• TennHedge

Parallels Between the Panic of 1819 and 2020

I have been seeking to learn more about the function of money and monetary policy as well as some of the previous financial crises in U.S. history, especially given the current economic environment we find ourselves living in. One instance of financial calamity in American history that has always drawn my attention: the Panic of 1819.


What is so special about this particular crisis? It was the first major economic crisis to hit the United States (some historians label this event as the first Great Depression), and the nature of the disaster and some of its origins are strikingly similar to what we are experiencing in the present day.


Leading up to the panic, asset prices (public land which was being sold in large quantities at the time) were being driven higher by speculators financed by state banks which had been practicing 'easy money' policies of issuing paper money in greater quantities than their hard money reserves, such as gold/silver.


Sound familiar?


The U.S. government had financed much of the War of 1812 with debt, and there was a shortage of hard money in the nation at the time, a situation which lead banks to suspend the settlement of transactions in gold and silver, as they did not have enough reserves to cover their obligations (so paper money backed by nothing was the solution naturally, so it seemed).


When the monetary base expanded during this time, it lead to unproductive investment and speculation in public lands, a bubble if you will. The Second Bank of the United States was forced to step in and pop the bubble by pivoting the nation's financial system back to a more sound monetary system, which of course lead to severe financial hardship for those who had speculated with worthless money.


There were of course other factors in play at the time that contributed to the Panic of 1819, such as the aftermath of the War of 1812 and the Napoleonic wars, but the principle cause of the panic was the effect of unsound monetary policies.


We see the same economic consequences in 2020 as we did 200 years ago, as easy money backed by air and cheap debt have fueled asset prices to unsustainable levels, and have caused unproductive rot to grow in the global economy. We have seen the bubble pop in 2020, fueled by the coronavirus pandemic as a catalyst.


What we are not seeing in 2020 that we did in 1819 is a central bank committed to correcting the monetary policy to promote a more stable, productive economic condition. To the contrary, the U.S. Federal Reserve has taken the disastrous position that the solution to the current economic predicament is to support asset prices with more unsound money through the rapid expansion of the monetary base. This is why 2020 has witnessed the shortest bear market in history despite little improvement in the economic backdrop.


All the Fed has accomplished is the enlargement of the bubble of asset prices and delay the inevitable economic downturn to follow the popping of this bubble. The Panic of 1819 demonstrated that the resolution we are likely to see is a return to sound money by ripping off the band-aid. Until we have that moment in the United States, we will all continue to live in a bubble and an economy of fantasy.


-TH


You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.


Disclosure: nothing in this article should be considered financial advice and I am not a financial advisor. Do your own research as everything in finance carries risk.