The City University of New York
A global credit crunch, widespread fraud, real estate speculation and Congressional shenanigans were all major players in triggering the financial crises of 2008 — and counting. But few people realize that Americans have experienced similar crashes of their economy long before — as author of Waking Giant, David Reynolds, explains.
All the way back during the Presidency of James Monroe, American workers got a harsh lesson in the vicissitudes of capitalism when the economy crashed. The Panic of 1819 initiated the nation’s first major depression. As in the case today, that crash, too, resulted from a confluence of national and international events. In the heady atmosphere after the War of 1812, both U.S. imports and exports surged.
This was the first of several severe downturns that would tarnish America’s otherwise vigorous economy throughout the 19th century.
As in the case today, that crash, too, resulted from a confluence of national and international events. In the heady atmosphere after the War of 1812, both U.S. imports and exports surged.
European demand for American goods, especially agricultural staples like cotton, tobacco, and flour, increased. To feed the overheated economy, state banks proliferated, and credit was easy.
The federal government offered for sale vast tracts of western lands, fueling real estate speculation funded by bank notes. Reserves of specie, or hard money, plummeted, especially in the West and the South.
As early as 1814, Thomas Jefferson warned, “We are to be ruined by paper, as we were formerly by the old Continental paper.” Two years later, he asserted that “we are under a bank bubble” that would soon burst.
The Second Bank of the United States was supposed to steady the economy, but gross mismanagement in its early phase sapped its effectiveness.
The bank’s first president, William Jones, instead of taking steps to regulate the nation’s currency, doled out huge loans that fed speculation and inflation. He also kept lax watch over state banks, where fraud and embezzlement created chaos.
A congressional committee’s proposal to terminate the nearly insolvent Bank of the United States had little backing — because 40 members of Congress held stock in the bank.
The bank’s problems arose at precisely the wrong moment, when the economy needed a firm rudder during its postwar expansion. Jones resigned and was replaced by the South Carolina congressman Langdon Chews — and later by the Philadelphia lawyer Nicholas Biddle.
Although the bank sharply contracted loans in 1818, the damage had been done. The Bank of the United States, far from helping the economy, was among the destabilizing forces that led to the depression of 1819.
At the same time, swelling crop yields in Europe reduced the demand for American farm products, whose prices plunged. An economic contraction in Europe led banks there to reduce credit. The crisis abroad, coupled with the contraction at home, forced American banks to call in their loans as well.
By early 1819, credit, once so easy, was unavailable to many Americans. With specie reserves depleted many American banks failed, and other businesses followed. Sales of public lands plummeted. Unemployment soared, and in some regions food and other basic necessities were difficult to come by.
Especially hard hit were cities outside of New England like Philadelphia, Pittsburgh, and Cincinnati. Farmers suffered too, though many survived by resuming a subsistence lifestyle.
With insolvency rife, prisons were overcrowded with debtors. The depression lingered for two years. It was the first of several severe downturns that would tarnish America’s otherwise vigorous economy throughout the 19th century.
The Panic of 1819 fostered mistrust of banks, bankers and paper money. The volatile Tennessee politician Davy Crockett spoke for many when he dismissed “the whole banking system” as nothing more than “a species of swindling on a large scale.”
The aging Thomas Jefferson complained that the new generation, “having nothing in them of the feelings or principles of ‘76, now look to a single and splendid government of an aristocracy, founded on banking institutions, and money incorporations... riding and ruling over the plundered ploughman and beggared yeomanry.”
This mistrust of corporations was aggravated by landmark decisions handed down in 1819 by the Supreme Court under Chief Justice John Marshall.
In Dartmouth College v. Woodward, the Supreme Court protected private corporations against interference by the state governments that had created them.
In McCullough v. Maryland, it ruled that the Bank of the United States, though privately run, was a creation of the federal government that could not be touched by the states.
These pro-capitalist court rulings aggravated class divisions, which escalated over the next decade. The 1820s saw the meteoric rise of Andrew Jackson, who defended working-class Americans against what he characterized as the oppression of a wealthy elite epitomized by the central bank.
The recession of 1819-1822, which was blamed largely on bankers, was one of the economic forces that made many Americans look to Jackson as the savior of the working class.
U.S. President Martin Van Buren’s optimism reflected the economic prosperity that had buoyed Jackson’s final years in office. Five weeks after his inauguration, that prosperity dissolved. David Reynolds explains how the ‘Panic of 1837’ initiated the worst economic depression the United States had yet known.
In 1836, the Bank of England, fearing a run on its deposits of specie (silver and gold), sharply contracted credit. British companies curtailed their business with the United States. Foreign demand for U.S. cotton plummeted, cutting cotton prices nearly in half.
Southern planters suffered and many northern companies associated with the cotton trade failed. The Specie Circular, which mandated that speculators could purchase public land only with hard money, caused a drain of specie from eastern to western banks.
In April 1837, world prices suddenly collapsed, creating a run on banks. On May 10, 1837, all banks in New York suspended specie payments — that is, they refused to redeem paper currency in silver or gold. Banks in New Orleans and other cities soon did the same.
The specie suspensions caused panic, which in turn led to widespread bank failures. The New York diarist George Templeton Strong said, of the banks, “So they go — smash, crash. Where in the name of wonder is to be the end of it?”
All told, around 40% of America’s 850 banks soon were out of business. Most sectors of the economy slumped. Business failure brought unemployment. By January 1838, half a million Americans were jobless.
The economy then briefly rebounded, but another contraction abroad brought on a second panic in October 1839, leading to four more years of depression.
Wholesale prices tumbled, and the nation’s money supply shrank. Imports plummeted, as did property values. America would not again see such deep, prolonged economic malaise until the Great Depression of the 1930s.
Predictably, President Van Buren was blamed for the downturn. Whigs insisted that Jackson’s reckless policies, carried forward by Van Buren, had wreaked havoc on the economy.
What was needed, they argued, was government-sponsored stabilization of the economy through a new national bank. As the “out” party, the Whigs profited politically from the depression, gaining in state elections at moments when it was especially bad.
Still, as the 1840 election approached, Van Buren had reason to be confident of re-election.
He had consolidated the Democratic Party. He had averted war and subdued sectional tensions. He had run a tight financial ship with the assistance of generally skilled administrators.
In his view, he had put the nation on a course toward economic recovery by divorcing the government from banking.
He did not seem to recognize the depth of the nation’s crisis. A much later Democratic presidential candidate would heed advice that should have been shouted in Van Buren’s ear: “It’s the economy, stupid!”
Despite the small upturn of the economy in the middle of Van Buren’s term, the nation had never seen such hard times as it did under him.
It was difficult for many Americans to fathom the withdrawal of the government’s money from many banks at a time when money was in such short supply.
The Whig arguments for an expanded currency, relaxed credit and governmental participation in everyday finance made sense at a time when scarcity reigned.
The Democrats’ largest base was among rural and urban workers. The Whigs appealed mainly to business interests in the North and plantation owners in the South, but also to some sectors of the working class.
Neither party was wholly “the people’s party,” though the Democrats had seized this image.
The turnout on election day was exceptionally strong. Voter participation, which had stood at 58% of eligible voters in 1836, reached an astonishing 80% in 1840, setting a pattern for high turnouts that continued through the 19th century.
Although the Log Cabin hoopla contributed to the excitement, recent historians have shown that it was the mass hunger for economic reform that brought out voters in unprecedented numbers. The Whigs surged to victory.