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A Monetary Explanation for the Recession of 1797

Nicholas Adam Curott

State University of New York (SUNY) - Delhi

Tyler Watts

East Texas Baptist University

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.

Number of Pages in PDF File: 40

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

JEL Classification: E32, E50, N11

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Date posted: May 2, 2011  

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

Contact Information

Nicholas Adam Curott (Contact Author)
State University of New York (SUNY) - Delhi ( email )
2 Main Street
Delhi, NY 13753
United States
Tyler Watts
East Texas Baptist University ( email )
One Tiger Dr.
Marshall, TX 75670
United States
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