ThePanic of 1796–1797 was a series of downturns in credit markets in bothGreat Britain and the newly establishedUnited States in 1796 that led to broader commercial downturns. In the United States, problems first emerged when aland speculationbubble burst in 1796. The crisis deepened when theBank of England suspendedspecie payments on February 25, 1797 under theBank Restriction Act 1797. The bank's directors fearedinsolvency when English account holders, who were nervous about a possible French invasion, began withdrawing their deposits insterling rather than bank notes. In combination with the unfolding collapse of the U.S. real estate market's speculative bubble, the Bank of England's action haddeflationary repercussions in the financial and commercial markets of the coastal United States and the Caribbean at the start of the 19th century.
The scandals associated with these and other incidents prompted theU.S. Congress to pass theBankruptcy Act of 1800, modeled on English practice, which limited petitioning a creditor for relief to merchants, bankers, and brokers. It had a five-year sunset, but was repealed after three years.[1]
Frequent instability characterized the United States economy during the 1780s and 1790s. Rampant inflation ofContinental Currency during theRevolutionary War gave rise to the phrase "not worth a Continental". Lacking a stable currency, banks issued their own notes, and calls for stronger public credit led to the establishment under theArticles of Confederation of theBank of North America in 1781. After the adoption of theConstitution, theFirst Bank of the United States succeeded it as a de facto central bank. Concerns remained, however, over the strength of public credit as unstable banknotes remained a medium of exchange.[2][3]
During this time,speculation was the investment of choice, leading to thePanic of 1792. FormerContinental CongressmanWilliam Duer raised large sums of money to invest in bank stock and government securities, novel and financially sophisticated assets whose risks many contemporaries failed to understand. Duer soon defaulted on his debts, destroying the savings of many middle- and working-class people. The ensuing panic caused riots and reignited Congressional debate over a bankruptcy law that would finally produce the Bankruptcy Act of 1800 after the Panic of 1796–1797.[4]
Duer and other prominent financiers then sought to recover their fortunes by incitingland speculation, an old concept applied on unprecedented scale too. This set the stage for the bubble that burst known as the Panic of 1797.[5]
The immediate cause of the Panic of 1796–1797 was a series of land speculation schemes in the fledgling United States that issuedcommercial paper backed by claims to Western lands. The largest such scheme was created by the Boston merchantJames Greenleaf and Philadelphia financiersRobert Morris andJohn Nicholson. The new federal capital under construction,Washington D.C., required private investment for development. By late 1793, a partnership of the three speculators had acquired 40 percent of the building lots in the new capital. Greenleaf planned to finance these purchases with loans from Dutch banks, but the French invasion of the Netherlands prevented this. Lacking funds, the three speculators then formed the North American Land Company in 1795 to consolidate their land holdings from previous speculations. They planned, once again, to sell stock in this company to European investors.[6]
However, quick sales failed to materialize as European investors grew wary of American land schemes. Unclear titles and the poor quality of much of the company’s land further slowed sales. Morris and Nicholson then began to finance their purchases by issuing their ownprivate notes, which creditors readily accepted because of Morris’s immense financial stature. These notes became themselves the subject of speculation, depreciating rapidly as amedium of exchange.[7]
Meanwhile, continued war in Europe constricted credit, exposing the precariousness of the North American Land Company scheme and others like it. Rampant business failure plagued Eastern port cities by late 1796, and land speculators less preeminent than Morris soon found themselves in debtors' prison. Among these wasJames Wilson, whose confinement, combined with rumors of Morris’s imprisonment, caused panic. Morris and Nicholson’s notes, by now totaling $10,000,000, began trading at just one-eighth their value. By 1797, their paper pyramid collapsed altogether.[8][9]
Across the Atlantic, British legislation exacerbated the damage wrought by the bursting land speculation bubble. The monetary strain imposed by theNapoleonic Wars and withdrawals by panicked depositors had greatly depleted the coin and bullion reserves of theBank of England. This prompted Parliament to pass theBank Restriction Act 1797, which haltedspecie payments.[10] The disruption of access to British gold and silver, coupled with the inability for financiers in the United States to successfully access Continental specie markets, unraveled the Atlantic credit web,[clarification needed] hastening the collapse of Morris’s and other speculation schemes.[11]
By 1800, the crisis had resulted in the collapse of many prominent merchant firms in Boston, New York, Philadelphia, and Baltimore, and the imprisonment of many American debtors. The latter included the famedfinancier of the revolutionRobert Morris and his partnerJames Greenleaf, who had invested in backcountry land.[12][13] Associate Justice of the U.S. Supreme CourtJames Wilson was forced to spend the rest of his life literally fleeing from creditors until he died at a friend's home inEdenton, North Carolina.[14]George Meade, the grandfather of theAmerican Civil War Union GeneralGeorge Gordon Meade was ruined by investments in Western land deals and died in bankruptcy due to the panic.[15] The fortune ofHenry Lee III, father of Confederate GeneralRobert E. Lee, was reduced by speculation with Robert Morris.
The panic caused a pronounced commercial downturn in American port cities that did not relent until after 1800. Investors in land schemes did not suffer alone. Shopkeepers, artisans, and wage laborers, all of whom depended on the continuance of overseas commerce, felt the impact as businesses failed between 1796 and 1799. The panic did not, however, evenly affect the whole economy. Port cities along the Eastern Seaboard suffered much worse than the rural interior, which had not yet developed the intricate webs of credit and market exchange that would drag it into future panics and depressions.[16]
The panic also revealed the young republic's economic interconnectedness with Europe. In spite of and perhaps validating the prescient warnings of the dangers of foreign entanglement laid out inGeorge Washington’s Farewell Address, the panic demonstrated that the nascent American economy would be subject to ripples of political turbulence on the European continent, an effect that later promptedThomas Jefferson to sign theEmbargo Act of 1807.[17][18]
Finally, the imprisonment for indebtedness of such prominent American statesmen as James Wilson and Robert Morris compelled Congress to pass the Bankruptcy Act of 1800, establishing a framework for creditors and debtors to cooperate in reaching a settlement. Though critics, who argued that the law encouraged risky investments by reducing the cost of failure, prevented its renewal in 1803, the act represented a step in the American legal tradition against imprisoning debtors.[19]
