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The Panic of 1819 and Today

Some things never change -- the first depression in U.S. history was very similar to all future economic downturns, including today's.

The Panic of 1819 sparked a crisis that featured price drops, bank failures, mortgage foreclosures, and mass unemployment. The main culprit in the economic downturn was the Second Bank of the United States (forerunner to today’s Federal Reserve System). The Bank offered bad (and sometimes fraudulent) loans and printed paper money that fueled overspeculation and inflation.

When the Bank tried returning to a sound monetary policy through deflation, prices dropped, home and land values plummeted, and overextended banks and homeowners went broke. This affected farming and manufacturing, which in turn caused unemployment. Not only did the panic demonstrate the boom-and-bust business cycle in U.S. economics for the first time, but it also bred suspicion of a national bank that had virtually unlimited power to manipulate the currency.

Politicians offered many proposals to relieve the depression. Northern manufacturers proposed raising tariffs (i.e., taxes) on imported goods to coerce consumers into buying cheaper U.S. goods. However, higher tariffs would have likely made the crisis worse by compelling foreign trading partners to retaliate by either increasing their own tariffs or closing their ports to U.S. goods.

Others proposed ending deflation by printing more paper money, which would aid debtors by raising prices and lowering interest rates. However, such aid would have only encouraged more irresponsible borrowing. Some proposed initiating government-controlled public works projects, but others objected because such projects were unconstitutional. Most acknowledged that true recovery could only come by liquidating unsound conditions and returning to sound money, industry (i.e., working harder), and economy (i.e., spending less).

President James Monroe ultimately adhered to the Constitution by limiting government intervention; industry and economy applied not only to the people but to their government as well. Salaries of government officials were cut, along with overall government spending. These measures, combined with an influx of Mexican silver, helped to end the depression within three years.

The panic heightened interest in economic issues, giving them new dimensions and spawning new theories and ideas that have evolved to this day. The depression caused by the Panic of 1819 was similar to modern economic crises, including that of 2008. The boom of banks and printed money fueled a real estate boom that was ultimately corrected by a market bust, much like 2008.

The panic also generated intense hostility toward the Second Bank of the United States, just as many free market economists blame the Federal Reserve System for the 2008 economic downturn. The ability of a government-backed national bank to manipulate the national currency for political or financial gain has been the subject of a longstanding debate over central banking in the U.S. that continues today.


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