Panic of 1837
PANIC OF 1837
In the early nineteenth century an unstable currency and a new shaky banking system supported the nation's economic foundation. Construction of the nation's transportation system, which consisted of railroads and canals, led to accumulation of large debts by investors in the early 1830s. In addition speculation was rampant in western lands as states became settled, and new banks were chartered. In the 1832 elections President Andrew Jackson (1829–1837) ran on a populist platform marked by an anti-Eastern establishment philosophy including opposition to the Second Bank of the United States (created in 1816). Jackson charged that the Second Bank did not fairly treat the common citizen and that it only served the wealthy.
Following his assumption of office Jackson proceeded to dismantle the central banking system. In 1833 Jackson began transferring federal funds from the U.S. Bank to selected state banks, often owned by friends of Jackson. He also stopped depositing government money in the Second Bank, instead placing new proceeds from land sales and revenue from taxes in various state banks, which he called his "pet banks." With more money the state banks increasingly expanded their issuance of credit, giving out too many loans and printing almost worthless paper money, as banks had been allowed to issue their own paper currency. Confidence in the currency declined, especially within the Eastern business establishment. So much available paper money led to a spiraling inflation rate. The price of land available from the government also rose. Since this did not stem the number of speculators, they borrowed more heavily. In 1832 the government sold less than $3 million in land and by 1836 the amount increased to almost $25 million. To make economic matters worse, in addition to the high inflation, imports began exceeding exports creating a foreign trade deficit.
With land speculation continuing rampantly Jackson issued the "Specie Circular" in 1836, which required that all public lands be bought with specie (coin), rather than private script (paper money) issued by individual banks. Also in 1836 Congress passed an act distributing the surplus federal revenues from the U.S. Treasury to the states. In reaction to the tightening of federal monetary policies, banks reduced credit available. With fewer loans available for domestic investment, reliance on British investors grew. Unfortunately, this coincided with an internal financial crisis in England, leading British creditors to collect on their loans abroad. Three British banking houses failed and a trade imbalance for the United States grew as Britain could afford fewer U.S. exports. Gold began an increased flow to Europe. With the U.S. economy already in decline, another financial blow occurred with widespread crop failures in 1835 and 1837. A financial crisis loomed.
In May 1837 New York banks ceased specie payments to investors, leading other banks across the nation to do the same. With no coin to back it paper currency lost its value, triggering the Panic of 1837. During a brief ensuing time span many companies crashed and fortunes were lost. Unemployment skyrocketed, especially in the West and South with a loss of agricultural exports and crop failures. Public calls for banking reform increased as a six-year depression followed.
The Panic of 1837 brought about changes in banking and monetary policy. President Martin Van Buren (1837–1841) moved to establish an independent U.S. treasury system in 1840 to hold and disburse government funds. Though initially defeated, the federal system became permanent in 1846. From that point onward, to help stabilize the nation's economy, public funds were held in the U.S. Treasury and its branches in various cities, rather than in the nation's private banking and financial system.
State governments had also invested heavily in enterprises such as canal and railroad construction with hopes of ultimately boosting their economies. Many of the existing 26 state governments went bankrupt or came close to it. New York state government became a leader in reform with adoption of a new constitution in 1846, instilling a philosophy of state governmental fiscal restraint. To address economic displacement of the states' citizens, a key part of various state legislative reform measures was protection for families who fell into debt. State laws were passed to alleviate the effects of the panic on an individual basis. Texas was the first state to pass a homestead exemption law following the panic. These laws aimed at shielding private individuals from free market fluctuations and provided some state protection for families during the transition to an industrial economy in many sections of the country.
On the national level Congress passed a federal bankruptcy law removing about $450 million in debt from a million creditors. However, by bailing out investors the credit system itself was substantially undermined. Creditors were more hesitant to hand out loans unsure if they could enforce repayment. The numerous bankruptcies resulting from the panic and associated debt relief similarly discouraged foreign investors. The Panic of 1837 had cost British investors almost $130 million.
Difficult economic times contributed to the rush of emigrants that began flooding across the Oregon Trail, beginning in 1843, seeking a fresh economic start. Thousands of emigrants had been displaced by the depression resulting from the Panic of 1837. Ironically, the depression drove U.S. expansionism and spurred new economic hope by the late 1840s.
The economy and the securities markets did not recover fully from the 1837 panic until 1844, when trade revived, the effects of the liquidations had been absorbed, and expansion into the West accelerated once more. The Mexican War and gold discoveries in California gave a further fillip (boost) to the economy, as did the banking and tariff reforms of the Polk Administration.
robert sobel, historian, 1968
See also: Nicolas Biddle, Panic of 1819, Panic of 1907, Panics of the Late Nineteenth Century
Cohen, Bernice. The Edge of Chaos: Financial Booms, Bubbles, Crashes, and Chaos. New York: John Wiley and Sons, 1997.
Collman, Charles A. Our Mysterious Panics, 1830– 1930: A Story of Events and the Men Involved. New York: Greenwood Press, 1968.
Kindleberger, Charles Poor. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1989.
Sobel, Robert. The Money Manias: The Eras of Great Speculation in America, 1770–1970. New York: Weybright and Talley, 1974.