The biggest problem the nation faced at this point was the state of the
nation's economy. The war had thrown the government treasury into deep
debt, a debt financed largely
by the government's borrowing from a number of private banks. This
borrowing in turn flooded the economy with new bank notes, producing a
currency inflation that threatened the financial stability of the
country.
Furthermore, the private sector was in just as much
trouble. With the end of the Napoleonic wars in 1815, the demand in
Europe for American agricultural goods, which had produced much of the
prosperity of the Era of Good Feelings, dropped away rapidly (European
soldiers had returned to their farms, thus ending the demand for
American farm goods). The price of farm products faded away in America,
leaving farmers unable to pay the debts they had acquired in buying
more land to meet the former high European demand. Land prices also
fell as farmers scrambled to sell off some of the land they had
purchased.
Banks that held farmer's mortgages soon also found
themselves in trouble as well, the banks demanding from the farmers
cash payments, cash which the farmers simply did not have. The bankrupt
farmers being forced to turn their land titles over to the banks was no
help to the banks, as the land was now valued at much less than the
original loans the banks had extended to the farmers. Also, people now
began to make a run on potentially troubled banks, demanding specie
(gold or silver) for the bank notes issued previously by the banks. As
the banks had issued paper notes ten times the value of the metallic
specie they held in their vaults, they were simply forced to shut down.
By 1819 and 1820, banks, farms, and other businesses were closing down
everywhere.
Understanding the economic dynamic
This was the first major panic, like those that
would hit the country at regular intervals, such as in 1837, 1857,
1873, 1893, and 1907. The pattern of the 1817 panic was also very
similar to the one that developed within rural America just after World
War One (1919-1920) when American farmers and their banks found
themselves in exactly the same situation. And there were similar
elements in the situation during the 1930s Great Depression when
American manufacturers found that the market for their new consumer
goods was saturated, most Americans now possessing the radios, cars,
sewing machines, washing machines, etc., that had the industrial market
running so hot in the 1920s.
It is the very nature of venture capitalism to get
caught up in these wild swings of fortune, especially because of the
aggressive – and risk-taking – nature of capitalism itself. A
capitalist economic system is shaped very heavily by the personal
economic decisions that the individual members of society themselves
make. At the same time, the system is subject to unpredictable forces,
simply because there are so many forces at play in a free or open
national economy. But history has demonstrated over and over again that
it is better to let those mysterious factors play out than to try to
bring them under the mastery of some small group of enlightened
economists or social planners. Such Socialism, in trying to bring these
mysterious social and economic forces under human control, simply ends
up snuffing them out. Invariably Socialism brings into being the most
oppressive and impoverished of all economic systems.
Of course, some moderate amount of governmental
refereeing of the economic game played in a market open to all private
producers and consumers is wise. But the governing referee must never
start trying to play the game itself or the game will simply stall.
This would be, after all, just another version of Socialism.
Actually, in 1816, just prior to the outbreak of
the Panic, Congress had voted into existence the second Bank of the
United States in order to bring the economy under some kind of stricter
management. Eventually the financial discipline that the BUS imposed on
the nation (tightening the country's money supply) brought down the
inflation, and helped stabilize the value of the nation's currency. At
first this intervention merely deepened the crisis, leaving many
businesses, large and small, facing collapse when they could not repay
the cheap money they had borrowed earlier with the money now due on
their loans, money (especially silver and gold coinage) that was now
much more scarce and thus more expensive for them. Then when in early
1819 American cotton prices crashed as a result of the British purchase
of cotton from India, panic set in. But the BUS did not let up on its
tight money strategy, despite the country's economic reversal from
inflation to deflation.
Finally the economy settled down and began to
revive, though less from any activity of the BUS than from the
availability of new Mexican silver to back an expansion of America's
money supply in metallic specie.
But not surprisingly, as with the first BUS, the
second BUS would come under the intense dislike of America's vast
legion of farmers – who, as always, loved cheap money and inflation
since it allowed them to repay their mortgages and other operational
loans much more easily with cheaper or inflated dollars. Besides, to
their way of looking at things, the banking world was simply the tool
of wealthy exploiters operating out of the industrial East.
Thus sadly, the stumbling economy, and the
government's efforts to revive it, had undermined the spirit of
national unity produced by the war, and revived the old sectional
rivalries that divided the country.
These events would also split the Republican Party
into the New Republicans (in many ways similar in their economic and
political philosophy to the former Federalists) and the
Democratic-Republicans (closer to the original Jeffersonians).
These events would also bring the short-lived Era of Good Feelings to
an abrupt end.