The Panic of 1819 was part of a  worldwide financial crisis but the inept management of the Second Bank of America caused the U.S. panic by first extending far too much credit, then quickly restricting it. These banking policies led to runs on state banks, bank closures, foreclosures and bankruptcies. The Panic of 1819 was the first Important financial crisis in the United States and the terrible effects of the panic resulted in the public loss of confidence in the financial structure.

The Panic of 1819 for kids: Background History
The War of 1812 between the US and Great Britain had ended in a stalemate, and massive war debts, but gave the United States the confidence to consider itself as a strong, unified and independent nation.

The political calm in the country led to the period known as the Era of Good Feelings. The government introduced an economic plan aimed at improving the economy of the US. The nation's economic plan was based on a new national bank to provide credit to Americans, taxing foreign goods to raise income and creating a subsidized transportation infrastructure of new roads and canals to enable Westward Expansion to new lands with more settlers becoming farmers.

The plan was initiated by Henry Clay and was called the 'American System'.

The establishment of the Second Bank of the United States was part of the economic plan to reach these goals. President James Madison, with the approval of Congress, granted a charter to the Second Bank of the United States in 1816 which was a privately held banking corporation.

What were the Causes of the Panic of 1819?
There were many causes of the Panic of 1819 including those are detailed in the following fact sheet.

Westward expansion: The government offered vast tracts of western land for sale. This fueled real estate speculation that was funded by increased availability of credit from the Second Bank of the United States and new, reckless frontier banks

The number of banks in the United States more than doubled between 1812 and 1819

The Banks were unregulated and began to issue massive amounts of bank notes. The bank notes were not backed by gold and silver.

Banks issued notes far in excess of their specie deposits (see Promissory Notes below)

In other words bank's capital was based on IOU's

State banks were chartered for the express purpose of extending credit to speculators

Easy credit was obtained by high-risk debtors including many farmers

An International financial crisis emerged (a global credit crunch, banks were restricting credit and loans were being called in)

A trade deficit in the U.S. was caused by a downturn in exports and strong price competition from foreign goods

Increasing crop yields in Europe reduced the demand for American farm products, especially wheat, cotton and tobacco, and prices for these products plunged

Demand for manufactured goods also decreased

The bad management of poor banking policies of the state banks and the Second Bank of the United States

The first president of the Second Bank of the United States was William Jones, a political appointee who had gone bankrupt (refer to the Spoils System for more info)

William Jones first extending far too much credit and then panicked and restricted it too quickly

In 1819 Langdon Cheves replaced William Jones as president of the Second Bank of the United States. To combat the economic crisis he put into place a number of measures

Fewer loans were extended
The number of notes in circulation were halved
He presented state banknotes to banks for specie (gold and silver coins)
He foreclosed on mortgages

Promissory Notes
The capital of the banks were made up from promissory notes like the example in the picture

• A promissory note was a signed document containing a written promise to pay a stated sum in gold or silver to a specified person at a specified date or on demand

Section 8 of the Constitution permits Congress to coin money and to regulate its value. Section 10 of the Constitution denies states the right to coin or to print their own money.

What were the Effects of the Panic of 1819?
The terrible effects of the Panic of 1819 are detailed in the following fact sheet.

Banks went into bankruptcy - they did not have enough gold and silver to cover withdrawal requests

The banks had to demand payment of debts by the farmers of the Midwest

The banks had to demand payment of debts by the industrialists and manufacturers

The ability to obtain easy credit, or extend credit, disappeared

The value of land decreased - land sold for up to $70 an acre dropped in value to only $2 an acre

Demand for manufactured goods also decreased

The prices of products plunged and inflation rose

There were foreclosures, numerous people were made homeless and lost their farms and businesses

A foreclosure is the process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up mortgage payments

There were numerous bankruptcies

A bankruptcy is financial ruin caused by not having the money needed to pay your debts

People were thrown into debtors prisons

Widespread unemployment was triggered

The gross mismanagement of the Second Bank of the United States reduced the effectiveness and belief in the American System

The nation suffered a depression for the next two years

The Significance of the Panic of 1819:
What was the significance of the Panic of 1819? The Rush-Bagot agreement was significant because:

• The Land Act of 1820 was passed abandoning the credit system for buying public lands and led to the future confiscation of land from Native Americans and lower cost lands for settlers in the west

• There were calls for additional protective economic policies which led to the 1828 Tariff of Abominations and the Nullification Crisis

• The experiences suffered by so many Americans fostered a profound mistrust of banks, bankers and paper money

• The Panic of 1819 led to the future Bank War waged by President Andrew Jackson and the issue of the Specie Circular

Also refer to the article on the Panic of 1837.

The Panic of 1819 for kids: Additional Information
The Panic of 1819 was one of a series of financial crisis to cripple the economy of the United States - refer to the Bank War, the Panic of 1837 and the Panic of 1857 for additional facts and information.