The Panic of 1819

This is a review of Andrew Browning’s Book.

In 1819, Thomas Jefferson went broke. He had co-signed a friend’s loan, and when that friend slid into bankruptcy, he took Jefferson down with him. Jefferson never recovered, and left his family deeply in debt when he died in 1826. A few years later, his grandson quietly sold Monticello to pay off Jefferson’s estate, with Jefferson still buried there.

There were thousands of stories like Jefferson’s in the 1820s. Andrew Browning calls the Panic of 1819 the “most important event in American history that nobody has heard of,” and I think he makes a good case. The Panic ranks amongst the worst financial disasters in US history, right up there with the Great Depression. Land prices collapsed by as much as 80%. Per-capita GDP fell from $130 in the 1810s to $70 in 1824, and took a full decade to recover. In cities, unemployment reached 50%. In towns, farms failed and the laid-off agricultural workers regressed to barter and subsistence agriculture.

Ok, but — why should we care? There’s a major financial crisis every 20 years (at least!), so what makes this one more interesting than the dot-com bubble, or the savings and loan crisis, or whatever? Browning’s answer would probably be that fallout from the Panic of 1819 explains US national politics through the Civil War, including the rise of Jacksonian populism and North/South sectionalism. My answer would be that the Panic of 1819 is a funhouse mirror for the present, giving unusual and interesting reflections on cryptocurrencies and central banks.

On the other hand: In the forward to A Distant Mirror, Barbara Tuchman warns against making simplistic comparisons between daily life in the 1300s and the 1900s. We might think we can know what it’s like to be a medieval peasant, but we really don’t. Instead, we’re just imagining ourselves — with all our current ethical, social, and economic beliefs — magically transported into the head of a 1348 English yeoman. It’s Nagel’s bat argument, but with people.

What’s true of 1300s social structure is also true of 1800s finance. Some things were so different that it’s hard to make direct comparisons to today, and the questions become philosophical very quickly. For example…

What even is money?

Let’s start with the money. There was no official US fiat currency in 1819. Sure, the US Mint in Philadelphia made gold and silver coins, but there’s good evidence that people valued these only because of their metal content, and not because it said “e pluribus unum” on the back. In fact, most of the silver coins circulating in the US at the time were foreign made; Spanish reales far outnumbered US silver dollars.

But wait, it gets weirder. It’s not that there wasn’t paper money in the early 1800s, it’s just that the US government didn’t make it. There were about 300 state and local banks in the US in the 1810s, and virtually no banking regulation. These banks could, and did, print their own money in the form of banknotes — essentially carnival tokens that only meant something to the bank that issued them. Banks would literally print pieces of paper saying “this is totally worth $5”, and then try to get people to use them. Some banks maintained a semblance of creditworthiness by offering to give you $1 of gold in exchange for its $1 notes, but many did not. Even the ones that did were going bankrupt all the time making the self-imposed gold standard worth less than you might think. (Tuchman: no FDIC insurance in 1819, so you’re out of luck if your bank goes under.)

In this insanely decentralized system, everybody was a judge in a continual Keynesian beauty contest, trying to guess what everybody else thought a given bank’s Monopoly money was worth. As Browning relates:

Today a tourist abroad may negotiate at a souvenir stand for the best exchange rate between dollars and the local currency; in 1819 almost every domestic transaction involved the exchange rate of dollars in one bank’s money for dollars in another bank’s, sometimes with different discounts for different banks in the same city. Niles’ Register published a semi-serious anecdote of a customer who tried to redeem a certain bank’s notes for silver; when they refused, he asked for notes from any other bank that would redeem; when refused again, he finally asked if they had any well-printed counterfeit notes for specie-redeeming banks.

This system invited constant fraud. One common scam was to buy up a reputable bank, and make it disreputable. Imagine a well-run, financially conservative bank whose $1 notes are valued close to $1. Perhaps there’s $10k worth of gold in the vault, and $20k worth of banknotes in circulation, a 2:1 reserve ratio that’s more conservative than that of most banks today.

What you could do is: buy this bank, hyper-inflate its currency, and spend all the money before anybody catches on. Tuchman: It’s important to remember that news traveled by horse in 1819. So if you printed a ton of banknotes and then spent them quickly in places that were far apart, there was no way for anyone to know that your once-trustworthy notes were now worthless “shinplasters.” Around 1808, a guy named Andrew Dexter did just that:

Dexter’s plan was to issue as many banknotes as possible and distribute them as far from Glocester as possible, delaying their return for redemption as long as possible… His specie reserves seem never to have exceeded $200, and may have been as low as $45, but eventually he issued $800,000 in notes. He complained that the bank’s cashier, an unhappy Quaker named William Colwell, didn’t — or couldn’t — sign notes as fast as Dexter could print them… “I am sorry,” Dexter wrote to him, “You have signed no more bills, and beg you to sign twice as many more during the next week. I wish you would work day and night so as to sign, if possible, $20,000 a day.” He meant day and night literally, directing Colwell to sign notes after midnight, behind closed doors, so that no one would see how many notes were being produced.

Dexter spent the money and fled to Nova Scotia when the pitchforks and torches came out. (He later returned to the US to found Montgomery, Alabama. Even later, he lost most of his fortune in another financial crisis, the Panic of 1837, and died of yellow fever. I’m not sure what the moral of this story is.)

A Den of Vipers and Thieves

Banking was unfamiliar on a national level too. The Second Bank of the US (SBUS) was a weird institution. Modern readers will be tempted to compare it with the Fed but, again, Tuchman: while the SBUS banked the US government, it was also a public corporation with independent shareholders. (Secretary of the Treasury William Crawford to SBUS President Langdon Cheves: “The first duty of the [Bank] is to the stockholders; the second is to the nation.”) There was no “fiat” in the fiat money of SBUS; it was free to print banknotes, just like other banks, but it didn’t have a monopoly on legal tender. It’s best to think of the SBUS as a private bank that happened to have the US government as one of its largest customers, and which enjoyed some strong regulatory capture as a result.

The SBUS directors got up to all kinds of hijinks, recounted in detail by Browning, but I’m just going to focus on the disastrous bullet payment on the Louisiana Purchase. In 1803, the US bought Louisiana from Napoleon for $15M. It financed this with $3.75M of cash and $11.25M of bonds. The bonds accrued interest at 6% per year, and came due in 1818. They were to be paid in specie…

This worked fine for the first fourteen years, and was a fiasco in the final one. SBUS had to pay off the bonds in gold or silver. SBUS didn’t have any gold or silver. The main reason it didn’t have any is that SBUS maintained specie convertibility for its own notes, while accepting the worthless notes of other banks. Gresham’s Law in action: you could more or less buy up the depreciated notes of XYZ bank for 50¢ on the dollar, turn them into SBUS banknotes, and then redeem those for $1.00 worth of actual silver. A lot of people did this, so any silver SBUS managed to get its hands on was soon gone.

If Gresham knew this was a bad idea in the 1500s, why was SBUS doing it in the 1810s? It was trying to shore up the national credit system, by essentially guaranteeing the credit of its partner banks. But those partner banks were scams, and were only too happy to continue printing tons of money if SBUS was happy to continue converting it to gold and silver. The one threat SBUS had in its arsenal was to stop accepting paper from partner banks, but its directors feared that doing so would cause a crash. It probably didn’t help that some of the scam banks were run by SBUS directors’ friends and relatives. (Tuchman: people more or less ignored conflicts of interest in 1819. Remember that insider trading on the stock market was considered a totally reasonable perk well into the 1900s.)

Years of halfhearted attempts to fix this problem went nowhere, as nobody could agree how to contract the money supply slowly and safely. In the end, SBUS had to contract it quickly and violently. When the notes on the Louisiana Purchase came due, SBUS had to come up with gold or silver immediately. So it stopped extending credit to partner banks, suspended redemption of their banknotes, and started demanding repayment of its own loans — in specie. Of course, those partner banks didn’t have any specie either. So now they stopped extending credit to farms and small businesses, and demanded loan repayment, also in specie. The farmers had no one to demand specie from, so they went bankrupt.

This tanked the country’s credit system (suddenly, not even Thomas Jefferson could get a loan) and destroyed the money supply. By some measures, the number of dollars in circulation halved, causing deflation on a level we’ve never seen in the modern era. You know how inflation makes your fixed-rate mortgage cheaper in real terms? Imagine the reverse, where your mortgage payments double.

In most accounts of the Panic of 1819, SBUS gets the bulk of the blame. Roberts agrees that they pricked the bubble, and their willingness to prop up scam banks for so long probably made the financial contagion worse when the crash came. But he points out that there probably would have been a panic even without SBUS. The paper money system was already a looming disaster in 1815, before SBUS even existed. Also, there were some important exogenous causes that had nothing to do with the bank, such as a volcano.

Yes, a Volcano

In April 1815, Mount Tambora blew up. This was the largest volcanic eruption in recorded history, and it shot something like 100 million tons of sulfur into the stratosphere. This made 1816 “the year without a summer”, which wrecked agricultural yields across the world, but especially in Europe, which soon had its worst famine of the 19th Century.

Britain, literally starving for wheat and corn, suspended its protectionist “Corn Laws” that limited the import of American grain. Suddenly, American farmers had a new export market, and prices were sky high. The same thing happened for cotton.

This was great news if you were a farmer, and almost everyone was a farmer. (Tuchman again: over 80% of the American labor force worked in agriculture in the 1810s.) Being a farmer in 1816 must have felt something like being a software engineer in 1998, but on a national scale. The whole country was tripping over itself to buy land and get in on the boom.

The US government helped out. First, the Land Act of 1800 made it possible to buy federal land on credit, a revolutionary step at a time when almost all land purchases were made in cash. A few years later, another act lowered the minimum purchase size to 160 acres — putting a small plot well within reach of the average American farmhand who was willing to save up for one or two years.

Second, remember that bogus money from bogus banks? The Land Office accepted that, often at face value. So you could buy your real estate with unreal money.

Predictably, agricultural land prices skyrocketed. In prime growing locations like Huntsville Alabama, plots that sold for $5/acre in 1810 were going for upwards of $100/acre in 1817.

But prices didn’t stay high. The sulfur dissipated, and agricultural yields recovered. Soon there was a glut, and cotton, wheat, and corn prices fell below the cost of production. With perfect timing, this is the moment when SBUS began contracting credit. So, to recap the situation of the stereotypical American farmer in 1819:

They overpaid for a farm in 1817, on credit.
Their first big payment came due in 1819, at which point their crops were worth less than it cost to grow them.
They had to pay in specie, not the inflated paper money they thought they could use when they bought the land.

You can see why Thomas Jefferson went broke.

Aftermath

Going bankrupt in 1819 was (Tuchman) very different from doing so in 2023. For one thing, Dickensian debtor’s prisons were still very much a thing in the 1820s. At least the prosecution was egalitarian. John Piatt, the richest man in Cincinnati circa 1815, died in a debtor’s prison in 1822. On the other side of the distribution, Hannah Crispy of Boston was imprisoned for a $12 debt in 1820, along with her nursing infant; when the baby died in jail, she was initially refused discharge to attend the funeral. (The district attorney eventually posted her bail personally.)

Today, when the US has an economic crisis, the federal government responds with things like PPP loans, extended unemployment benefits, direct payments to consumers, etc. In 1819, the federal government did nothing:

Ever since the New Deal, each modern economic downturn evokes the immediate question of what the government is going to do — and it goes without saying that the government means the federal government. The early nineteenth century was a different world; during two terms in office, President Monroe rarely commented on the nation’s economic woes, and no one really expected him to… There was no federal policy on unemployment, no federal office that kept economic statistics… Regulation of banking, such as there was, fell entirely to state governments. To the extent the Supreme Court permitted, so did the laws covering debts and bankruptcies, given the absence of a federal bankruptcy law, which Congress refused to pass._

The only real federal relief came in the form of the Land Act of 1821, which let farmers who bought plots from the Land Office cancel their debts in exchange for returning the land. Otherwise, relief was a mess of state and local laws and charity programs.

Gazing into the Distant Mirror

In his 2012 “Origins and Mission of the Federal Reserve”, Ben Bernanke argues that the gold standard is a bad idea:

Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy. And in particular, under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that’s the reverse of what a central bank would normally do today. So again, because you had a gold standard which ties the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation. Now some people view that as a benefit of the gold standard, taking away the discretion from central banks and there’s an argument for that, but it did have the implication that there was more volatility year-to-year in the economy under a gold standard, and there has been in modern times._

I used to think, sure, that makes sense — but it’s also exactly what a central banker lizard person overlord would say. If you’re the puppetmaster with the money machine, you don’t want any constraints on your ability to print. The gold standard feels Real and Democratic, an important check/balance that keeps the government honest.

But it turns out that, in equilibrium, people like paper money. Libertarians had their way in the 1810s: if you wanted to, you could work exclusively with banks that maintained gold standards, and if you dared, you could work with banks that printed unbacked paper money. It turns out that lots of people were happy taking the paper money. Inevitably, the bank failures wiped out the fiscally liberal — but also many of the fiscally conservative, because it’s hard to isolate yourself from a national banking crisis. Today, people complain about the American economy being subject to the whims of the Fed. In 1819, you were subject to the whims of some complex dynamical system. Pick your poison.

Relatedly, it’s impossible for me to read about decentralized paper currency in 1819 and not think about decentralized cryptocurrency in 2023. Knowing that people were willing to attribute value to random banknotes in the 1810s, it now seems a lot less weird to me that people are willing to attribute value to long-tail altcoins in 2023 (or, at least, 2021.) Creating money outside a state-sponsored fiat system isn’t novel human behavior — people were doing it 200 years ago!

And that’s what makes The Panic of 1819 so fun in general. You can take almost any macro econ or monetary policy issue of today, and find a Bizzaro version of it in 1819. If that sounds interesting to you, read Browning’s book.