Panic of 1837 - Business in United States of America
The Event: National depression precipitated by loss of faith in the banking system
Place: United States
Significance: The Panic of 1837 undermined the state banking system established during President Andrew Jackson’s administration. The failure of large eastern and small rural banks to handle the panic began a movement toward hard money and a distrust of speculation. The resulting depression also wiped out much of the slowly growing labor movement.
Several factors contributed to the Panic of 1837 and the depression that followed. The Andrew Jackson administration’s banking policy may have started the depression, as Jackson ordered the withdrawal of federal deposits from the Second Bank of the United States and the placement of federal money in state banks. This shift eliminated the stabilizing effect of a national bank able, with sufficient central power, to inject liquidity into the financial system. The federal government paid off the national debt in 1835, leaving it with excess revenues that it distributed to the states, exacerbating the growing inflationary pressures. As the amount of paper money in the economy exploded, Jackson issued an order requiring all public land sales to occur in gold or silver, rather than banknotes. Jackson hoped to end speculation by limiting the currency available to purchase land. The result was a squeezing of the money supply and a financial panic.
Failures and Consequences
The first firms to fail were cotton exporters, whose buyers in London lost their credit as the Bank of England refused to lend money for purchases in the United States. The financial panic hit New Orleans first, as cotton prices collapsed. Cotton speculators and producers suffered, and their financial losses moved to the New York banking industry. As depositors tried to remove their assets from threatened banks, those same banks were forced to halt payments in gold starting in May, 1837. Without a national bank to provide liquidity, credit tightened, and a depression followed.
Cotton mills in Lowell, Massachusetts, and all over New England shut down, as demand for clothing declined and mass unemployment swept through factory towns. The British economy also slipped into depression, deepening the American downturn, as exporters saw their overseas markets dry up just as their domestic markets also weakened. American business received one benefit, as the growing union movement was crushed under the weight of unemployed workers. The 1837 depression was the first major economic downturn of the industrial era. Thousands of workers lost their jobs and were without the benefit of a government safety net.
The real estate industry suffered, because land speculation had been a major cause of the depression. As the value of land declined, speculators abandoned their property to their creditors, further depressing prices. Without people buying land, the need for internal improvements such as roads and canals also eased. This led to rising unemployment, further undermining the economy.
The decline in cotton prices spread the depression into the agricultural South; landowners abandoned their property and headed west in search of cheaper land. Many in the South headed toward the Republic of Texas, an independent country, hoping to escape the poor economic conditions in the United States. For those plantation owners who had not speculated, their slave-based economy escaped some of the worst aspects of the depression, convincing some that the southern slave system was superior to the wage-based economy of the North.
The consequences of the depression for the American economy were profound. For only the second time in the country’s history, Congress passed a federal bankruptcy law, attempting to protect creditors and debtors alike. The number of bankruptcies skyrocketed from 1841 through 1843, when the law was repealed.
The banking system was also bruised by the depression. Jackson’s attempt to restructure the country’s financial system had left the country without the mechanisms for handling a panic or banking crisis. The replacement of the second national bank with state banks led to more speculation, deepening the depression and forcing Jackson’s successor, Martin Van Buren, to retreat from Jackson’s policies. Most of Van Buren’s term in office was consumed by a political debate over creating an independent treasury that could provide liquidity to state banks. The law eventually passed near the end of Van Buren’s term, and state banks tried to reopen and pay their depositors in gold, but another banking collapse in 1839 extended hard times through 1843.
The Panic of 1837 highlighted the weakness of a new form of business, the corporation, and its impersonal nature. Spread across a single state or several states, corporations had limited loyalty to their workers, responding to economic depressions with layoffs and plant closures. The buying and selling of stock and the issuing of bonds by corporations provided economic opportunities and risk for ordinary citizens, as they could make or lose a fortune quickly and easily. Many American workers also experienced the negative aspects of wage labor, losing their jobs and unable to find replacements. Unlike farmers, who could produce their own food and owned their land, manufacturing workers were left without an income. As unemployment increased, wages were depressed, as more workers sought fewer and fewer jobs.
The political consequences of the panic were felt in 1840, as President Van Buren, mocked as "Martin Van Ruin,” lost a close presidential race to William Henry Harrison.
Feller, Daniel. The Jacksonian Promise. Baltimore: Johns Hopkins University Press, 1995. Wideranging discussion of the political era and of economic changes that promised prosperity for the middle and working classes of the period.
Remini, Robert. The Jacksonian Era. Wheeling, Ill.: Harlan Davidson, 1997.Written by a preeminent Andrew Jackson scholar, this book is a brief description of the political, social, and economic changes that occurred during the 1820’s and 1830’s.
Rousseau, Peter. "Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837.” Journal of Economic History 62, no. 457 (2002). Economic analysis of how Andrew Jackson’s banking policy and his specie circular contributed to the Panic of 1837.
Sellers, Charles. The Market Revolution. London: Oxford University Press, 1991. Expansive book that describes the rise of the market economy in the United States from 1815 to 1846. Includes a description of the 1837 depression and the economic conditions that led to it and followed it.
Widmar, Ted. Martin Van Buren. New York: Times Books, 2005. Van Buren’s careers as a political operative, secretary of state, and president are the book’s primary focus. Widmar also describes how the 1837 depression dominated the Van Buren presidency and his inability to revive the economy.