Panic of 1796–1797 facts for kids
The Panic of 1796–1797 was a time when money and business faced big problems in both Great Britain (now the United Kingdom) and the new country of the United States. It started in 1796 when a "bubble" burst in the U.S. This means that prices for something, like land, got super high very quickly, and then suddenly crashed.
The crisis got worse in February 1797. The Bank of England, which is like Britain's central bank, stopped letting people exchange their paper money for gold or silver coins. This happened because people in England were worried about a possible French invasion and started taking out all their money. This action, combined with the crashing land market in the U.S., caused prices to drop and made money harder to get in American cities and the Caribbean.
Because of these money problems, the U.S. Congress later passed the Bankruptcy Act of 1800. This law helped merchants, bankers, and brokers who couldn't pay their debts.
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Why the Panic Happened
The U.S. economy was often unstable in the late 1700s. During the American Revolutionary War, the paper money called "Continental Currency" lost almost all its value. People even used the phrase "not worth a Continental" to mean something was worthless.
Because there wasn't stable money, banks printed their own notes. To make things better, the Bank of North America was created in 1781. After the U.S. Constitution was adopted, the First Bank of the United States took its place as a central bank. But people still worried about how strong the country's money system was.
Risky Investments in the U.S.
Many people tried to get rich quickly by investing in risky ventures, a practice called speculation. This led to an earlier money crisis in 1792. A former politician named William Duer borrowed a lot of money to buy bank shares and government bonds. These were new types of investments, and many people didn't understand the risks. Duer couldn't pay back his debts, and many people lost their savings. This caused riots and led to talks in Congress about a bankruptcy law.
After this, Duer and other rich investors tried to make money by buying huge amounts of land. This was an old idea, but they did it on a much bigger scale than ever before. This set the stage for the land bubble that burst in 1797.
The main reason for the Panic of 1796–1797 was a series of land deals in the U.S. that went wrong. Investors were selling special papers that promised ownership of land in the western parts of the country.
The biggest land scheme was put together by James Greenleaf from Boston and Robert Morris and John Nicholson from Philadelphia. These three bought 40% of the building lots in the new capital city, Washington D.C., which was still being built. Greenleaf hoped to get loans from banks in the Netherlands, but a French invasion stopped that.
Without enough money, the three partners formed the North American Land Company in 1795. They planned to sell shares in this company to investors in Europe. However, European investors became careful about American land deals. It was hard to sell the land because the ownership papers were unclear, and much of the land wasn't very good.
Morris and Nicholson then started paying for their land purchases by issuing their own private notes, which were like promises to pay money later. People accepted these notes because Morris was very famous and rich. But these notes quickly lost value and became part of the risky speculation.
Meanwhile, ongoing wars in Europe made it harder to get loans. This showed how risky the North American Land Company and similar schemes were. Many businesses in East Coast cities failed by late 1796. Land speculators who weren't as famous as Morris soon ended up in debtors' prison, meaning they were jailed for not paying their debts.
One of these was James Wilson, a signer of the Declaration of Independence. His imprisonment, along with rumors that Morris might also be jailed, caused widespread panic. Morris and Nicholson's notes, which were worth $10,000,000, soon traded for only one-eighth of their original value. By 1797, their whole financial plan collapsed.
British Bank Problems
At the same time, problems in Britain made the situation worse. The cost of the Napoleonic Wars and people taking out their money from banks had greatly reduced the gold and silver stored by the Bank of England.
Because of this, the British Parliament passed the Bank Restriction Act 1797. This law stopped the Bank of England from giving out gold or silver coins for paper money. This made it harder for American financiers to get gold and silver from Europe. This financial problem between Europe and America made Morris's and other land schemes collapse even faster.
What Happened in the U.S.
By 1800, the crisis had caused many important merchant businesses in Boston, New York, Philadelphia, and Baltimore to fail. Many Americans who owed money were sent to debtors' prison.
This included Robert Morris, who helped fund the American Revolution, and his partner James Greenleaf. James Wilson, a Supreme Court Justice, had to spend the rest of his life avoiding people he owed money to. George Meade, whose grandson became a famous general in the American Civil War, lost his fortune in Western land deals and died bankrupt. Even the fortune of Henry Lee III, father of Confederate General Robert E. Lee, was reduced because of his investments with Robert Morris.
After the Panic
The panic caused a big slowdown in business in American port cities that lasted until after 1800. It wasn't just the land investors who suffered. Shopkeepers, craftspeople, and workers who relied on trade also felt the impact as businesses failed between 1796 and 1799.
However, the panic didn't affect everyone equally. Cities along the East Coast suffered much more than the countryside. Rural areas didn't have the same complex financial connections that would later pull them into future money crises.
The panic also showed how much the young United States economy was connected to Europe. Even though George Washington’s Farewell Address warned against getting too involved with other countries, the panic proved that America's new economy would be affected by political problems in Europe. This later led Thomas Jefferson to sign the Embargo Act of 1807 to try and protect American trade.
Finally, because important American leaders like James Wilson and Robert Morris were jailed for debt, Congress passed the Bankruptcy Act of 1800. This law created a way for people who owed money and those they owed money to work out a solution. Some people thought the law encouraged risky investments because it made failure less costly. So, it wasn't renewed in 1803. But the act was still an important step in American law against jailing people for their debts.
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