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Crisis Chronicles: The Panic Of 1819 - America’s First Great Economic Crisis

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Authored by James Narron, David Skeie, and Don Morgan; via The NY Fed's Liberty Street Economics blog,

Blog_Panic-1819-United_States_Bank_Philadelphia_1875_450

As we noted in our last post on the British crisis of 1816, while Britain emerged from nearly a quarter century of war with France ready to supply the world with manufactured goods, it needed cotton to supply the mills, and all of Europe needed wheat to supplement a series of poor harvests. The United States met that demand for cotton and wheat by expanding agricultural production, facilitated by the loose credit policies of a growing number of lightly regulated state banks. Meanwhile, the Treasury needed revenue to pay off debts from the Louisiana Purchase and the War of 1812, so the government turned to selling land acquired in the Louisiana Purchase. But the increased agricultural demand and easy credit policies led to a speculative real estate boom, particularly in Alabama. So when the Treasury started to pay off its debts, the specie drain caused a painful but necessary contraction and the boom went bust. In this edition of Crisis Chronicles, we describe America’s first great economic crisis.

Loose Credit and Lax Standards
In the mid-1810s, the nation was still sparsely populated at just 7 million inhabitants, the economy was agriculture-based, specie was scarce, and barter was extensive on the frontier. While some cotton and wool was used for domestic mills in the Northeast, the majority was produced for export, with Boston, New York, and Philadelphia serving largely in an export/trade capacity.

     The nation was also in debt. The government had borrowed heavily to finance the War of 1812, and the debt payments for the Louisiana Purchase were looming. State banks issued their own paper money and specie payments were suspended in 1814. Without a requirement to convert notes into specie, expansionist Western banks issued notes far beyond their ability to eventually redeem them in gold or silver. But banks in the Northeast remained more conservative and were even reticent to lend to the government.

The Second Bank of the United States
The expansionist note issuance led to a chaotic money situation, with different notes from different banks trading at different discounts. As a result, many argued for creation of a second national bank (the first one had ceased operation when its twenty-year charter expired in 1811). The Second Bank of the United States was chartered with a primary goal to create a uniform national currency by printing paper money convertible into specie. But the Bank undermined its own credibility by accepting IOUs for capital, and it did little to rein in the expansionist money policies of the state banks. It even contributed to the monetary expansion, particularly in its western branches.

     But the loose monetary and credit policies spurred investment in transportation infrastructure, such as turnpike construction and shipbuilding, and in agriculture-based real estate. And while investors, merchants, and farmers took on debt, those investments were initially profitable, driven by the demand for cotton in the British mills, the demand for wheat across Europe, and the need for transport to deliver the goods to market. Specie payments resumed by 1817, if only on a nominal basis, from the state banks.

An Unlikely Epicenter of the Boom
By 1818, the economy was growing fast. As Glaeser notes in his recent work on real estate speculation in American history, “The epicenter of the boom, Huntsville, combined excellent cotton-growing soil with access to the Tennessee River, which brings access to the Ohio River, the Mississippi River and ultimately, the Gulf of Mexico. Transportation was the key to making frontier land valuable, and water was the key to transportation.” Farmers and speculators competed for land, driving up prices. The country boomed.

     Then U.S. cotton prices plummeted in January 1819 after British investors substituted to Indian cotton, a development that coincided with a general fall in demand for agricultural imports to Europe as European harvests improved. As Glaeser notes, “. . . the boom busted, the country went into recession and Alabama land values plummeted.”

     As Coffey explains, after the Bank attempted to resume a tight monetary policy through deflation, prices fell, housing and real estate values collapsed, and over-indebted banks and homeowners went bankrupt. Those maladies in turn spread to farming and manufacturing, which increased unemployment. The panic and recession were on.

A Likely Target for the Bust
The nation was leery of a national bank with seemingly endless power to manipulate the money supply and the Second National Bank of the United States was attacked by both the expansionists and the sound money opponents. It was during this period that future President Andrew Jackson shaped his anti-Bank views in Tennessee while his future hard-money arm in the Senate, Thomas Hart Benton (Old Bullion), shaped his views in Missouri, two of the hardest-hit states. The debate over central banking, and the concern over deflation and inflation, continue two hundred years later.

Inflationary and Deflationary Concerns
Great concern, debate, and often a change of course have typically followed tumultuous periods of heavy deflation or inflation over the past century. The graph below shows a nearly 350-year history of U.S.—or perhaps better termed “American”—inflationary and deflationary episodes, with inflationary periods in blue and deflationary periods in green. While the inflationary years leading up to the Panic of 1819 and the deflationary years that followed stand out during the first half of the nineteenth century, they appear to be in line with episodes over the century leading up to the panic and depression.

     Perhaps the most anomalous pattern in this history is the near complete lack of deflation—or green areas in the graph below—after the 1930s deflationary period of the Great Depression. The destructive ruin amid the downward deflationary spiral of the economy from those years led to the Keynesian fight against being stuck back in such a “liquidity trap” again. While concern over the risk of deflation was paramount, such concern was not as strongly levied against the risk of inflation. After the typical bout of inflation that accompanies war—and the graph illustrates that inflation was, incidentally, much milder in the case of World War II than in the previous cases of World War I and the Civil War—a lax attitude about inflation (and for some, an ill-advised advocacy of the belief that inflation would reduce unemployment) led to the most cumulatively inflationary episode (the mid-1960s through the 1970s) in the nation’s history and pre-history. Federal Reserve Chairman Paul Volcker’s defeat of inflation in the early 1980s ushered in the longest period of low and stable inflation rates in American history.

Ch1_US-Historical-Inflation-Rate

During the recent Great Recession, concern again arose about the risk of deflation, as inflation edged at times below 1 percent. And whenever the slow recovery hits rough patches, concerns about deflation jump back into the headlines. Others continue to speak of inflationary risks because of the unprecedented growth of the monetary base that was a byproduct of the Federal Reserve’s quantitative easing programs. Will deflation or inflation concerns always persist for the economy? Or after two hundred years, has U.S. central banking finally won the war against deflationary and inflationary fears?

 

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Fri, 12/05/2014 - 20:36 | 5522471 fauxhammer
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Open up your window, let some air into this room

Fri, 12/05/2014 - 20:57 | 5522546 thenextboy
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my classmate's step-sister makes $61 /hour on the laptop . She has been out of work for 5 months but last month her pay check was $12417 just working on the laptop for a few hours. browse around this web-site... www.yelptrade.com

Sat, 12/06/2014 - 21:40 | 5524901 Mad Muppet
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Shit. Is this spamming cocksucker back?

Fri, 12/05/2014 - 21:52 | 5522696 ajax
ajax's picture

 

 

A Nation of Deadbeats: An Uncommon History of America's Financial Disasters

http://vimeo.com/62187967

Listen and learn. There's nothing new under the sun, the damage is always done.

 

Fri, 12/05/2014 - 22:44 | 5522818 ajax
ajax's picture

 

 

America's first mortgage backed collateralized debt obligations issued to 'investors': the year 1851

http://vimeo.com/62187967 

Always "the short con" but since a very, very long time...



 

Fri, 12/05/2014 - 20:12 | 5522410 lordbyroniv
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This time its different.

Fri, 12/05/2014 - 20:18 | 5522433 kchrisc
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For further enlightenment on the Panic of 1819 by Rothbard:

https://mises.org/library/panic-1819-reactions-and-policies

https://mises.org/sites/default/files/The%20Panic%20of%201819%20Reaction...

An American, not US subject.

Fri, 12/05/2014 - 20:41 | 5522498 weburke
weburke's picture

to me andrew jackson was successful. he stopped the bank, and the washington monument. Well, him and the americans of the day. Kennedy with his silver cetificate just joined the ranks of unsuccessful americans who didnt know when the war really was won. which if it needed a date, I would give as the date the washington monument was restarted, or certainly when lincoln made the us a corporation. 

Fri, 12/05/2014 - 20:26 | 5522449 kchrisc
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"The Second Bank of the United States
The expansionist note issuance led to a chaotic money situation, with different notes from different banks trading at different discounts. As a result, many argued for creation of a second national bank (the first one had ceased operation when its twenty-year charter expired in 1811). The Second Bank of the United States was chartered with a primary goal to create a uniform national currency by printing paper money convertible into specie."

For those taking notes, notice that the answer put forth about the problem of the local banksters' frauds is to create a second national bank of fraud, not to prosecute and punish the fraudsters. Create a national fraudster and fraud controller.

Money and power. Taxes and death. Robbery and slavery.

An American, not US subject.

 

 

Fri, 12/05/2014 - 20:32 | 5522468 esum
esum's picture

what could possibly go wrong with Harvard and MIT educated CENTRAL PLANNERS..... bwhaaaaaaaaaaaaaaaaaa

these bastions of elite wealth polluted thewell in the '60's by bring in common human scum and giving them a shot at a great education

those ungreatful pups are now trying to "burn the bitch down".... SO WHAT COULD POSSIBLY GO WRONG

two examples: borat obumbler and hitalary clintoon.... two ivy league educated non-appreciative COMMIE SCUMBAGS 

Fri, 12/05/2014 - 20:37 | 5522484 NotApplicable
NotApplicable's picture

Deflation shall not be denied. The next bout shall have to compensate for everything since the last depression.
War cometh.

Fri, 12/05/2014 - 20:39 | 5522489 A Lunatic
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Too bad there were no polar vortexes to blame it on back in 1819.....

Sat, 12/06/2014 - 04:20 | 5523245 Uber Vandal
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Actually, it was close:

The year with out a Summer 1816, caused by the eruption of Mt. Tambora.  This lasted from 1815 - 1818.

http://www.branchcollective.org/?ps_articles=gillen-darcy-wood-1816-the-...

Fri, 12/05/2014 - 20:54 | 5522535 lakecity55
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"By the Eternal, I will Wipe You Out!"
AJ

Fri, 12/05/2014 - 21:38 | 5522657 SilverIsMoney
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God bless Andrew Jackson...

Fri, 12/05/2014 - 21:39 | 5522662 Vol_so_Hahd
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Bear Flag?

Fri, 12/05/2014 - 22:07 | 5522747 Notsobadwlad
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Nobody likes the central bank except those who get rich from its criminal activities.

But the bank has power ... the power to ultimately corrupt.

Sat, 12/06/2014 - 00:01 | 5522984 matrix reinvented
matrix reinvented's picture

I wish I lived in the period 1650 - 1665. It appeared (according to the chart) these people's were living in an absolute transparent economic equilibrium.

Those certainly were the good old days. 

 

Sat, 12/06/2014 - 00:51 | 5523041 spqrusa
spqrusa's picture

Inflation has been redefined repeatedly over the last 30 years to make sure it never appears out of control. Too many .gov entitlements are tied to inflation and by undervalueing inflation, they (.gov) can find another way to steal from the ignorant and unfortunate.

Also, defining inflation over such a long-term is rather pointless as the value of goods and services are relative to whomever is purchasing and what is generally valued as core commodities.

Sat, 12/06/2014 - 12:18 | 5523675 jmc8888
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Andrew Jackson wasn't anti-bank.  He was pro-british bank, and against the AMERICAN central bank.

He created the bigger den of thieves.  He did not rout them out, but put them in.  He lied his ass off and vastly overstated crimes so he could really get in there and loot, loot, loot.

Much of how America has been destroyed, especially the rah rah Party line, came from....Andrew Jackson.

 

Andrew Jackson was no savior...he was the destroyer.  Andrew Jackson was a TRAITOR. Better learn your history. 

 

http://www.larouchepub.com/other/2012/3949jackson_v_usa.html

 

I suggest reading the PDF there.

Here's a direct link to the PDF

http://www.larouchepub.com/eiw/public/2012/eirv39n49-20121214/04-45_3949...

 

Don't forget his role in sewing the seeds on the behalf of his British masters for the Civil War.  Andrew Jackson the slave monger and indian genocidalist.

You will never understand anything unless you truly realize how wrong Andrew Jackson was.  You'll just be set up for a fall.  You cannot win the war without overcoming the lie of Andrew Jackson.

Glass-Steagall

 

 

Sat, 12/06/2014 - 13:35 | 5523895 moneybots
moneybots's picture

"Will deflation or inflation concerns always persist for the economy? Or after two hundred years, has U.S. central banking finally won the war against deflationary and inflationary fears?"

 

Math always wins.  Inflation and deflation complete a cycle.  The FED has not eliminated the law of cycles.

The FED cannot prevent 1+1 from equaling 2.

Bernanke wrote a paper, Deflation, Making Sure it Doesn't Happen Here.  Yet the FED is still fretting over deflation, because they still can't get away from it, no matter how much debt is created. 

Inflation causes deflation.  How does the FED defeat deflation by fueling it?  Mathematically, it can't.

Sat, 12/06/2014 - 13:37 | 5523906 moneybots
moneybots's picture

The right side of that chart shows a lot of pent up deflation.

Sat, 12/06/2014 - 16:32 | 5524222 OldE_Ant
OldE_Ant's picture

Now rework that in flation chart as either a gold or silver price adjusted chart and guess the fuck that chart starts to look a hell of a lot different.

Don't get me wrong here I'm not a massive gold and silver bug becuase there are so many issues with buying, holding/storing, then exchanging pm's it isn't funny.

You could also do the same chart modification relative to a basket of energy prices (oil, ng, coal etc.).

What I find most interesting is just about everyones brain seems to only think about economics in fiat vs. commodities.  Ditch the fiat and think in terms of energy or pms and you start to get the real feeling for what is going on in the economy.  For the last few years and even through the crisis pms and oil traded almost lock step.

Anyone been looking at diesel prices lately.  Virtually no change at pumps while gasoline has been dropping quite quickly.   Any refiner making diesel is making a killing here.  Gasoline not so much.

l8r,

OldE_Ant

 

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