Antebellum America: The Panic of 1837
Even though Andrew Jackson was a southerner, the Nullification Crisis and Jackson's strong pro-union stance had eroded his popularity as polarization between the northern and southern factions of the country grew. In 1836 after serving two-terms, Jackson's hand-picked successor, Martin Van Buren, ran for President. The newly formed Whig Party adopted a strategy of running four different candidates in different regions of the country, hoping that each would be popular enough to defeat Van Buren in their respective areas, throwing the election to the House of Representatives as had happened in 1824. The strategy failed. Van Buren won a majority of the electoral vote and became President.
But victory was short-lived for Van Buren. Soon, the nation would be encased in a financial crisis known as the Panic of 1837, a major recession that lasted until the mid-1840s. Profits, prices and wages decreased while unemployment went up and pessimism abounded. The panic had both domestic and foreign causes and its adverse affects lasted for many years. It also was probably the main reason that the politically able Martin Van Buren ended up as a one-term president.
The crisis followed a period of economic expansion from 1834 to 1836, when the prices of land, cotton, and enslaved persons rose sharply. Large amounts of silver were coming into the United States from Mexico and China and land sales and tariffs on imports were generating substantial federal revenues. Bonds sold by the states to raise revenues for capital projects were being bought in British money markets. In 1836, directors of the Bank of England noticed that the Bank's monetary reserves were declining significantly, possibly because of poor wheat harvests that forced Great Britain to import much of its food. To compensate, the directors decided that they would gradually raise interest rates from 3 to 5 percent. Because of the American dependence on British financing, major banks in the United States also had to raise their rates.
Increased interest rates resulted in a reduction in the demand for cotton and the price of cotton fell by 25% in the first quarter of 1837. The United States economy, especially in the southern states, was heavily dependent on stable cotton prices. It was another reason why southerners saw themselves being injured by northern interests.
Five years earlier, in July 1832, President Andrew Jackson had vetoed the bill to recharter the Second Bank of the United States, which had been the nation's central bank and fiscal agent. As the Bank wound up its operations in the next four years, state-chartered banks in the West and South were able to relax their lending standards. They maintained unsafe reserve ratios. In 1836 the law required that western lands could be purchased only with gold and silver coin, according to an executive order issued by Andrew Jackson. The intent was to curb inflation, but the policy had unforeseen negative consequences.
The Deposit and Distribution Act of 1836 placed federal revenues in various banks across the country rather than in a central bank. Many of these banks were located in western regions. With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic.
Many Americans at the time blamed the policies of President Andrew Jackson who refused to renew the charter of Second Bank of the United States, resulting in the withdrawal of government funds from the bank. Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration preceded the panic by only five weeks. Van Buren refused to intervene to address the crisis, in large part because this would be seen as contradicting the policies of his political mentor, Andrew Jackson.
Jacksonian Democrats, on the other hand, doubled down and blamed the national Bank, both in funding rampant speculation and in introducing inflationary paper money. They said that the cause of the panic was banks issuing paper money excessively.
The whole nation felt the effects of the panic, both in the north and in the south. The mercantile districts of Connecticut, New Jersey, and Delaware were hurt and Vermont's business and credit systems was also hit hard. But conditions in the South were much worse, especially in the Cotton Belt. In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops. New Orleans felt a general depression in business, and its money market were hurt. Several planters in Mississippi had spent much of their money in advance, leading to the complete bankruptcy of many planters as they could only sell their crops at a huge loss. By 1839, many of the plantations were thrown out of cultivation.
Within two months the losses from bank failures in New York alone totaled nearly $100 million. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered. The publishing industry was also hurt by the ensuing depression.
It was not until 1842, that the American economy was able to rebound somewhat and overcome the five-year depression, in part due to the Tariff of 1842, but the economy did not recover until 1843. There had been brief recovery from 1838 to 1839, but this ended when the Bank of England and Dutch creditors raised interest rates.
Many individual states had defaulted on their bonds, and this eroded the trust of British creditors for future lending. For a brief time, the United States withdrew from international money markets. It was only in the late-1840s that Americans re-enter these markets. The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply. By 1850, the US economy was booming again.
The panic also taught a lesson about the effect that psychology played in economics. Because central banks had only limited ability to control prices and employment, bank runs were common during the Panic. As banks collapsed, alarm quickly spread throughout the community and this was worsened by partisan newspapers. To meet these demands even established banks had to meet these demands by calling in loans. That fed the hysteria and made matters worse. Anxiety, fear, and a lack of confidence. Today economists and most political leaders recognize that phenomenon and can attempt to address it. The same thing occurred with many southern planters, who speculated in land, cotton, and slave labor. Many planters took out loans from banks under the assumption that cotton prices would continue to rise. When cotton prices dropped, these planters could not pay back their loans, which jeopardized the solvency of many banks. It led to the later creation of deposit insurance as a means of preventing panic in future.
But once again, southern mistrust of northern moneyed interests grew, adding another brick on the wall that would lead to civil war.
But victory was short-lived for Van Buren. Soon, the nation would be encased in a financial crisis known as the Panic of 1837, a major recession that lasted until the mid-1840s. Profits, prices and wages decreased while unemployment went up and pessimism abounded. The panic had both domestic and foreign causes and its adverse affects lasted for many years. It also was probably the main reason that the politically able Martin Van Buren ended up as a one-term president.
The crisis followed a period of economic expansion from 1834 to 1836, when the prices of land, cotton, and enslaved persons rose sharply. Large amounts of silver were coming into the United States from Mexico and China and land sales and tariffs on imports were generating substantial federal revenues. Bonds sold by the states to raise revenues for capital projects were being bought in British money markets. In 1836, directors of the Bank of England noticed that the Bank's monetary reserves were declining significantly, possibly because of poor wheat harvests that forced Great Britain to import much of its food. To compensate, the directors decided that they would gradually raise interest rates from 3 to 5 percent. Because of the American dependence on British financing, major banks in the United States also had to raise their rates.
Increased interest rates resulted in a reduction in the demand for cotton and the price of cotton fell by 25% in the first quarter of 1837. The United States economy, especially in the southern states, was heavily dependent on stable cotton prices. It was another reason why southerners saw themselves being injured by northern interests.
Five years earlier, in July 1832, President Andrew Jackson had vetoed the bill to recharter the Second Bank of the United States, which had been the nation's central bank and fiscal agent. As the Bank wound up its operations in the next four years, state-chartered banks in the West and South were able to relax their lending standards. They maintained unsafe reserve ratios. In 1836 the law required that western lands could be purchased only with gold and silver coin, according to an executive order issued by Andrew Jackson. The intent was to curb inflation, but the policy had unforeseen negative consequences.
The Deposit and Distribution Act of 1836 placed federal revenues in various banks across the country rather than in a central bank. Many of these banks were located in western regions. With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic.
Many Americans at the time blamed the policies of President Andrew Jackson who refused to renew the charter of Second Bank of the United States, resulting in the withdrawal of government funds from the bank. Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration preceded the panic by only five weeks. Van Buren refused to intervene to address the crisis, in large part because this would be seen as contradicting the policies of his political mentor, Andrew Jackson.
Jacksonian Democrats, on the other hand, doubled down and blamed the national Bank, both in funding rampant speculation and in introducing inflationary paper money. They said that the cause of the panic was banks issuing paper money excessively.
The whole nation felt the effects of the panic, both in the north and in the south. The mercantile districts of Connecticut, New Jersey, and Delaware were hurt and Vermont's business and credit systems was also hit hard. But conditions in the South were much worse, especially in the Cotton Belt. In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops. New Orleans felt a general depression in business, and its money market were hurt. Several planters in Mississippi had spent much of their money in advance, leading to the complete bankruptcy of many planters as they could only sell their crops at a huge loss. By 1839, many of the plantations were thrown out of cultivation.
Within two months the losses from bank failures in New York alone totaled nearly $100 million. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered. The publishing industry was also hurt by the ensuing depression.
It was not until 1842, that the American economy was able to rebound somewhat and overcome the five-year depression, in part due to the Tariff of 1842, but the economy did not recover until 1843. There had been brief recovery from 1838 to 1839, but this ended when the Bank of England and Dutch creditors raised interest rates.
Many individual states had defaulted on their bonds, and this eroded the trust of British creditors for future lending. For a brief time, the United States withdrew from international money markets. It was only in the late-1840s that Americans re-enter these markets. The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply. By 1850, the US economy was booming again.
The panic also taught a lesson about the effect that psychology played in economics. Because central banks had only limited ability to control prices and employment, bank runs were common during the Panic. As banks collapsed, alarm quickly spread throughout the community and this was worsened by partisan newspapers. To meet these demands even established banks had to meet these demands by calling in loans. That fed the hysteria and made matters worse. Anxiety, fear, and a lack of confidence. Today economists and most political leaders recognize that phenomenon and can attempt to address it. The same thing occurred with many southern planters, who speculated in land, cotton, and slave labor. Many planters took out loans from banks under the assumption that cotton prices would continue to rise. When cotton prices dropped, these planters could not pay back their loans, which jeopardized the solvency of many banks. It led to the later creation of deposit insurance as a means of preventing panic in future.
But once again, southern mistrust of northern moneyed interests grew, adding another brick on the wall that would lead to civil war.