The following was written for my Early American History course during the Spring of 2023. Not my best work, but an interesting time in American History. As always, I ran into word limit issues, so maybe, I’ll update it with all the details I left out at a later date. Read “a later date” as “after Graduation.”
The Panic of 1837
The Panic of 1837 was the first major depression in United States history. Both domestic and international factors contributed to the Panic. The effects were felt domestically and globally, and the Panic fundamentally changed the United States. Although many tactics were proposed and attempted to end the depression, ultimately it was war that restored the American economy. By studying the causes and effects of the Panic of 1837, Americans can better understand the dangers of economic instability and make informed decisions to mitigate these risks.
The Panic was brought on by a convergence of factors. America’s rising prominence in the global economy had led to a surge in land speculation, which was rampant in the years before the Panic of 1837. America was growing to the West, with settlers farming and ranching. The cotton market, both domestically and internationally, was thriving, making plantation land in the South–and the slaves that worked the land–increasingly valuable. (Zakim & Kornblith, 2012) Land and people were bought and sold by speculators using increasing amounts of borrowed money. This demand for land created a bubble, with speculators, farmers, banks, and even state governments accruing unsustainable levels of debt.
Banking policies enacted in the preceding decade left these entities particularly vulnerable. The United States was founded on principles that included limits on the federal government, leaving most decisions to the people, or by extension, to the states. This included banking, and officially there was no central bank. At that time, banks all over the country operated with bank notes, ostensibly backed by gold and silver, or “specie.” In actuality, banks would issue more notes than they had specie to back up. To complicate matters, every bank had unique paper notes, and there were thousands of different notes all over the country. (Knight, 2014) A plantation owner might be paid with notes issued from a bank hundreds of miles away, with no easy way to exchange it for gold or silver. The same was true of trade partners and creditors across the Atlantic. Unregulated banking also allowed the private banks, including those that were backed by their respective state governments, to issue increasing amounts of credit, which left both the borrowers and the banks in precarious situations.
The Second Bank of the United States had been created in 1816 to help to regulate paper money by forcing state chartered banks to redeem their notes in specie. This helped ebb the flow of unlimited unbacked credit and slow the rate of speculation. (Zakim & Kornblith, 2012) President Andrew Jackson had vetoed a bill to recharter the bank in 1832, and the bank’s charter officially expired in 1836. This led to a series of banking policies that left banks and other entities vulnerable to economic shocks, such as the 1836 executive order known as the Specie Circular, which required the use of gold or silver to purchase public land. (Gura, 2017)
Internationally, the British economy had been flourishing, building factories and mills in record numbers. In the mid 1830s, Britain imported 90% of the cotton they used in their textile mills from plantations in the South. (Roberts, 2012) But a British economic downturn, which began in the late 1830s, led to a decline in demand for American cotton, slowing the economy. Further, word of the overextension of American banks led to a decrease in international credit and a raise in interest rates. (Gura, 2017) These factors, in turn, contributed to the collapse of the land speculation bubble and the ensuing economic crisis.
The effects of the Panic created significant instability and discontent throughout the United States, contributing to a rise in both sectionalism and partisanship. State governments, which had backed the failing local banks, faced the brunt of the financial collapse. The banks were unable to repay their debts, leading to a ripple effect that resulted in the failure of even more banks and to the bankruptcies of state governments. Estimating the extent of the losses was a challenging task, with conflicting estimates from 1841 placing the losses between a half billion and one billion dollars over the first three years of the crisis.
Unemployment and inflation led to social unrest, rioting and exposed deep class inequalities in American society. The wealthy and powerful were better able to weather the economic storm, while the poor and working-class suffered the most. This led to a growing sense of resentment and anger among the lower classes, who felt that the economic system was rigged against them. (Gura, 2017)
There were also significant political implications. The President, Martin Van Buren, was a proponent of states rights. The federal government as a whole saw the crisis as a state issue and did little to intervene, which exacerbated the economic downturn. (Widmer & Widmer, 2005) This led to a growing sense of frustration and anger among citizens who felt abandoned by their government. Partisan politics also played a role. Feuding over the extent the federal government should play in matters of banking, (Hietala, 2003) the Whig Party blamed the crisis on the policies of the previous President, Andrew Jackson, while the Democrats blamed the banks and financial institutions. Internationally, Europe lost trust in American credit, which led to a decrease in foreign investment in the US. This, in turn, contributed to a decline in trade and economic activity, which worsened the downturn. Like most economic downturns, all of this resulted in a lack of trust, in which business slowed enough to create more distrust. (Roberts, 2012)
In the years following the initial Panic, gridlock in Washington was widespread, as politicians were divided on how to address the economic downturn. The depression created divisions within the Democratic party, with some members advocating for more radical solutions, while others preferred a more conservative approach. Similarly, the Whig party was split on proposed banking resolutions. In 1838 the Governor of Pennsylvania requested federal troops to help restore order when tensions between Whigs and Democrats became violent (Roberts, 2012). The gridlock did nothing to resolve the crisis.
One proposed solution was the Independent Treasury Act, which would create a system for the federal government to manage its own finances without relying on banks. The act mandated that the public revenues be held by the Treasury, which was to operate independently of the national banking and financial system, paying out its own funds in either species or Treasury Notes. Supporters of the act believed that having an independent treasury would eliminate the risk of banks mismanaging government funds and protect the government from the instability of the banking system. Additionally, they believed it would stabilize the value of the currency and prevent inflation. The act languished in Congress until it was finally passed in 1840, only to be repealed a year later. It was eventually reestablished in 1846.
Another proposed solution was to assess new tariffs to protect domestic industries. This was supported by Northern industrialists and the Whigs, but opposed by the largely Democratic South. (Hietala, 2003) Southerners believed that new tariffs would disproportionately harm their economy, which relied heavily on agricultural exports. There were also calls for tax cuts to stimulate economic growth, but there was little agreement on how to implement them. Some believed that tax cuts would be an effective way to encourage spending and investment, while others feared that they would only exacerbate the economic crisis. Calls for public works projects to create jobs and stimulate the economy were also widespread. Again, there was little agreement on how to fund these projects, and many were skeptical of the government’s ability to manage large-scale public works projects effectively. (Roberts, 2012)
With so much disagreement on how to implement these solutions, political tensions remained high. It was ultimately the Mexican-American War that helped to bring an end to the depression. The war created significant demand for American goods and services, which helped to stimulate the economy. The declaration of war sparked a surge of patriotism throughout the country. (Roberts, 2012)
There are many lessons to be learned from the Panic of 1837 principally the importance of banking regulation and responsible lending practices. Prior to the panic, banks were engaging in risky lending practices, which led to calls for increased regulation of the banking industry, in order to prevent similar crises from occurring in the future. Today, banking regulations aim to promote responsible lending practices and ensure the stability of the financial system, yet the dot com bubble and the 2008 housing crisis emphasize a cause for caution. The practices that contributed to the crisis were similar to the practices that have contributed to other economic downturns throughout history and highlight the need for responsible borrowing and lending practices, both at the individual and institutional levels.
In conclusion, the Panic of 1837 was a significant event in American history, with far-reaching consequences for the economy and society. By studying its causes and effects, we can better understand the dangers of economic instability and make informed decisions to mitigate these risks. The panic was caused by reckless speculation and unsustainable lending practices, and its resolution was slow and complicated. It holds important lessons for us today, including the dangers of speculation and credit expansion, the importance of international trade, the value of government intervention in times of crisis, and the importance of sound banking practices. By keeping these lessons in mind, we can work to create a more stable and resilient economy.
If you enjoyed this post, and would like to support my goal to go to graduate school, please hit the button below to buy me a coffee! All donations, large and small, are very much appreciated!
You can also support my goals, and my education, by buying from my Kindle Wish List! Thanks again!
References
Gura, P. F. (2017). Man’s Better Angels: Romantic Reformers and the Coming of the Civil War. Harvard University Press.
Michael Zakim, & Gary J. Kornblith. (2012). Capitalism Takes Command : The Social Transformation of Nineteenth-Century America. University of Chicago Press.
Rolnick, A. J., Smith, B. W., & Weber, W. E. (2000b). The Suffolk Bank and the Panic of 1837. Quarterly Review – Federal Reserve Bank of Minneapolis. https://doi.org/10.21034/qr.2421
Roberts, A. (2012). America’s First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837. Cornell University Press.
Hietal, T. R. (2017). Manifest Design: Anxious Aggrandizement in Late Jacksonian America [Dataset]. Cornell University Press.
Widmer, T. (2005). Martin Van Buren: The American Presidents Series: The 8th President, 1837-1841. Times Books. Henry Holt and Company, LLC.
Knight, T. (2014). Panic, Prosperity, and Progress: Five Centuries of History and the Markets. John Wiley & Sons.