Second Bank of the United States reverses credit policy

Background. The Second Bank of the United States began operations in January 1817 under a twenty-year charter. It was expected to acquire $28 million in specie but started with only $2 million, forcing it to purchase specie at usurious rates in London. This burden overextended its credit. By July 1818, demand liabilities exceeded $22.4 million against a $2.4 million specie fund, creating an unsustainable 10:1 ratio.

Policy Reversal. Beginning in 1818, the bank sought to compensate for lax regulation of state bank credit by initiating a sharp curtailment in loans by its western branches. In August 1818, branch offices began rejecting all state-chartered banknotes. Historians have variously described the bank's contraction as having "triggered", "pricked", or "precipitated" the financial panic, though economic historians do not regard the bank as the sole causative agent of the Panic of 1819.

Consequences. The credit contraction, combined with a sudden recovery in European agricultural production in 1817, led to widespread bankruptcies and mass unemployment. The panic drove the country into recession, particularly after cotton values dropped 25% in a single day in January 1819. Many economic historians agree that the Panic of 1819 as a whole marked the United States' entrance into the modern business cycle.