Panic of 1819

The Panic of 1819 was the first major peacetime financial crisis in the United States followed by a general collapse of the American economy persisting through 1821. The Panic announced the transition of the nation from its colonial commercial status with Europe toward an independent economy, increasingly characterized by the financial and industrial imperatives of central bank monetary policy, making it susceptible to boom and bust cycles.

Though driven by global market adjustments in the aftermath of the Napoleonic Wars, the severity of the downturn was compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.

The Second Bank of the United States (BUS), itself deeply enmeshed in these inflationary practices, sought to compensate for its laxness in regulating the state bank credit market by initiating a sharp curtailment in loans by its western branches, beginning in 1818. Failing to provide metallic currency when presented with their own bank notes by the BUS, the state-chartered banks began foreclosing on the heavily mortgaged farms and business properties they had financed. The ensuing financial panic, in conjunction with a sudden recovery in European agricultural production in 1817 led to widespread bankruptcies and mass unemployment.

The financial disaster and depression provoked popular resentment against banking and business enterprise, and a general belief that federal government economic policy was fundamentally flawed. Americans, many for the first time, became politically engaged so as to defend their local economic interests.

The New Republicans and their American System – tariff protection, internal improvements, and the BUS – were exposed to sharp criticism, eliciting a vigorous defense.

This widespread discontent would be mobilized by Democratic-Republicans in alliance with Old Republicans, and a return to the Jeffersonian principles of limited government, strict construction of the Constitution, and Southern preeminence. The Panic of 1819 marked the end of the Era of Good Feelings and the rise of Jacksonian nationalism.

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