The Panic of 1918: a Central Bank Conspiracy?

©1997 by Gerry Rough <>

In the eyes of many conspiracy theorists, the Panic of 1819 is
our nation’s first experience with what is now called the “boom-bust” cycle.
In 1817, the second Bank of the United States went into operation and quickly
became the target of many who believed that banks, and especially large
banks, were evil institutions of fraud and deceit. When the economy turned
south a mere two years after the Bank began its operations, it was quickly
derided by its enemies as the fall guy that caused the panic. Since the
Bank of the United States was poorly managed and found to be fraudulent
in its original management, this emboldened its enemies all the more. The
Bank’s public image tarnished by fraud, the ensuing panic was now seen
as salt in an old wound. Conspiracy theorists are quick to point toward
this controversial issue in their zeal to prove the New World Order theory.
Unfortunately, the facts that are given to support their theory do not
stand the test of good research. Was the Panic of 1819 part of the New
World Order conspiracy? Bob Adelmann provides our first look:

      In 1816, a Second Bank of the United States was chartered, the money


      supply was expanded enormously, and prices rose again. Then, in 1818, a


      major contraction took place, instead of the now-traditional suspension


      of gold payment, causing a recession. This is the first carefully recorded


    “boom and bust” cycle caused by a central bank in the United States. [1]

As is so often the case with conspiracy writers, Adelmann conveniently
deletes the part that does not agree with his theory. John Jay Knox fills
in some of the blanks:

      The bank went into operation on January 7, 1817. This was at the worst


      stage of the monetary troubles, beginning with the suspension of specie


      payments in 1814, and continuing until the general crash of 1819 and 1820.


      At this time lands and agricultural products had fallen to one-half the


      prices which were readily obtainable in 1808 and 1810, and to one-third


      the value they possessed when the excessive indebtedness of the people


      was incurred-namely, during the inflation years of the State banks. The


      contraction of the circulation and the general failures of the State banks


      began in 1818. The second United States Bank, therefore, came into existence


    on the very verge of a great monetary crisis. [2]

The monetary crisis, then, had nothing to do with the Bank. The
crisis started long before the Bank went into existence. Ralph C. H. Catterall
is more blunt on the Matter:

      Its curtailments had, indeed, precipitated the panic, for which, however,


    it was hardly more responsible than was Noah for the flood. [3]

G. Edward Griffin also attempts the same blunder:

      In economics, every policy carries a consequence, and the consequence


      of the loose monetary policy of the Second Bank of the United States was


      that America was introduced to her first experience with what is now called


      the “boom-bust” cycle. Galbraith tells us: “In 1816, the postwar boom was


      full on; there was especially active speculation in western lands. The


    new Bank joyously participated. [4]

Prior to the above in Griffin’s text, the second Bank of the United
States has been introduced. In its context, the above is cited to prove
that the Bank was to blame for the panic. This would appear to be credible
since 1816 is also the stated date of the Bank’s chartering by Congress.
Unfortunately, Griffin falsely gives the impression that Galbraith blames
the Bank as well. As if to emphasize the obvious fraud long prior to its
assertion, on the very same page Griffin cites above, Galbraith praises
the Bank for its loan policies of 1818, while disconnecting the policies
of the Bank to the ensuing panic which followed. Galbraith continues:

      In 1819, William Jones, a politician of questionable intelligence but


      proven bad judgment, was replaced by Langdon Cheves, described by most


      historians as a notably insensitive man, who may well have been what the


      occasion required. He instituted a drastic policy of loan contraction and


      foreclosure. Simultaneously, although mostly it would appear coincidentally,


      the boom collapsed, prices fell, debtors were closed out and bankruptcies


    went up. [5]

So much for context. In order to get the full picture of the Panic
of 1819, let’s digress for a moment to view the larger context. The panic
had as its genesis five main factors which produced the crisis. First,
without the restraining influence of the Bank of the United States from
1811-1816, the state banks were allowed to produce as much or as little
currency as they wished. That they chose to produce more currency is no
small understatement. It was this over-expansion of the money supply that
was the main factor in producing the crisis. In reviewing the plethora
of economic literature of the period, A. Barton Hepburn’s exaggerated analysis
may well be the classic statement to be remembered:

      Other corporations and tradesman issued “currency.” Even barbers and


      bartenders competed with the banks in this respect….nearly every citizen


    regarded it his constitutional right to issue money. [6]

The second factor producing the crisis was that the state banks
refused to redeem their notes in gold. At this time in our history, every
denomination of currency was supposed to be redeemable in gold coin. The
Bank of the United States regulated the state banks not by force of law,
but by example. It would routinely ask for gold payment in exchange for
the notes it had accumulated in the normal course of business. This had
the effect of restraining the state banks from issuing far more notes than
it had gold coin in its vaults. In so regulating the state banks by example,
the Bank was increasingly seen by the state banks as an oppressive master,
a hindrance to more profit. Since the state banks refused to pay in gold,
they frequently piled up large balances against the Bank which expected
at some point in the future to be paid in gold. Catterall picks up the

      These had always large balances against them at the Bank of the United


      States, constituting loans without interest to these amounts. Not being


      called on for balances, they continually inflated their issues and expanded


      their discounts. Moreover, a leniency was shown to the state banks which


      was not extended to the national one….Thus the Bank of the United States,


      even when it attempted to press its claims, found insuperable obstacles


      to collecting in coin. Hence the state banks enjoyed a virtual immunity


    from the payment of the vast majority of their notes. [7]

Rothbard even cites a letter from State Senator Condy Raguet to
David Ricardo:

      This is the whole secret. An independent man, who was neither a stockholder


      or debtor, who would have ventured to compel the banks to do justice, would


    have been persecuted as an enemy of society… [8]

The mirror image to the above, of course, is that the Bank of the
United States did not press its claims against the state banks when it
should have. This was yet another cause of the panic. While it is true
that the state banks in January, 1817, were not in a position to begin
operations on a specie basis as yet, Hepburn’s analysis that the best course
for the Bank should have been the gradual resumption of specie payments
is certainly worth considering. [9] Even more so if this course had been
followed from the very beginning of its existence. Catterall would seem
to agree with this analysis:

      Yet by the very conditions of its existence the Bank of the United


      States was compelled to act as if specie resumption was complete….and


      to fail in restoring specie payments was to lose the very reason for its


      existence. Under these circumstances the bank should have kept its dealings


      as restricted as possible, for, unless it did this, it could not enforce


      restriction upon the state banks, and without such restriction no effective


    resumption was possible. [10]

The top of the food chain is usually preferable to life at the bottom.

The Bank was, in some small measure, partly responsible for the
crisis. The south and western branches of the Bank did, in fact, follow
the poor example of the state banks in that these loan policies were wildly
excessive as well. The south and western states were making such wildly
excessive loans compared to the amount of gold in their vaults, that the
practice can only be seen in hindsight as fraudulent and downright criminal.
In this the conspiracy theorists are correct to point out. But the line
has to be drawn in the sand long before the Bank ever came into existence.
That is the problem with the conspiracy theorists argument on this issue.
Blaming the Bank for problems that existed long before it began operations
is not exactly, well, bourgeois.

But there is one last piece to the puzzle. The issue of the heavy
public debt needed to be resolved. In 1816 and 1817, this was mostly due
to short-term debt. In 1818-1821, this was due to the long-term debt repayment
of the Louisiana purchase. [11] In both cases, the Bank of the United States
was forced to make heavy payment in specie (gold) overseas. As earlier
noted, the Bank could not redeem the notes from the state banks to recover
the outgoing specie from its vaults. In the final analysis, then, the Bank
had no way replenish its specie stock, and had to begin the painful process
of contracting its outstanding loans to the state banks and its commercial
customers. Here again, the conspiracy theorists have aimed their clumsy
artillery at the Bank only to find their facts to be grossly wanting. Again,
as earlier stated, the panic had its genesis long before the Bank had commenced
operations. These problems only aggravated an already impossible situation.

Our last example of the conspiracy theorists argument comes again from
G. Edward Griffin:

      In the past, the effect of this inflationary process always had been


      the gradual evaporation of purchasing power and the continuous transfer


      of property from those who produced it to those who controlled the government


    and ran the banks. [12]

Let me get this straight. Banks and governments deliberately cause
depressions and panics so that in the end they make more money. This is
a curious statement indeed considering that many of the bankruptcies that
occurred during the panic were the banks themselves. The complete stupidity
of believing that banks conspire to create their own downfall is
beyond comprehension. And what of the government profiting from economic
disaster? Bray Hammond quotes Representative Alexander C. Hanson of Maryland:

      So completely empty was the treasury and destitute of credit that funds


      could not be obtained to defray the current ordinary expenses of the different


      Departments….the Department of State was so bare of money as to be unable


    to pay even its stationary bill. [13]

With this gullibility in mind, is it no wonder then at all that
conspiracy theorists are considered the lunatic fringe?

1) Bulletin: Committee To Restore The Constitution, February, 1989 P.O.
Box 986, Ft. Collins, CO 80522

2) John Jay Knox, A History of Banking in the United States
(New York: Bradford Rhodes & Company, 1903) 57

3) Ralph C.H. Catterall, The Second Bank of the United States (Chicago:
The University of Chicago Press, 1903) 61

4) G. Edward Griffin, The Creature from Jekyll Island (Appleton:
American Opinion Publishing, Inc., 1995) 343
5) John Kenneth Galbraith, Money: Whence It Came, Where It Went
(Boston: Houghton Mifflin Company, 1975) 77

6) A. Barton Hepburn, A History of Currency in the United States
(New York: The Macmillan Co., 1903; reprinted, August M. Kelly Publishers,
1967) 102

7) Catterall, p. 35-36

8) Murray N. Rothbard, The Panic of 1819: Reactions and Policies
(New York: Columbia University Press, 1962) 10, 11

9) Hepburn, p. 97

10) Catterall, p. 38-39

11) Walter Buckingham Smith, Economic Aspects of the Second Bank
of the United States
(Cambridge: Harvard University Press, 1953) 65.
See also Rothbard, p. 11, and Knox, p. 57
12) Griffin, p. 344

13) Bray Hammond, Banks and Politics in America (Princeton:
Princeton University Press, 1957) 230

Additional Resources
M. St. Clair Clarke and D.A. Hall, Legislative and Documentary History
of the Bank of the United States
(Washington: Gales & Seaton, 1832;
reprinted August M. Kelley, Publishers, 1967)

Alexander Balinky, Albert Gallatin: Fiscal Theories and Policies

(New Brunswick: Rutgers University Press, 1958)

Raymond Walters, Albert Gallatin (New York: The Macmillan Company,

Davis Rich Dewey, Financial History of the United States ( New
York: Longmans, Green, and Co., 1903)

Albert Gallatin, Considerations on the Currency and Banking System
of the United States
(Philadelphia: Carey Lea, 1831)

Murray N. Rothbard, The Mystery of Banking (New York: Richardson &
Snyder, 1983)
William M. Gouge, A Short History of Paper Money and Banking in
the United States
(Philadelphia: T.W. Ustick, 1833; reprinted August
M. Kelley, 1968)

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