The Panic of 1819 was the first widespread and durable financial crisis in the United States that slowed westward expansion in the Cotton Belt and was followed by a general collapse of the American economy that persisted through 1821. The Panic heralded the transition of the nation from its colonial commercial status with Europe toward an independent economy.
Though the downturn was driven by global market adjustments in the aftermath of the Napoleonic Wars, its severity 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 (SBUS), 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 gold specie from their reserves when presented with their own banknotes for redemption by the SBUS, 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 recession provoked popular resentment against banking and business enterprise, along with 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 SBUS—were exposed to sharp criticism, eliciting a vigorous defense.
Post-war European readjustments and the American economy: 1815–1818
The United States and the United Kingdom signed the Treaty of Ghent on December 24, 1814, ending the War of 1812. The British government effectively relinquished its effort to impose mercantilist policies on the United States, preparing the way for the development of free trade and the opening of America's vast western frontier.
Europe was undergoing a period of disorganization as it readjusted to peacetime production and commerce in the aftermath of the Napoleonic Wars. The general effect was a decline in prices throughout the Western world, due to a scarcity of gold and silver specie. Britain had advanced its industrial capacity to fully meet its wartime demands, but post-war continental Europe was temporarily too devastated to absorb Britain's surplus manufactured goods. Moreover, European agriculture production, exhausted by years of warfare, was unable to feed its own population. The economy of the United States was not immune to the chaos that afflicted Europe, and therein lay the roots of the Panic of 1819.
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. Continental Europe, its agrarian output crippled by the recent war, offered new markets for American staple crops, particularly cotton, wheat, corn and tobacco. As prices soared for agricultural goods, a speculative agrarian land boom ensued in the South and West United States, encouraged by liberal terms for government public land sales. "The entire postwar American economy", observed historian George Dangerfield, was "based on a land boom". The inflationary bubble grew from 1815 to 1818, obscuring the general deflationary trends in world prices.
Unregulated banking and the imperatives of Republican enterprise
With the failure to recharter the First Bank of the United States in 1811, regulatory influence over state banks ceased. Credit-friendly Republicans—entrepreneurs, bankers, farmers—adapted laissez-faire financial principles to the precepts of Jeffersonian political libertarianism—equating land speculation with "rugged individualism" and the frontier spirit. Private banking interests and their allies sought to evade or resist any threat to the profitability of their local enterprises, including the regulatory influence of a government bank limiting easy credit. There followed an enormous expansion in state-chartered banking, with chartered institutions increasing from 88 in 1811 to 208 in 1815, mostly in the mid-Atlantic states.