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The Financial Crisis of 1814 The United States started the War of 1812 in a poor financial state and things only got worse. Opposition to the war led Congress to attempt the impossible, conducting a war against a major power without raising taxes. Although Congress did double the import duties, it continued to refuse to increase internal taxes until well into the war. And even after they did finally raise taxes, the start date for payments was delayed six months. The Secretary of the Treasury, Albert Gallatin, attempted to pay for the war through loans, but this quickly fell apart. Two things happened at the same time to make it impossible to pay down the national debt. The first was that the national government didn't issue currency, local banks did. With the collapse of trade, due to the war, banks couldn't manage to reclaim their loans. As a result, the banknotes they issued lost value. This was a two-edged sword. As a result of the devaluation of banknotes, revenue in taxes to the federal government dropped off dramatically… because people were paying their taxes with devalued currency. Often, if the bank failed entirely, the currency with which people paid their taxes would become worthless. The government attempted to pay its debts with treasury bonds, payable with interest after one year. But as the financial situation grew worse, these bonds became as worthless as the worthless local banknotes used to pay them off. Recruiting came to a standstill as the government was unable to pay bounties to new recruits. The armory in Springfield, Massachusetts was shut down to save costs… creating a weapons shortage. And jails, holding British POWs ran out of funds to buy food. In the fall of 1814, Congress defaulted on the American national debt. Instead of paying holders of loans to the US government with gold or silver (as required by law) it attempted to pay them with the now worthless treasury bonds. Only one bank kept the US from complete collapse, Baring Brothers of London. Sometimes money is more important than politics.
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