Although foreign affairs, which the Constitution placed directly under the control of the executive, occupied much of his attention, a variety of domestic issues required executive involvement. In his first annual message, Monroe startled the members of Congress by recommending that the Constitution be amended to authorize federal construction of roads and canals. In making this proposal Monroe was attempting to resolve the dilemma created when Madison, just before leaving office, vetoed as unconstitutional a bill appropriating dividends from the federally owned stock in the Bank of the United States for internal improvements. Madison's action had seemed inconsistent to many, for Madison, like Jefferson, had signed bills for the construction of the Cumberland Road. When Monroe queried Madison, he received the unsatisfactory response that the earlier bills had been signed hastily, without full consideration of the issue.
Monroe's recommendation produced some acrimonious debates, but action on an amendment was blocked by those who insisted that Congress had adequate power. Monroe, to his surprise and pain, was vigorously criticized for meddling in a purely legislative matter. In the next few years Monroe contributed to the confusion by signing bills for the extension of the Cumberland Road. Not until 1822, when he vetoed a bill for the collection of tolls on the Cumberland Road, did he have an opportunity to clarify his position. In a lengthy essay he argued that the collection of tolls was an invasion of the police power of the states. It was true that the road had been built with federal funds, but jurisdiction had remained in the hands of the states that had cleared the right of way. This finespun argument did not strike contemporaries as very convincing, no matter where they stood on the issue.
Monroe took a particular interest in the strengthening of the defenses of the nation. Just before leaving the War Department in 1815, he had submitted a report to Congress recommending that the army be retained at twenty thousand men rather than returned to the prewar figure of ten thousand. He also outlined an extensive plan for constructing coastal fortifications. Although Congress reduced the army to its prewar level, the substantial sum of $400,000 was appropriated in 1818 for coastal fortifications. The next year the sum was increased to $800,000. However, the decline in federal revenues following the Panic of 1819 led to a cutback in 1821 to $220,000. Only after revenues improved in 1822 did Congress raise the annual appropriation to $400,000, in response to Monroe's plea for the need to defend Florida.
Midway in his first term Monroe was confronted by two unexpected domestic crises. During his western tour in 1819, Monroe had become aware of the distress precipitated by the first peacetime depression—the so-called Panic of 1819. There was large-scale unemployment in urban areas, farm prices were depressed, and business failures were numerous in the new industries established during the war. The depression was the result of complex factors ill understood at that time. Monroe shared the prevailing opinion that the major causes were the influx of cheap European manufactures, which forced the closing of factories, and the financial instability resulting from excessive note issues and careless loan practices by state-chartered banks. Neither Monroe nor his contemporaries appreciated the role of the extensive speculation in western lands nor the impact of the catastrophic drop in cotton prices in 1818.
Contemporaries unjustly blamed the financial distress on the policies of the second Bank of the United States (rechartered in 1817), admittedly badly managed by William Jones, its first president. Monroe, who considered the bank essential to ensure a sound currency and to control the careless habits of state banks in making loans, succeeded in 1819 in persuading the directors to replace Jones with Lang-don Cheves, a far abler financier. Monroe approved Chief Justice Marshall's decision in McCulloch v. Maryland (1819), which upheld the constitutionality of the bank.
Within the limitations of current thinking about the role of government in the economy, there was little that Congress could do to ameliorate the suffering caused by the depression. In his annual message of 1819, the president urged citizens to respond to the current difficulties, which he considered temporary, by practicing industry and economy—a policy also considered proper for the federal government. In response to his suggestion that Congress "give encouragement to domestic industries," a bill was introduced providing for increased duties on textiles, the industry most hurt by imports. This mild protectionist measure encountered immediate opposition from southern congressmen, many of whom had eagerly supported the tariff of 1816. The bill passed the House but failed in the Senate by one vote.
The only form of governmental intervention familiar to Americans during economic crises was in the form of debtor relief provided by the states. Although debtor problems lay mostly within the jurisdiction of the states, the federal government was faced with extensive defaults in payments for purchases of public land. In his annual message of 1820, Monroe recommended that purchasers who acquired the land when prices were high be granted a "reasonable indulgence." Following a specific plan submitted by Crawford, a bill was passed permitting debtors unable to pay the balance to secure title for that portion for which they had already paid. A discount was granted those making their payments on time.
Since government revenues from customs and land sales had declined so sharply, the Treasury in 1820 was faced with a deficit of $7 million, a sizable sum in a budget of only $25 million. Calhoun had made substantial economies in the operation of the War Department, which absorbed nearly a third of the budget in 1818, but they were insufficient to reduce the deficit substantially. Regarding the depression as only temporary, Monroe accepted Crawford's recommendation that the deficit be met by loans. However, as Monroe noted in his second inaugural, if the depression continued, he would request additional taxes.
Not until after the Missouri question (see below) had been laid to rest near the end of the session of 1820–1821 did Congress move to enact measures to reduce governmental expenditures. The main thrust of the economizers was against the War Department, not only because it absorbed such a large share of the budget but because supporters of rival candidates used it as a means of attacking Calhoun. Republicans of the old school, who had always been hostile to military expansion, were only too happy to join the attack. In addition to cutting appropriations for fortifications, in March 1821 Congress approved a bill reducing the army from a complement of ten thousand men to six thousand, to effect a saving estimated at $2 million. Even after the revenues improved, the reduction in the army was made permanent.