The Panic of 1837
As we all know, our world is driven, many times, by reaction. Today we find ourselves reacting to Tweets and the 24-hour news cycle, our economy reacting to the global economy and international politics reacting to American politicians. As I did my research, I learned life wasn’t much different in the mid-1800s albeit the information traveled much slower. Given this, I’m going to take a quick step to the side on my geography theme and talk a little about the mid-19th century American economy.
Only a decade ago, many Americans watched as their savings evaporated in a series of financial implosions that rocked the American economy, and parts of the global economy, after a decade of easily available credit and large inflows of Russian and Asian investment money. Based on predatory lending, weak and fraudulent underwriting, subprime lending, the existence of the shadow banking system and many other factors, the American economy fell apart. Banks were forced to foreclose on people’s homes, retirement savings evaporated when investment management companies failed and financial markets staggered under the weight of it all. Historically it will be known as the Financial Crisis of 2007-2008 and the worst financial crisis since the Great Depression of 1929.
In 1849, the American economy was still feeling the effects of the Panic of 1837, following the economic boom from mid-1834 to mid-1836. Through lucrative cotton contracts and state-backed bonds in British money markets, the US acquired significant capital investment from Great Britain. These bonds financed American infrastructure, transportation projects, industrial development and western expansion.
In 1836, the Bank of England raised their interest rates to compensate for declining monetary reserves. American banks were forced to do the same along with a measured scale back on lending. The effect on the cotton industry was devastating and the price fell by 25% in one month. The US economy, specifically the southern states, faced massive reverberations without stable cotton prices.
In reaction, President Andrew Jackson signed an executive order called the Specie Circular (Specie = coin money or hard currency) in 1836 that mandated all western lands (remember “western” was still east of the Mississippi) could only be purchased with gold and silver coin with the intent to curb speculation. Instead it set off a real estate price crash with most buyers unable come up with the coin to pay for the land.
Additionally, the Deposit and Distribution Act of 1836 had been intended to redistribute federal monetary revenues in western, regional banks. Instead, the Act’s mandate transferred specie away from the nation’s eastern commercial centers, which forced the East Coast banks to reduce their loan activity. Put all of these events together and the Panic of 1837 was born.
Jacksonian Democrats blamed the bankers. Whigs blamed Jackson. Martin Van Buren, who became president in March of 1837, five weeks after the panic started, was blamed for not allowing government intervention in the crisis.
The southern states were hit the worst since much of their business model had them spending money in advance of their crops. Many fell into complete bankruptcy. The eastern states waffled between distress and recovery for years. The agricultural northwestern states (Ohio, Indiana and Illinois) didn’t feel an effect until 1839. No one recovered until the California gold rush started in 1848 and by 1850, the US economy was booming again.
But, in the decade between the panic and the recovery, people struggled. Those who had lost their savings when the banks failed had few choices. Unable to pay off debts, many liquidated their possessions and started over. Others, fearing debtor’s prison, loaded up their belongings and left under the cover of darkness. Each faced the music in their own way. With the whispers of free land in the Pacific frontier west, or rumors of gold laying around for the picking-up started, it is easy to understand how so many got gold fever.
There are many stories of plows being left in the fields, their operators never returning with the required horses to finish the job, because they were sure their luck would be good enough in California to become rich. Agrarians were not the only ones susceptible: doctors, lawyers, shopkeepers, educated or not, poor or middle-income. Mostly men at first, women were left to fend for themselves and their families, all on the hope and promise that their husbands, fathers and sons would return with vast riches. Unfortunately, it didn’t always work out the way they thought it would.