Presidents and the Economy: Andrew Jackson, Martin van Buren and the Panic of 1837
The Panic of 1837 was a financial crisis in the United States that touched off a major recession that lasted until the mid-1840s. Profits, prices and wages went down 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 slaves 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 indicated 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 raised 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.
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 relaxed their lending standards, and maintained unsafe reserve ratios. Legislation passed in 1836 required that western lands could be purchased only with gold and silver coin. 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. 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.
Jacksonian Democrats, on the other hand, blamed the national Bank, both in funding rampant speculation and in introducing inflationary paper money. This was caused by banks issuing paper money excessively.
The whole nation felt the effects of the panic. 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.
In 1842, 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 defaulted on their bonds, which angered British creditors. For a brief time, the United States withdrew from international money markets. Only in the late-1840s did Americans re-enter these markets. The panic undermined confidence in public support for internal improvements.
The crisis followed a period of economic expansion from 1834 to 1836, when the prices of land, cotton, and slaves 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 indicated 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 raised 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.
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 relaxed their lending standards, and maintained unsafe reserve ratios. Legislation passed in 1836 required that western lands could be purchased only with gold and silver coin. 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. 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.
Jacksonian Democrats, on the other hand, blamed the national Bank, both in funding rampant speculation and in introducing inflationary paper money. This was caused by banks issuing paper money excessively.
The whole nation felt the effects of the panic. 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.
In 1842, 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 defaulted on their bonds, which angered British creditors. For a brief time, the United States withdrew from international money markets. Only in the late-1840s did Americans re-enter these markets. The panic undermined confidence in public support for internal improvements.