What Caused The Economic Panic Of 1837
The financial panic of 1837 was the result of President Andrew Jackson's disastrous economic policies. The Jackson administration triggered an economic panic that led to a severe national depression. President Andrew Jackson's policies were blamed for triggering the panic, which caused many Americans to experience economic woes. President Andrew Jackson presidential term ended in 1836. His successor, Martin Van Buren, was forced to deal with the consequences of Jackson's actions. Although there is no single cause of this financial crisis, many attribute it to Jackson's political leadership and change in policy. While not the only cause, Jackson's elimination of the Bank of the United States played a key role in the economic crisis.
The Elimination of the 2nd Bank of the United States
During Jackson's presidency, his acolytes wanted to gain control of the economy and eliminate the nation's central bank, the Second Bank of the United States. This created a "bank war" when President Andrew Jackson vetoed a bill that would renew the bank’s charter and money policies. As a result, this caused many state banks to become insolvent due to their inability to access federal funds. Additionally, with President Andrew Jackson’s Specie Circular in 1836 all land purchases had to be made with gold or silver coins instead of paper money. The Specie Circular in 1836 required that land purchases be made with hard currency, such as gold or silver, rather than paper money. This policy helped to reduce the money supply, making it more difficult for banks to meet their obligations. This further limited the ability for banks to lend out money as they had less coins and gold in their vaults. This exacerbated the lack of capital and liquidity amongst state banks.
This caused numerous businesses to become bankrupt and the Whigs blamed President Andrew Jackson for his impatience and federal banks restraint upon bank credit. As a result, approximately eight hundred banks closed their doors and the economy was stifled. Jackson had removed government funds from the Second Bank of the United States, which he viewed as corrupt, causing a large amount of money to be in circulation. This removed restraints on banking, leading to an economic panic as banks recklessly lent money without sufficient capital.
The United States began printing paper money
The government began printing more paper money, and the 850 banks that began operating in the country started printing their own currency. This caused inflation and led to sky high unemployment. Banks loaned large sums to governments and businesses, as well as foreign governments, which ruined many businessmen in the United States. With no central bank to regulate it, each bank printed its own currency which further hurt the economy of the United States. Furthermore, without any regulation on banks or mints, they recklessly loaned out huge sums of money - something that could not be sustained indefinitely.
This caused a chain reaction when some of the most important state banks refused to accept the paper notes from other banks. This eventually led to the other banks halting specie payments, which in turn halted all banks. As investors began to withdraw their funds, these banks suspended both paper currency and specie payments, further depleting already falling monetary reserves. British investment bankers also refused to lend money, forcing deposit banks in New York City and other cities to suspend currency withdrawals as well. This crisis quickly spread throughout the entire financial world as investors rushed to withdraw their money from all sources.
The Bank Panic and
The Bank Panic was compounded by the own financial troubles of many banks, when English banks stopped lending money to American Banks. This made it difficult for American banks to scale their loans and caused many Southern Banks to fail. As a result, there were massive runs on vaults of major banks and other financial institutions as people scrambled to withdraw their money from these sources. This banking crisis created a domino effect on the American economy, with other industries such as real estate crashing due to lack of liquidity in the market and lower monetary reserves for lenders. The crisis was further worsened by plantation owners who had been cultivating many crops but pumping money into land speculation instead of reinvesting in their plantations.
The Cotton Bubble
This led to a bubble in cotton prices, which subsequently fell and caused severe financial losses for the farmers. This was exacerbated by the banking policies of the time, as banks had issued far too much currency, causing it to lose value and leading to further losses for farmers. In addition to this, fiscal and monetary policies of the time also played a part in the panic as they were unable to prevent the bubble from falling cotton prices or address movements collapsing land bubbles. The economic crisis was catastrophic for farmers, merchants, business owners and banks alike; hundreds collapsed as their losses ruined them.
The Combination of a Speculative land boom and Bank Failures
The Panic of 1837, as it became known, was a brewing major economic crisis that had been led by an ailing economy and the revocation of the national bank charter under president Andrew Jackson. In the 1830s, there was a speculative boom in land, particularly in the western United States. People were buying land with the hope of selling it later at a higher price, and banks were lending money to finance these purchases.
The loose state banking practices, such as granting loans to anyone regardless of their credit history, coupled with a lack of control over monetary policy and inflationary practices, gave way to a series of bank runs and credit contraction. This led investors to pull out their money from banks and investments, greatly exacerbating the panic even further. When Martin Van Buren took office in 1837, he sought to implement new policies to combat the crisis. Many of the banks that were lending money to speculators were poorly managed and had inadequate reserves. When the banks started to fail, depositors rushed to withdraw their money, causing even more bank failures.
The Panic Arose from the misguided policies of Andrew Jackson
Jackson's elimination of the 2nd Bank of the United States triggered as series of events that ultimately spiraled out of control. In addition to destroying the US Bank, he also sought to limit the actions of state banks, which had caused runaway inflation. He removed government deposits from these banks, and this became one of the first angry measures taken by Andrew Jackson when he became President in 1829. Jackson wanted to reduce government bonds and regulate printing of currency. His policies, which quickly became known as “Jackson's” policies, distributed currency through banks with little oversight or national direction for printing issuance. This lack of regulation helped create a lack of confidence in national banks and a surge in inflation.
This economic panic in 1837 was caused by the interconnected global economic system that was present in the 1830s. The open economy allowed for Pennsylvania's financial crisis to be transmitted to other states. This caused monetary policies to be weakened and a panic spread throughout the Midwest. The hegemonic power of the United States government at this time had weak trade barriers, allowing for the spread of panic from Pennsylvania to Indiana, Ohio, and Illinois. This lack of regulation and free trade created an environment where banking crises could easily be transmitted across state lines.
Key Words: united states, andrew jackson, national bank, currency, economy, president andrew jackson, inflation, investors, cotton prices, depression, martin van buren, financial crisis, specie circular, doors, growth