Financial problems are nothing new to the Prairie State. Sadly, neither are inept responses by governmental officials. After the Panic of 1819 one of our own townsmen, an esteemed founding father, was one of several leaders investigated for wrongdoing in relation to state-sponsored recovery efforts.

This fact was discovered by local historian and author David Brady, who wrote a booklet about what he learned: Panic of 1819: Its Cause and Effects in Illinois History (Sangamon County Historical Society, 2007).

The national depression of 1819, the first in the nascent country’s history, was caused by a variety of factors, including worldwide aftereffects of the Napoleonic Wars, the War of 1812 and an Indonesian volcanic eruption in 1815. The latter caused climate changes that benefited farmers in what is now the Midwest, but resulted in food shortages elsewhere. To take advantage of the situation, farmers borrowed money to buy more land and grow much-needed, highly profitable corn.

But the price of corn plummeted three years later, according to Brady, and the climate normalized. The farmers’ heydays were over and they were broke. “They were being kicked off of their farms,” he says. Some came to central Illinois from other states to settle on land before it was available for sale, thereby “stealing” it; they didn’t have money to buy land elsewhere.

Illinois’ solution to this financial mess was to create a state-owned bank. There was a good deal of opposition in the legislature to the idea. Some thought it would provide “quick and easy access to every luxury and vice,” according to The Panic of 1819: Reactions and Policies by Murray N. Rothbard (Ludwig von Mises Institute, 2002). Some opponents declared the idea unconstitutional.

However, supporters rigged its passage, according to Rothbard, and it became law.

The state bank opened in August, 1821. “A principal bank was established at Vandalia and four or five branches in other places: the legislature elected all the directors and officers, a large number of whom were members of the legislature, and all of them professional politicians,” wrote Thomas Ford in his 1854 book, A History of Illinois, from its Commencement as a State in 1818 to 1847 (republished in 2009 by BiblioBazaar).

The problem was the new bank had very little cash. It got $2,000 from the state and all of that was spent printing notes (loans), according to Rothbard.

Nonetheless, the state bank’s orders were to loan, loan and loan some more.

“The state believed that if it gave everyone $100, the people would take that and pay off their debts,” which would help the debtors and their creditors, Brady explains. All citizens needed to get their hundred was a co-signor, so most paired up and co-signed for each other.

The policy was “so generous — and unsound — that borrowers quickly consumed all of the bank’s funds,” says Roger Biles’s Illinois: A History of the Land and Its People (Northern Illinois University Press, 2005).

Most people didn’t use their loans to pay off debts, Brady says. They bought stuff. To make matters worse, the U.S. Supreme Court declared that it was unconstitutional for state banks to make loans to the public. When many debtors learned this, they didn’t pay back their loans. The loans still came due, though, and the banks couldn’t pay. They closed.

Even before that, complaints arose about the branches’ poor management and possible loan abuses. Governor Edward Coles ordered an investigation of the bank branches in 1822.

The next governor, Ninian Edwards, demanded an examination of the Edwardsville branch specifically. This is where Springfield’s esteemed Elijah Iles, who helped found the town and was a successful shop owner and land speculator here, comes in.

Iles had served as a director of the Edwardsville branch, which is the branch Springfieldians used. According to the History of Madison County (by W. R. Brink and Co., 1882), the branch’s officers were charged with making loans for much less than the required collateral and for loaning themselves “amounts greatly in excess of that permitted by law.”

The Illinois House of Representatives held a long investigation into the branch‘s alleged wrongdoing, seeking testimony from many, including Iles, who “basically said he didn’t have any part in it,” according to Brady.

Although the State Bank “ruined the public finances and demoralized the people,“ according to Ford, the House concluded that “nothing” had been “proved” against the Edwardsville branch officers. Neither they nor Iles was punished.

Iles did, however, become a state senator.

Contact Tara McAndrew at tmcand22@aol.com.