America’s reliance on cotton as an economic staple presented an opportunity for prosperity and an accompanying risk. In late 1818, the value of cotton fell as supply outpaced demand and “London banks decided there was no longer a need to extend more credit.” Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 142. Then, the Second Bank of the United States, just two years into its life, “responded by shifting suddenly away from its own expansionist policy,” by the direction of William Jones, which only exacerbated the credit problem. See id. at 142-43. The Panic of 1819 erupted.
Investors panicked and tried to sell their investments, causing the value of investments to plummet. Id. at 143 citing Murray Rothbard, The Panic of 1819 (New York, 1962), 11-17. This sparked a reaction that would hit ordinary Americans hardest, causing them to lose mortgaged properties and to be laid off. Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 143.
The Panic of 1819 would last for a few years, and contemporaries called it simply “hard times,” as it was “the first time that the American public had experienced collectively what would become a recurrent phenomenon, a sharp downward swing of the business cycle.” Id. citing Charles Sellers, The Market Revolution (New York, 1991), 137. In other words, it was “a traumatic awakening to the capitalist reality of boom-and-bust.” Charles Sellers, The Market Revolution (New York, 1991), 137.
Up until this point, Americans had only grappled with economic difficulties as a result of “war, natural disaster, or the political paralysis of the Articles of Confederation.” Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 143-44. A scapegoat was needed, and William Jones would be one, as he resigned early in the crisis as he oversaw lax lending during the boom years preceding the Panic. See id. at 144.
In the aftermath of the Panic, Americans questioned how best to prevent another one. Some believed that the banking system must have been reconstituted, that more tariff protections be created for producers, that the government sponsored additional transportation projects, and that there be additional expansion of credit. Id. at 146. Others believed that government spending must be reduced, regulation of issuing banknotes was necessary, and consumers must be urged to live within their means. Id. States took matters into their own hands, with some proposing “stay laws,” so as to slow foreclosure proceedings and to prevent the issuance of bank notes by state banks that have insufficient reserves. Id. The United States Supreme Court would invalidate a New York law that facilitated “bankruptcies as a violation of the constitutional rule against ‘impairing the obligation of contracts.'” Id. quoting Sturges v. Crowninshield, 17 U.S. 122 (1819).
Perhaps most notably, there was generally no animosity toward President Monroe or Washington. Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 146. In fact, the American voters re-elected President Monroe in 1820, leaving the Panic of 1819 to be “the only nationwide depression in American history when the voters did not turn against the administration in Washington.” Id. at 147.
The Panic of 1819 was the first of many tests for the American economy and the American people. It is notable for its absence of animosity toward Washington but also its varied responses. America, in 1819, was still very much a confederation of states with a relatively weak federal government. In that sense, it was difficult for President Monroe to become a scapegoat, as the federal government had not yet pervaded as many aspects of American life as modern Americans experience. As a result, simply because of the circumstances, President Monroe would have the benefit of a second term in the White House.