A Monetary Explanation for the Recession of 1797

40 Pages Posted: 2 May 2011  

Nicholas Adam Curott

Ball State University - Department of Economics

Tyler Watts

East Texas Baptist University

Date Written: May 1, 2011

Abstract

This paper presents a monetary explanation the US recession of 1797. Credit expansion initiated by Bank of the United States in the early 1790s unleashed a bout of inflation and low real interest rates which spurred a speculative investment bubble in real estate and capital intensive manufacturing and infrastructure projects. A correction occurred as domestic inflation created a disparity in international prices that led to a reduction in net exports. Specie flowed out of the country, prices began to fall, and real interest rates spiked. In the ensuing credit crunch businesses reliant upon rolling over short term debt were rendered unsustainable. The general economic downturn which ensued throughout 1797 and 1798 involved declines in the price level and nominal GDP, the bursting of the real estate bubble, and a cluster of personal bankruptcies and business failures. We detail the scope of the credit expansion, price level movements, fluctuations in interest rates, and the investment errors that these conditions spawned in several sectors of the economy.

Keywords: Panic of 1797, business cycles, speculation, credit expansion, free banking, Bank of the United States

JEL Classification: E32, E50, N11

Suggested Citation

Curott, Nicholas Adam and Watts, Tyler, A Monetary Explanation for the Recession of 1797 (May 1, 2011). Available at SSRN: https://ssrn.com/abstract=1828282 or http://dx.doi.org/10.2139/ssrn.1828282

Nicholas Adam Curott (Contact Author)

Ball State University - Department of Economics ( email )

Muncie, IN 47306-0340
United States

Tyler Watts

East Texas Baptist University ( email )

One Tiger Dr.
Marshall, TX 75670
United States

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