The Panic of 1819

By Mike Barhorst

SIDNEY — The first serious depression the United States experienced – the Panic of 1819 – occurred the year Shelby County was founded.

Throughout the history of our country, there have been cycles of prosperity followed by downturns in the economy. Such downturns have alternately been referred to as recessions and depressions. In the 18th century, they were often referred to as “panics.”

Fortunately, the 2,000 souls who were living in Shelby County at the time were fairly insulated from the effects of the depression, as most were subsistence farmers.

The Panic of 1819 had its roots in the global market adjustments that followed the Napoleonic Wars. In addition to being the most powerful nation in the world, Great Britain was an industrial powerhouse. The industrial revolution began there, and Britain had increased its industrial output to meet the war demands of both its armies and its citizenry.

The Treaty of Ghent was signed in London on Dec. 24, 1814, and ratified by the United States Senate on Feb. 12, 1815, effectively ending the War of 1812. Despite both the United States and Great Britain incurring massive debt as a result of the war (remember that Great Britain was simultaneously battling Napoleon), the war ended with neither side gaining an advantage.

The war did give most Americans confidence in the central government. America had, after all, defeated Great Britain at the Battles of Plattsburg, Lake Erie, and New Orleans. In addition, the Siege of Fort McHenry had given the young nation a national anthem.

The political calm in the country following the war led to the period known as the Era of Good Feelings. President James Madison, with the approval of Congress, introduced an economic plan aimed at improving the country’s economy.

Drafted by Kentucky Sen. Henry Clay, the American System was based on the creation of the Second Bank of the United States providing easy credit that would allow settlers to purchase land in the “west.” The plan also established tariffs on foreign goods to both protect American industry and to raise funds to support the creation of transportation infrastructure that included new roads and canals that would enable western settlement. The plan also called for relatively high prices for public lands so that their sale would provide additional income for the federal government.

Once the Napoleonic Wars were concluded, the rest of Europe was so devastated by years of fighting that it was unable to provide a market for most of Britain’s manufactured goods. As markets constricted and manufactured products began to accumulate, workers were furloughed. There were not the “safety nets” that now exist in most western countries, and workers who were laid off simply struggled to survive.

British manufacturers dumped vast quantities of surplus products in America. As the goods flooded American markets, priced well below their value, they were purchased by Americans looking for a bargain. American manufacturers, many of them small, were forced out of business and often into bankruptcy because they could not compete with the cheap imports.

The situation in the United States was worsened by the rampant speculation in western lands (at that time, Ohio was the “wild west”), the lack of a firm monetary policy and the unrestrained issuance of paper money by banks. In fact, the number of state-chartered financial institutions in the United States increased from 88 in 1811 to 208 in 1815.

Prior to the Panic of 1819, there were 20 banks in Ohio. On Oct. 12, 1820, the Bank of the United States Cincinnati Branch, the only bank in Cincinnati still open, closed its doors. Bank officers demanded that all outstanding loans ($2,251,061) be repaid immediately in gold or silver. Those who could not repay had their properties seized.

A side note and an interesting story in its own right, one of the only banks remaining open in Ohio was the Bank of the United States Chillicothe Branch. Ohio’s General Assembly passed a law taxing the Bank of the United States. State Auditor Ralph Osborn ordered the bank to pay taxes in 1820. When the taxes were not paid, officials from the Auditor’s Office broke open the bank’s safe and seized the $120,000 inside. The actual taxes the state said were owed were $100,000. Ohio Gov. Ethan Allen Brown decried the auditor’s actions, and the state promptly repaid the $20,000 overage.

Maryland had passed a similar tax, and in 1819, the case of McCulloch v. Maryland had reached the United States Supreme Court. The high court ruled that states could not tax the Bank of the United States. In their ruling, the Supreme Court decreed that the federal government and its institutions were superior to state governments.

Based on that ruling, the Bank of the United States sued Osborn for the return of the additional $100,000. In the ensuing legal maneuvering, the federal government argued that Osborn violated a court order prohibiting him from taxing the Bank of the United States. Osborn claimed that he was not properly served with the court order.

The federal circuit court ruled in favor of the Bank of the United States, and federal marshals immediately seized $98,000 dollars from Ohio’s treasury. Osborn had paid his tax agents $2,000 for collecting the tax, and this money still remained in dispute. In 1824, the case reached the United States Supreme Court. In Osborn v. Bank of the United States, the Supreme Court ruled in favor of the Bank and of the United States. A chagrined Gov. Jeremiah Morrow returned the $2,000.

Aggravating the depression in 1819 was the inept management of the Second Bank of the United States. Bank officials first extended far too much credit and then when they realized their error, too quickly restricted credit. The policies of the central bank led to runs on state banks. State banks were forced to close when they could not cover their deposits with gold or silver. Those policies resulted in subsequent foreclosures and ultimately bankruptcies.

Western lands that had been selling for as much as $70 per acre were suddenly worth as little as $2 per acre. Debtors prisons filled; many of the western farmers simply moved further into the wilderness to avoid serving time.

The depression would last through 1821. Unfortunately, many Americans lost faith in banks, bankers and paper money. While this was understandable, reliance on gold and silver coinage would also later prove problematic. The ongoing battle between state and federal government was also a contributing factor in the election of Andrew Jackson in 1828.

A fortunate result of the Panic of 1819 was that the United States transitioned from reliance upon commercial ties primarily with European nations to an economy that was far more independent. Manufactured goods that had always been purchased from England, France or any of a dozen other European nations were now made in America.

Fortunate too was the fact that the impact of the Panic of 1819 in Shelby County was nearly imperceptible. Most of the settlers here had either received their land in return for their service in the Army or had purchased the land for cash.

The United States has had 33 economic recessions or a downturn every three to five years. Unlike the Panic of 1819, the most recent economic downturn, the Great Recession of 2008, would hit Shelby County hard. We were not nearly so insulated in 2008 as we were in 1819.

By Mike Barhorst

The writer is the Shelby County Bicentennial co-chair and mayor of Sidney.

The writer is the Shelby County Bicentennial co-chair and mayor of Sidney.