The Panic of 1819
[Libertarian Review, August 1975.]
Though short-shrifted in most history books, the Panic of 1819 was an unforgettable nightmare for early Americans. Banks throughout the country were unable to make good on customers' claims for specie and were forced to close their doors. Creditors foreclosed on deeply indebted farmers, city dwellers, and speculators who had bought cheap public land. Wages as well as prices dropped precipitously. Interest rates climbed and people moaned over the "scarcity of money." Utmost in the minds of American leaders and influential journalists was the question, "Why did the boom die?"
The Panic of 1819, Murray Rothbard's incisive and extremely well-styled Columbia University dissertation, provides an answer and a fascinating history of the era.
The panic and depression were a result of a huge monetary inflation. After the War of 1812, the economy flourished, as loosely chartered State banks issued redeemable notes far beyond specie. The quantity of money multiplied rapidly. In 1815 alone, bank notes increased from $46 million to $68 million.
Eventually, bank notes began selling at a discount, as foreigners and money brokers profitably claimed the notes for specie. In addition, the Bank of the United States' began to call on branches to redeem other bank obligations. The monetary expansion ended abruptly and a wave of bankruptcies ensued.
Although the 1819–1821 depression was relatively short-lived, Rothbard shows how the panic served as an important training ground for future American leaders. It was during this period, for example, that General Andrew Jackson grew extremely suspicious of banks. There is little doubt that Jackson's vehement opposition to the Second Bank of the United States grew out of this experience. Other important contemporary figures, such as Martin Van Buren, William Henry Harrison, and Davy Crockett (who called the banking system a "swindling"), also gained prominence at this time as a consequence of their opposition to wildcat banking.
One of the most interesting parts of Rothbard's history presents the views of the founding fathers who lived through the Panic of 1819. Thomas Jefferson is referred to as the "most thorough-going opponent of bank credit," favoring the "eternal suppression of bank paper." Jefferson believed that only specie should be allowed to circulate. Jefferson's son-in-law, Governor Thomas Randolph, was in support of a 100 percent specie standard. James Madison regarded banks as "harmful" institutions. And John Adams, whose views on banks were nearly identical with Jefferson's, regarded paper money beyond specie as "theft." Although such views as the 100 percent specie standard are considered repugnant and taboo to most economists today, it is interesting and significant that such views were generally held by the founding fathers.
Another fascinating aspect of Rothbard's research is the debate that raged between the inflationists and the hard-money advocates during the depression. Some public figures spoke out for public works projects and relief for the poor. Some states enacted legislation to keep creditors from foreclosing on debtors (stay laws and minimum appraisal laws). Others blamed the depression on the contraction of the money supply and enacted laws to "prime the pump" in an effort to reduce interest rates and stimulate business. On the national level, vain efforts were made to issue a currency unbacked by gold or silver. Finally, some blamed the depression on foreign imports and sought a high protective tariff.
But unlike today, the deflationists and hard-money men had the upper hand. As a result, the depression ended rather quickly (by 1821) when confidence in currency was restored and currency once again was redeemable in specie.
Now, to paraphrase George Santayana, if only we could learn from history instead of repeating it.