The early days of our Republic are usually believed to be a time of unity, development, and stability. Nothing could be farther from the truth. The new nation was deeply in debt because of the Revolutionary War, and economically unstable with nearly worthless currency. The country was politically volatile, and rife with division. There was a very good chance that the country would collapse and fail. The Panic of 1796-97 was an economic blow, but it demonstrated that national economies are interrelated and the USA was becoming a major player.
The great powers of the eighteenth century were expecting and working for American failure. Great Britain believed they lost the Revolutionary War only because of French intervention and did not honor our sovereignty. Spain was actively working both overtly and clandestinely against the US. Both these monarchies possessions bordered the new nation, and both were openly hostile. Despite all these negatives, the country persevered, eventually overcame internal problems and fought new wars to establish a rightful place in the world.
Political stability is impossible without economic stability and security. The Panic of 1796-97 was just one economic crisis to confront the young nation but it involved the British economy and had long lasting effects. An earlier crisis, The Panic of 1792 had been caused when former Congressman William Duer raised large sums of money to invest in risky ventures. He defaulted on his debts and many common people’s savings were wiped out. This caused riots and moved Congress to talk about bankruptcy laws although they took no action. Despite the harm to many, the ramifications were not international.
Duer and others tried to recover losses in many ways, but one of the most common methods was “land speculation.” The New World had lots of land and speculation was common even in Colonial times. Most of the Royal Governors had made considerable income through land speculation. This source of fast profits came to a crashing, although temporary, end in 1796 when a series of events caused the land speculation bubble to burst.
The key to land speculation was to sell land-secured stock of American companies to European investors. The biggest US investment group was created by Boston merchant James Greenleaf and Philadelphia financiers Robert Morris (financier of the Revolution) and John Nicholson. In addition to western frontier land, they had acquired 40 percent of the building lots in the new US capital of Washington, DC. They were initially depending on Dutch investors, but the French invasion of the Netherlands ended that plan.
To recover from this setback the big US investors formed the North American Land Company to consolidate their holdings. The company was set up to use the power of their vast holdings to entice European investors to buy stock.
Sufficient sales did not materialize, however. European investors were becoming wary of American land schemes because of unclear titles and the poor quality of some of the land. To overcome this, Morris and Nicholson began to issue their own notes, which creditors quickly accepted because of Morris’ immense personal wealth. These notes did not solve the problem and began depreciating rapidly as the financial situation worsened. Continuing war in Europe was constricting international credit. Soon, the position of the North American Land Company and others like it became untenable.
Large scale business failures began to plague the Eastern US port cities by late 1796. Those land speculators with less wealth than Morris now found themselves in Debtor Prison. James Wilson (Signed Declaration of Independence and Constitution, and was Associate Justice of the US Supreme Court) was sentenced and after his release spent the rest of his life on the run evading creditors. The Morris and Nicholson notes which totaled $10,000,000.00 also failed and were trading at only one-eighth of their face value.
In 1797 the British Parliament added fuel to the financial wildfire in America by passing the Bank Restriction Act. This act, which halted gold and silver payments, was enacted in response to the drain of coin and bullion caused by the Napoleonic Wars and panicked withdrawals by depositors. The disruption of access to British specie unraveled the Atlantic credit fabric and the American “house of paper” collapsed completely. Many more prominent men including Robert Morris were sentenced to Debtor Prison.
The Panic of 1796-97 resulted in a severe economic crash in American port cities. The land speculators certainly suffered financial disaster but so did the merchants and workers who depended on income from international trade. The effects of the crash were being felt until at least 1800. Luckily, the rural areas were not impacted as much because they had not yet developed a credit economy.
More financial crises would arise during our history, but the Panic of 1796-97 revealed for the first time the international interconnection of the American economy. The infant American economy was subject to the ups and downs of the economies of Europe and eventually the entire world. This also demonstrated that the rest of the world would be affected by the American economy that was growing rapidly and would eventually be the strongest in the world.
The other important side effect of this crises was that congress was forced to finally face the stupidity of Debtor Prisons. These prisons were relics of British law which had been held over from Colonial days. I believe Congress faced it mainly because so many prominent men had been sent to Debtor Prison, which meant it could happen to them. As a first baby-step to eliminating Debtor Prisons, Congress passed the Bankruptcy Act of 1800.
Many in Congress believed the Bankruptcy Act encouraged risky investments and they carried the day in 1803 when the act was not renewed. To Congress’ credit, they have wrestled with the complex subject of bankruptcy and debt into modern times by passing a series of mostly improving laws. The subject is complicated and bankruptcy laws will probably continue to be “tweaked” far into the future.
Although the Panic of 1796-97 was a financial blow to the new United States, the country recovered easier than Europe where constant war and rigid monarch-ruled, class-based societies stifled flexibility. The US was expanding west at an amazing and unrelenting pace which fueled the economy. Common men would make, lose, and remake fortunes. Many people could and would become rich through hard work and vision. Freedom encourages initiative and risk-taking. I believe the most important result of the expanding American economy was the slow but persistent development of a prosperous middle class, something that is still unique among nations.
The founders of the United States of America created a form of government unlike anything seen before or since. The government recognizes that the individual has the God-given right to fail, and to try again and again. The founders somehow set up something entirely new that is still working today. The more I learn about them and the results of their labor, the more amazed and the more thankful I become.