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What Caused the Recession of 1797?

Author

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  • Curott, Nicholas

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

  • Watts, Tyler

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

Abstract

This paper presents a monetary explanation for the U.S. recession of 1797. Credit expansion initiated by the 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.

Suggested Citation

  • Curott, Nicholas & Watts, Tyler, 2016. "What Caused the Recession of 1797?," Studies in Applied Economics 48, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    • Handle: RePEc:ris:jhisae:0048
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    References listed on IDEAS

    as
    1. Cowen, David J., 2000. "The First Bank of the United States and the Securities Market Crash of 1792," The Journal of Economic History, Cambridge University Press, vol. 60(4), pages 1041-1060, December.
    2. Milton Friedman & Anna Jacobson Schwartz, 1970. "Introduction to "Monetary Statistics of the United States: Estimates, Sources, Methods"," NBER Chapters, in: Monetary Statistics of the United States: Estimates, Sources, Methods, pages 1-85, National Bureau of Economic Research, Inc.
    3. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1.
    4. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
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    More about this item

    Keywords

    Panic of 1797; business cycles; speculation; credit expansion;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913

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