In 1820, President Monroe had to face both the Congress and the American people and ask them to trust the federal government and the Second Bank of the United States in their handling of the Panic of 1819. Monroe began with a reminder to the nation of the blessings they enjoy, and ended with a plea to their trust in the "All-merciful Creator" and "our most excellent system of government". Monroe stated that "taking all circumstances into consideration which claim attention, I see much cause to rejoice in the felicity of our situation". Yet, Monroe admitted that there are pressures on certain interests of our nation. Monroe asked rhetorically, "From whence do these pressures come?". It is not from a government that is founded for and by the people. Instead, it was due to a "peculiar character of the epoch in which we live". One one hand, Monroe blamed it on the "convulsions with which several of the powers of Europe", but on the other hand he pointed to pressures at home here as well. Monroe described that here at home we suffered heavy losses as a nation and contracted considerable debts "disturbing the ordinary course of affairs by augmenting to a vast amount the circulating medium, and thereby elevating at one time the price of every article above a just standard and depressing it at another below it, had likewise its due effect."
"In communicating to you a just view of public affairs at the commencement of your present labors, I do it with great satisfaction, because, taking all circumstances into consideration which claim attention, I see much cause to rejoice in the felicity of our situation. In making this remark I do not wish to be understood to imply that an unvaried prosperity is to be seen in every interest of this great community. In the progress of a nation inhabiting a territory of such vast extent and great variety of climate, every portion of which is engaged in foreign commerce and liable to be affected in some degree by the changes which occur in the condition and regulations of foreign countries, it would be strange if the produce of our soil and the industry and enterprise of our fellow citizens received at all times and in every quarter an uniform and equal encouragement. This would be more than we would have a right to expect under circumstances the most favorable.Since the end of the War of 1812, inflation was on the rise, and the recently established Second Bank of the United States seemed incapable of stopping it. The bank was not only a victim of the inflation, but were in fact making matters worse with their pro-expansion policies. The Second Bank of the United States began operations in January of 1817, and in February were scheduled to receive all government revenue in legal tender as required by its charter. Because of shortages in hard money, the directors of the Bank allowed investors to purchase Bank shares on the security of the stock itself with no specie requirement. The BUS had expected to acquire $28 million by time it opened for business, but only $2 million was actually acquired, forcing the Bank to purchase specie at very high rates from the London financial markets. Meanwhile, the state-chartered banks, unwilling to submit to regulatory influence of the central bank, pressured the bank to refrain from collecting public deposits held in the state banks until July 1, 1817. Secretary of Treasury William H. Crawford agreed to this and to greatly expanding the Bank's credit at a discount of $6 million. In effect, transforming the private state banks into it's creditors.
Pressures on certain interests, it is admitted, have been felt; but allowing to these their greatest extent, they detract but little from the force of the remarks already made. In forming a just estimate of our present situation it is proper to look at the whole in the outline as well as in the detail. A free, virtuous, and enlightened people know well the great principles and causes on which their happiness depends, and even those who suffer most occasionally in their transitory concerns find great relief under their sufferings from the blessings which they otherwise enjoy and in the consoling and animating hope which they administer.
From whence do these pressures come? Not from a Government which is founded by, administered for, and supported by the people. We trace them to the peculiar character of the epoch in which we live, and to the extraordinary occurrences which have signalized it. The convulsions with which several of the powers of Europe have been shaken and the long and destructive wars in which all were engaged, with their sudden transition to a state of peace, presenting in the 1st instance unusual encouragement to our commerce and withdrawing it in the second even within its wonted limit, could not fail to be sensibly felt here. The station, too, which we had to support through this long conflict, compelled as we were finally to become a party to it with a principal power, and to make great exertions, suffer heavy losses, and to contract considerable debts, disturbing the ordinary course of affairs by augmenting to a vast amount the circulating medium, and thereby elevating at one time the price of every article above a just standard and depressing it at another below it, had likewise its due effect."
Another pressure on the banking system was land speculation. After the war, the the federal government was encouraging settlement of the western frontier by offering public land at $2 per acre. The US treasury accepted payment for this land in the form of bank notes issued by western and southern state banks who often lacked sufficient specie reserves and were greatly over-extended. These state banks then restocked their specie reserves by redeeming their own notes for hard money at BUS branches in the North and East. This cycle of excessive lending, continued with the BUS injecting so much paper money into circulation that they no longer had any leverage to demand payments from state banks that held public deposits.
At the end of the war the US had already seen a dramatic increase, but now the increase of paper money into circulation and speculation of land prices caused the BUS directors to take action. The BUS directors led by former Congressman from South Carolina, Langdon Cheeves implemented a policy of fiscal conservatism and tight money, and, in summery of 1818, The Second Bank of the United States initiated a sharp credit contraction, and moved into a pro-deflation mode. The contraction remained in force until hard currency of gold and silver surpassed paper currencies such as species in the overall money supply. By limiting the availability of hard currency, the BUS made it difficult for state banks to remain solvent. BUS branch offices began to reject all state-charted bank notes, and many banks especially in the West and the South were unable to cover their payments to the BUS. Many State banks fought back. For example, the state banks in South Carolina threatened to get their state legislature to pass laws preventing the BUS from collecting.
As the contraction continued, banks began to call in loans on cash poor farmers and speculators. As the value of the land dropped 50% to 75%, banks began to foreclose on the properties and transfer them directly to the Second Bank of the United States. The contraction also led to a rapid drop in export staples such as cotton and tobacco,forcing many merchants in large cities and small towns to go bankrupt as well. By the end of 1820, parts of the country were beginning to rebound, but the South was still hurting. It was a precarious time, the United States was struggling to recover and states were pitting themselves against he federal government. The people were crying out for help, and President Monroe was asking them to put their trust in "the great perfection of our most excellent system of Government", which Monroe described as "the powerful instrument in the hands of our All-merciful Creator in securing to us these blessings".
"It is manifest that the pressures of which we complain have proceeded in a great measure from these causes. When, then, we take into view the prosperous and happy condition of our country in all the great circumstances which constitute the felicity of a nation - every individual in the full enjoyment of all his rights, the Union blessed with plenty and rapidly rising to greatness under a National Government which operates with complete effect in every part without being felt in any except by the ample protection which it affords, and under State governments which perform their equal share, according to a wise distribution of power between them, in promoting the public happiness - it is impossible to behold so gratifying, so glorious a spectacle without being penetrated with the most profound and grateful acknowledgments to the Supreme Author of All Good for such manifold and inestimable blessings.
Deeply impressed with these sentiments, I can not regard the pressures to which I have adverted otherwise than in the light of mild and instructive admonitions, warning us of dangers to be shunned in future, teaching us lessons of economy corresponding with the simplicity and purity of our institutions and best adapted to their support, evincing the connection and dependence which the various parts of our happy Union have on each other, thereby augmenting daily our social incorporation and adding by its strong ties new strength and vigor to the political; opening a wider range, and with new encouragement, to the industry and enterprise of our fellow citizens at home and abroad, and more especially by the multiplied proofs which it has accumulated of the great perfection of our most excellent system of Government, the powerful instrument in the hands of our All-merciful Creator in securing to us these blessings."
http://www.presidency.ucsb.edu/ws/index.php?pid=29462
https://en.wikipedia.org/wiki/Panic_of_1819
http://blueandgraytrail.com/event/Panic_of_1819
The Bank of the United States and the American Economy by Edward Kaplan (1999) pgs 67-71
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