Financial History 146 Summer 2023 | Page 15

forces converge — which requires widespread participation .
The Panic of 1819 was caused by three major drivers that collided in the 1810s . The set-up began in February 1811 when Congress failed to renew the 20-year charter of the nation ’ s first central bank , the First Bank of the United States . The Bank ’ s disappearance created a void in credit markets . State-chartered banks proliferated and quickly filled the void , but they were lightly regulated and lacked the protection of a lender of last resort . 1
The second factor was trade related . On March 23 , 1815 , the British Parliament received royal approval for the Corn Laws , which placed steep tariffs on US agricultural exports .
The third and most powerful factor was climate related . On April 10 , 1815 , Mt . Tambora exploded in the largest volcanic eruption in recorded human history . The volcano emitted a massive cloud of sulfur dioxide , which repelled sunlight and cooled global temperatures . The effects were especially pronounced during the summer of 1816 , which was dubbed the “ Year without a Summer .” Europeans suffered widespread crop failures , which drove sharp increases in wheat and cotton prices . Great Britain suspended the Corn Laws to prevent its citizens from starving .
America ’ s First Real Estate Bubble
Agricultural yields in the United States declined during the “ Year without a Summer ,” but the crops that were salvaged were of high quality . No longer impeded by the Corn Laws , American farmers exported wheat and cotton at exceptionally high prices . In 1814 , American farmers sold wheat for an average of $ 1.48 per bushel ; by 1817 , prices climbed to an average of $ 2.41 per bushel .
Drawn by enormous profits , American farmers and speculators purchased farmland aggressively in the midwestern states ( Figure 1 shows an example of increased land purchases ), and state-chartered banks lent liberally and with little concern for borrowers ’ capacity to repay . Everybody assumed that crop prices would remain at elevated levels for many years . Nobody realized that Mt . Tambora had caused the temperature to drop , much less that natural processes would quickly remove sulfur dioxide from the atmosphere . Global temperatures returned to normal within a few
FIGURE 1 : Total Washington County Land Sales in State of Mississippi ( 1814 – 1817 )
Source : Malcolm J . Rohrbrough , The Land Office Business : The Settlement and Administration of American Public Lands , 1789 – 1837 ( London : Oxford University Press : 1968 ).
years , and crop yields rebounded . When they did , overplanting produced record harvests that far exceeded global demand .
A Rough Start for the Second Bank
On April 10 , 1816 , Congress reintroduced a central bank with the approval of a charter for the Second Bank of the United States . The goal was to restore the stability of US currency , but this proved more difficult than anticipated . After the “ Year without a Summer ,” state-chartered banks issued bank notes recklessly , and several branches of the Second Bank initially engaged in similar behavior . As a result , the value of bank notes circulating in the United States far exceeded specie reserves . 2
By late 1817 , wheat and cotton prices were in freefall , and Britain reinstated the Corn Laws to protect domestic producers . By 1819 , wheat sold for $ 1.34 per bushel , and in 1821 it averaged only $ 0.88 . The prices of farmland soon followed the collapse of agricultural prices , as farmers and speculators valued land based on future cash flow expectations . Unable to cover loan payments , farmers and speculators began defaulting in large numbers .
In early 1818 , the Second Bank was barely able to maintain adequate specie reserves to honor bank note redemptions . In an effort to repair its balance sheet , the Second Bank aggressively redeemed state bank notes for specie , called in loans and borrowed specie from abroad . These activities intensified when the US Treasury demanded a withdrawal of $ 2 million in specie to fund a scheduled principal payment to holders of Louisiana Purchase bonds that were issued in 1803 . The actions of the Second Bank were equivalent to a sharp tightening of monetary policy during a time in which the US economy was under intense pressure .
Panic and Depression
In 1819 , the contractionary monetary policies of the Second Bank amplified the effects of declining crop prices and land values . State banks throughout the nation suspended specie redemptions and many were forced into insolvency . The Second Bank lacked the ability to serve as a lender of last resort , which allowed bank runs to spread . Statistics are imprecise , but it is estimated that the rate of bank failures in the aftermath of the Panic of 1819 rivaled those of the Great Depression in the 1930s . By 1822 , more than 80 state banks had closed , and the value of bank notes in circulation contracted by more than 50 %. 3
Tight monetary conditions forced thousands of businesses and individuals into bankruptcy , and the nation descended into a painful depression that lasted until the mid-1820s . It is difficult to capture the anguish of the depression because statistics are scarce , but one of the more reliable metrics is per capita GDP , and estimates are that it was cut by nearly 50 % between 1814 and 1824 .
Post-COVID-19 Policies and Inflation
Two hundred years have passed since the Panic of 1819 , making it forgivable
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