9.2 A vibrant capitalist republic  (Page 3/11)

During the War of 1812, the Bank of the United States had suspended payments in specie    , “hard money” usually in the form of gold and silver coins. When the war ended, the bank continued to issue only paper banknotes and to redeem notes issued by state banks with paper only. The newly chartered banks also adopted this practice, issuing banknotes in excess of the amount of specie in their vaults. This shaky economic scheme worked only so long as people were content to conduct business with paper money and refrain from demanding that banks instead give them the gold and silver that was supposed to back it. If large numbers of people, or banks that had loaned money to other banks, began to demand specie payments, the banking system would collapse, because there was no longer enough specie to support the amount of paper money the banks had put into circulation. So terrified were bankers that customers would demand gold and silver that an irate bank employee in Ohio stabbed a customer who had the audacity to ask for specie in exchange for the banknotes he held.

In an effort to bring stability to the nation’s banking system, Congress chartered the Second Bank of the United States (a revival of Alexander Hamilton’s national bank) in 1816. But this new institution only compounded the problem by making risky loans, opening branches in the South and West where land fever was highest, and issuing a steady stream of Bank of the United States notes, a move that increased inflation and speculation.

The inflated economic bubble burst in 1819, resulting in a prolonged economic depression or severe downturn in the economy called the Panic of 1819. It was the first economic depression experienced by the American public, who panicked as they saw the prices of agricultural products fall and businesses fail. Prices had already begun falling in 1815, at the end of the Napoleonic Wars, when Britain began to “dump” its surplus manufactured goods, the result of wartime overproduction, in American ports, where they were sold for low prices and competed with American-manufactured goods. In 1818, to make the economic situation worse, prices for American agricultural products began to fall both in the United States and in Europe; the overproduction of staples such as wheat and cotton coincided with the recovery of European agriculture, which reduced demand for American crops. Crop prices tumbled by as much 75 percent.

This dramatic decrease in the value of agricultural goods left farmers unable to pay their debts. As they defaulted on their loans, banks seized their property. However, because the drastic fall in agricultural prices had greatly reduced the value of land, the banks were left with farms they were unable to sell. Land speculators lost the value of their investments. As the countryside suffered, hard-hit farmers ceased to purchase manufactured goods. Factories responded by cutting wages or firing employees.

In 1818, the Second Bank of the United States needed specie to pay foreign investors who had loaned money to the United States to enable the country to purchase Louisiana. The bank began to call in the loans it had made and required that state banks pay their debts in gold and silver. State banks that could not collect loan payments from hard-pressed farmers could not, in turn, meet their obligations to the Second Bank of the United States. Severe consequences followed as banks closed their doors and businesses failed. Three-quarters of the work force in Philadelphia was unemployed, and charities were swamped by thousands of newly destitute people needing assistance. In states with imprisonment for debt, the prison population swelled. As a result, many states drafted laws to provide relief for debtors. Even those at the top of the social ladder were affected by the Panic of 1819. Thomas Jefferson, who had cosigned a loan for a friend, nearly lost Monticello when his acquaintance defaulted, leaving Jefferson responsible for the debt.