Have any Piggs read this? Sorry for the length. I found it interesting.

With little interest in and even less knowledge of history, the modern American finds anything he considers tragic to be an utterly new crisis of unfathomable proportions and, as befits a great nation, one completely new to mankind’s historical experience. As any patriotic American knows, we ooze uniqueness.

Yet, despite Congressman Barney Frank’s blubbering insistence that our nation’s current financial mess is a “new phenomena,” today’s “housing/credit/confidence crisis” is anything but. Our ancestors had already seen all the broken dreams and ignorant greed surfing high on a wave of paper money and hollow credit — more than once before. The America of 1819 and the financial panic its citizens experienced was only the first of what is America’s true national pastime: speculative mania.

Examining how the men of 1819 responded to the crisis and, most importantly, what the results of their actions were, may give us an idea or two (or none) to help solve the current crisis. Should we solve it — and I have no doubt that we will — then we can write down our own warnings, born of harsh experience, so that generations not yet born may completely ignore them too.

The “Era of Good Feeling”
From the Roaring Twenties to the “great moderation,” America has always shown a flair for labeling things, and speculative manias are no exception. Historians remember the ignorant, blissfully happy times that preceded the Panic of 1819 by the same label as those who lived through them — the Era of Good Feeling.

Like so much of what is fatal to civilized society, the Panic of 1819 was birthed in the turmoil of war, specifically the War of 1812, a now-largely-forgotten episode best remembered for delivering Francis Scott Key’s hard-to-sing and harder-to-listen-to “Star-Spangled Banner.”

As in every war, the host government’s first battle was to pummel the local currencies, which in 1812 America consisted mostly of state bank notes redeemable in gold, or at least promised to be. Wars are always expensive and the government’s inability to print paper money at will is a huge disadvantage to them. The America of 1812 adhered to a gold standard; it had to go, and by 1814 it went.

By that year, not being able to redeem in gold all the promises of gold they had printed, the state bankers were in a fine mess, and the politicians, instead of throwing them into jail for fraud, granted them legal immunity to continue the swindle. After all, these banks were printing like mad in part to buy all those government bonds, to lend those same politicians credit in time of war and, as you doubtless know, twenty-gunned frigates like the Hornet didn’t come cheap.

Now freed from having to actually raise money (gold) prior to issuing paper promises for it, the banking system’s highly inflationary printing binge went into overdrive. During the war’s three years, domestic prices rose by 25% and import prices by 70%.

From 1811 to 1815, banks multiplied like mushrooms on a dung heap, lending out credit they didn’t have as if it were manna from heaven. Where actual money in bank vaults had decreased by 9.4% during that period, paper bank notes and deposits, all with claims on that money, had increased by 87.2%. Keynes himself would have been proud (Rothbard 2002, p. 73).

By December 1814, the British, having decided that Napoleon was more interesting to fight than America, signed the treaty that ended the War of 1812. This outbreak of peace was accompanied by an upswing in trade between the two nations’ businessmen.

British manufacturers were eager to begin trade again and the flood of goods and the easy availability of credit made Americans ravenous consumers. Imports, which stood at $12.9 million in 1814, reached $151 million within two years, and this during a period when imported goods, freed from the wartime risk of getting deliberately sunk in transit, were rapidly falling in price (Dupre 2006, p. 280).

During this orgy of consumption, “merchants throughout the country overextended themselves…aid[ed] in their efforts by the availability of bank credit” (Dupre 2006, p. 271). Whatever in 1819 qualified as a widescreen TV, I’m sure Americans had plenty of it because fusspots from that time, much as in ours, moaned about the people’s sad attraction to wasteful spending on trivial luxuries. America as a whole was importing far more than it was exporting, as our exports were flat in volume and rising only in terms of depreciating paper bank notes.

In addition to our ancestors’ heightened attraction to imports, “the sudden availability of vast new reaches of territory, combined with the loose money left over from the war” (Brands 2006, p. 66) ignited a real-estate mania in America, particularly along the young nation’s frontier areas. Illinois, overrun with fevered buyers, was the epicenter with Ohio not too far behind. Cincinnati laid claim to being the Las Vegas of the mania, and, according to one historian, most of it was subsequently repossessed.

As 1815 came to a close, the proliferation of paper bank notes and credit had the financial system of the United States in a mess — a direct result of the political establishment deliberately allowing the state banks to counterfeit with impunity. Now, seeing the orgy of speculation, stockjobbing, and pursuit of luxury imports that their policies had created, Congress stepped in to clean up the mess.

Amidst much hypocrisy, backroom dealing, bribery, threats, and displays of great oratorical skill, they proposed for themselves more money and power: another central bank, America’s second go at the institution. (We are now on our fourth.) The new Bank of the United States was up and running by 1816, with the ostensible purpose of bringing the state banks’ inflation to heel.

Instead, the men who ran the new central bank promised not to demand redemption of any state bank paper notes until over one year later. And they bailed out the insolvent state banks with $6 million in taxpayer money. The more things change, the more they stay the same.

To add injury to insult, the men who ran the central bank “jumped on the inflationary bandwagon” themselves (Dupre 2006, p. 271). Printing paper and promises with Bernanke-like abandon, within two years of its creation they had loaned $41 million worth of gold promises and issued paper bank notes redeemable in gold worth $23 million, all on top of just $2.5 million worth of gold (Dupre 2006, p. 270), a level of leverage insane enough to make a Lehman Brothers risk manager feel right at home.

“Flood[ing] the market with bank notes it could not now redeem” (Dobson 2002, p. 105) between 1816 and 1818, the supply of paper bank notes and credit on the US market grew by 40.7%, “most of it supplied by the Bank of the United States” (Rothbard 2007, p. 87). The Philadelphia and Baltimore branches of the bank would prove to be the most profligate — and the most corrupt — of all.

The economic dislocations gained steam throughout 1816–1818, and prices in real estate, land, and slaves floated upward on credit. As 1818 feverishly arrived, though, it was only the greatest of the fools who were buying. The music would soon come to an end since the postwar prosperity was built on a foundation of nothing more than pieces of paper with promises scribbled on them. In the actual vaults, there was precious little money (the pledged gold) at all.

Soon enough this became a problem, as notes from the Bank of Kentucky promising gold wouldn’t sit well with a merchant from Liverpool, England. Foreign merchants demanded payment in money, not paper. Plus, payment was coming due for the Louisiana Purchase and the French also wanted gold, not paper. The central bank was responsible for coming up with that money. Foreseeing disaster, it slammed on the monetary brakes.

So recently the Johnny Appleseed of credit, the Bank of the United States now returned as a loan shark’s heavy. In one hand they held the state bank notes, with the other they demanded the gold pledged by them, which the state banks had little of.

When it was realized that many paper bank notes were just that, their values began to collapse, many to zero (the same amount of gold you could get for it), and the money supply contracted at a ferocious rate. From the fall of 1818 to the beginning of 1819, demand liabilities at the central bank fell from $22 million to $12 million (Dupre 2006, p. 272) and the total money supply fell about 28% (Rothbard 2007, p. 89).

Insolvent banks and overextended debtors alike collapsed, while prices, no longer pumped up by the bubble, raced downward to their equilibrium. As the money supply cleansed itself of the bad apples, time and effort had to be paid so that the flow of funds could adjust back to their best uses, following prices as their guideposts. It was a massive, countrywide downturn, and introduced a slowly industrializing America to a new experience — mass unemployment.

Compared to now however, the state and federal politicians did basically nothing to “help” the economy recover from the Panic of 1819, yet by 1821 the economy had begun to get back on its feet, which must seem a stunning outcome to anyone burdened with a degree in economics.

What a Difference a Few Centuries Can Make
The response of America’s intellectual and political elite to the Panic of 1819 was, in most ways, vastly different from what it has been so far in our current “Great Unmoderationing.” Although we live under the same legal constitution and within the same lines on the map, the America of 1819 had a citizen who was, culturally speaking, utterly alien to the modern American; that they adhered to a gold standard, however imperfectly, is but one example of this difference.

The rest of the article here.