40 Pages Posted: 2 May 2011
Date Written: May 1, 2011
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: Suggested Citation