The Panic of 1819 (4 page)

During 1821, total exports and total imports are listed as almost identical, $54.6 million for the former and $54.5 million for the latter. Both were absolute low points, not only for the period of boom and depression but for America since 1815.
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Import prices also fell with the advent of economic contraction abroad. They fell only slightly, however, and were a negligible factor in the reduction of import values, as compared to the decrease in money income at home. The index of import prices at Philadelphia fell from 126 to 112 from November, 1818 to July, 1819.
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The credit contraction also caused public land sales to drop sharply, falling from $13.6 million in 1818, to $1.7 million in 1820, and to $1.3 million in 1821.
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Added to a quickened general desire for a cash position, it also led to high interest rates and common complaint about the scarcity of loanable funds.

Economic distress was suffered by all groups in the community.
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The great fall in prices heavily increased the burden of fixed money debts, and provided a great impetus toward debtor insolvency.
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The
distress of the farmers, occasioned by the fall in agricultural and real estate prices, was aggravated by the mass of private and bank debts that they had contracted during the boom period. Borrowing for long-term improvements, farmers had been served by the new and greatly expanded banks of the South and West, as well as by the western branches of the Bank of the United States. Bank stockholders who had borrowed on the basis of unpaid stock found themselves forced to meet their debts. Speculators and others who had bought public lands during the boom were now confronted with heavy debt burdens. Merchants suffered from the decline in prices and demand for their produce and from heavy debts. Their debts to the British as well as to domestic creditors were often canceled by the ruthless process of bankruptcy. Niles judged that no less than $100 million of mercantile debts to Europe were eliminated by bankruptcy during the depression. So low were prices and so scarce was the monetary medium in the frontier areas that there was a considerable return to barter conditions among farmers and other local inhabitants. Various areas returned to barter or the use of such goods as grain and whiskey as media of exchange.
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There was widespread resort to the bankruptcy courts and to judgments for debt payment. The plight of debtors in the West was well expressed by William Greene, secretary to Governor Ethan Allen Brown of Ohio, in a memorandum to the Governor, in April, 1820:

One thing seems to be universally conceded, that the greater part of our mercantile citizens are in a state of bankruptcy—that those of them who have the largest possessions of real and personal estate . . . find it almost
impossible to raise sufficient funds to supply themselves with the necessaries of life—that the citizens of every class are uniformly delinquent in discharging even the most trifling of debts.
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Manufacturers suffered from the general decline in prices as well as from the contraction in credit, and the panic served to intensify their generally depressed condition since the end of the war. However, the progressive factory at Waltham was able to withstand the buffetings of the depression, to continue profitable operations, and even to expand throughout the depression period.
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Evidence is very scanty on the behavior of wage rates during this period. In Massachusetts, the wages of agricultural workers fluctuated sharply with the boom and contraction, averaging sixty cents per day in 1811, $1.50 in 1818, and fifty-three cents in 1819. The wage rates of skilled labor, on the other hand, remained stable throughout at approximately $1 per day.
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In Pennsylvania, woodcutters who averaged a wage of thirty-three cents per cord in the
first half of the nineteenth century were paid only ten cents per cord in 1821 and 1822. Unskilled turnpike workers paid seventy-five cents a day in early 1818 received only twelve cents a day in 1819.
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One of the most significant phenomena of the depression was the advent of a new problem casting a long shadow on future events: large-scale unemployment in the cities. Although America was still an overwhelmingly rural country, the cities—the centers of manufacture and trade—were rapidly growing, and this depression witnessed the problem of unemployment for factory workers, artisans, mechanics, and other skilled craftsmen. These workers were often independent businessmen rather than employees, but their distress was not less acute. Concentrated in the cities, their plight was thereby dramatized, and they lacked the flexibility of farmers who could resort to barter or self-sufficiency production. In the fall of 1819, in thirty out of sixty branches of manufacturing (largely handicraft) in Philadelphia, employment in these fields totaled only 2,100, compared to 9,700 employed in 1815. There was a corresponding decline in total earnings—from $3 million to less than $700 thousand during the later year. Very drastic declines in employment took place in the cotton, woolen, and iron industries.
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Unemployment also swelled the ranks of the paupers during the depression.
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By 1821, the depression had begun to clear, and the economy was launched on a slow road to recovery. The painful process of debt liquidation was over, and the equally painful process of monetary contraction had subsided.
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The surviving banks, their notes returned to par, successfully expanded credit. The Bank of the United States, saved from imminent failure, was at last in a sound position. Its branches were again able to redeem each others’ notes, and were now more firmly under strong central control. The premium on Spanish silver dollars over Bank notes dropped in June, 1819 from 4 percent to less than 2 percent, and par was restored by April, 1820. In states such as Kentucky or Tennessee, however, there was no general return to par and redeemability for several more years.
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Business in Britain and continental Europe was also past the trough of depression, and American exports began to recover both in prices and in total values. Prices, in general, which had continued sluggish after the steep decline in 1819, began a slow rise. Export staples at Charleston, reaching 77 in June 1819, fell to a trough of 64 in April, 1821, then slowly rose from that point on. In the same month a trough was reached by cotton prices, domestic commodities at Philadelphia, agricultural commodities, and industrial commodities, and each rose very slowly thereafter. Import prices, however, continued to fall slightly or remain at a stable level.
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Credit began to be available, and new securities to be heavily subscribed, both at home and in the British market. Business and manufacturing activity began to rise again.
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Is the crisis of 1819 together with the preceding boom to be considered a modern business cycle? Wesley C. Mitchell, in his
Business Cycles . . . The Problem and Its Setting
, declared that

until a large part of the population is living by getting and spending money incomes, producing wares on a considerable scale for a wide market, using credit devices, organizing in business enterprises with relatively few employers and many employees, the economic fluctuations which occur do not have the characteristics of business cycles. . . .

in the modern sense.
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On the one hand, the boom, the crisis of 1818–19, and the depression until 1821 present many features akin to modern business cycles as interpreted by Mitchell. Although banking had previously been undeveloped, this period saw a rapid expansion of banks and bank money—unsound as much of the expansion may have been. The period also saw much of the typical characteristics of later financial panics: expansion of bank notes; followed by a specie drain from the banks both abroad and at home; and finally a crisis with a contraction of bank notes, runs on banks, and bank failures. A corollary to the contraction of loans and bank runs was the scramble for a cash position and rapid rise in interest rates during the panic. The diversity of bank notes and bank activity from section to section was hardly a modern characteristic, but there was an approach to uniformity in expansion and contraction because of the existence of the Bank of the United States. As in modern business cycles, the entire contraction and expansion cycle was fairly short-lived, totaling five or six years, and the period of crisis itself a short one. Furthermore, the sequence of phases was boom, crisis, depression, and revival as in the business cycle.
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Other modern characteristics were: the expansion of credit and of investment projects during the boom; the appearance of urban unemployment; and the marked expansion and contraction in prices.

On the other hand, there were many backward features of the economy that go counter to an interpretation of the period as a modern business cycle in the Mitchellian sense or the Panic of 1819 as a modern business crisis. Despite the growth of commerce, it was still true that the overwhelming preponderance of economic activity in that period was in agriculture. It has been estimated that 72 percent of the labor force in 1820 was engaged in agriculture.
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Although statistics are not available, it seems from contemporary comments that urban construction increased in the boom and declined in the crisis. Physical agricultural production is not too responsive to cycles, however, and agricultural production represents overwhelmingly the greatest part of productive activity during this period.
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Thus, physical production of cotton, rice, wheat, and flour continued to grow during the depression period.
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Certainly farm employment is not a markedly cyclical phenomenon.
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Furthermore, many farm households were self-sufficient, and carried on only local barter trade, or entered the monetary nexus occasionally. With such a prevalence of home sufficiency and barter conditions, the economy could hardly be classified as modern, or conditions the same as a modern business cycle.

Furthermore, the manufacturing and business enterprises that did exist were mainly small-scale. Modern business cycles are most
characteristic in the sphere of large-scale business enterprises and large-scale manufacturing. Conditions in this period were quite the opposite. Small shops, small banks, small factories comprised the enterprises of the day. Rather than a sharp distinction existing between employers and numerous laboring employees, most workers, as we have indicated above, were craftsmen, who worked either in very small-scale firms or as independent businessmen, with not much marked differentiation. Such were the blacksmiths, shoemakers, tailors, printers, carpenters. More in the category of employees were sailors and unskilled road and canal workers.

One of the most vital points of difference between the economy of that period and of the modern day is the role of manufacturing. Not only was it small-scale, and even then largely (approximately two-thirds) in self-sufficient households,
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but the conditions of the fledgling factories differed from the rest of the economy. The factories were depressed while the rest of the community was booming, due to the postwar import of manufactured goods; their depression was continued and intensified during the panic. A crisis occurring in the midst of a depressed period—as happened to much of manufacturing in 1819—is more a feature of early pre-cyclical crisis as described by Mitchell.
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Furthermore, in manufacturing fields other than textiles, there were not even glimmerings of large-scale factory production. The other leading branches of manufacture, such as pot and pearl ashes, iron, soap, whiskey, candles, leather, lumber products, flour, paper, were the product of household and small-scale neighborhood manufactures. An exception was the larger flour mills, which expanded rapidly during 1815–16 to supply the booming European market. The great preponderance of
flour mills, however, continued to be small, local affairs using local streams for power.
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Transportation, so vital in the vast and thinly-populated country, stood just on the threshold of advances that would take it far beyond its current rude and primitive level. Inland transportation traveled mainly on the very costly dirt roads and down flatboats on the big rivers such as the Mississippi. The great improvements in transportation were just on the horizon: the river steamboats, the regular transatlantic packets, the canal boom and the great trade opened up by the Erie Canal, and the turnpike boom. But as yet, none of these developments had progressed beyond the early, hesitant stages.

With production and transportation in a relatively backward state, with such a large proportion of production on the farms and in self-sufficient households, and with the budding factory production facing a different course of economic conditions from the rest of society it is apparent that the National Bureau of Economic Research, within its own definitions, was correct in beginning its reference dates for American business cycles with the 1834–38 cycle and not earlier.
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On the other hand, as the greatest and last major crisis before 1836, the panic of 1819 holds considerable interest for the study of business cycles and for the present day. It was an economy in transition, as it were, to a state where business cycles as we know them would develop. Its new shaky, banking structure provided a surge of bank notes, while bringing in its wake many modern problems of money supply, bank soundness, and bank failure. Its new manufactures were the beginning of a great industrial development, and initiated national concern with foreign competition and the prosperity of industry. Extensive foreign trade brought the country in direct relationship to the fluctuations and developments in European economic conditions. Finally, urban unemployment, that modern specter, first became an object of concern with this panic.