In 1819, the impressive post-War of 1812 economic expansion ended. Banks throughout the country failed; mortgages were foreclosed, forcing people out of their homes and off their farms. Falling prices impaired agriculture and manufacturing, triggering widespread unemployment. All regions of the country were impacted and prosperity did not return until 1824.
The primary cause of the misery seems to have been a change toward more conservative credit policies by the Second Bank of the United States (rechartered in 1816). The wary directors viewed with scorn the unconventional practices of many western banks. The B.U.S. called in its loans, forcing the state banks to do likewise. State loans had been made to land speculators who were unable to repay; banks failed and depositors were wiped out. Conditions were exacerbated by the influx of large quantities of foreign goods into the American market and the slumping cotton market in the South.
James Flint, a traveler from Scotland, wrote a letter from Jefferson, Indiana, on May 4, 1820, in which he commented on the panic:
Merchants in Cincinnati, as elsewhere, have got into debt by buying property or by building houses, but are now secure in the possession. Such people, notwithstanding, complain of the badness of the times, finding that the trade of buying without paying cannot be continued. Those who have not already secured an independence for life may soon be willing to have trade and fair dealing as formerly. Property laws deprive creditors of the debts now due to them; but they cannot force them to give credit as they were wont to do.
Reaction to the Panic depended upon where one lived. Northern manufacturers thought future economic downturns could be avoided by enacting high tariffs that would protect them from foreign competition. Southerners, however, resented the higher prices they had to pay for imports because of the tariff and began a long campaign against those duties, hoping that freer trade would revive the cotton economy. Westerners, taking a still different approach, blamed the bankers and speculators.
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