Presidents and the Economy: James Monroe and the Panic of 1819
James Monroe served as the fifth President of the United States from 1817 to 1825. He presided over a time of peace and his time in office was marked by what many historians have called "the era of good feelings" because of the decline of the Federalists. In fact Monroe essentially ran unopposed for re-election in 1820, with an electoral vote cast against him only to show deference to George Washington, who would continue to be the only president to win all of the electoral votes.
Monroe did face trouble on the economic front however, in what was known as the Panic of 1819, an economic recession that lasted for about two years. The panic is characterized by some as an aftershock to the end of the Napoleonic wars between Britain and France. Europe was undergoing a period of disorganization as it readjusted to a peacetime economy. The general effect was a decline in prices due to a scarcity of metallic sources of currency (i.e. gold and silver). Britain had stepped up its industrial production to fully meet its wartime demands, but post-war continental Europe was temporarily too devastated to buy Britain’s surplus manufactured goods. European agriculture production, injured by years of war, was unable to feed its own population. The economy of the United States was hurt by the chaos that afflicted Europe, and the result was the Panic of 1819.
American manufacturers faced US markets swamped with British products, priced well below competitive rates. This forced many factories out of business. Continental Europe offered new markets for American agricultural crops, particularly cotton, wheat, corn and tobacco. But as prices soared for agricultural goods, a speculative land boom occurred in the South and West United States, encouraged by easy terms for government public land sales. The inflationary bubble grew from 1815 to 1818, and it was about to come crashing down due to the general deflationary trends in world prices.
The United States did not have a central bank to help soften this crisis. With the failure to recharter the First Bank of the United States in 1811, regulatory influence over state banks did not exist. This resulted in 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.
During the war with Great Britain (1812 – 1815), the American government turned to these new banks for loans, depleting the newer banks of their hard money reserves. In response, the US government suspended specie payments from state banks in order to extend wartime lending. The arrangement continued after the war, allowing old and new banks to profitably lend without regard to their metallic currency reserves. By 1814, calls were heard for a new central bank and a resumption of regulatory controls.
A new political movement arose led by Speaker of the House Henry Clay and Congressman John C. Calhoun that called for a mew federalism to replace the one that had disappeared after the War of 1812. This group wanted to create a stable economy through a centralized banking system. This group called for a protective tariff to encourage manufacturing, a federally funded program for internal improvements and a revival of the First Bank of the United States to regulate finance.
During the War of 1812, the Treasury of the United States had to offer $16 million in government war bonds in order to stave off bankruptcy due to military costs and wartime loss of revenue. Three prominent businessmen, Stephen Girard, John Jacob Astor and merchant David Parish, bought up these government securities and rescued the nation’s credit. Through their influence, and in alliance with Calhoun and Clay, they were promoting a new Bank of the United States to shore up their investments. In the previous administration when he had been Secretary of State, James Monroe supported the Bank’s revival. Republicans in the South and West joined in support for a national bank. In January 1816, Calhoun had introduced a bill of incorporation in the House of Representatives for a government bank. The measure was passed by Congress and signed by President James Madison in April 1816.
Opposition to the Bank came from two fronts: the old Jeffersonians saw it as an enlargement of the central government and ass an assault on personal liberty. State chartered private banking interests were also opposed to federal regulation of local banking operations. Nevertheless, the Second Bank of the United States began operations in January 1817 under a twenty-year charter. The Bank accepted circulating state bank paper money from individuals, businesses and importers when they paid taxes or custom duty fees. The central bank immediately credited these payments to the US Treasury and expected that the state banks which had issued the paper money would, upon demand and redeem their currency with gold and silver, reimbursing the government bank. In order to remain solvent, the state banks were expected to constrain their lending of paper money so as not to allow the Bank of the United States to become a significant creditor and deplete their species reserves.
The Second Bank of the United States began operations in January 1817 as fiscal agent of the United States Treasury. After February 20, 1817, the BUS was scheduled to begin to receive all government revenue in legal tender as required by its charter. But hard money shortages prevailed because US exports exceeded imports. Due to the scarcity of gold, the terms of the Bank’s incorporation provided for private subscribers to invest with a combination of metallic currency and government stock. Ultimately, investors were allowed to purchase Bank shares on the security of the stock itself. Under its charter guidelines, the bank was expected to acquire species totaling $28 million by the time it opened for business, but with only $2 million secured when it commenced operations, the Bank was compelled to purchase gold and silver at exhorbitant rates from the London financial markets in 1817 and 1818, overburdening the bank's credit.
State-chartered banks did not cooperate with officials from the national bank. On February 1, 1817, an association of bankers from Pennsylvania, New York, Maryland and Virginia met with Monroe's Secretary of the Treasury William H. Crawford and William Jones (President of the National Bank) to arrange a compromise, one which undermined the ability of the central bank to assert its role as creditor to the private banks. The directors of the national bank promised to refrain from collecting public deposits held in state banks until July 1, 1817.
The onset of the financial panic was precipitated by the Second Bank of the United States when it initiated a sharp credit contraction beginning the summer of 1818. The link between the frontier land boom and overseas markets for staple goods became a huge problem when Europe finally recovered from its post-war harvest shortages and began producing bumper crops in 1817. American planters and farmers, who had expanded production to exploit the European demand, discovered agricultural prices declining by half. Southwestern plantations were devastated when Britain began to increase its imports of East India cotton as a means to avoid purchasing the high-priced US cotton. Cotton prices began to drop in 1818 and threaten to burst the speculative bubble. The national bank reduced its lending in response to these developments.
In August 1818, with its credit dangerously overextended, William Jones ordered of his bank's branch offices to reject all state-chartered bank notes, with the exception of those used as revenue payments to the US Treasury. In October 1818, The US Treasury demanded a transfer of $2 million in species from the the bank to redeem bonds on the Louisiana Purchase. State banks in the West and South were unable to provide the required gold and silver and began to call in their loans on the heavily mortgaged lands they had financed. Cash poor farmers and speculators found their land values dropping 50% to 75%. Banks began foreclosing on the properties and transferring them to their creditor: the Second Bank of the United States.
When news arrived in January 1819 that the value of cotton had fallen drastically, dropping 25% in a single day, the ensuing panic drove the country into recession. Williams Jones resigned from his position as president of the national bank and was replaced by South Carolinian Langdon Cheves. He implemented a tight money, but this just deepened the depression, undermining the recovery that was already underway.
Through public land debt relief legislation, Cheves managed to reduce the Bank’s land debt by $6 million within a year of his becoming the bank's president. Specie drain was also reversed to a great extent, increasing from $2.5 million in 1819 to $3.4 million by 1820. It rose to $8 million by 1821. Bank notes in circulation were reduced by about $23 million by 1820. Employing these stern measures, Cheves placed the Bank on sound footing again.
President Monroe limited governmental action to cutting spending. Although Monroe agreed that improved transportation facilities were needed, he refused to approve appropriations for internal improvements without constitutional amendments. In 1821, Congress passed the Relief for Public Land Debtors Act. The bill allowed debtors who owed money on land purchased from the government to keep the part of land they had already paid for and relinquish the remaining amount. It also extended the schedule of payments by several years, with a discount for quick payment. Many state legislatures, particularly in rural western states, passed extra relief measures for debtors.
A major effect of the Panic of 1819 was increased support for protective tariffs for American industry. Protectionists blamed free trade for the depression and argued that tariffs would protect American prosperity. However, this lead to the “Tariff of Abominations” which was implemented in 1828, which in turn led to the outbreak of Nullification Crisis.
Monroe did face trouble on the economic front however, in what was known as the Panic of 1819, an economic recession that lasted for about two years. The panic is characterized by some as an aftershock to the end of the Napoleonic wars between Britain and France. Europe was undergoing a period of disorganization as it readjusted to a peacetime economy. The general effect was a decline in prices due to a scarcity of metallic sources of currency (i.e. gold and silver). Britain had stepped up its industrial production to fully meet its wartime demands, but post-war continental Europe was temporarily too devastated to buy Britain’s surplus manufactured goods. European agriculture production, injured by years of war, was unable to feed its own population. The economy of the United States was hurt by the chaos that afflicted Europe, and the result was the Panic of 1819.
American manufacturers faced US markets swamped with British products, priced well below competitive rates. This forced many factories out of business. Continental Europe offered new markets for American agricultural crops, particularly cotton, wheat, corn and tobacco. But as prices soared for agricultural goods, a speculative land boom occurred in the South and West United States, encouraged by easy terms for government public land sales. The inflationary bubble grew from 1815 to 1818, and it was about to come crashing down due to the general deflationary trends in world prices.
The United States did not have a central bank to help soften this crisis. With the failure to recharter the First Bank of the United States in 1811, regulatory influence over state banks did not exist. This resulted in 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.
During the war with Great Britain (1812 – 1815), the American government turned to these new banks for loans, depleting the newer banks of their hard money reserves. In response, the US government suspended specie payments from state banks in order to extend wartime lending. The arrangement continued after the war, allowing old and new banks to profitably lend without regard to their metallic currency reserves. By 1814, calls were heard for a new central bank and a resumption of regulatory controls.
A new political movement arose led by Speaker of the House Henry Clay and Congressman John C. Calhoun that called for a mew federalism to replace the one that had disappeared after the War of 1812. This group wanted to create a stable economy through a centralized banking system. This group called for a protective tariff to encourage manufacturing, a federally funded program for internal improvements and a revival of the First Bank of the United States to regulate finance.
During the War of 1812, the Treasury of the United States had to offer $16 million in government war bonds in order to stave off bankruptcy due to military costs and wartime loss of revenue. Three prominent businessmen, Stephen Girard, John Jacob Astor and merchant David Parish, bought up these government securities and rescued the nation’s credit. Through their influence, and in alliance with Calhoun and Clay, they were promoting a new Bank of the United States to shore up their investments. In the previous administration when he had been Secretary of State, James Monroe supported the Bank’s revival. Republicans in the South and West joined in support for a national bank. In January 1816, Calhoun had introduced a bill of incorporation in the House of Representatives for a government bank. The measure was passed by Congress and signed by President James Madison in April 1816.
Opposition to the Bank came from two fronts: the old Jeffersonians saw it as an enlargement of the central government and ass an assault on personal liberty. State chartered private banking interests were also opposed to federal regulation of local banking operations. Nevertheless, the Second Bank of the United States began operations in January 1817 under a twenty-year charter. The Bank accepted circulating state bank paper money from individuals, businesses and importers when they paid taxes or custom duty fees. The central bank immediately credited these payments to the US Treasury and expected that the state banks which had issued the paper money would, upon demand and redeem their currency with gold and silver, reimbursing the government bank. In order to remain solvent, the state banks were expected to constrain their lending of paper money so as not to allow the Bank of the United States to become a significant creditor and deplete their species reserves.
The Second Bank of the United States began operations in January 1817 as fiscal agent of the United States Treasury. After February 20, 1817, the BUS was scheduled to begin to receive all government revenue in legal tender as required by its charter. But hard money shortages prevailed because US exports exceeded imports. Due to the scarcity of gold, the terms of the Bank’s incorporation provided for private subscribers to invest with a combination of metallic currency and government stock. Ultimately, investors were allowed to purchase Bank shares on the security of the stock itself. Under its charter guidelines, the bank was expected to acquire species totaling $28 million by the time it opened for business, but with only $2 million secured when it commenced operations, the Bank was compelled to purchase gold and silver at exhorbitant rates from the London financial markets in 1817 and 1818, overburdening the bank's credit.
State-chartered banks did not cooperate with officials from the national bank. On February 1, 1817, an association of bankers from Pennsylvania, New York, Maryland and Virginia met with Monroe's Secretary of the Treasury William H. Crawford and William Jones (President of the National Bank) to arrange a compromise, one which undermined the ability of the central bank to assert its role as creditor to the private banks. The directors of the national bank promised to refrain from collecting public deposits held in state banks until July 1, 1817.
The onset of the financial panic was precipitated by the Second Bank of the United States when it initiated a sharp credit contraction beginning the summer of 1818. The link between the frontier land boom and overseas markets for staple goods became a huge problem when Europe finally recovered from its post-war harvest shortages and began producing bumper crops in 1817. American planters and farmers, who had expanded production to exploit the European demand, discovered agricultural prices declining by half. Southwestern plantations were devastated when Britain began to increase its imports of East India cotton as a means to avoid purchasing the high-priced US cotton. Cotton prices began to drop in 1818 and threaten to burst the speculative bubble. The national bank reduced its lending in response to these developments.
In August 1818, with its credit dangerously overextended, William Jones ordered of his bank's branch offices to reject all state-chartered bank notes, with the exception of those used as revenue payments to the US Treasury. In October 1818, The US Treasury demanded a transfer of $2 million in species from the the bank to redeem bonds on the Louisiana Purchase. State banks in the West and South were unable to provide the required gold and silver and began to call in their loans on the heavily mortgaged lands they had financed. Cash poor farmers and speculators found their land values dropping 50% to 75%. Banks began foreclosing on the properties and transferring them to their creditor: the Second Bank of the United States.
When news arrived in January 1819 that the value of cotton had fallen drastically, dropping 25% in a single day, the ensuing panic drove the country into recession. Williams Jones resigned from his position as president of the national bank and was replaced by South Carolinian Langdon Cheves. He implemented a tight money, but this just deepened the depression, undermining the recovery that was already underway.
Through public land debt relief legislation, Cheves managed to reduce the Bank’s land debt by $6 million within a year of his becoming the bank's president. Specie drain was also reversed to a great extent, increasing from $2.5 million in 1819 to $3.4 million by 1820. It rose to $8 million by 1821. Bank notes in circulation were reduced by about $23 million by 1820. Employing these stern measures, Cheves placed the Bank on sound footing again.
President Monroe limited governmental action to cutting spending. Although Monroe agreed that improved transportation facilities were needed, he refused to approve appropriations for internal improvements without constitutional amendments. In 1821, Congress passed the Relief for Public Land Debtors Act. The bill allowed debtors who owed money on land purchased from the government to keep the part of land they had already paid for and relinquish the remaining amount. It also extended the schedule of payments by several years, with a discount for quick payment. Many state legislatures, particularly in rural western states, passed extra relief measures for debtors.
A major effect of the Panic of 1819 was increased support for protective tariffs for American industry. Protectionists blamed free trade for the depression and argued that tariffs would protect American prosperity. However, this lead to the “Tariff of Abominations” which was implemented in 1828, which in turn led to the outbreak of Nullification Crisis.