Panic Of 1796–1797
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The Panic of 1796–1797 was a series of downturns in credit markets in both
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and the newly established
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in 1796 that led to broader commercial downturns. In the United States, problems first emerged when a
land speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable in a brief amount of time. It can also refer to short sales in which the speculator hopes for a decline ...
bubble Bubble, Bubbles or The Bubble may refer to: Common uses * Bubble (physics), a globule of one substance in another, usually gas in a liquid ** Soap bubble * Economic bubble, a situation where asset prices are much higher than underlying fundame ...
burst in 1796. The crisis deepened when the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
suspended
specie Specie may refer to: * Coins or other metal money in mass circulation * Bullion coins * Hard money (policy) * Commodity money * Specie Circular, 1836 executive order by US President Andrew Jackson regarding hard money * Specie Payment Resumption A ...
payments on February 25, 1797 under the
Bank Restriction Act 1797 The Bank Restriction Act 1797 (37 Geo. 3. c. 45) was an Act of Parliament, Act of the Parliament of Great Britain which removed the requirement for the Bank of England to convert banknotes into gold. The period lasted until 1821, when convertibil ...
. The bank's directors feared
insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
when English account holders, who were nervous about a possible French invasion, began withdrawing their deposits in sterling rather than bank notes. In combination with the unfolding collapse of the U.S. real estate market's speculative bubble, the Bank of England's action had
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...
ary repercussions in the financial and commercial markets of the coastal United States and the Caribbean at the start of the 19th century. The scandals associated with these and other incidents prompted the
U.S. Congress The United States Congress is the legislative branch of the federal government of the United States. It is a bicameral legislature, including a lower body, the U.S. House of Representatives, and an upper body, the U.S. Senate. They both ...
to pass the
Bankruptcy Act of 1800 The Bankruptcy Act of 1800 was the first piece of federal legislation in the United States surrounding bankruptcy. The act was passed in response to a decade of periodic financial crises and commercial failures. It was modeled after English pra ...
, modeled on English practice, which limited petitioning a creditor for relief to merchants, bankers, and brokers. It had a five-year sunset, but was repealed after three years.


Background

Frequent instability characterized the United States economy during the 1780s and 1790s. Rampant inflation of Continental Currency during the Revolutionary War gave rise to the phrase "not worth a Continental". Lacking a stable currency, banks issued their own notes, and calls for stronger public credit led to the establishment under the
Articles of Confederation The Articles of Confederation, officially the Articles of Confederation and Perpetual Union, was an agreement and early body of law in the Thirteen Colonies, which served as the nation's first Constitution, frame of government during the Ameri ...
of the
Bank of North America The Bank of North America was the first chartered bank in the United States, and served as the country's first ''de facto'' central bank. It was chartered by the Congress of the Confederation on May 26, 1781, and opened in Philadelphia, Pennsy ...
in 1781. After the adoption of the
Constitution A constitution is the aggregate of fundamental principles or established precedents that constitute the legal basis of a polity, organization or other type of entity, and commonly determines how that entity is to be governed. When these pri ...
, the
First Bank of the United States The President, Directors and Company of the Bank of the United States, commonly known as the First Bank of the United States, was a National bank (United States), national bank, chartered for a term of twenty years, by the United States Congress ...
succeeded it as a de facto central bank. Concerns remained, however, over the strength of public credit as unstable banknotes remained a medium of exchange. During this time,
speculation In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable in a brief amount of time. It can also refer to short sales in which the speculator hope ...
was the investment of choice, leading to the
Panic of 1792 The Panic of 1792 was a financial credit crisis that occurred during the months of March and April 1792, precipitated by the expansion of credit by the newly formed Bank of the United States as well as by rampant speculation on the part of Willi ...
. Former
Continental Congress The Continental Congress was a series of legislature, legislative bodies, with some executive function, for the Thirteen Colonies of British America, Great Britain in North America, and the newly declared United States before, during, and after ...
man William Duer raised large sums of money to invest in bank stock and government securities, novel and financially sophisticated assets whose risks many contemporaries failed to understand. Duer soon defaulted on his debts, destroying the savings of many middle- and working-class people. The ensuing panic caused riots and reignited Congressional debate over a bankruptcy law that would finally produce the Bankruptcy Act of 1800 after the Panic of 1796–1797. Duer and other prominent financiers then sought to recover their fortunes by inciting
land speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable in a brief amount of time. It can also refer to short sales in which the speculator hopes for a decline ...
, an old concept applied on unprecedented scale too. This set the stage for the bubble that burst known as the Panic of 1797.


Causes


Land speculation in the U.S.

The immediate cause of the Panic of 1796–1797 was a series of land speculation schemes in the fledgling United States that issued
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...
backed by claims to Western lands. The largest such scheme was created by the Boston merchant
James Greenleaf James Greenleaf (June 9, 1765 – September 17, 1843) was a late 18th and early 19th century American land speculator responsible for the development of Washington, D.C., after the city was designated as the nation's capital following passag ...
and Philadelphia financiers Robert Morris and John Nicholson. The new federal capital under construction, Washington D.C., required private investment for development. By late 1793, a partnership of the three speculators had acquired 40 percent of the building lots in the new capital. Greenleaf planned to finance these purchases with loans from Dutch banks, but the French invasion of the Netherlands prevented this. Lacking funds, the three speculators then formed the North American Land Company in 1795 to consolidate their land holdings from previous speculations. They planned, once again, to sell stock in this company to European investors. However, quick sales failed to materialize as European investors grew wary of American land schemes. Unclear titles and the poor quality of much of the company’s land further slowed sales. Morris and Nicholson then began to finance their purchases by issuing their own private notes, which creditors readily accepted because of Morris’s immense financial stature. These notes became themselves the subject of speculation, depreciating rapidly as a
medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. Most forms of money are categorised as mediums of exchange, i ...
. Meanwhile, continued war in Europe constricted credit, exposing the precariousness of the North American Land Company scheme and others like it. Rampant business failure plagued Eastern port cities by late 1796, and land speculators less preeminent than Morris soon found themselves in debtors' prison. Among these was James Wilson, whose confinement, combined with rumors of Morris’s imprisonment, caused panic. Morris and Nicholson’s notes, by now totaling $10,000,000, began trading at just one-eighth their value. By 1797, their paper pyramid collapsed altogether.


British Bank Restriction Act 1797

Across the Atlantic, British legislation exacerbated the damage wrought by the bursting land speculation bubble. The monetary strain imposed by the
Napoleonic Wars {{Infobox military conflict , conflict = Napoleonic Wars , partof = the French Revolutionary and Napoleonic Wars , image = Napoleonic Wars (revision).jpg , caption = Left to right, top to bottom:Battl ...
and withdrawals by panicked depositors had greatly depleted the coin and bullion reserves of the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
. This prompted Parliament to pass the
Bank Restriction Act 1797 The Bank Restriction Act 1797 (37 Geo. 3. c. 45) was an Act of Parliament, Act of the Parliament of Great Britain which removed the requirement for the Bank of England to convert banknotes into gold. The period lasted until 1821, when convertibil ...
, which halted
specie Specie may refer to: * Coins or other metal money in mass circulation * Bullion coins * Hard money (policy) * Commodity money * Specie Circular, 1836 executive order by US President Andrew Jackson regarding hard money * Specie Payment Resumption A ...
payments. The disruption of access to British gold and silver, coupled with the inability for financiers in the United States to successfully access Continental specie markets, unraveled the Atlantic credit web, hastening the collapse of Morris’s and other speculation schemes.


Collapse in the U.S.

By 1800, the crisis had resulted in the collapse of many prominent merchant firms in Boston, New York, Philadelphia, and Baltimore, and the imprisonment of many American debtors. The latter included the famed
financier An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of in ...
of the revolution Robert Morris and his partner
James Greenleaf James Greenleaf (June 9, 1765 – September 17, 1843) was a late 18th and early 19th century American land speculator responsible for the development of Washington, D.C., after the city was designated as the nation's capital following passag ...
, who had invested in backcountry land. Associate Justice of the U.S. Supreme Court James Wilson was forced to spend the rest of his life literally fleeing from creditors until he died at a friend's home in Edenton, North Carolina. George Meade, the grandfather of the
American Civil War The American Civil War (April 12, 1861May 26, 1865; also known by Names of the American Civil War, other names) was a civil war in the United States between the Union (American Civil War), Union ("the North") and the Confederate States of A ...
Union General George Gordon Meade was ruined by investments in Western land deals and died in bankruptcy due to the panic. The fortune of
Henry Lee III Henry Lee III (January 29, 1756 – March 25, 1818) was an early American Patriot (American Revolution), Patriot and politician who served as the ninth Governor of Virginia and as the Virginia United States House of Representatives, Representa ...
, father of Confederate General
Robert E. Lee Robert Edward Lee (January 19, 1807 – October 12, 1870) was a general officers in the Confederate States Army, Confederate general during the American Civil War, who was appointed the General in Chief of the Armies of the Confederate ...
, was reduced by speculation with Robert Morris.


Aftermath

The panic caused a pronounced commercial downturn in American port cities that did not relent until after 1800. Investors in land schemes did not suffer alone. Shopkeepers, artisans, and wage laborers, all of whom depended on the continuance of overseas commerce, felt the impact as businesses failed between 1796 and 1799. The panic did not, however, evenly affect the whole economy. Port cities along the Eastern Seaboard suffered much worse than the rural interior, which had not yet developed the intricate webs of credit and market exchange that would drag it into future panics and depressions. The panic also revealed the young republic's economic interconnectedness with Europe. In spite of and perhaps validating the prescient warnings of the dangers of foreign entanglement laid out in George Washington’s Farewell Address, the panic demonstrated that the nascent American economy would be subject to ripples of political turbulence on the European continent, an effect that later prompted
Thomas Jefferson Thomas Jefferson (, 1743July 4, 1826) was an American Founding Fathers of the United States, Founding Father and the third president of the United States from 1801 to 1809. He was the primary author of the United States Declaration of Indepe ...
to sign the
Embargo Act of 1807 The Embargo Act of 1807 was a general trade embargo on all foreign nations that was enacted by the United States Congress. Much broader than the ineffectual 1806 Non-importation Act, it represented an escalation of attempts to persuade Br ...
. Finally, the imprisonment for indebtedness of such prominent American statesmen as James Wilson and Robert Morris compelled Congress to pass the Bankruptcy Act of 1800, establishing a framework for creditors and debtors to cooperate in reaching a settlement. Though critics, who argued that the law encouraged risky investments by reducing the cost of failure, prevented its renewal in 1803, the act represented a step in the American legal tradition against imprisoning debtors.Mann, 2002, pp. 254–255


See also

*
Economic globalization Economic globalization is one of the three main dimensions of globalization commonly found in academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization. Econ ...


References


Further reading

* * * * * {{DEFAULTSORT:Panic of 1796-97 Economic crises in the United States Economic history of the United Kingdom Financial crises 1796 in economic history 1797 in economic history 1796 in Great Britain 1797 in Great Britain 1796 in the United States 1797 in the United States 18th-century disasters in the United States 1796 disasters 1797 disasters