What Caused the Recession of 1797?

Nicholas Curott () and Tyler Watts
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Nicholas Curott: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise
Tyler Watts: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

No 48, Studies in Applied Economics from 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.

Keywords: Panic of 1797; business cycles; speculation; credit expansion (search for similar items in EconPapers)
JEL-codes: E32 E50 N11 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-02
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