism between the southern states and the northern states that would ultimately help produce the American Civil War.

The successor to the Tariff of 1824, the so-called "Tariff of Abominations" of 1828, was perhaps the most infamous of the protective tariffs for the controversy it incited, known as the Nullification Crisis.

The Nullification Crisis was a sectional crisis during the presidency of Andrew Jackson that arose when the state of South Carolina attempted to nullify a federal law passed by the United States Congress. The crisis developed during the national economic downturn throughout the 1820s that hit South Carolina particularly hard after the Panic of 1819. South Carolina’s attempt was based on a constitutional theory articulated by John C. Calhoun. He believed that any state could unilaterally, or in cooperation with other states, refuse to comply with any federal law which a convention selected by the people of the state ruled was unconstitutional. The theoretical issue related to the very nature of the United States Constitution. As historian Forest McDonald wrote, “Of all the problems that beset the United States during the century from the Declaration of Independence to the end of Reconstruction, the most pervasive concerned disagreements about the nature of the Union and the line to be drawn between the authority of the general government and that of the several states.” In this specific case, however, most states’ rights supporters outside of South Carolina considered the "nullifier position" to be extreme and rash.

Many South Carolina politicians blamed the state’s economic problems on a national tariff policy that developed after the War of 1812. The highly protective Tariff of 1828 (also called the "Tariff of Abominations") was enacted into law in 1828 during the presidency of John Quincy Adams. The tariff was opposed in the South and parts of New England. Opponents generally felt that the protective features were harmful to agrarian interests and were unconstitutional because they favored one sector of the economy over another. Proponents found no constitutional restriction on the purposes for which tariffs could be enacted. They argued that strengthening the industrial capacity of the nation was in the interest of the entire country. The expectation of the tariff’s opponents was that with the election of Andrew Jackson as president, the tariff would be significantly reduced. By 1828, South Carolina state politics increasingly organized around the tariff issue. When the Jackson administration failed to address its concerns, the most radical faction in the state began to advocate that the state itself declare the tariff null and void within South Carolina. In Washington, an open split on the issue occurred between President Andrew Jackson and Vice-President John C. Calhoun.

On July 14, 1832, after Calhoun had resigned his office, Jackson signed into law the Tariff of 1832, which made some reductions in tariff rates. The reductions were too little for South Carolina. In November of 1832, the state called for a convention. By a vote of 136 to 26, the convention overwhelmingly adopted an ordinance of nullification drawn by Chancellor William Harper. It declared that the tariffs of both 1828 and 1832 were unconstitutional and unenforceable in South Carolina.

In late February, the U.S. Congress passed the Force Bill (called "Jackson's Bloody Bill" or "War Bill" by opponents), which authorized President Andrew Jackson to use military force against South Carolina. Violence was averted when Henry Clay and John C. Calhoun worked out a compromise. Congress passed the new negotiated tariff satisfactory to South Carolina. The South Carolina convention reconvened and repealed its tariff Nullification Ordinance on March 11, 1833. “In a purely symbolic gesture,” it then nullified the Force Bill.

The crisis was over, and both sides could find reasons to claim victory. The tariff rates were reduced. The states’ rights doctrine of nullification as articulated by South Carolina had been “irretrievably smashed.” While tariff policy would continue to be a national political issue between Democrats and the newly emerged Whig Party, by the 1850s the intertwined issues of slavery and territorial expansion would become the most significant and sectionally divisive issues in the nation.

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