Panic of 1796–1797

The Panic of 1796–1797 was a series of downturns in credit markets in both Great Britain and the newly established United States in 1796 that led to broader commercial downturns. In the United States, problems first emerged when a land speculation bubble burst in 1796. The crisis deepened when the Bank of England suspended specie payments on February 25, 1797 under the Bank Restriction Act 1797. The bank's directors feared insolvency when English account holders, who were nervous about a possible French invasion, began withdrawing their deposits in sterling rather than bank notes. In combination with the unfolding collapse of the U.S. real estate market's speculative bubble, the Bank of England's action had deflationary repercussions in the financial and commercial markets of the coastal United States and the Caribbean at the start of the 19th century.

The scandals associated with these and other incidents prompted the U.S. Congress to pass the Bankruptcy Act of 1800, modeled on English practice, which limited petitioning a creditor for relief to merchants, bankers, and brokers. It had a five-year sunset, but was repealed after three years.

Background

Frequent instability characterized the United States economy during the 1780s and 1790s. Rampant inflation of Continental Currency during the Revolutionary War gave rise to the phrase "not worth a Continental". Lacking a stable currency, banks issued their own notes, and calls for stronger public credit led to the establishment under the Articles of Confederation of the Bank of North America in 1781.