1819: America's First Housing Bubble - C.J. Maloney - Mises Institute

1819: America's First Housing Bubble - C.J. Maloney - Mises Institute:

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.

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).

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.

In 1819 America, nobody blamed the effects for the Panic of 1819, they rightly blamed the cause; they blamed (in Caroline Baum's words) the "friendly central bank." As Professor John Dobson points out, "the [central] bank's policies fueled inflation, and it was popularly viewed as a major contributor to the Panic of 1819." After this encounter with central banks, "hard money leadership was abundant and influential" (Rothbard 2007, p. 207).

The urge to bail out debtors was fought against not only from a practical but from a moral level as well. Besides Tennessee state representative Robert Allen warning his colleagues that "if people learn that debts can be paid with petitions and fair stories, you will soon have your table crowded" (Rothbard 2007, p. 43), the pages of the influential Pennsylvania Aurora argued that any such bailouts would not only be economically unsound, but unjust, being a special privilege to the debtor (Rothbard 2007, p. 56).

The Panic of 1819 lasted about three years — the Great Depression lasted well over a decade. When looking for solutions to our current mess, we should study a winning team; instead we seem determined to channel FDR, the same arrogant fool who took an economic downturn and stretched it into a decade-plus tragedy.