The Panic of 1819: A Central Bank Conspiracy?
©1997 by Gerry Rough

In the eyes of many conspiracy theorists, the Panic of 1819 is our nationís first experience with what is now called the "boom-bust" cycle. In 1817, the second Bank of the United States went into operation and quickly became the target of many who believed that banks, and especially large banks, were evil institutions of fraud and deceit. When the economy turned south a mere two years after the Bank began its operations, it was quickly derided by its enemies as the fall guy that caused the panic. Since the Bank of the United States was poorly managed and found to be fraudulent in its original management, this emboldened its enemies all the more. The Bankís public image tarnished by fraud, the ensuing panic was now seen as salt in an old wound. Conspiracy theorists are quick to point toward this controversial issue in their zeal to prove the New World Order theory. Unfortunately, the facts that are given to support their theory do not stand the test of good research. Was the Panic of 1819 part of the New World Order conspiracy? Bob Adelmann provides our first look:

As is so often the case with conspiracy writers, Adelmann conveniently deletes the part that does not agree with his theory. John Jay Knox fills in some of the blanks: The monetary crisis, then, had nothing to do with the Bank. The crisis started long before the Bank went into existence. Ralph C. H. Catterall is more blunt on the Matter: G. Edward Griffin also attempts the same blunder: Prior to the above in Griffinís text, the second Bank of the United States has been introduced. In its context, the above is cited to prove that the Bank was to blame for the panic. This would appear to be credible since 1816 is also the stated date of the Bank's chartering by Congress. Unfortunately, Griffin falsely gives the impression that Galbraith blames the Bank as well. As if to emphasize the obvious fraud long prior to its assertion, on the very same page Griffin cites above, Galbraith praises the Bank for its loan policies of 1818, while disconnecting the policies of the Bank to the ensuing panic which followed. Galbraith continues: So much for context. In order to get the full picture of the Panic of 1819, letís digress for a moment to view the larger context. The panic had as its genesis five main factors which produced the crisis. First, without the restraining influence of the Bank of the United States from 1811-1816, the state banks were allowed to produce as much or as little currency as they wished. That they chose to produce more currency is no small understatement. It was this over-expansion of the money supply that was the main factor in producing the crisis. In reviewing the plethora of economic literature of the period, A. Barton Hepburnís exaggerated analysis may well be the classic statement to be remembered: The second factor producing the crisis was that the state banks refused to redeem their notes in gold. At this time in our history, every denomination of currency was supposed to be redeemable in gold coin. The Bank of the United States regulated the state banks not by force of law, but by example. It would routinely ask for gold payment in exchange for the notes it had accumulated in the normal course of business. This had the effect of restraining the state banks from issuing far more notes than it had gold coin in its vaults. In so regulating the state banks by example, the Bank was increasingly seen by the state banks as an oppressive master, a hindrance to more profit. Since the state banks refused to pay in gold, they frequently piled up large balances against the Bank which expected at some point in the future to be paid in gold. Catterall picks up the story: Rothbard even cites a letter from State Senator Condy Raguet to David Ricardo: The mirror image to the above, of course, is that the Bank of the United States did not press its claims against the state banks when it should have. This was yet another cause of the panic. While it is true that the state banks in January, 1817, were not in a position to begin operations on a specie basis as yet, Hepburnís analysis that the best course for the Bank should have been the gradual resumption of specie payments is certainly worth considering. [9] Even more so if this course had been followed from the very beginning of its existence. Catterall would seem to agree with this analysis:

The top of the food chain is usually preferable to life at the bottom.

The Bank was, in some small measure, partly responsible for the crisis. The south and western branches of the Bank did, in fact, follow the poor example of the state banks in that these loan policies were wildly excessive as well. The south and western states were making such wildly excessive loans compared to the amount of gold in their vaults, that the practice can only be seen in hindsight as fraudulent and downright criminal. In this the conspiracy theorists are correct to point out. But the line has to be drawn in the sand long before the Bank ever came into existence. That is the problem with the conspiracy theorists argument on this issue. Blaming the Bank for problems that existed long before it began operations is not exactly, well, bourgeois.

But there is one last piece to the puzzle. The issue of the heavy public debt needed to be resolved. In 1816 and 1817, this was mostly due to short-term debt. In 1818-1821, this was due to the long-term debt repayment of the Louisiana purchase. [11] In both cases, the Bank of the United States was forced to make heavy payment in specie (gold) overseas. As earlier noted, the Bank could not redeem the notes from the state banks to recover the outgoing specie from its vaults. In the final analysis, then, the Bank had no way replenish its specie stock, and had to begin the painful process of contracting its outstanding loans to the state banks and its commercial customers. Here again, the conspiracy theorists have aimed their clumsy artillery at the Bank only to find their facts to be grossly wanting. Again, as earlier stated, the panic had its genesis long before the Bank had commenced operations. These problems only aggravated an already impossible situation.

Our last example of the conspiracy theorists argument comes again from G. Edward Griffin:

Let me get this straight. Banks and governments deliberately cause depressions and panics so that in the end they make more money. This is a curious statement indeed considering that many of the bankruptcies that occurred during the panic were the banks themselves. The complete stupidity of believing that banks conspire to create their own downfall is beyond comprehension. And what of the government profiting from economic disaster? Bray Hammond quotes Representative Alexander C. Hanson of Maryland: With this gullibility in mind, is it no wonder then at all that conspiracy theorists are considered the lunatic fringe?


1) Bulletin: Committee To Restore The Constitution, February, 1989 P.O. Box 986, Ft. Collins, CO 80522
2) John Jay Knox, A History of Banking in the United States (New York: Bradford Rhodes & Company, 1903) 57
3) Ralph C.H. Catterall, The Second Bank of the United States (Chicago: The University of Chicago Press, 1903) 61
4) G. Edward Griffin, The Creature from Jekyll Island (Appleton: American Opinion Publishing, Inc., 1995) 343
5) John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston: Houghton Mifflin Company, 1975) 77
6) A. Barton Hepburn, A History of Currency in the United States (New York: The Macmillan Co., 1903; reprinted, August M. Kelly Publishers, 1967) 102
7) Catterall, p. 35-36
8) Murray N. Rothbard, The Panic of 1819: Reactions and Policies (New York: Columbia University Press, 1962) 10, 11
9) Hepburn, p. 97
10) Catterall, p. 38-39
11) Walter Buckingham Smith, Economic Aspects of the Second Bank of the United States (Cambridge: Harvard University Press, 1953) 65. See also Rothbard, p. 11, and Knox, p. 57
12) Griffin, p. 344
13) Bray Hammond, Banks and Politics in America (Princeton: Princeton University Press, 1957) 230

Additional Resources

M. St. Clair Clarke and D.A. Hall, Legislative and Documentary History of the Bank of the United States (Washington: Gales & Seaton, 1832; reprinted August M. Kelley, Publishers, 1967)
Alexander Balinky, Albert Gallatin: Fiscal Theories and Policies (New Brunswick: Rutgers University Press, 1958)
Raymond Walters, Albert Gallatin (New York: The Macmillan Company, 1957)
Davis Rich Dewey, Financial History of the United States ( New York: Longmans, Green, and Co., 1903)
Albert Gallatin, Considerations on the Currency and Banking System of the United States (Philadelphia: Carey Lea, 1831)
Murray N. Rothbard, The Mystery of Banking (New York: Richardson & Snyder, 1983)
William M. Gouge, A Short History of Paper Money and Banking in the United States (Philadelphia: T.W. Ustick, 1833; reprinted August M. Kelley, 1968)

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