The Panic of 1837 was a terrible financial crisis that gripped the United States from roughly 1837-1843 which had a number of causes.
Hundreds of banks closed, unemployment soared, bankruptcies were common, and personal debt skyrocketed as life savings for the common man evaporated.
The effects of the Panic of 1837 would last generations as the United States was slow to recover from the disaster. The crisis would also lead to a change in political leadership as the Jacksonian Era came to a close after Andrew Jackson and Martin Van Buren were blamed for the event.
4 Causes of the Panic of 1837
There were four primary causes of the Panic of 1837: rapid economic growth and inflation, the collapse of cotton prices, the Specie Circular and Deposit Act of 1836, and the lack of a national bank.
Though the panic was caused by both domestic policy as well as international trade and market forces, the Jacksonian Democrats and President Martin Van Buren in particular are often pinned with the blame.
Although the causes were multifaceted, Van Buren’s lack of timely action and laissez-faire approach almost certainly prolonged the crisis.1
Rapid Economic Growth and Inflation
The Panic of 1837 was preceded by one of the most prosperous periods in American history. Businesses and trade thrived, leading to rapid economic growth.
The United States became an attractive place to invest as foreign investors pumped specie (gold & silver) into the nation. All this additional investment allowed banks to increase the supply of paper money in circulation.
The various state banks in existence failed to properly account for the massive inflation that ensued due to the rapid increase in money supply.
With credit easy to obtain there was massive speculation on western lands that had recently become available as one of the effects of the Indian Removal Act.
Rampant speculation helped to drive prices even higher—further worsening inflation and creating several inflationary asset bubbles.
President Andrew Jackson issued the Specie Circular in 1836 hoping to quell the inflation. The Circular stated that all land sales must be in specie, not paper money. This requirement drastically shifted specie from eastern banks to western banks at perhaps the worst moment.
When the United States’ prime trading partner Great Britain pulled back on lending and required trade payments to be made in specie, eastern banks did not have the reserves to comply.
It was at this moment that banks realized how overextended they were and the inflationary asset bubbles popped. Deflation quickly ensued as poorly-backed paper money became worthless overnight.
The uncontrolled rapid economic growth led to runaway inflation that doomed the economy.
Collapse of Cotton Prices
A sudden collapse in cotton prices was another cause of the Panic of 1837.
Cotton production in the United States and worldwide rapidly increased in the 1830s. In the US the growth can be attributed to the further spread of slavery in the south thanks to the cotton gin. Cotton production also rapidly increased in other British colonies such as Egypt and India.
The worldwide glut in available cotton and overproduction in the US helped saturate the market and left it oversupplied. Naturally, prices drop when supply is greater than demand.
Furthermore, Britain found itself overextended as its critical specie reserves dropped to a dangerously low level.
In order to regenerate its specie balance, it required all trade with the United States to be paid in specie, rather than foreign bills of exchange.
The east coast banks that handled trade with Great Britain also had dangerously low specie reserves, thanks in part to Jackson’s Specie Circular.
A significant portion of American trade with Britain was with the cotton crop. The combination of payments in specie as well as drastically-reduced cotton prices combined to doom the economy.
As Britain tightened credit, so too did American banks. So began the vicious cycle of deflation that signified the Panic of 1837 as available credit for investment dried up.
Specie Circular and Deposit Act of 1836
Andrew Jackson’s executive order in 1836 called the Specie Circular undoubtedly was a major cause of the Panic of 1837. The Deposit Act of 1836 passed by Congress also contributed to the onset of the crisis.
Jackson attempted to help curb the rampant inflation from the economic prosperity from 1833-1836 by requiring all purchases of western land over 320 acres to be made in specie.
Many land speculators could not adequately come up with specie to continue buying western lands. Those that did obtained specie from eastern banks and effectively transferred them to western banks to complete the land purchases.1
The result was a drain in specie reserves on east coast banks that helped spark the panic when their lending was curbed due to specie demands in international trade.
At the same time that the Specie Circular was enacted, Congress passed the Deposit Act of 1836. The law determined which “pet banks” would receive excess federal revenues.
In preparation for the deposits, the Treasury initiated a series of supplemental transfers that also had the same effect as the Specie Circular. Namely, specie was transferred from eastern banks to western banks.
New York City was the economic center of the United States at the time, in part thanks to the impacts of the Erie Canal. Its critical specie reserves plummeted from $7.2M in September 1836 to $1.5M by May 1837.1
This series of executive and legislative blunders were primary causes of the financial crisis.
Lack of a National Bank
When Andrew Jackson was elected President in the election of 1828, the US had a National Bank to help control monetary policy and inflation.
Jackson despised the Bank, believing it corrupt and working against the common man. In the Bank War of 1832 Jackson successfully vetoed the National Bank’s renewal charter, leaving the US without a one beginning in 1836.
The National Bank played a crucial role in maintaining a uniform monetary policy across the United States. Although its actions were a primary cause in the Panic of 1819, it quickly course-corrected to help the US recover from the crisis.
Without a national bank directing a uniform policy, there was a general lack of oversight on the standards of banking across the nation. Hundreds of state banks opened during the period of rapid growth in the 1830s and access to credit became widely available.
Businessmen, state governments, and land speculators took advantage of all this easy money to start businesses, fund infrastructure projects, and purchase former Native American land.
Jackson’s preferred state banks, or “pet banks,” effectively became a medium for the rampant speculation on western lands.2
The lack of oversight and national direction the National Bank could have provided helped to cause the runaway inflation that preceded the financial crisis. Additionally, more direct and uniform policy measures could have helped the US recover more quickly from the grip of the depression than it was able to muster.
Jackson’s personal vendetta against the National Bank may have cost the US dearly in the Panic of 1837.
Conclusion
To recap, there were four primary causes of the Panic of 1837:
- Rapid Economic Growth and Inflation
- Collapse of Cotton Prices
- Specie Circular and Deposit Act of 1836
- Lack of a National Bank
Once ensnared by the financial crisis, the nation had a difficult time recovering. It would be several years before the economy recovered, and it did not boom again until the California Gold Rush in the late 1840s.
The Panic of 1837 also had significant impacts on the American populace. Unemployment was high and the depression left many in great personal debt.
Particularly in cities, many struggled to put food on the table for their families. Relief efforts were haphazard and generally unorganized, furthering the dread and suffering.
At one point in 1837 over five hundred men applied in one day for an advertisement asking for 20 laborers at a low pay rate. Such desperation was common as jobs and employment evaporated as hundreds of businesses filed for bankruptcy.3
Like most financial crises, the common laborers and poorest citizens suffered the most.
While there were many causes of the Panic of 1837, Americans could justifiably blame Andrew Jackson’s policies for at least some of their woes during the crisis.
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Sources
1) Rousseau, Peter L. “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837.” The Journal of Economic History, vol. 62, no. 2, 2002, pp. 457–88. JSTOR, http://www.jstor.org/stable/2698187.
2) “Reflections of the 1837 Panic.” Bulletin of the Business Historical Society, vol. 7, no. 4, 1933, pp. 6–10. JSTOR, https://doi.org/10.2307/3110974.
3) Rezneck, Samuel. “The Social History of an American Depression, 1837-1843.” The American Historical Review, vol. 40, no. 4, 1935, pp. 662–87. JSTOR, https://doi.org/10.2307/1842418.
