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Panic of
1837
The Panic of 1837
was an
economic depression, one of the sharpest financial crises in the
history of the United States. The Panic was built on a speculative
fever. The bubble burst on May 10, 1837 in New York City, when every
bank stopped payment in specie (gold and silver coinage). The Panic was followed by a
six-year depression, with the failure of banks and record unemployment levels.
1. Causes
Causes include the economic
policies of President Andrew Jackson, including the
Specie Circular and the withdrawal of government funds from the
Second Bank of the United States. Martin van Buren, Jacksons' hand
picked, heir apparent, President during 1837 was blamed for the Panic.
His refusal to involve the government in the economy contributed to
the damages and duration of the Panic.
1.1 The
banking system
Jackson began his first
administration by withdrawing all federal deposits from the Bank of
the United States, whose charter was allowed to lapse in 1836, based
on a Jackson veto. The Federal funds were distributed to local and
state banks, fuelling the boom.
1.2 Inflationary
boom of the 1830s
The boom of the early 1830s
was led by the construction of new canals and schemes that would
eventually provide the first network of railroads. The Federal
government encouraged the speculative fever by selling millions of
acres of public lands in western states like Michigan and Missouri,
mostly to speculators, who resold and bought, in hopes of assembling
well-located parcels that would quickly increase in real value as well
as paper value, once the turnpikes and canals and the promised
railroads brought settlers and traffic.
The U.S. Treasury was
accumulating a
budget surplus, which members of Congress voted to distribute in
the spring of 1837, passing the funds to their home districts, where
the windfall was quickly invested-- in canals, turnpikes and railroad
companies.
1.3 A
failure of confidence in banknotes
Meanwhile the compromise
tariff bill enacted in 1833 (after South Carolina's portentous
threat of secession) was reducing the Federal government's income,
which depended heavily on
excise taxes, while at the same time Andrew Jackson's
administration worked to pay off the
national debt, in 1835.
The Jackson Administration,
like many private individuals, preferred the secure value of
gold and
silver (payments in specie 'by coin') to payment in notes from
the multitude of all but unregulated local banks. Jackson and his
Secretary of the Treasury, Levi Woodbury of New Hampshire, issued the
Specie Circular, commanding that as of August 15, 1836, the U.S.
Treasury cease to accept banknotes as payment for public lands. It was
a vote of 'no confidence' in paper money at the highest level.
Many state banks and the
'wildcat' local banks did not have specie to back their paper, when a
bank run occurred; instead of the expected flood of gold and silver
coming to the national treasury, land sales dropped to a quarter of
the previous year's level, companies started paying their workers in
scrip, IOU's began to circulate, specie payments defaulted. The
Western demand for coin was quickly transferred to New York City,
linked now to the west through the Erie Canal. A full-fledged
financial crisis greeted Martin van Buren's inauguration in March
1837. During the first three weeks of April, two hundred and fifty
business houses failed in New York. On May 10, 1837, every bank in New
York suspended payment in specie.
2. Effects
and Aftermath
Within two months the
failures in New York alone aggregated nearly $100M. "Out of eight
hundred and fifty banks in the United States, three hundred and
forty-three closed entirely, sixty-two failed partially, and the
system of State banks received a shock from which it never fully
recovered."
A central banking cushion
of any sort might have prevented some local failures. A few large
local banks, like the Suffolk Bank of Boston, acted like central
banks, lending reserves to other banks, and alleviated the effects of
the Panic of 1837 in New England. Though van Buren did not engender
the Panic of 1837, he was harshly judged (and failed to be re-elected)
because he was ideologically committed to keeping the government out
of banking regulation, a resolve that many economic historians feel
extended the effects of the Panic, which was not over until 1843. Van
Buren even kept Jackson's Secretary of the Treasury, Levi Woodbury.
3. See also
4.
External
link
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