The Panic of 1819: The United States’ First Great Depression

The Panic of 1819 is considered the first Great Depression in the US. Along with the Banking Crisis of 1819, it was a nationwide economic crisis that left a lasting imprint on the country.

It had its roots in many factors, including the Louisiana Purchase, Westward Expansion, loose bank lending practices, reduced wartime production after the War of 1812 ended, and rising unemployment.

Let’s take a look at how and why it happened.

The Louisiana Purchase

On November 10, 1803, President Thomas Jefferson purchased over 800,000 square miles west of the Mississippi River basin from France for $15 million. 

This purchase was called the Louisiana Purchase. On October 25, 1803, the House approved the motion for the purchase with a 90 to 25 vote.

The territories that the Louisiana Purchase covered included present-day Louisiana, Iowa, Missouri, Oklahoma, Kansas, Arkansas, Nebraska, and South Dakota. It also encompassed parts of Montana, North Dakota, Wyoming, Minnesota, Colorado, New Mexico, and Texas.

Westward Expansion in the United States

The new land holdings of the United States encouraged settlers from the East Coast to head West. From 1804 to 1806, the Lewis and Clark Expedition surveyed the new regions and created maps of those areas.

As settlers traveled toward the west of the Mississippi River, many of them started debating the issue of allowing slavery in the new lands under the Louisiana Purchase. 

The United States Congress adopted the 1820 Missouri Compromise to maintain the balance between slave states and non-slave states.

It decreed that Maine would be a free state while Missouri would be a slave state. It also stipulated that the lands to the north of Missouri’s border in the south would be non-slave states.

The idea of “Manifest Destiny” postulated that the United States was destined to expand from the Atlantic to the Pacific Ocean. It was a popular notion in the early 1800s. By 1840, around 7 million Americans, which roughly constituted 40% of the United States population, lived west of the Appalachian Mountains.

Background for the War of 1812

In the early 19th century, French emperor Napoleon Bonaparte was at war with Great Britain. During the conflict, Great Britain and France prevented their enemies from trading with the United States to cut off supplies.

In 1807, Great Britain published the Orders in Council. These orders stipulated that neutral countries had to get a license from it to trade with France or its colonies. 

Great Britain also used impressment or crimping (forcing seamen from American ships to serve the British Royal Navy). This further agitated the United States.

In the same year, President Jefferson issued the Embargo Act to penalize warring nations for interfering with American trade. The Act’s various trade restrictions led to unemployment in the United States and badly affected its economy.

In 1809, the United States rescinded the Embargo Act and instead enacted the Non-Intercourse Act. This act prevented the country from trading with France and Great Britain. 

In 1810, Congress enacted a bill that stated that the United States would continue trading with either country if they removed their trade barriers.

The next president, James Madison, discontinued trade relations with Great Britain after Napoleon declared that France would drop its restrictions. 

Meanwhile, new Congress members wanted to wage war against Great Britain for impressment and goading Native Americans to push back against Westward Expansion.

The War of 1812

On June 18, 1812, the United States officially declared war against Great Britain. It first attacked the British colony of Canada. Commodore Oliver Hazard Perry won many battles against the British in the Northwest Territory. But the costs of war increased the federal government’s debt and resulted in budget deficits.

In 1814, the British defeated France and directed their war efforts toward the United States. On August 24, 1814, it burned down the White House and the Capitol. Despite these events, the United States Navy continued its winning streak.

In 1814, both countries finally entered peace talks. Great Britain pledged to stop its attempts at building a Native American state in the Northwest Territory. It also relinquished its claims on Canada. On December 24, 1814, the Treaty of Ghent put the War of 1812 to an end.

The Era of Good Feelings

After the 1812 War ended, the United States witnessed a short period of economic boom. This period was called the Era of Good Feelings. During the conflict between France and Britain, their reliance on American goods led to the prosperity of the American economy. But the end of the war saw a fall in foreign demand for these goods.

Meanwhile, Americans bought land in the West at extravagant rates. In 1815, they bought around one million acres from the United States government. By 1819, this figure had spiked to 3.5 million acres.

Lax Lending Policies

As settlers eagerly proceeded West, they began using credit lines to buy land they couldn’t afford to purchase outright. The Bank of the United States, and state and private banks started engaging in loose lending practices. 

They released too many banking notes and credit lines that didn’t have the backing of hard currency.

The influx of credit and increased property buying drove prices up and led to high inflation. The newly formed Second Bank of the United States reduced the money supply to counteract soaring prices. It also started calling in loan payments. Other banks followed suit while people didn’t have the finances to repay their debts.

One of the reasons for the lack of money among people was the dramatic fall in cotton prices. This led to financial losses for cotton farmers. Moreover, as the young economy was highly dependent on cotton, it also faced a downturn.

Meanwhile, non-repayment of debts led to the foreclosure of farms and bank failures, which caused the Banking Crisis of 1819. The financial turmoil led to the Panic of 1819.

McCulloch v. Maryland

In the face of reduced credit lines, many states started levying taxes on the Bank of the United States. 

They hoped that implementing taxes on the federal bank would help them get hold of some liquidity. They could then use those funds to provide loans to their citizens and relieve the shortage of money.

But in the 1819 case of McCulloch v. Maryland, the Supreme Court ruled that the federal government and its institutions should have a higher status than state governments. 

So, the federal government was allowed to levy taxes on state and private banks. In contrast, states didn’t have the power to tax the Bank of the United States. 

Meanwhile, the United States government introduced the Land Act of 1820, which reduced property prices. It also passed the Relief Act of 1821, which offered loan credits for land returned to the government.

These acts aimed to reduce some of the farmers’ hardships. Unfortunately, despite a slight alleviation in farmers’ sufferings, economic chaos reigned.

The Impact of the Panic of 1819

The scope and impact of the Panic of 1819 were disastrous as it spread like a plague across the nation. Property values fell across the United States while unemployment and urban poverty rose drastically. Debtors’ prisons also became overcrowded.

Thousands of Americans who couldn’t pay off their mortgages had to surrender their lands. Many factory owners found it difficult to compete with well-established European factories. The American public also couldn’t afford the manufactured goods from the factories owing to the lack of money in circulation.

To address poverty, newspapers started appealing to citizens to donate old clothes and shoes to the destitute. 

Municipal governments and churches also set up soup kitchens to provide food for the poor.

Some cities witnessed bankruptcy sales nearly every day and a rise in idle factories. 

Protests among debtors also grew, with many of them demanding “stay laws” so that they could get relief from their debts. They also called for a ban on debtors’ prisons.

Manufacturers clamored for greater protection from imports. Meanwhile, many southerners felt that the cause of all their problems was high tariffs that made the prices of imports shoot up and decreased foreign trade.

Many Americans campaigned for curtailment in the costs of government as well as federal and state budgets. Others, especially those in the West and South, criticized the country’s banks and the Bank of the United States’ tight-money policies for causing the panic.

The End of the Panic of 1819

By 1823, the panic subsided. But its political effects lasted many decades. The American public pressed for the democratization of state constitutions and the end of limitations on voting and holding office. 

There was also increased hostility toward banks, large corporations, and monopolies.

The Panic of 1819 also aggravated friction within the Republican Party. Moreover, it heightened sectional divisions as northerners demanded an increase in protective tariffs while southerners were against nationalistic economic programs.

The country’s financial chaos increased the popularity of future President Andrew Jackson. He fiercely opposed the Bank of the United States, which caught the interest of many Americans. 

They saw him as a man of the people and supported him in his political campaigns, changing the face of American politics.


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