The Panic Of 1819 appears to have proceeded from a rapid series of economic shocks causing a whipsaw in incentives and, subsequently, large imbalances in the the still-immature US economy.
1) As the French Revolution morphed into the Napoleonic Wars, demand for US exports (and re-exports) surged as the European combatants found themselves in immediate need of raw materials.
2) Shortly thereafter, tensions with both the UK and France, followed by the Embargo Act and Non-Intercourse Act of 1809, followed thereafter by war with the UK, led to a collapse of US shipping, imports, and exports. Simultaneously, demand for textiles surged domestically as the government purchased for the war effort. This move towards autarky led to a wave of manufacturing investment in New England and the Mid-Atlantic, and generally loose banking conditions as the banking institutions outside of New England covered the government’s war-related financing needs by issuing notes. A large increase in the chartering of banks with inadequate capital ensued, as well as a general suspension of convertibility.
3) The end of the War Of 1812 and the close of the wars in Europe then caused a rapid shift in the opposite direction, exacerbated by the 1815 eruption of Mount Tambora. The resumption of imports of British manufactures pressured the fairly new domestic manufacturers heavily. Simultaneously, the recovery in Europe and the “Year Without A Summer” drove a huge increase in demand for food and cotton, leading to a rapid increase in prices and thereafter speculation in southern and western lands that would be turned to production to cover the demand shock. The chartering of the 2nd Bank of the United States, while intended to produce greater stability in the financial system, in effect sustained and enhanced the loose monetary conditions due to its policy of treating most notes as being fully convertible despite regional origin, basically supporting the new southern and western banking institutions that were specie-poor.
4) Finally, the return of British and European sources of supply as the European post-war recovery continued, the climactic effects of Tambora faded, and non-US sources of cotton came online resulted in a negative demand shock. By 1819, cotton prices (underpinning much of the previous phase of speculation) collapsed. Simultaneously, the 2nd BUS had finally panicked with regards to its position, and began to reject notes from state-chartered banks. This was a tightening of credit and liquidity at precisely the wrong moment, exacerbating the collapse in prices, driving insolvency and bankruptcies, and driving a wave of populism that Andrew Jackson eventually rode to office.
It seems to me that short-circuiting 1812 not only removes Jackson’s initial claim to fame, but also aborts much of the subsequent whipsawing that led to his (and the populist) moment. Demand for raw materials will likely be sustained as long as the European wars are ongoing, and for a bit after as resources are shifted. Ergo, land-speculation and loose money are probably going to remain. But the shift between “no demand” and autarky at the height of the War Of 1812 and “massive demand” as Europe and the UK open up won’t be as drastic or sharp. The drive towards land-speculation is likely to be less drastic. No war-finance requirements means there will be less pressure to let the non-New England banks remain off of convertibility. The 2nd BUS, if and when it exists, will likewise face less pressure to let the new banks (and its own branches) get away with murder.
The net effect should be continued growth as Europe and Britain keep sucking in raw materials, and some southern and western land speculation, but none of the drastic shocks that resulted in the Panic. This should kill a lot of the political pressure for loose money, protectionism, and relief that gave Jackson (or an alt-Jackson, given no opportunity for heroism at New Orleans) his moment. Thoughts? Ideas on what comes next?
1) As the French Revolution morphed into the Napoleonic Wars, demand for US exports (and re-exports) surged as the European combatants found themselves in immediate need of raw materials.
2) Shortly thereafter, tensions with both the UK and France, followed by the Embargo Act and Non-Intercourse Act of 1809, followed thereafter by war with the UK, led to a collapse of US shipping, imports, and exports. Simultaneously, demand for textiles surged domestically as the government purchased for the war effort. This move towards autarky led to a wave of manufacturing investment in New England and the Mid-Atlantic, and generally loose banking conditions as the banking institutions outside of New England covered the government’s war-related financing needs by issuing notes. A large increase in the chartering of banks with inadequate capital ensued, as well as a general suspension of convertibility.
3) The end of the War Of 1812 and the close of the wars in Europe then caused a rapid shift in the opposite direction, exacerbated by the 1815 eruption of Mount Tambora. The resumption of imports of British manufactures pressured the fairly new domestic manufacturers heavily. Simultaneously, the recovery in Europe and the “Year Without A Summer” drove a huge increase in demand for food and cotton, leading to a rapid increase in prices and thereafter speculation in southern and western lands that would be turned to production to cover the demand shock. The chartering of the 2nd Bank of the United States, while intended to produce greater stability in the financial system, in effect sustained and enhanced the loose monetary conditions due to its policy of treating most notes as being fully convertible despite regional origin, basically supporting the new southern and western banking institutions that were specie-poor.
4) Finally, the return of British and European sources of supply as the European post-war recovery continued, the climactic effects of Tambora faded, and non-US sources of cotton came online resulted in a negative demand shock. By 1819, cotton prices (underpinning much of the previous phase of speculation) collapsed. Simultaneously, the 2nd BUS had finally panicked with regards to its position, and began to reject notes from state-chartered banks. This was a tightening of credit and liquidity at precisely the wrong moment, exacerbating the collapse in prices, driving insolvency and bankruptcies, and driving a wave of populism that Andrew Jackson eventually rode to office.
It seems to me that short-circuiting 1812 not only removes Jackson’s initial claim to fame, but also aborts much of the subsequent whipsawing that led to his (and the populist) moment. Demand for raw materials will likely be sustained as long as the European wars are ongoing, and for a bit after as resources are shifted. Ergo, land-speculation and loose money are probably going to remain. But the shift between “no demand” and autarky at the height of the War Of 1812 and “massive demand” as Europe and the UK open up won’t be as drastic or sharp. The drive towards land-speculation is likely to be less drastic. No war-finance requirements means there will be less pressure to let the non-New England banks remain off of convertibility. The 2nd BUS, if and when it exists, will likewise face less pressure to let the new banks (and its own branches) get away with murder.
The net effect should be continued growth as Europe and Britain keep sucking in raw materials, and some southern and western land speculation, but none of the drastic shocks that resulted in the Panic. This should kill a lot of the political pressure for loose money, protectionism, and relief that gave Jackson (or an alt-Jackson, given no opportunity for heroism at New Orleans) his moment. Thoughts? Ideas on what comes next?