The Panic of 1819's Lasting Effects on America Leading to the Civil War

The Panic of 1819's Lasting Effects on America Leading to the Civil War

US History 1 Honors

March 15, 2013

The Panic of 1819 was America's first great depression. It was caused by inflation and speculation because of bad and weak loans, public debt from the War of 1812, the Second Bank of the United States, and rapid population growth. The effects this depression had on America included cotton production decline, bank failures, mortgage foreclosures, and mass unemployment. The Bank of New York, the Second Bank of the United States, and the Bank of Kentucky activated policies to help the economy. President Monroe cut salaries and government spending to help America recover from this depression. The Panic also helped result in the separation between North and South. Banking systems and financial policies were forced to change. The Panic can be important for current and future studies. America was affected greatly by The Panic of 1819, through the change of banking systems and financial policies, which helped lead them to the Civil War.

The Panic of 1819 was the result of the debt from the War of 1812, rapid population growth in the West, and bad decisions by the Second Bank of the United States which caused inflation and real estate speculation. After the War of 1812, America raised prices of agricultural commodities because they were high demand in Europe and to attempt to pay off the debt from the war, which led to the rapid population growth in the West due to virgin, cheap land. The victories of European American settlers over American Indian tribes freed land beyond the Appalachians for settlement. The creation of a public land system induced huge numbers of people to leave their old homes along the eastern seaboard and seek new homesteads. In 1815, Americans purchased roughly one million acres of land from the federal government. The federal government did not allow Americans to buy land on credit so state and private banks sent out banknotes (loans).The high price of cotton production was also a huge contributor for why people moved out west.

The Panic of 1819 was not caused by either a specific internal or external action but was rather the result of a chain of events. Unlawful decisions by the Second Bank of the United States caused inflation and real estate speculation. These are the Second Bank of the United States' rights described by Clement Juglar.

On the 15th of February, 1815, an effort was made to re-establish for the second time a United States Bank. It was authorized on the 10th of April 1816, the Act permitting the formation of a company, with a capital of $35,000,000, divided into 350,000 shares of $100 each, of which the Government took 70 shares and the public 180,000 shares. These last were payable in $7,000,000 of gold or silver, of the United States of North America, and $21,000,000 in like money, or, in the funded debt of the United States either in the 6 percent. It had no right to contract any debt greater than $35,000,000, more than its deposits, unless by special act; the directors were made responsible for every violation, and could be sued by each creditor. The bank could lend no more than $500,000 to the United States, $50,000, to each state, and nothing to foreigners.

The Second Bank of the United States was made a company now and was made up of 350,00 shares of $100 each. They could now only lend $500k to the U.S., $50k to each state, and nothing to foreigners. This Second Bank of the United States was created to offer a common national currency by printing money backed by specie (gold) and to replace the old Bank of the United States. This was intended to replace all the money printed by state banks. The Second Bank of the United States had the advantage of opening a branch anywhere in America. The numbers of branches were established in the new states by the Second Bank of the United States. They lent money to state banks and private banks that were in debt, this only gave those banks more room to borrow and expand. This help from the Second Bank of the US created an economic boom and introduced investment banking. This was the start to the present New York Stock Exchange in 1817. To serve the needs of this new wave of immigrants to the West, the newly created western states authorized numerous state banks. These supplied immigrants with credit in the form of state banknotes. The Second Bank of the United States issued these banknotes freely. The Second Bank of the US was created to stop irresponsible practices by state and private banks but as the economy grew, the politicians encouraged banks to continue their policies. By 1818 leaders began to realize that these irresponsible expansions of the money must stop soon or it will lead to a gigantic bust. The Second Bank of the US asked for outstanding loans and credit to be paid back. Land owners then had to sell their land to pay off their debt they had with the banknotes. In result of this, cotton prices fell dramatically. The state and private banks had no money to repay their loans and they failed. As early as 1814, Thomas Jefferson warned, "We are to be ruined by paper, as we were formerly by the old Continental paper." Although people moved out West to make money with cotton production, they lost everything in the end and became in debt with the banks.

The effects the Panic of 1819 had on America were that prices of cotton production declined, banks failed, mortgage foreclosure, and mass unemployment occurred. Banks closed and the economy plummeted. The banks closed because bank notes that were approved by the Second Bank of the United States spread widely among immigrants to new public lands, resulting in significant inflation. Debtors did not have enough money to pay back their debt which forced banks to close and debtors to lose their land. With gold reserves depleted many American banks failed and other businesses followed because they could not pay off their debt they owed to the banks. This then assisted in the higher cotton production costs because debtors in the West and South had to sell their land. When U.S. cotton prices crashed in January 1819 after British investors switched to Indian cotton, America's main resource, production of cotton, dropped in price because fewer farms were open and running. By early 1819, credit was unavailable to many Americans. Because of this, sales of public lands plummeted, unemployment soared, and in some regions food and other basic necessities were difficult to come by because many were broke and had no money. The scarcity of these items was high. The unemployment rate in Philadelphia reached 75 percent. Unemployed