VII. Conclusion

Confronted with the nation’s first great panic, Americans searched widely for the causes of and remedies for their plight. Their search led them to a wide variety of suggestions and controversies, many of which showed keen insight and economic sophistication. Discussion was carried on in the newspapers, in monographs, and in the halls of legislatures. Particularly striking is the high caliber economic thinking of the influential journalists of the day and of many leading political figures. The absence of specialized economists was in a way compensated by the economic knowledge and intelligence of the articulate members of the community, including the leading statesmen.

One of the chief centers of attention was the monetary system. The nation’s monetary system was highly imperfect; banking on a nationwide scale was new, and the nation suffered from inconvertibility and varying rates of depreciation during the War of 1812 and elimination and then renewal of a Bank of the United States. There had always been men who favored inconvertible paper for purposes of national development and men who opposed it, but lately little attention had been paid to such schemes. The panic caused monetary troubles to intensify and take on a new urgency. Groups of monetary expansionists arose, many of them respectable pillars of their communities, who wished to stop contraction of the money supply and expand the circulating medium instead. Various types of plans were developed and advanced, on both a federal and state level. Most discussion was on the state level, where all banks except the Bank of the United States were chartered. The most moderate wished to bolster the failing banks by permitting them to suspend specie payment temporarily while continuing in operation. Others turned to the creation of wholly state owned banks or loan offices to issue inconvertible currency. Many states adopted measures to bolster or expand the money supply, including attempts to outlaw depreciation of bank notes. Four western states—Illinois, Missouri, Kentucky, and Tennessee—went to the length of establishing state owned inconvertible paper. The measures were only adopted after keen controversy.

Many writers advocated more ambitious schemes of a federal inconvertible paper money. None came to a vote in Congress, but the House asked Secretary of Treasury Crawford to report on the desirability of such a plan. Crawford’s rather reluctant rejection buried the idea. His own paper scheme, though finally rejected by him, drew sharp comment, which incidentally provided some keen analysis of monetary problems and business fluctuations.

The basic argument of the monetary expansionists was a need to relieve an alleged scarcity of money, thereby eliminating the depression by aiding debtors and raising prices. The more sophisticated inflationists added their contention that the rate of interest depended inversely on the quantity of money, and that expansion would therefore lead to a beneficial lowering of the rate of interest, and hence to restored prosperity.

The “sound money” opponents of such schemes formed a majority of leading opinion. Their major argument was that depreciation would ensue from any inconvertible paper schemes. But in the process of forming their opposition, much higher level analysis was elaborated. Many hard money writers formulated a monetary explanation of the business cycle—seeing the cause of depression in an expansion of bank credit and money supply, a subsequent rise in prices, specie drain abroad, and finally contraction and depression. Monetary expansion would only renew this process and prolong the contraction necessary to liquidate unsound banks and reverse the specie drain. The only cure for the depression, they concluded, was a rigid enforcement of specie payment. Sound money writers conceded that monetary contraction would bring temporary disturbances, but declared that any legislative intervention would only aggravate the situation.

Much of the discussion concerned the procedure to best maintain confidence. The inflationists urged that new money would bolster confidence and induce money to leave idle hoards, thereby restoring prosperity. Their opponents, on the other hand, maintained that confidence could only be achieved by strict adherence to specie payment.

Believing that excessive bank credit was primarily responsible for the depression, restrictionists generally advocated various controls over credit as a method of relieving the present depression and preventing future ones. Various plans were offered (in addition to insistence on strict adherence to specie payments): for example, banks should be allowed only in cities; prohibition of small denomination notes; and the prohibition of interbank borrowing. Hostility to banks was widespread throughout the nation, and many influential figures went so far as to advocate abolition of banking, or virtual abolition through imposing 100 percent reserves. In practice, however, they were often willing to accept more immediately attainable proposals for restricting bank credit. Leading Virginia statesmen were particularly prominent in the hard money ranks.

Thus, America had quite a few exponents of the “Currency principle”—100 percent reserve banking and the idea that fiduciary bank credit causes a business cycle—several years before Thomas Joplin first gave it prominence in England. Perhaps one reason for this precedence was that Americans, while benefiting from the famous English bullionist discussions on problems of an inconvertible currency, were forced to grapple with inflation under a mostly convertible currency several years before the English—who did not complete their return to specie payments until 1821.

Hostility was also engendered toward the Second Bank of the United States, which had touched off the monetary contraction at the onset of the panic. Legislatures passed resolutions urging the elimination of the bank, and some states levied taxes on it or sanctioned suspension of specie payment to the bank only. Little was done in Congress to curb the bank, however. The depression intensified a longstanding political controversy concerning the power of the bank. It is often overlooked, however, that hostility to the bank on economic grounds came from two opposing directions: from those who attacked it as too restrictive, and from the hard money ultras who considered it a nationwide engine of monetary expansion. Such ultra hard money leaders as the Virginia group had little use for either state or federal banking.

Much of the discussion between the hard and soft money forces was on a highly sophisticated level. Some inflationists welcomed the prospect of a limitless flood of money and even advocated depreciation as helping to build up a home market, but wiser ones countered the opposition with the thesis that an inconvertible currency could be more stable in value than specie. Specie was subject to fluctuations of supply and demand, but paper could be regulated by the government so as to provide a stable value of the dollar. Hard money men were generally content to grant this in theory but to deny its practicality, asserting that the government would always tend to inflate the currency. Some added the subtle theoretical argument that the value of money could not be measured, and denied that such stabilization was either possible or desirable.

The twin planks of the relief platform in the states were inconvertible state paper and debtors’ relief. Debtors’ relief took the form of stay laws and minimum appraisal laws. These measures had been used before in America, but not on such a widespread or intensified scale. In some cases they were adopted by themselves; in others they were used as means to bolster the circulation of the new inconvertible notes. Controversy over debtors’ relief proposals raged in states throughout the Union. Minimum appraisal laws were enacted in four western states—Indiana, Missouri, Ohio, and Tennessee—while stay laws were enacted in eight, two of them in the East (Maryland and Vermont). Some other eastern states (e.g., New York, Rhode Island, Pennsylvania) modified their procedures to ease the strain on insolvent debtors.

The reasoning of the relief forces was generally simple and straightforward: the debtors were in a bad plight, and it was the duty of the legislature to come to their relief. Stress was often laid on the burden placed on debtors by the rise in the purchasing power of the dollar during the depression, with debtors being forced to repay in money of far greater value than they had borrowed. The opponents of relief could not deny the plight of the debtors. Their economic argument emphasized that alleviation of the debtors’ problems would only intensify the depression in the long run, for creditors would lose confidence, and this would aggravate the depression and delay recovery. The only lasting help for debtors was to let the economy take its course and await the resumption of confidence. Furthermore, the debtors would thereby be forced to hew to the virtues of thrift and hard work, the only long run basis for prosperity.

One debt problem was a federal one: the public land debt, a mass of which was owed to the government. Granting more liberal terms of credit clearly constituted no interference with private contract. Congress moved to permit debtors to relinquish the unpaid portion of their land, to forgive much of the outstanding debt and keep title to the rest, and to grant extended time for payment. The impetus for this relief came from the West, but it was generally supported in all sections and passed overwhelmingly. Leading opposition, in fact, came from westerners who wanted aid confined to the actual settlers. President Monroe’s inaction in the face of the depression has been often stressed, but it should not be forgotten that he took the lead in sponsoring public land debt relief. Monroe did not overlook the depression in that case when he believed federal action appropriate.

The tariff question was another issue that sprang into prominence during the depression. After the War of 1812, the tariff of 1816 had been enacted with general approval in the national spirit carried over from wartime, and in the wish to aid the manufactures developed during the war. Since then, the tariff issue had been dormant, only to revive in the depression in its more modern form as an active, almost evangelical, movement. The movement centered in the Middle Atlantic states and was led by cotton and woolen manufacturers. A determined drive for a high tariff was narrowly defeated in the Senate in 1820, along with two subsidiary measures designed to hamper imports: a prohibitory tax on auction sales—the major sales outlet for imported textiles—and a suspension of the federal government’s practice of granting time for the payment of import duties.

The protectionists seized every opportunity to stress the severity of the depression, to press their claim that the tariff would furnish a cure. Manufactures would be bolstered and agriculture assured a steady home market. The phenomenon of widespread unemployment was heavily stressed by the protectionists, and they asserted that a protective tariff would bring about full employment for labor. The existence of unemployment was particularly used to rebut standard free trade objections that a higher tariff would withdraw needed resources from agriculture and commerce.

The free trade opposition centered in the South, where agriculture depended on exports, and in New England shipping centers. Free traders, when they answered the depression argument, maintained that the tariff would aggravate the depression in commerce and agriculture by blocking foreign trade. Some sophisticated free traders also charged that a higher tariff would aggravate the depression by imposing a tax burden on consumption, demonstrating also that falling prices had already increased the real burden of the tariff on the nation’s consumers. Thus, they arrived at the position that burdens on consumption should be abated during a depression.

The depression gave rise to suggestions for internal improvements as a partial remedy, in arguments reminiscent of the public works proposals of a later day. These projects would alleviate the depression by giving work to the unemployed, invigorating enterprise in the community, and quickening the circulation of money.

Many citizens objected to all these legislative remedies on the grounds of laissez-faire principle. Their arguments had two facets: (1) the government could not remedy the situation, and (2) a remedy could only come from the market processes themselves: via liquidation of unsound conditions and a return to the fundamental virtues of “industry and economy.” Even many of those with other proposals to offer felt that they must pay lip service to the pervasive belief in the importance of these twin virtues. Stress on the moral virtues often took the form of attack on luxurious consumption and other extravagances of the day. Embryonic Veblenians called upon the rich to set an example in thrifty living to the lower classes, who tended to imitate the former.¹

The laissez-faire partisans opposed higher tariffs and debtors’ relief legislation. Most of them were hard money stalwarts as well. Controls over banks were not considered interference in the market but rather an exercise of the government’s sovereign rights over the money supply and a prevention of bank interference with the market. The most cogent upholders of this view were the leading Virginians. Some ardent states-rights Virginians, in fact, were willing to grant federal control over banking. A few free traders, in contrast, favored an inflationist monetary policy. Some advocates of laissez-faire were uneasy about stringent regulation of banks, and a few evolved a rudimentary self-generating theory of business cycles, in which cycles were depicted as inevitably recurring business processes, always furnishing their own corrective countermovements. Protection and easy money, conversely, did not necessarily go hand in hand, as some leading protectionists remained staunch hard money men.

The struggles over remedial proposals took their place in the context of nineteenth century struggles over monetary and debt relief proposals. Many historians orient their discussion of such struggles in America along class or sectional lines. The image is often conjured up of poor western farmer-debtors favoring inflation, battling rich eastern merchant-creditors favoring sound money. The results of this study cast strong doubt on this common ideal-type.² In the widespread monetary struggles during the depression of 1819–21, at least, the battle of inflation vs. hard money cut sharply across regional, geographic, wealth, and occupational boundaries. The fact that two wealthy cotton planters from Nashville were the leaders of the opposing sides of the raging controversies typified the monetary and debtors’ relief debates. Furthermore, several western governors and inflationist leaders completely changed their position after viewing the results of the inconvertible paper schemes. These shifts could scarcely have occurred so swiftly if their opinions had been determined by their class, occupation, or region. Caution should be exercised in employing the much used term “agrarian,” for often an agrarian turns out to be a wealthy land speculator rather than an impoverished settler. Sectional and occupational differences were far more clear cut in the tariff controversy, however, with manufacturers in the Middle Atlantic states ranged against southern farmers and planters and New England merchants.

The controversies inspired by the Panic of 1819 continued to make their imprint on later years in America. The protective movement, denied its victory at the time, triumphed in 1824. Inflation of inconvertible notes by states was generally discredited as an anti-depression weapon by the rapid depreciation of the notes. Many of the anti-bank, ultra hard money leaders of the Jackson-Van Buren period first came to a hard money position during this depression. Andrew Jackson himself foreshadowed his later opposition to banking by making himself the fervent leader of the opposition to inconvertible paper in Tennessee. Thomas Hart (“Old Bullion”) Benton, later Jackson’s hard money arm in the Senate, was converted to hard money by his experience with banking in Missouri during the panic. Future President James K. Polk of Tennessee, who was to be Jackson’s leader in the House and later to establish the ultra hard money Independent Treasury system, began his political career in Tennessee in this period by urging return to specie payment. Amos Kendall, later Jackson’s top adviser and confidant in the bank war, became an implacable enemy of banks during this period. Condy Raguet, though not a Jacksonian politically, did favor the Independent Treasury plan. He was converted to hard money during the Panic of 1819, after having been a leading inflationist since the end of the War. (The depression also converted Raguet from a protectionist to one of the leading champions of free trade.) Raguet’s depression-born search for stricter controls over bank credit expansion led him to be one of the leaders in the free banking movement of the late 1820s.

One of the most impressive aspects of the discussions about the depression was the high intellectual level of the debate, as carried on in newspapers and elsewhere. Participants showed familiarity with English and Continental economists, and with the English reviews, and attempted to relate their practical proposals to a framework of theory to a degree that seems remarkable today.³

There is a strong possibility that the panic gave a great impetus toward the launching of a class of economists in this country—in both the academic and journalistic fields.⁴ The first treatise on economics published in this country was Daniel Raymond’s Thoughts on Political Economy in 1820 (expanded into Elements of Political Economy in 1823). It was written very much under the impact of the monetary and tariff controversies of the depression, in which Raymond was embroiled. John McVickar, the nation’s first academic economist, began teaching economics at Columbia College around this period, and later in the 1820s evolved the “free banking” plan, with bank notes to be secured by government bonds and land mortgages. In fact, many began teaching and writing economics during the 1820s, such as Thomas Cooper, Henry Vethake, William Beach Lawrence, Willard Phillips, Alexander Everett, George Tucker, William Jennison, Jacob N. Cardozo, the Reverend Samuel P. Newman, the Reverend Francis Wayland. Certainly much of this flowering of economics in the United States can be attributed to the impetus given to economic thought by Ricardo, Say, and other European economists. Part of the credit, however, may well be assigned to the controversies over economic policy that the Panic of 1819 had brought into sharp focus.

The Panic of 1819 exerted a profound effect on American economic thought. As the first great financial depression, similar to a modern expansion-depression pattern, the panic heightened interest in economic problems, and particularly those problems related to the causes and cures of depressed conditions. Such important unsolved economic problems as monetary and banking policy, tariff protection, debt collection, internal improvements, all existed before the depression and all continued after it was gone. But the panic gave them new dimensions and aroused new speculations which were not to disappear with the return of prosperity.

---

¹Here free traders joined forces with protectionists, who constantly inveighed against the use of imported luxuries.

²Neither can this study endorse the opposite ideal-type of Bray Hammond, whose recent work tends to the contrary extreme of identifying agrarians with hard money, and merchants and businessmen with inflation. Hammond, Banks and Politics in America, passim.

³On the great extent to which English and French economists were reprinted, translated, and sold in America during this period, see Esther Lowenthal, “American Reprints of Economic Writings, 1776–1848,” American Economic Review 42 (December 1952): 876–80, and “Additional American Reprints, 1776–1848,” ibid., 43 (December 1953): 884–85; and David McCord Wright, The Economic Library of the President of the Bank of the United States, 1819–23 (Charlottesville: University of Virginia Press, 1950).

⁴See Michael J.L. O’Connor, Origins of Academic Economics in the United States (New York: Columbia University Press, 1944), pp. 29, 73, 102.