The Causes of the United States Panic and Bank Run of 1819

By Probs Cheatin | Probs Cheatin | 14 May 2022


In earlier sections, we examined the consequences the Revolutions of 1848 had on European politics, society, and economic structures; also how the armed conflict affects our world today. We will now travel back in time during the early 1800s and across the Atlantic to the United States for the purpose of understanding what was happening in this developing country at the time. Why do we need to look at the early 19th century in the United States? Because gaining an understanding of the political, societal, and economic circumstances inside the country permits us to understand how certain groups rise to become wealthy and powerful, while others suffer repetitively. In addition, when we compare the 19th century United States to our situation today, obvious similarities emerge between the two time periods that illustrate issues in economic production, societal progress, and political development that still disturb us to date. We left the American discussion after the charter of the First Bank of the United States came to an end in 1811 and the United States immediately found themselves into war with Great Britain, causing the government to need money to fund their expensive war effort. So, let’s jump into it.

The emotions the war against Britain produced in America were used by the rich as an excuse to advocate for the creation of a privately owned, nationwide banking system while tricking average people to give up their freedoms. In addition, the Era of Good Feelings was sweeping the US after the war ended in 1815 from the post-war nationalism that was created as a result of the Americans' perceived victory in the armed conflict. This era was marked by economic expansion and overall unity between the lower and middle classes because of political victories by democratic-republicans. The public support by the United States citizens for creating large and powerful federal institutions that fall outside the scope of the constitution was used by Money Changers to legitimize their views to the politicians to create laws that were not in the best interest of the people. How do they do it? By influencing citizens' emotions through manipulation of the media to brainwash the public into believing exuberance is necessary without any punishment. The War of 1812 and fear of Great Britain were used by American Money Changers, politicians, and aristocrats to produce a sense of unity and patriotism among citizens; and it sparked emotions for expansion, manifest destiny, and speculation.

Furthermore, having a nationalized financial system was justified by the national security concerns that arose from being in armed conflict with the most powerful empire in the world. During the war of 1812, the US suspended the requirement of having gold or silver in the private (state) bank’s reserves that loaned out money to the federal government because of its need for money, allowing for an expansion of the money supply and speculation on the value of currency, real-estate and other securities. After the war ended, the federal government did not reinstate the requirement to have gold or silver in bank reserves, and the practice of creating paper money out of thin air and loaning it out to corporations and citizens while charging interest continued to haunt the economy (Rothbard, 1961, p. 4).

By using these tactics, Money Changers were able to gain support from the public because people were perceiving the short-term benefits of a corrupt system. As a result, the government created a privately owned, interstate lending institution that handled national and international transactions. The creation of this bank was sparked by the public’s fear of war, passion for political unity, and desire for innovation in their economy. The Second Bank of the United States was born in 1816 that operated through 18 branches in various states that had little regulation or supervision by the public or politicians (Dangerfield, 1965, p. 80-81).

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(The north face of the Second Bank of the United States on Chestnut St.)

Political Background

Created with a 25-year charter this institution would act as a central bank in the United States and will be an important figure in our upcoming discussion around the Panic of 1819. In addition, this financial scare can be partially attributed to the chaos that was brewing after the resolution of the Napoleonic wars and the reorganization of political and social life in Europe during the Congress of Vienna.

However, the majority of the blame should be attributed to the Second Bank of the United States propping up an economic bubble without any meaningful response to solve the self-inflicted issues. Although President James Madison signed the charter, his second term came to an end and James Monroe would be the first president to see the effects of the new bank in 1817.

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(Portrait by Samuel Morse, circa 1819)

James Monroe gained his popularity after serving in the Revolutionary War and being given the rank of lieutenant because of his education. In battle, Monroe showcased his bravery alongside George Washington, allowing him to gain the recognition of many of the powerful and famous politicians connected with the future first President. Monroe became a founding father and served inside of Virginia’s state government, eventually making his way up to Senator.

At the time the Democratic-Republicans were primarily represented by Jefferson and Madison on the federal level. Therefore, Monroe accepted his role on the legislative side to help push forward the policies of his colleagues and friends. Monroe and Madison became close, allowing him to serve on Madison’s cabinet and increase his influence during his campaign for the presidency, which was won with a breeze because the citizens who were able to vote favored the political climate of the Democratic-Republicans at the time. The Democratic-Republican party had entered a short period of dominating politics against Federalists, with Monroe’s victory in his election giving the political party 3 consecutive presidents affiliated with their views.

The idea of the creation and maintenance of a privately owned central bank was first brought to the table in the United States by another prominent political figure, Alexander Hamilton. However, Alexander Hamilton died in a duel with Aaron Burr in 1804. Leaving the United States without a central figure to represent the Federalist policies and Money Changer's interests.

Although the Money Changers' largest political supporter was now dead, aristocrats had to find new people to carry out their ideas. The largest political support for the SBUS was driven by neo-federalists John Calhoun and Henry Clay who had the financial backing of John Astor, Stephen Girard, and David Parish. We spoke of these men earlier. Calhoun was one of the major advocates in government and leaders for the Second Central Bank that had deep connections with the financial elite within the United States. John Calhoun would eventually become the Vice-President under John Adams and Andrew Jackson. Henry Clay was a Kentucky Congressman who would go on to serve as the Secretary of State under John Adams and have important political influence throughout his career. His legacy is mostly concerned with the need for domestic infrastructure and modernized financial systems and is generally considered to be one of the most important political figures of the era. Astor, Girard, and Parish were all Money Changing elites within the United States that held vast amounts of assets from their respective businesses.

In addition, Money Changers had an important influence on the legislative front. The judicial branch also had a tremendous impact on a supreme court case that still affects our lives drastically today. The case is McCulloch v. Maryland which occurred in 1819. Ultimately the supreme court decided that SBUS was constitutional after invoking the Necessary and Proper Clause of the Constitution which states that the federal government has the ability to pass laws that are not specifically enumerated in the constitution if it furthers the powers that are explicitly listed in the constitution. The case occurred after Maryland issued a law that said other banks were not allowed to operate in Maryland unless they were given consent by the State Treasury Department. McCulloch issued illegal notes according to the State of Maryland and the State filed a lawsuit against McCulloch. After reaching the appeals court in the Maryland court system, the court found that the constitution did not mention anything about banking, and having the federal government create a bank would be considered unconstitutional, therefore the fine should apply. After reaching the supreme court, 7 justices disagreed and the SBUS was allowed to continue operations. As a result of the Supreme Court's decision an unconstitutional, privately owned, and unethical central bank was legally allowed to rule over the United States.

This case also established the supremacy clause, which limits the ability of states to create laws that inhibit federal government policies. Erwin Chemerinsky explains the decisions made in McCulloch V. Maryland are said to be, “the most important Supreme Court decision in American history defining the scope of Congress's powers and delineating the relationship between the federal government and the states (Constitutional Law (5th ed.). New York: Aspen Casebook Series. p. 116).

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(The text of the McCulloch v. Maryland decision, as recorded in the minutes of the Supreme Court)

Banks' Involvement in Panic of 1819

As we have alluded to earlier, the SBUS had to avoid all-out disasters before the bank was charted due to the greed, manipulation, and shady deals being made by bank directors, politicians, and Money Changers. A profound shortage of gold and silver circulating in the economy was affecting the SBUS’s ability to acquire adequate funding for beginning and maintaining operations. The scarcity of hard monies in the early 19th century across the world was occurring because Europe was going through its recovery from war, Money Changers hoarding specie, and the United States' inexperience with handling the nationalization of its financial infrastructure. Furthermore, without the First Bank of the US being chartered, State Banks (private banks) began popping up across the country from 88 in 1811 to 208 in 1815, nearly tripling in less than four years before the SBUS was created. The State Bank’s ability to produce paper currency that circulated in the economy allowed for supplemental opportunities for funding government projects, business plans, and individual expenses to emerge that exaggerated the prices of property and securities in the United States. (Rothbard, 1962, p. 4, Miller, 1960, p. 62)

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(https://investoramnesia.com/2021/09/12/the-panic-series-pt-ii-1819/)

One of the shady deals that occurred to charter the bank happened when the SBUS directors allowed Money Changers to pay for stock and private ownership in the SBUS with the stock of the bank itself, rather than bringing in any paper or specie money. If that doesn’t make sense, it’s because it shouldn’t. Money Changers did not have to bring hard monies, or even paper money, upfront to have ownership of the bank. Instead, the stock of the SBUS itself was used as funding for the institution by the Money Changers like Astor, Parish, and Girard; leaving the institution severely uncapitalized from the beginning.

When the original charter was written, it was assumed that $26 million dollars in hard money like gold or silver would be provided to the SBUS reserves for the purpose of carrying out the functions of lending and money changing. Instead, only $2 million dollars in hard money was invested, leaving a severe shortage of collateral in the bank reserves and causing alarm around the bank from the beginning. To make up for the shortage of funding the SBUS had to, “purchase specie at usurious rates from the London financial markets in 1817 and 1818, overburdening SBUS credit” (Dangerfield, 1965, p. 79). This issue was exacerbating the already escalating issue. With the SBUS being forced to take ridiculous loans, the high-interest payments were passed on to the individuals who had to suffer via economic contraction, loss of jobs, and poverty.

Another comprise the SBUS and private banks made was the SBUS would not request for the public’s loaned out deposits to the private banks until some point in the future. Not requesting hard monies effectively allowed private, unelected bank officials to use the public’s tax money to dictate the direction of the economy. Furthermore, the SBUS would lend the private banks monies at a severe discount, allowing the private banks to cash in on the little-to-no interest they were paying to the extreme interest rates they were charging individuals. “Under these "ominous terms" the bank was launched—its operational success already at risk” (Dangerfield, 1965, p. 78).

When the bank was created, there was a deadline in 1817 of February 20th that would mark the transition of the SBUS to only accept payments in gold or silver as legal tender and begin the refusal of collecting private bank paper money. However, poor leadership in the SBUS allowed for state banks to negotiate their own terms and push back the deadline. The weak leadership and poor decision-making would eventually undermine the trustworthiness of a central banking institution to act as a creditor in the eyes of the public. These decisions included having the SBUS refrain from resuming the convertibility of the private bank's paper money into hard specie. This allowed the private banks to continue the practice of lending out paper money at high-interest rates, without having any collateral, while having worthless paper money created in a sweatshop to circulate in the economy.

Once the bank was functional in 1817 from the political support of people like Calhoun and Clay, the country now had a central authority run by unelected bureaucrats that could actively control the amount of credit in the economy and determine when there will be economic recessions or booms, and it wasn’t even organized properly. A terror in the economy was destined to happen, and only two years later Americans across the country experienced the Panic of 1819.

Real-Estate/Finance Boom

In terms of land speculation, the turmoil that was occurring in Europe during 1815 was causing international production to decrease, and the United States was victim to the shortage in food and supplies and surpluses of land and paper money. At the time Great Britain was far more advanced than any country in the world, so without any other European countries to trade with because of the destruction of the Napoleonic Wars, the British drowned the American economy with their cheaper and higher quality products, “American manufacturers faced U.S. markets swamped with British products, produced by low-paid workers and priced well below competitive rates and forcing many factories out of business” (Parsons, 2009, p. 58, Ammons, 1971, p. 462). The monopoly that Great Britain had over goods that were entering the United States sparked a desire for Americans to own land to create products and harvest crops themselves. Therefore, people began to spread out to present-day Florida and the South-West United States in order to seek more opportunities and cheap land.

 

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(https://investoramnesia.com/2021/09/12/the-panic-series-pt-ii-1819/)

The combination of speculation forming around the credit and real-estate systems in the United States from institutions and individuals inflated the prices of securities and money in the economy and the SBUS added to the formation of the financial bubble that led to the panic of 1819.

One-way politicians and the SBUS stimulated the expansion of prices of goods and the real-estate industry was by offering land through government auctions for 2$ per acre (Salsbury, 1931, p. 332-333). Unfortunately, for the lower and middle classes, the federal government was accepting payment in the form of paper money from the private banks that had no collateral to back their worthless currency. This was known as wildcat banking, where private state banks issued their own worthless paper currency that would be used to pay back the public debt issued by the federal government.

A large variety of different paper currencies were circulating throughout the United States making it difficult to transact because some merchants wouldn’t accept certain bills. Furthermore, “public land debt ballooned from $3 million in 1815 to $17 million in 1818” (Dangerfield, 1965, p. 86), and in July 1818 liabilities were exceeding $22.4 million, while the gold and silver supply was at $2.4 million—a 10:1 ratio (Rothbard, 1962, p. 8). The public debt issued by the unelected officials in the private Second Bank of the United States could not be paid back; leaving the United States in a difficult position with overexpansion of their monetary supply, no regulation, and massive speculation on the price of securities.

 

The Panic of 1819

So far, we have discussed the excessive nature of Money Changers and aristocrats that led to the price of securities, like stocks and real estate, artificially increasing through manipulation and speculation. In combination with the excessive lending, another major factor was the over-expansion of monetary supply, which consisted mostly of private banks paper issued money. This privately issued money was worthless, created in workshops, and had no specie to back the value in the bank’s reserves who circulated it.

However, we have not discussed the trigger that caused the panic to occur. What ultimately caused the music to stop and people to scramble for their livelihood? In the summer of 1818, the SBUS nearly halted its credit system leading to a near collapse in the American economy (Wilentz, 2008, p. 206-207). During the summer of 1818, the SBUS Director William Jones gave orders to the SBUS branches to refuse payment in paper money by private banks as settlement for loans. Furthermore, in October 1818 bond payments were due by the United States government to their debtors who financed the Louisiana Purchase and they would only accept gold or silver. The US Treasury demanded the money from the SBUS who demanded money from the private banks that only had paper money to give. Unable to provide the required payments, private banks began calling on their extended loans, repossessing collateral that was put up, and passing the pain onto the lower and middle classes that had no idea what was happening in the first place. The value of land fell; the price of cotton dropped 25% overnight, trust in the system was broken and the private banks began to shut down their doors for good and pass their liabilities onto the SBUS and effectively the public. The Federal Government and the SBUS had forcibly gotten us drunk and now the US public had to deal with the hangover.

As a result of witnessing the securities rapidly fall in value, bank runs began and the banks had nothing in the reserves to give clients, leading to large lines forming outside of closed bank buildings. Unemployment, poverty, and hunger all increased as a result of the financial debacle that was plaguing the United States economy. Mostly attributable to the Money Changers' greed for inflating the price of securities and using citizens for exit liquidity into real money, like gold or silver, while they are increasing the value of their investments over time. The route of the economy is altered at the discretion of a small group of unelected, confidential, and overlooked thieves using policy and legislation to halt the speculation, prevent asset appreciation and decrease the supply of money; all for their personal benefit.

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(Illustration of Panic of 1819 on Wall Street)

The recession lasted until 1822 and the economy didn’t fully recover until 1829 when Andrew Jackson was nominated as president to replace John Quincy Adams, who had a short 4-year spurt as president. The widespread and harsh destruction of the economy and people’s livelihoods gave people a sour taste toward bankers, large corporations, and especially the SBUS. This created a domestic war within the United States during a time of market revolution. However, the war did not involve armed conflict. Instead, it involved a conflict of economic philosophy, in what is now known as the Bank War.

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Probs Cheatin
Probs Cheatin

I love decentralization and human coordination. I started investing in crypto in March 2021, so I'm a newbie. Please check out my website themoneychangers.org for the latest posts, merch, free crypto courses, community, and more!


Probs Cheatin
Probs Cheatin

Decentralization, Human Coordination, Bankless and Sovereignty

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