1819 Economic Panic: Unanticipated Consequence of War and Prosperity - Research Paper

Introduction

Americans had experienced a period of economic prosperity until the panic of 1819. The cause of this panic was the policies adopted by the American banking sector, end of the war between Britain and France and the booming agricultural economy of the western side of America which caused the increase in the prices of land. The end of the war between Britain and some American states in 1812 marked the beginning of economic prosperity for the USA economy which was later halted by the 1819 economic panic (Ha 102). The postwar period of 1812 was the begging of the United State of America's economic prosperity until 1819 when there was an economic panic. It was caused by several factors including the end of British-French war, the movement of farmers and land dealers towards the western side of America for agriculture which became a bubble and the banking sector that adopted unfavorable policies.

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Cause of the 1819 Panic

European Powers War

European powers such as Great Britain, Germany, and France had been at war with each other for a long time. War affects trade as countries at war and their allies do not engage in trade with their perceived enemies. For example, Britain and France had been at loggerheads with each other which affected trade between the two countries. Britain had even sort to stop transoceanic trade between France and American to their favor by restricting the vessels that were exporting products to France. The war between Great Britain and France had created an opportunity for American farmers and industries where they would export products to Europe especially France. In 1815, France and Britain decided to settle their differences that had caused previous wars between the two countries. This meant that European industries and farmers could now trade within the entire European market thus affecting the market that the American products were enjoying (Foner 75).

During the warring period between France and Britain, United States farmers especially those from the western side and industries from the north had prospered due to the available opportunity for international trade. After the war ended, the industries in Europe and the Agricultural sector started to prosper too. The industries in Europe were better skilled and advanced compared to the United States industries and thus they easily recaptured the market share in Europe from American exporters. Britain and France reduced their military men since there was no existing war. Former military men returned to their lands and adopted farming. These reduced the need to import agricultural products from the United States which impacted negatively on the American farmers (Ha 104).

The American farmers and industry were now unable to export the large number of products they had been used to in Europe thus reducing their income. They were unable to pay the loans taken from the American state banks and the banks had started to recall their loans as a result of the changed policy. The farmers lost their ability to produce because the land was taken by the banks to recover the existing loans and new loans were limited thus leading to the 1819 panic (Foner 92). Reduced exports to European markets made it difficult for farmers to service their loans or continue buying land that had skyrocketed in price. The farmers were in panic mode and this resulted in the 1819 panic that shocked the entire country. The success of the agricultural economy that was the pillar of the western side of America was halted and farmers basically became poor and destitute. The agricultural and industrial boom had been affected by the banking crisis and the end of the war between Britain and other European powers such as France (Ha 104).

Expansion Westwards

Before 1812, agriculture was not doing well in America. However, 1812 was the end of many wars by European powers which gave an opportunity for an economic expansion driven by agriculture. Farmers in the United States moved towards the westward side which had rivers and ports that could favor large-scale agricultural production. Agriculture became a major income earner for American citizens which prompted even subsistence farmers to move into the marketing agriculture which had proved more profitable. The prices of land also shot up especially the period between 1815 and 1819 which coincided with a favorable environment for agriculture and a carefree banking sector (Haulman 17). The westward side of America had better soil for agriculture, more factories, and ports that would export agricultural products to overseas especially to European ports. Cotton farming increased income for farmers and more farmers were interested in venturing into cotton farming after the invention of the cotton gin by Eli Whitney. With the invention of the cotton gin, Cotton farming became one of the largest income earners for farmers helping the agricultural economy grow to greater heights (Haulman 23).

The demand for agricultural products and the money that came with it led to land prices increasing and the banking sector lending more money to farmers since this was a highly rewarding venture. After the end of the war in 1812, Europe increased the demand for American agricultural products since they had more developed industries that would process agricultural products to resell in the wide European markets. Due to the increased financial success that westward expansion brought, state banks began giving loans inform of paper money to farmers in a loosely and careless manner which alarmed the Bank of the United States. The poor management of loans by state banks to farmers and land buyers in the western region of the United States caused panic as a result of the steps taken by the bank of United States which demanded that state banks start redeeming the loans given to farmers. Lack of loans to farmers and demand for payment of already existing loans caused panic in 1819 thus greatly affecting agriculture and the economy created by the sector (Foner 76).

Suddenly farmers were unable to repay the loans and the already flourishing industry collapsed as a result of the policies adopted by banks which were the face of the capitalist system fronted by the rich people in America. The banks had given out banking notes more than they could redeem and control thus making it impossible for them to redeem the notes in the form of loans without affecting the economy. The boom in agriculture and Land buying collapsed thus impacting negatively on poor farmers that had depended in this sector. This affected many families that suddenly were unable to afford basic needs on top of losing their land purchased through loans (Foner 88).

Banking Crisis

The banking industry was the pillar that supported the economic expansion in America after the end of the war in 1812. The peaceful period between 1812 and 1819 was a period that provided a good environment for the American economy especially for the agriculture and banking sector. However, in 1819, banks failed to effectively manage the loans given to farmers which affected agricultural financing and mortgage financing leading to an economic meltdown. Farmers were pushed out of their lands by state banks that wanted to get back their loans given to farmers that were unable to pay. Agricultural prices fell meaning farmers could not be able to service the loan (Benmelech and Tobias 1029).

Earlier, banks had been able to provide loans to farmers and settlers who wanted to buy large tracks of land especially in the Westside of the country and more so Alabama and Mississippi that had great rivers which would support agriculture. Scholars argued that this crisis was precipitated by the bank of America change of credit policies and the bank demanded that state banks implemented these policies which in return impacted negatively on the economy. Due to the booming agriculture economy, many banking directors in the western part of America became careless in giving loans which alarmed the Bank of United State of America which was supposed to regulate the practices by the state banks. The Bank of The United States of America made a decision to recall its loans given to state banks prompting the state banks to also recall their loans given to farmers and this action destabilized the already healthy agricultural economy leading to a financial crisis of 1819 (Benmelech and Tobias 1033).

During the period before 1819, banks were privately owned by the state and other players and there was no common currency. Banks gave out their own paper money which put the privately owned banks in a collision course with the bank of the United States of America that was federal and supposed to play a bigger role than the state banks (Benmelech and Tobias 1056) . The federal bank had more resources and thus was able to control the state banks mostly by using threats of limiting funding to them and thus they would always play ball whenever such a threat was made. Policy issue was not the only issue that the banking sector was facing; the managers of the banks especially the second bank of the United States based in Baltimore were very corrupt. They mismanaged the banks and led to the baking crisis that resulted in the 1819 panic. Investors lost a lot of money which caused a lack of confidence with the banks. Unfortunately when new managers were brought the policies implemented made it even worse. For example, when Cheves was brought to replace William Jones, his policies meant to manage the problems created the corrupt William Jones, led to the financial panic of 1819 as he limited lending to people that were in the past being done carelessly by the corrupt bank managers. The fall in the performance of the agricultural economy led to fewer finances in the sector leading to loss of employment. The prosperity in agriculture was regained in 1924 a few years after the panic of 1819 was resolved and the economy regained normal performance (Benmelech and Tobias 1057).

The Solution to the Panic of 1819

Public land debtor's act was passed by Congress in 1921 which resulted in farmers keeping part of the land they had already paid for while relinquishing the land they were unable to pay for. Most parts of these lands were purchased from the federal government and so it was easy to implement this law. Banks were more careful when implementing banking policies so as to avoid the recurrence of the 1819 panic. They were keener to avoid policies that would cause further inflation which would lead to an economic meltdown. American industries needed protection and tariffs were introduced by the government in order to ensure they do not suffer from the undue competition that would lead to unnecessary losses. Free trade was blamed for the depression of the economy and most leaders and scholars argued that tariffs would protect the local industries and ensure economic prosperity (Foner 76). The panic of 1819 made the United States government learned some hard lessons from the 1819 panic that necessitated embracing of modern economic policies and practices. The monetary policies introduced by the Bank of the United States of America helped reduce the careless lending by state banks thus helping manage inflation (Benmelech and Tobias 1070).

Conclusion

The panic of 1819 was a wakeup call to the American monetary policy. The bursting of the bubble created by the westward expansion of agriculture and land buying at inflated costs had greatly contributed to the 1819 panic but it became a lesson for leaders to learn and be careful on the policies passed by Congress. The agricultural economy regained its lost glory but after most farmers had lost it all. Agriculture and land buying expansion towards the western side was booming until the banking bubble which came with heavy lessons for the federal and state government. Westward expansion, banki...