Abstract

This paper discusses the first ever crisis of a severe magnitude that the American economy countered, known as the “the Panic of 1819”. The paper discusses the various circumstances and their significance that led to the economic depression that would play a vital role in shaping the American economy in ways it stands today.

The Panic of 1819

Introduction

The Panic of 1819 refers to the first ever economic crisis of a large magnitude experienced by the US. The Panic of 1819, to a major extent, could be attributed to the changes that occurred as a result of the War of 1812, fought between the US and the British Empire. The war and its aftermath had severe consequences for the young US economy.

The boom that followed the war altered the structure and the mechanism of the American economy. The government needed funds for its war operations that it acquired through very heavy loans and borrowings. It was largely reliant upon the note-issuing institutions and banks in the country that put these banks under tremendous pressure and strains. The banks faced serious threat to their specie reserves, which were retained against all such notes. This inevitably resulted in the suspension of the payments of all such specie throughout the country in 1814, marking the spread of the panic in the economy (Axelrod & Phillips, 2008, pp.130).

Discussion

Prior to the war, America had been a vast country with a thin population of seven million, most of whom were dedicated to agriculture. A substantial fraction of the agricultural output was exported to foreign countries and nations, while the rural households accounted for the consumption of the remaining part. Barter was a popular practice in many parts of the frontier. The commerce of the country was dominated by the export of the agriculture goods, whose production was usually based near sources of river transportation. The gains from these exports were used for importing different manufactured goods and consumer products from other countries. New York City formed the center of foreign trade for the nation.There were very few large and medium-scale industries in the US economy. The manufacturing and production during this period was carried out by small-scale industries, which were often run by a single individual. The manufacturers mainly included artificers and craftsmen, who performed the functions of both the entrepreneur and labor, such as blacksmith, cobblers, tailors and hatters. A substantial proportion of the manufacturing was carried out at home; particularly the textile manufactures, and was consumed by domestic households. There were no modern means of transportation, with most of it done through rivers and ocean, which was immensely time-consuming. The land transport was highly expensive and was carried out over poor dirt roads and unpaved, rough stretches (Rothbard, 2002, pp. 48).

The War of 1812 and its consequences resulted in many sudden and rapid transformations, in the American economy. The American shipping and foreign trade had always been in good shape, with great demand for the country's exports on both sides. However, the emergence of the ...