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Panic of 1837

The Panic of 1837 was an economic depression, one of the sharpest financial crises in the history of the United States. The Panic was built on a speculative fever. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in specie (gold and silver coinage). The Panic was followed by a six-year depression, with the failure of banks and record unemployment levels.

Causes include the economic policies of President Andrew Jackson, including the Specie Circular and the withdrawal of government funds from the Second Bank of the United States. Martin van Buren, President during 1837 was blamed for the Panic. His refusal to involve the government in the economy contributed to the damages and duration of the Panic.

The banking system. Jackson began his first administration by withdrawing all federal deposits from the Bank of the United States,, whose charter was allowed to lapse in 1836, based on a Jackson veto. The Federal funds were distributed to local and state banks, fuelling the boom.

Inflationary boom of the 1830s. The boom of the early 1830s was led by the construction of new canals and schemes that would eventually provide the first network of railroads. The Federal government encouraged the speculative fever by selling millions of acres of public lands in western states like Michigan and Missouri, mostly to speculators, who resold and bought, in hopes of assembling well-located parcels that would quickly increase in real value as well as paper value, once the turnpikes and canals and the promised railroads brought settlers and traffic.

The U.S. Treasury was accumulating a budget surplus, which members of Congress voted to distribute in the spring of 1837, passing the funds to their home districts, where the windfall was quickly invested-- in canals, turnpikes and railroad companies.

A failure of confidence in banknotes. Meanwhile the compromise tariff bill enacted in 1833 (after South Carolina's portentous threat of secession) was reducing the Federal government's income, which depended heavily on excise taxes, while at the same time Andrew Jackson's administration worked to pay off the national debt, in 1835.

The Jackson Administration, like many private individuals, preferred the secure value of gold and silver (payments in specie 'by coin') to payment in notes from the multitude of all but unregulated local banks. Jackson and his Secretary of the Treasury, Levi Woodbury of New Hampshire, issued the Specie Circular, commanding that as of August 15, 1836, the U.S. Treasury cease to accept banknotes as payment for public lands. It was a vote of 'no confidence' in paper money at the highest level.

Many state banks and the 'wildcat' local banks did not have specie to back their paper, when a bank run occurred; instead of the expected flood of gold and silver coming to the national treasury, land sales dropped to a quarter of the previous year's level, companies started paying their workers in scrip, i.o.u's began to circulate, specie payments defaulted. The Western demand for coin was quickly transferred to New York City, linked now to the west through the Erie Canal. A full-fledged financial crisis greeted Martin van Buren's inauguration in March 1837. During the first three weeks of April, two hundred and fifty business houses failed in New York.On May 10, 1837, every bank in New York suspended payment in specie.

Within two months the failures in New York alone aggregated nearly $100,000,000. "Out of eight hundred and fifty banks in the United States, three hundred and forty-three closed entirely, sixty-two failed partially, and the system of State banks received a shock from which it never fully recovered."[1]

A central banking cushion of any sort might have prevented some local failures. A few large local banks, like the Suffolk Bank of Boston, acted like central banks, lending reserves to other banks, and alleviated the effects of the Panic of 1837 in New England. Though van Buren did not engender the Panic of 1837, he was harshly judged (and failed to be re-elected) because he was ideologically committed to keeping the government out of banking regulation, a resolve that many economic historians feel extended the effects of the Panic, which was not over until 1843. Van Buren even kept Jackson's Secretary of the Treasury, Levi Woodbury.