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| Uploaded on Wednesday 16 July, 2014 to the money trust |
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| The first major financial crisis in the United States |
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The nascent republic of the United States of America was just two decades old when it experienced its first, serious, economic slump. The Panic of 1796-1797 happened as a direct result of speculation gone wrong in real estate. Because the U.S. dollar had depreciated so much in value and precious metals were not readily available, the investment of choice for the wealthy was to buy up property.
The U.S. economy was, from the onset, interconnected with European nations, in large part with the United Kingdom of Great Britain. The Bank of England, whilst it had no control over the U.S. money supply, held some influence over the U.S. economy, particularly so when foreign money reached its shores. Europeans, as well as American citizens, had investment portfolios in the United States.
Prior to the Napoleonic Wars of 1803-1815, in the latter part of the eighteenth century, skirmishes between Great Britain and France wreaked havoc and instability in the marketplace. With people anticipating an imminent war against France, confidence in the British pound waned and people demanded, on masse, that their money be converted into gold by their bank wherein they held their deposits. The British pound was on the gold standard which gave the bearer the right to convert his money into gold on demand.
The big problem was that the Bank of England's stock of bank notes far exceeded its gold supplies at the converted rate, and the astonishing truth of it all is that a concept known as fractional reserve lending makes it legal for banks to print money in excess of what it holds in assets; but when the system goes wrong, it really goes wrong, and on the 25th of February, 1797, Parliament in London hurriedly came to the rescue by passing the infamous Bank Restriction Act of 1797 in order to protect the banks from insolvency. This piece of legislation enabled the Bank of England to withhold specie payments, i.e. suspend the issuance of gold coinage in return for bank notes.
The economic troubles in Great Britain caused a ripple effect on the American continent, intensifying the panic which began in 1796 after a land speculation bubble popped. |
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