Panic of 1819: Summary & Causes

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  • 0:00 The First Depression
  • 0:45 Banks, Loans, Policies
  • 2:15 War Of 1812
  • 3:53 Westward Expansion
  • 4:45 Lesson Summary
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Lesson Transcript
Instructor: Christopher Prokes

Chris is an instructional designer and college faculty member. He has a Master's Degree in Education and also umpires baseball.

The Panic of 1819 was the first major economic depression in U.S. history. Banks closed, houses and farms were foreclosed, and nearly everyone was affected. In this lesson, focus on the Panic of 1819 and its causes.

The First Depression

The Panic of 1819 (1819-1824) was the first major economic depression in American history. It came on quickly and harshly, just like a severe bout of the flu. Many people are familiar with The Great Depression of the 1920s and 1930s and those who lived it might have seen it as a sickness on this country. You perhaps are even thinking about the recession of the 2000s, whose effects are still felt today.

Just like an illness, the Panic of 1819 had causes. When attempting to diagnose this malady, there are three main indicators, or symptoms if you will, that a physician (you, the reader!) can use for a diagnosis. These are:

  • Bank loans
  • The War of 1812
  • The move westward

When combined, these symptoms would lead to the Panic of 1819.

Bank Loans

Back in the early 1800s, banks gave loans to anyone regardless of credit or income, which is not the case today. These offers were called speculatory loans and they were loans for people to speculate on purchases, such as on land, with the bank really having no idea what the money would be spent on. Imagine trying to get a loan today for a house the bank has never seen!

Offering loans was a primary role of banks. These loans were set up to be paid back with high interest rates (money paid for borrowing money). Banks, whose numbers doubled between 1812 and 1819, began to issue bank notes for loans. These were paper certificates (at a time when paper money didn't exist!) that had no actual value in gold or silver. When banks wanted loans repaid, collecting on them was nearly impossible since banks couldn't prove the actual worth of the notes. Many banks went out of business, while robbing others of deposits.

The Second Bank of the United States (BUS)
Bank of the United States

Such questionable policies served as building blocks to the Panic of 1819. The Second Bank of the United States (BUS), a national bank, was the leading germ in the infectious chain of events that would lead to the panic. Banks would eventually call in nearly all of their loans. And, since paper notes were worthless and specualtory loans were not specific as to what would be purchased, no one knew how much was truly owed. So, banks had more money loaned than on hand, and angry customers could not withdraw their own money!

The War of 1812

Another symptom of the Panic of 1819 was economic expansion during and following the War of 1812, a military conflict that pitted the U.S. against the U.K. and its allies. When at war, a nation must produce weapons and other materials. During this war, the U.S. produced rifles, muskets, artillery, field supplies, uniforms, and ships to use in battle. This meant jobs since there was demand for these products. And not just in the U.S.: industry also supplied other countries. Why would the U.S. supply others with products when we were fighting a war? Well, other countries saw we were capable of high quantities of goods, ones made from raw materials foreign nations lacked. So, they bought American goods and made Americans a lot of money!

Battle of New Orleans during the War of 1812
Battle of New Orleans

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