In 1803, the Peace of Amiens collapsed and France and Britain resumed making war against each other. Clinging to neutrality, and trading with both nations, America prospered at first. However, the US soon found itself in the midst of an economic battle. Britain had blockaded the northern coast of Europe to prevent its enemies, the coalition of France, Germany, and Spain, from trading through these lines. Napoleon responded to the blockade with the Berlin Decree of 1806, declaring that all neutral ships which stopped at Britain before coming to the continent would be seized by the French fleet. Britain responded by ordering all ships bound for the continent to stop at Britain, upon penalty of seizure. Napoleon quickly retaliated with the Milan Decree (his army had moved), which stated that all neutral ships even consenting to a British search would be seized. Between these various orders, both the British and French seized many American merchant ships.
To make matters worse, the British changed their policy on what was known as the re-export trade. According to the British rule of 1756, US ships were not permitted to fill in for French ships trading between the West Indies and Europe during time of war. The solution to this restriction had traditionally been to ship goods from the West Indies to America, unload them, and then reload them to be shipped to Europe as American goods. However, in 1805, in a case involving the USS Essex, the British ruled this practice illegal, and began searching outgoing ships off the coast of the US for contraband.
As if these economic impositions were not enough, the British added the threat of impressment. The British navy experienced huge numbers of desertions due to low wages and morale. Many of these deserters found work sailing on US vessels. The British, ever in need of sailors, began stopping American ships, mustering the crew, and impressing those who were or had been British subjects into the royal navy. They often seized naturalized or even natural-born American citizens as well. With the French seizing ships in European ports, and the British accosting ships at sea, Thomas Jefferson sent diplomats to try to work out an agreement with Britain. The envoy walked away with a treaty so weak Jefferson refused to even show it to the Senate.
Anglo-American tensions reached a head in the Chesapeake-Leopard Affair. On June 22, 1807 the British naval frigate HMS Leopard followed the American naval frigate USS Chesapeake out of Norfolk harbor in Virginia, and opened fire upon it after a request to board had been denied. The Chesapeake, not prepared for battle, lost three men and had twenty wounded, and permitted the British to board. The British naval officers boarded, seized four men who had deserted the royal navy, hanged them from a yardarm, and sailed away.
Jefferson, outraged, issued a proclamation banning all British warships from American waters. Congress took measures to expand the army, and on December 22, 1807, passed the Embargo Act. The act prohibited any ship from leaving a US port for a foreign port, effectively ending both exportation and importation. Jefferson described the act as a means of peaceful coercion.
Despite substantial damage to the British economy, the Embargo Act hit the US harder. Merchants, artisans, and farmers alike, all suffered because of trade isolation. Unemployment was rampant and debtors prisons were filled. By December 1808, the Embargo Act was vociferously despised throughout the nation. Congress finally voted to terminate the act on March 3, 1809, replacing it with a non-intercourse law preventing trade with Britain and France and granting the President the power to determine when it should be resumed. Jefferson had announced he would not run for re-election even before the failure of the Embargo Act. James Madison, his secretary of state, won the election of 1808 and became president March 4, 1809.