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Panic of 1819

Panic of 1819

Going through this summary of the Panic of 1819 will help you understand how the United States was subjected to its first financial crisis and also, what were its repercussions on the economy.
Abhijit Naik
Failed banks, widespread foreclosures, impaired agriculture sector and manufacturing industry, and large-scale unemployment and homelessness ... these were some of the predominant characteristics of the US economy during the Panic of 1819―the first major financial crisis in the American history. It was one of the most hard-hitting crisis that the nation had ever witnessed, largely because the national financial system was still in its infancy and never before had the Americans witnessed crisis of such magnitude in their country.

An Overview

The Panic of 1819 was the first major financial crisis or economic recession that the US economy was subjected to. This crisis occurred towards the end of the Era of Good Feelings in the first quarter of 19th century. The buildup of this crisis had begun with the War of 1812. In 1818, the British investors turned their attention towards the Indian subcontinent for cotton. This turned out to be a major trigger for large-scale panic among the masses, which eventually resulted in economic depression. It started with drastic fall in land prices across the United States, and went for the next three years till 1822. One thing led to another, and soon enough the entire economy had come to a standstill, even before the government could figure out what was happening.

Unlike the previous financial crisis that the nation was subjected to, the causes for this panic were rooted within the US economy. While the public debt of 1812 and Louisiana Purchase had its own share, the most prominent cause for the same was an irresponsible banking system prevailing in the country during this period, with the Second Bank of the United States at its forefront. In its attempt to raise money to pay off the debt that had accumulated after the War of 1812, the administration hiked the prices of goods, which, in turn, resulted in inflation. In the post-war US economy, the absence of a nationalized banking system gave state banks the power to print currency. With no monitoring authority as such, these banks pumped enormous amount of money in the economy, with no backing of any sort. Eventually, this became one of the most prominent causes for inflation in the country.

When the Second Bank of the United States came into existence, it walked on the same path as the state banks―towards economic expansion, as it added to nation's revenue. Only when it realized that the inflation is affecting the economy, it switched over from its expansionary stance to a deflationary stance in 1818, with the intent of curbing inflation. In a bid to control inflation, the Second Bank contracted the money supply and called in all the outstanding loans, which, in turn, resulted in failure of many state banks. As the British investors turned all their attention to their new colonies in Asia, it resulted in large-scale loss in the agriculture sector, which eventually resulted in a full-fledged financial crisis in the country.

The Panic of 1819 marked the end of the policy of economic expansion in the United States. Similarly, it had long-lasting effects on the banking system in the country. The new financial policies that followed were ideal for the economic development of the nation. The effects were most obvious in the southern and western states. In the field of politics, it allowed Andrew Jackson to strengthen his base in the nation. Most important of all, it was a lesson for American citizens who realized the importance of the government's role in their lives.

The crisis finally came to an end in 1823, but that was just one of the numerous financial crisis that the United States was subjected to during the 19th century. Other financial crisis of this period were the Panic of 1837, Panic of 1857, Panic of 1873, and the Panic of 1893. Even though the Panic of 1819 was not as intense as the Great Depression, which was the largest economic depression in the 20th century, it did replace the foundation of the US economy with a new stronger foundation.