Panic of 1837

Panic of 1837

MD: At MoneyDelusions, there’s a tool we use to test ideas. Ideas come up when someone thinks there’s a better way to do something. Thus, something is already being done. People resist change and they will put great energy into preserving the current process rather than trying a new process that promises improvements.

Well, what if the roles were reversed? What if the proposed process was in place and working? What if the existing process had to prevail as a “new” idea?

Let’s try it with this article. Let’s assume that the “real” money process was in effect. Would the subject of this essay, The Panic of 1837, even exist? Or if it did exist or arise, would it be as severe under the “real” money process described in the side bar? If the issues could arise, could the actual existing process deal with the issues better?

Let’s give it a try. The article we annotate here is from Wikipedia.

The Texas Handbook has many articles on this subject. We may try the tool to test ideas it presents.

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Whig cartoon showing the effects of unemployment on a family that has portraits of Democratic Presidents Andrew Jackson and Martin Van Buren on the wall.

The Panic of 1837 was a financial crisis in the United States that touched off a major depression, which lasted until the mid-1840s. Profits, prices, and wages went down, westward expansion was stalled, unemployment went up, and pessimism abounded.

MD: Notice the language “touched off”. We’re reading this article as if a “real” money process was in effect and efficiently operating. Could anything “touch off a major depression” with a “real ” money process in effect? Why would profits, prices, and wages go down? Why would westward expansion be stalled? Why would unemployment go up? Why would pessimism abound?

The panic had both domestic and foreign origins. Speculative lending practices in the West, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Britain were all factors.[1][2]

MD: Note, none of these claimed causes exist with a “real” money process. There are “no” lending “practices” when it comes to a “real” money process. When a trader sees clear to deliver on a promise that spans time and space, he “creates” money. He doesn’t “borrow” money. Someone doesn’t “lend” him money. There is no resistance to a responsible trader (one who delivers as promised) when he makes the promise. The problems “all” happen if he fails to deliver…and those problems have a very different characteristic if “borrowing” and “lending” are not involved. The key element here is “responsibility”.

The lack of a central bank to regulate fiscal matters, which President Andrew Jackson had ensured by not extending the charter of the Second Bank of the United States, was also key.

MD: Here comes the recommended improvement…”a central bank” to regulate fiscal matters. Well, we already have a process that “regulates fiscal matters” (i.e. those related to money). (1) If the trader creating the money is not responsible, he incurs and INTEREST load. Or more correctly, a “responsible” trader never incurs an INTEREST load. If there’s a problem delivering on a promise, that problem doesn’t get smaller by imposing an INTEREST load. The argument against a central bank is obvious. A central bank can only make matters worse. In fact, it can be used…and is easily shown to be used… to cause a panic. Further (2), Andrew Jackson had experience with such solutions and rejected the charter for the Second Bank. They’re saying here that the panic would not have happened if this “new centeral bank” idea was allowed. Let’s watch them make the case.

This ailing economy of early 1837 led investors to panic – a bank run ensued – giving the crisis its name.

MD: They claim an “ailing economy”. What caused it to be ailing? Who are these “investors” who are led to panic. With a “real” money process, investors only play a role when irresponsible traders are concerned. Supposedly, such traders are higher risk and thus must pay INTEREST premiums to cover that risk. It works like “casualty insurance” where PREMIUMS = CLAIMS. With responsible traders, CLAIMS are zero…so PREMIUMS are zero.

A real money process imposes INTEREST load in direct response to DEFAULTs on trading promises. Responsible traders don’t DEFAULT, thus they bear no INTEREST load. All responsible traders a alike as far as the process is concerned. Irresponsible traders come with varying degrees of “propensity to DEFAULT”. This is also true with casualty insurance where those with greater risk of CLAIM pay greater PREMIUMS. And as with insurance claimants, filing a CLAIM is a choice. If you can resolve the issue without filing a CLAIM you can maintain a lower PREMIUM load.

And how about the “bank run”? Well, no bank exists. It only exists with the solution they propose. But its obvious here, it is their very solution that introduces this additional possible cause. And what is a bank run? It’s a case of “irresponsible banks DEFAULTING”. Their process has a 10x leverage advantage. They can “lend” 10x as much money as they have. Well, that gives them 10x the motivation to “screw” their customers…i.e. those who trusted them to keep their money safe. See how easy it is to show how defective the existing solution can be? The tables are turned. “They” must prove their case…and it obviously can’t even be argued, let alone proved.

The run came to a head on May 10, 1837, when banks in New York City ran out of gold and silver. They suspended specie payments and would no longer redeem commercial paper in specie at full face value.[3]

MD: And here’s another claim that is easily refuted. Precious metals are “not” money. They are just stuff standing in as money. In a “real” money process, they play no role in trade. If you have surplus money and you think its safer to have gold, then buy (i.e. trade your money for) gold. That’s a choice.

Obviously the gold can be stolen as easily (or even more easily) than money. Remember, money may simply be an entry in a ledger. If that ledger is transparent for other traders to scrutinize (which the so-called financial audit does), then the money is difficult to steal.

This solution of “substituting specie for a promise” does nothing but give risk another avenue to come about. Worse, the value of the specie can change over time and space (e.g. a gold shipment can be robbed…or a new huge source can be found), and thus change in supply/demand determined value in trade. That can’t happen with money created in a “real” money process.

A significant economic collapse followed. Despite a brief recovery in 1838, the recession persisted for approximately seven years. Nearly half of all banks failed, businesses closed, prices declined, and there was mass unemployment.

MD: Look what happened! Half the ” banks” failed. With no banks to fail, there are no bank failures. You’re bank solution is openly flawed. Why? Because your solution presents a domino effect. One “borrower” DEFAULTs. If you’ve “loaned” out all your money, you can’t pay “demand” deposits. But with the “real” money process no such existing commitments are affected.

If a trader DEFAULTs on his promise, new “non-responsible” traders wishing to create money incur INTEREST load to immediately mitigate that DEFAULT. This is an automatic negative feedback mechanism. If the DEFAULT was the result of market softening (i.e. the demand prompting the promise was not as anticipated), then new traders are discouraged from making such promises too. Thus you don’t have “bubbles”. They get nipped in the bud. Further, if the demand is real, more traders move in to meet it and supply/demand imbalance is quickly corrected…thus prices remain competitive.

From 1837 to 1844 deflation in wages and prices was widespread.[4] The lack of deposit insurance deepened the Panic. By 1850 the economy was booming again, a result of increased specie flows from the California Gold Rush.

MD: INFLATION means there is a supply/demand imbalance. This is normal for any trade…except in a “real” money process, it is not normal for money. With money in perpetual free supply, INFLATION of money is perpetually zero. This is additionally achieved by mitigating DEFAULTs immediately with INTEREST collections of like amount.

And look how they say they came out of the panic! They found more gold! With a “real” money process, finding more gold just makes gold less dear…and thus trades of less other stuff…including “real” money created by traders.

So now I suggest you go through the rest of the article. (1) Make the case that the “cause” doesn’t even exist with a “real” money process involved. and (2) Make the case that the “banking” solution just exacerbates the problems…and in fact it is to the bankers benefit to instigate such disruptions. It is their way of manipulating the market. They call it the “business cycle”



This article is part of
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The crisis followed a period of economic expansion from mid-1834 to mid-1836. The prices of land, cotton, and slaves rose sharply in those years. The boom’s origin had many sources, both domestic and international. Because of the peculiar factors of international trade, abundant amounts of silver were coming into the United States from Mexico and China.[citation needed] Land sales and tariffs on imports were also generating substantial federal revenues. Through lucrative cotton exports and the marketing of state-backed bonds in British money markets, the United States acquired significant capital investment from Britain. The bonds financed transportation projects in the United States. British loans, made available through Anglo-American banking houses like Baring Brothers, fueled much of America’s westward expansion, infrastructure improvements, industrial expansion, and economic development during the antebellum era.[5]

From 1834 to 1835, Europe experienced extreme prosperity, which resulted in confidence and an increased propensity for risky foreign investments. In 1836, directors of the Bank of England noticed that its monetary reserves had declined precipitously in recent years due to an increase in capital speculation and investment in American transportation. Conversely, improved transportation systems increased the supply of cotton, which lowered the market price. Cotton prices were security for loans, and America’s cotton kings defaulted. In 1836 and 1837 American wheat crops also suffered from Hessian fly and winter kill which caused the price of wheat in America to increase greatly, which caused American labor to starve.[6]

The hunger in America was not felt by England, whose wheat crops improved every year from 1831 to 1836, and European imports of American wheat had dropped to “almost nothing” by 1836.[7] The directors of the Bank of England, wanting to increase monetary reserves and to cushion American defaults, indicated that they would gradually raise interest rates from 3 to 5 percent. The conventional financial theory held that banks should raise interest rates and curb lending when they were faced with low monetary reserves. Raising interest rates, according to the laws of supply and demand, was supposed to attract specie since money generally flows where it will generate the greatest return if equal risk among possible investments is assumed. In the open economy of the 1830s, which was characterized by free trade and relatively weak trade barriers, the monetary policies of the hegemonic power (in this case Britain) were transmitted to the rest of the interconnected global economic system, including the United States. The result was that as the Bank of England raised interest rates, major banks in the United States were forced to do the same.[8]

An 1837 caricature blames Andrew Jackson for hard times.

When New York banks raised interest rates and scaled back on lending, the effects were damaging. Since the price of a bond bears an inverse relationship to the yield (or interest rate), the increase in prevailing interest rates would have forced down the price of American securities. Importantly, demand for cotton plummeted. The price of cotton fell by 25% in February and March 1837.[9] The American economy, especially in the southern states, was heavily dependent on stable cotton prices. Receipts from cotton sales provided funding for some schools, balanced the nation’s trade deficit, fortified the US dollar, and procured foreign exchange earnings in British pounds, then the world’s reserve currency. Since the United States was still a predominantly agricultural economy centered on the export of staple crops and an incipient manufacturing sector,[10] a collapse in cotton prices had massive reverberations.

In the United States, there were several contributing factors. In July 1832, President Andrew Jackson vetoed the bill to recharter the Second Bank of the United States, the nation’s central bank and fiscal agent. As the bank wound up its operations in the next four years, state-chartered banks in the West and the South relaxed their lending standards by maintaining unsafe reserve ratios.[2] Two domestic policies exacerbated an already volatile situation. The Specie Circular of 1836 mandated that western lands could be purchased only with gold and silver coin. The circular was an executive order issued by Jackson and favored by Senator Thomas Hart Benton of Missouri and other hard-money advocates. Its intent was to curb speculation in public lands, but the circular set off a real estate and commodity price crash since most buyers were unable to come up with sufficient hard money or “specie” (gold or silver coins) to pay for the land. Secondly, the Deposit and Distribution Act of 1836 placed federal revenues in various local banks, derisively termed “pet banks”, across the country. Many of the banks were located in the West. The effect of both policies was to transfer specie away from the nation’s main commercial centers on the East Coast. With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic, besides the real estate crash.[11]

Americans attributed the cause of the panic principally to domestic political conflicts. Democrats typically blamed the bankers, and Whigs blamed Jackson for refusing to renew the charter of the Bank of the United States and on the withdrawal of government funds from the bank.[12] Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration had preceded the panic by only five weeks. Van Buren’s refusal to use government intervention to address the crisis, such as emergency relief and increasing spending on public infrastructure projects to reduce unemployment, was accused by his opponents of contributing further to the hardship and the duration of the depression that followed the panic. Jacksonian Democrats, on the other hand, blamed the Bank of the United States for both funding rampant speculation and introducing inflationary paper money. Some modern economists view Van Buren’s deregulatory economic policy as successful in the long term, and argue that it played an important role in revitalizing banks after the panic.[13]

Effects and aftermath

The modern balaam and his ass, an 1837 caricature placing the blame for the Panic of 1837 and the perilous state of the banking system on outgoing President Andrew Jackson, shown riding a donkey, while President Martin Van Buren comments approvingly.

Virtually the whole nation felt the effects of the panic. Connecticut, New Jersey, and Delaware reported the greatest stress in their mercantile districts. In 1837, Vermont’s business and credit systems took a hard blow. Vermont had a period of alleviation in 1838 but was hit hard again in 1839–1840. New Hampshire did not feel the effects of the panic as much as its neighbors did. It had no permanent debt in 1838 and had little economic stress the following years. New Hampshire’s greatest hardship was the circulation of fractional coins in the state.[citation needed]

Conditions in the South were much worse than in the East, and the Cotton Belt was dealt the worst blow. In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops. New Orleans felt a general depression in business, and its money market stayed in bad condition throughout 1843. Several planters in Mississippi had spent much of their money in advance, which led to the complete bankruptcy of many planters. By 1839, many plantations were thrown out of cultivation. Florida and Georgia did not feel the effects as early as Louisiana, Alabama, or Mississippi. In 1837, Georgia had sufficient coin to carry on everyday purchases. Until 1839, Floridians were able to boast about the punctuality of their payments. Georgia and Florida began to feel the negative effects of the panic in the 1840s.[citation needed]

At first, the West did not feel as much pressure as the East or the South. Ohio, Indiana, and Illinois were agricultural states, and the good crops of 1837 were a relief to the farmers. In 1839, agricultural prices fell, and the pressure reached the agriculturalists.[14]

Within two months the losses from bank failures in New York alone aggregated nearly $100 million. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of state banks received a shock from which it never fully recovered.[15] The publishing industry was particularly hurt by the ensuing depression.[16]

Many individual states defaulted on their bonds, which angered British creditors.[17]: 50–52  The United States briefly withdrew from international money markets. Only in the late 1840s did Americans re-enter those markets.[citation needed] The defaults, along with other consequences of the recession, carried major implications for the relationship between the state and economic development. In some ways, the panic undermined confidence in public support for internal improvements.[17]: 55–57  Although state investment in internal improvements remained common in the South until the Civil War, northerners increasingly looked to private rather than public investment to finance growth.[citation needed] The panic unleashed a wave of riots and other forms of domestic unrest. The ultimate result was an increase in the state’s police powers, including more professional police forces.[18][17]: 137–138 


Hard times token, late 1830s; privately minted, used in place of the one-cent coin during currency shortage; inscription reads “I Take the Responsibility”, showing Andrew Jackson holding a drawn sword and a coin bag emerging from a strongbox.

Most economists agree that there was a brief recovery from 1838 to 1839, which ended when the Bank of England and Dutch creditors raised interest rates.[19] The economic historian Peter Temin has argued that when corrected for deflation, the economy grew after 1838.[20] According to the Austrian economist Murray Rothbard, between 1839 and 1843, real consumption increased by 21 percent and real gross national product increased by 16 percent, but real investment fell by 23 percent and the money supply shrank by 34 percent.[21]

In 1842, the American economy was able to rebound somewhat and overcome the five-year depression, but according to most accounts, the economy did not recover until 1844.[22] The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply. By 1850, the US economy was booming again.

Intangible factors like confidence and psychology played powerful roles and helped to explain the magnitude and the depth of the panic. Central banks then had only limited abilities to control prices and employment, making bank runs common. When a few banks collapsed, alarm quickly spread throughout the community and were heightened by partisan newspapers. Anxious investors rushed to other banks and demanded to have their deposits withdrawn. When faced with such pressure, even healthy banks had to make further curtailments by calling in loans and demanding payment from their borrowers. That fed the hysteria even further, which led to a downward spiral or snowball effect. In other words, anxiety, fear, and a pervasive lack of confidence initiated devastating, self-sustaining feedback loops. Many economists today understand that phenomenon as an information asymmetry. Essentially, bank depositors reacted to imperfect information since they did not know if their deposits were safe and so fearing further risk, they withdrew their deposits, even if it caused more damage. The same concept of downward spiral was true for many southern planters, who speculated in land, cotton, and slaves. Many planters took out loans from banks under the assumption that cotton prices would continue to rise. When cotton prices dropped, however, planters could not pay back their loans, which jeopardized the solvency of many banks. These factors were particularly crucial given the lack of deposit insurance in banks. When bank customers are not assured that their deposits are safe, they are more likely to make rash decisions that can imperil the rest of the economy. Economists have concluded that the suspension of convertibility, deposit insurance, and sufficient capital requirements in banks can limit the possibility of bank runs.[23][24][25]

See also


Timberlake, Richard H. Jr (1997). “Panic of 1837”. In Glasner, David; Cooley, Thomas F. (eds.). Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 514–16. ISBN978-0-8240-0944-1. Knodell, Jane (September 2006). “Rethinking the Jacksonian Economy: The Impact of the 1832 Bank Veto on Commercial Banking”. The Journal of Economic History. 66 (3): 541. doi:10.1017/S0022050706000258. S2CID155084029. Damiano, Sara T. (2016). “The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis by Jessica M. Lepler”. Journal of the Early Republic. 36 (2): 420–422. doi:10.1353/jer.2016.0024. S2CID148315095. “Measuring Worth – measures of worth, prices, inflation, purchasing power, etc”. Retrieved 27 December 2012. Jenks, Leland Hamilton (1927). The Migration of British Capital to 1875. Alfred A. Knopf. pp. 66–67. Davis, Joseph H. (2004). “Harvests and Business Cycles in Nineteenth-Century America” (PDF). Quarterly Journal of Economics. Vanguard Group. 124 (4): 14. doi:10.1162/qjec.2009.124.4.1675. S2CID154544197. Alison, Archibald. History of Europe: From the Fall of Napoleon, in MDCCCXV to the…, Volume 3. New York: Harper and Brothers. p. 265. Temin, Peter (1969). The Jacksonian Economy. New York: W.W. Norton & Company. pp. 122–147. Jenks, Leland Hamilton (1927). The Migration of British Capital to 1875. Alfred A. Knopf. pp. 87–93. North, Douglass C. (1961). The Economic Growth of the United States 1790–1860. Prentice Hall. pp. 1–4. Rousseau, Peter L (2002). “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837” (PDF). Journal of Economic History. 62 (2): 457–488. doi:10.1017/S0022050702000566. hdl:1803/15623. Bill White (2014). America’s Fiscal Constitution: Its Triumph and Collapse. PublicAffairs. p. 80. ISBN9781610393430. Hummel, Jeffery (1999). “Martin Van Buren The Greatest American President” (PDF). The Independent Review. 4 (2): 13–14. Retrieved 2017-08-01. McGrane, Reginald (1965). The Panic of 1837: Some Financial Problems of the Jacksonian Era. New York: Russell & Russell. pp. 106–126. Hubert H. Bancroft, ed. (1902). The financial panic of 1837. The Great Republic By the Master Historians. Vol. 3. Thompson, Lawrance. Young Longfellow (1807–1843). New York: The Macmillan Company, 1938: 325. Roberts, Alasdair (2012). America’s First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837. Ithaca, New York: Cornell University Press. ISBN9780801450334. Larson, John (2001). Internal Improvement: National Public Works and the Promise of Popular Government in the Early United States. Chapel Hill: University of North Carolina Press. pp. 195–264.[page range too broad]Friedman, Milton. A Program for Monetary Stability. p. 10. Temin, Peter. The Jacksonian Economy. p. 155. Rothbard, Murray (18 August 2014). A History of money and Banking in the United States: The Colonial Era to world War II (PDF). p. 102. Cheathem, Mark R.; Corps, Terry (2017). Historical Dictionary of the Jacksonian Era and Manifest Destiny. Lanham, Md.: Rowman & Littlefield. pp. 282–283. ISBN9781442273191; Roberts, Alasdair (2013). America’s First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837. Ithaca, N.Y.: Cornell University Press. pp. 204–205. ISBN9780801478864. Chen, Yehning; Hasan, Iftekhar (2008). “Why Do Bank Runs Look Like Panic? A New Explanation” (PDF). Journal of Money, Credit and Banking. 40 (2–3): 537–538. doi:10.1111/j.1538-4616.2008.00126.x. Diamond, Douglas W.; Dybvig, Philip H. (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy. 91 (3): 401–419. CiteSeerX10.1.1.434.6020. doi:10.1086/261155. JSTOR1837095. S2CID14214187.

  1. Goldstein, Itay; Pauzner, Ady (2005). “Demand-Deposit Contracts and the Probability of Bank Runs”. Journal of Finance. 60 (3): 1293–1327. CiteSeerX doi:10.1111/j.1540-6261.2005.00762.x.

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