How was the Panic of 1837 resolved

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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

FURTHER READING

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.

McGrane, Reginald C. The Panic of 1837: Some Financial Problems of the Jacksonian Era. Chicago: The University of Chicago Press, 1924.

Sobel, Robert. The Money Manias: The Eras of Great Speculation in America, 1770–1970. New York: Weybright and Talley, 1974.

Unfortunately for Jackson’s Democrats (and most other Americans), their victory over the Bank of the United States worsened rather than solved the country’s economic problems.

For a while, to be sure, the signs were good. Between 1834 and 1836, a combination of high cotton prices, freely available foreign and domestic credit, and an infusion of specie (“hard” currency in the form of gold and silver) from Europe spurred a sustained boom in the American economy. At the same time, sales of western land by the federal government promoted speculation and poorly regulated lending practices, creating a vast real estate bubble.

Meanwhile, the number of state-chartered banks grew from 329 in 1830 to 713 just six years later. As a result, the volume of paper banknotes per capita in circulation in the United States increased by forty percent between 1834 and 1836. Low interest rates in Great Britain also encouraged British capitalists to make risky investments in America. British lending across the Atlantic surged, raising American foreign indebtedness from $110 to $220 million over the same two years.

As the boom accelerated, banks became more careless about the amount of hard currency they kept on hand to redeem their banknotes. And although Jackson had hoped that his bank veto would reduce bankers’ and speculators’ power over the economy, it actually made the problems worse.

Two further federal actions late in the Jackson administration also worsened the situation. In June 1836, Congress decided to increase the number of banks receiving federal deposits. This plan undermined the banks that were already receiving federal money, since they saw their funds distributed to other banks. Next, seeking to reduce speculation on credit, the Treasury Department issued an order called the Specie Circular in July 1836, requiring payment in hard currency for all federal land purchases. As a result, land buyers drained eastern banks of even more gold and silver.

By late fall in 1836, America’s economic bubbles began to burst. Federal land sales plummeted. The New York Herald reported that “lands in Illinois and Indiana that were cracked up to $10 an acre last year, are now to be got at $3, and even less.” The newspaper warned darkly, “The reaction has begun, and nothing can stop it.”

Runs on banks began in New York on May 4, 1837, as panicked customers scrambled to exchange their banknotes for hard currency. By May 10, the New York banks, running out of gold and silver, stopped redeeming their notes. As news spread, banks around the nation did the same. By May 15, the largest crowd in Pennsylvania history had amassed outside of Independence Hall in Philadelphia, denouncing banking as a “system of fraud and oppression.”

The Panic of 1837 led to a general economic depression. Between 1839 and 1843, the total capital held by American banks dropped by forty percent as prices fell and economic activity around the nation slowed to a crawl. The price of cotton in New Orleans, for instance, dropped fifty percent.

Travelling through New Orleans in January 1842, a British diplomat reported that the country “presents a lamentable appearance of exhaustion and demoralization.” Over the previous decade, the American economy had soared to fantastic new heights and plunged to dramatic new depths.

Many Americans blamed the Panic of 1837 on the economic policies of Andrew Jackson, who is sarcastically represented in the lithograph as the sun with top hat, spectacle, and a banner of “Glory” around him. The destitute people in the foreground (representing the common man) are suffering while a prosperous attorney rides in an elegant carriage in the background (right side of frame). Edward W. Clay, “The Times,” 1837. Wikimedia.

Normal banking activity did not resume around the nation until late 1842. Meanwhile, two hundred banks closed, cash and credit became scarce, prices declined, and trade slowed. During this downturn, seven states and a territorial government defaulted on loans made by British banks to finance internal improvements.