Panic of 1819
The Panic of 1819 was the first major widespread financial panic in the United States. The financial disaster affected the U.S. banking system, the “Cotton Belt” southern states, and western migration to federally owned lands. Unemployment and bankruptcies increased, and faith in government monetary policy rapidly decreased. This economic panic adversely affected once-growing territories like Arkansas for years.
A significant precursor to the crisis in 1819 was the Napoleonic Wars in Europe. Although warfare between Great Britain and France hurt the European economy, they caused the American economy to grow. Countries in Europe relied on American manufacturing and also the United States’ agricultural production, which was growing as settlers relocated to states and territories like Ohio, Missouri, and Arkansas (Arkansas becoming a territory of its own on March 2, 1819). The end of the Napoleonic Wars lowered the demand for American products, and the United States and Great Britain became chief competitors. After the War of 1812, the countries were diplomatically at peace even though their economies were battling over the same markets.
During the Napoleonic Wars, America was also experiencing a domestic economic boom. By 1818, American citizens had bought millions of acres of land from the federal government. In 1819, they bought another 3.5 million acres. Most purchasers did not have the specie to buy the land outright, but the federal government allowed purchases with credit. As the economy worsened, the Second Bank of the United States, as well as state and local banks, called in their loans. The Second Bank also called in loans from state banks. Without local farmers and businesses able to pay back their loans, the state banks could not pay back their loans to the federal government. This economic shock led to the Banking Crisis of 1819, which contributed to the Panic of 1819.
The combination of economic decline and banking instability led to prices dropping, which led to landowners not being able to pay back the loans they took out. The United States had a surplus of wheat and cotton, but the European markets were in better shape with the Napoleonic Wars over and Great Britain getting cotton from India. Crop prices dropped by more than seventy percent. This decrease in prices led to a drop in profit for farmers across the country, including in states like Ohio and Pennsylvania with their wheat and in Alabama and Arkansas with their cotton.
The decline in goods hurt farmers and businessmen who had taken out large debts for their companies and massive loans for their land purchases. This caused the banks to re-call their loans and confiscate the property. The banks, however, could not sell the properties, as few people had the funds to buy the land. As farmers lost land, the overall reduction in purchases hurt manufacturers and factories in urban centers. For example, seventy-five percent of workers in Philadelphia, Pennsylvania, were out of work. Factories in Ohio and Kentucky were completely inactive. Since Arkansas had a population of only 14,273 people when the panic struck, the state did not face the massive layoffs and joblessness that eastern states faced.
America’s private charities faced an onslaught of needy citizens. Some states drafted debt-relief laws because their debtors’ prisons were overflowing. Some states passed laws to get rid of debtors’ prisons altogether. Arkansas did not have penitentiaries of any kind until 1838, but to help the coffers, the assembly chose to levy taxes on landholders who did not have permanent residence in the territory. Wealthy Americans also saw crippling economic constraints, but the Panic of 1819 was unique because it affected every corner of American society. John C. Calhoun of South Carolina stated that “enormous numbers of persons [were] utterly ruined; multitudes in deep distress.” The effects of the panic lasted well into the 1820s. By 1823, the economy had stabilized, but economic hardship and a growing animosity toward the banking system had altered attitudes in the United States. Arkansas remained a territory until 1836, when it became the first state admitted to the Union since the height of the economic panic in 1821. In addition, Arkansas did not have a significant banking presence until statehood.
Although the panic ended in the early 1820s, it continued to affect national and regional politics. Nationally, the hostility toward federal influence over banking led to increased opposition to federal concentration of power. Although James Monroe won reelection effectively unopposed in 1820, the Democratic-Republican Party would have stiffer competition in future election cycles. The party effectively dissolved in the 1830s. At the same time, the economic problems would contribute to the political ascension of the Democratic Party and future president Andrew Jackson.
Regionally, northerners supported higher tariffs, while many southern Americans rejected tariffs and withdrew from supporting national economic policies. By the late 1820s, tariffs became a massive issue that would lead to more regional crises. In addition, a regional dispute over the admission of Missouri as a slave state in 1820 led to the Missouri Compromise. Enacted during the early months of the financial panic, the compromise, also called the Compromise of 1820, addressed the contentious issues of slavery and western territories. Both conflicts would continue to grow and contribute to hostilities that would precede the American Civil War.
For additional information:
Browning, Andrew H. The Panic of 1819. Columbia: University of Missouri Press, 2019.
Blackson, Robert M. “Pennsylvania Banks and the Panic of 1819: A Reinterpretation.” Journal of the Early Republic 9 (Autumn 1989): 335–358.
Rothbard, Murray N. The Panic of 1819: Reaction and Policies. Auburn, AL: Mises Institute, 2007.
Whayne, Jeannie M., et al. Arkansas: A Narrative History. 2nd ed. Fayetteville: University of Arkansas Press, 2013.
Michael J. Megelsh
Blue Mountain Christian University
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