Panic of 1819
Nevins (1934) argued that state banks caused the Panic of 1819 by issuing too many notes; he underestimated the depth of the subsequent depression, however, and did not adequately explain how simple inflation could wreak such havoc. Rothbard (1962) also blamed state banks for issuing too many notes, but carried the analysis further, arguing that the subsequent inflation induced businessmen to import too much and to lay productive endeavors aside to engage in speculative, but macroeconomically worthless, buying and selling. Such conditions forced the Second Bank of the United States to restrict credit, leading to a liquidity crisis and lack of confidence that disrupted all financial contracts.
Suspensions of specie payments informally or officially permeated the economy outside of New England during the Panic of 1819. every time there was a banking crisis brought on by inflationary expansion and demands for redemption in specie, state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continued to flourish. It thus became clear to the banks that in a general crisis they would not be required to meet the ordinary obligations of contract law.
The United States emerged from the War of 1812 in a chaotic monetary state, with banks multiplying and inflating ad lib. The federal government, not the state banks themselves, were largely to blame for encouraging new, inflated banks to monetize the war debt. Then, in particular, it allowed them to suspend specie payment in August 1814, and to continue that suspension for two years after the war was over, until February 1817. Thus, for two and a half years banks were permitted to operate and expand while issuing what was tantamount to fiat paper and bank deposits. During the panic of 1819, when banks collapsed after an inflationary boom lasting until 1817, obstacles and intimidation were often the lot of those who attempted to press the banks to fulfill their contractual obligation to pay in specie.
Maryland and Pennsylvania, during the panic of 1819, engaged in almost bizarre inconsistency in this area. Maryland, on February 15, 1819, enacted a law "to compel. . . banks to pay specie for their notes, or forfeit their charters." Yet two days after this seemingly tough action, it passed another law relieving banks of any obligation to redeem notes held by money brokers, "the major force ensuring the people of this state from the evil arising from the demands made on the banks of this state for gold and silver by brokers." Pennsylvania followed suit a month later. In this way, these states could claim to maintain the virtue of enforcing contract and property rights while moving to prevent the most effective method of ensuring such enforcement. The banks south of Virginia largely went off specie payment during the panic of 1819, and in Georgia at least general suspension continued almost continuously down to the 1830s.
Out of the bitter experiences of the Panic of 1819 emerged the beginnings of the Jacksonian movement, dedicated to hard money, the eradication of fractional-reserve banking in general, and of the Bank of the United States in particular. Andrew Jackson himself, Senator Thomas Hart ("Old Bullion") Benton of Missouri, future President James K. Polk of Tennessee, and Jacksonian economists Amos Kendall of Kentucky and Condy Raguet of Philadelphia, were all converted to hard money and 100 percent reserve banking by the experience of the Panic of 1819.
The Jacksonians adopted, or in some cases pioneered in, the Currency School analysis, which pinned the blame for boom-bust cycles on inflationary expansions followed by contractions of bank credit. Far from being the ignorant bumpkins that most historians have depicted, the Jacksonians were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School.
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