Failed banks, widespread foreclosures, impaired agriculture sector and manufacturing industry, large scale unemployment and homelessness.... these were some of the predominant characteristics of the US economy during the Panic of 1819 - the first major financial crisis in the American history. It was one of the most hard-hitting crisis that the nation had ever witnessed - largely because the national financial system was still in its infancy and never before had the Americans witnessed crisis of such magnitude in their country.

What was the Panic of 1819?

The Panic of 1819 was the first major financial crisis or economic recession that the US economy was subjected to. This crisis situation occurred towards the end of the Era of Good Feelings in the first quarter of 19th century. The buildup of this crisis had begun with the War of 1812. In 1818, the British investors turning their attention towards the Indian subcontinent for cotton and this turned out to be a major trigger for large scale panic among the masses, which eventually resulted in economic depression in the United States. It started with drastic fall in land prices across the United States, and went for the next three years till 1822. One thing led to another, and soon enough the entire economy had come to a standstill - even before the government could figure out what was happening.

What Caused the Panic of 1819?

Unlike the previous financial crisis which the nation was subjected to, the Panic of 1819 causes were rooted within the US economy. While the public debt of 1812 and Louisiana Purchase had its own share in causing the Panic of 1819, the most prominent cause for the same was an irresponsible banking system - with the Second Bank of the United States at its forefront, prevailing in the country during this period. In its attempt to raise money to pay off the debt which had accumulated after the War of 1812, the administration hiked the prices of goods - which, in turn, resulted in inflation. In the post-war US economy, the absence of a nationalized banking system gave state banks the power to print currency. With no monitoring authority as such, these banks pumped enormous amount of money in the economy - with no backing of any sort, and this eventually became one of the most prominent causes for inflation in the country.

When the Second Bank of the United States came into existence, it walked on the same path as the state banks - towards economic expansion, owing to the fact that this expansion added to nation's revenue. Only when it realized that this inflation is affecting the economy, it switched over from its expansionary stance to a deflationary stance - with the intent of curbing inflation in the economy, in 1818. In a bid to control inflation, the Second Bank contracted the money supply and called in all the outstanding loans - which, in turn, resulted in failure of many state banks. As the British investors turned all their attention to their new colonies in Asia, it resulted in large scale loss in the agriculture sector - which eventually resulted in a full fledged financial crisis in the nation.

What Were the Effects of Panic of 1819?

The Panic of 1819 marked the end of the policy of economic expansion in the United States of America. Similarly, it had long lasting effects on the banking system in the country. The new financial policies that followed the Panic of 1819 were ideal for the economic development of the nation. Panic of 1819 effects were most obvious in the southern and western states. In the field of politics, it allowed Andrew Jackson to strengthen his base in the nation. Most important of all, the Panic of 1819 was a lesson learned for American citizens who realized that the role of the government in their lives.

The Panic of 1819 finally came to an end in 1823, but that was just one of the numerous financial crisis that the United States was subjected to during the 19th century. Other financial crisis of this period were the Panic of 1837, Panic of 1857, Panic of 1873 and the Panic of 1893. Even though the Panic of 1819 was not as intense as the Great Depression - which was the largest economic depression in the 20th century, it did did replace the foundation of US economy with a new- stronger foundation.

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Published: 12/16/2010

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