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During the 1830s, the United States political situation was undergoing dangerous divisiveness over the condition of the SBUS and the economy at large. The effects on the country were devasting and depending on who you ask, the blame for the Panic of 1837 is assigned to different groups.
If you questioned the Whigs, responsibility for the Panic of 1837 can be transferred to President Jackson and his successor President Martin Van Buren for failing to recharter the SBUS and using public funds to resurrect the economy, also known as a bailout. If you ask the Jacksonian Democrats, they assign blame to the SBUS for producing a speculative bubble and inflating a worthless paper currency. Also, culpability is put on English Money Changers and politicians for injecting capital into the economy and then proceeding to increase interest rates. So, let’s get into it.
(President Jackson “Slaying the Many-Headed Monster" is represented by heads of the SBUS. https://www.armstrongeconomics.com/panic-of-1837/)
The SBUS was officially dissolved and became a private bank in 1836, which meant the institution was unable to continue lending fiat money to states and institutions outside of the state it was chartered. However, for a two-year period before the SBUS was defunct, the economy inside of the United States was thriving. The causes of success in the economy were due to prices of property, goods, and securities rising sharply from the increasing demand of citizens during industrialization, a growing economy, and the increasing supply of paper money used for speculation. Another large cause for the growth of the American economy in the 1830s includes the foreign investment that was coming from Great Britain and other parts of Europe. As the United States was growing into a larger economy, State and Federal bonds began circulating to some of the most mature markets in the world, including Great Britain. The American States offered bonds to Great Britain, allowing large amounts of foreign capital to pour inside the United States, with the individual states giving the foreign investors cash flow in the form of interest payments. Even more foreign capital came from Europe with the United States' ability to export large amounts of cotton during the height of slavery in southern plantations. In addition, without heat and electricity throughout the world in the 19th century, cotton was a highly sought-after resource for warmth, clothing, and more. As the demand and price of cotton in Europe increased, the United States was able to bring in large profits that could be reinvested into the domestic economy.
The final source of economic success in the US economy prior to the failure of the economy in the Panic of 1837 came from foreign loans entering the United States, specifically through the Barings Bank in London. Throughout the early 19th century, the Barings were large financers for the United States including in the War of 1812, large expansion into the West, and manufacturing production inside populated urban regions in the US (Jenks, Leland Hamilton. 1927).
Although in the middle of the 19th century the United States was having financial success by slowly shifting from an agricultural to an industrial economy, the situation was becoming too bloated. Having foreign investors become large funders in domestic projects through extending loans or buying bonds, and fiat money becoming rampant in the economy from private and public printing of currency are the recipes that led to disaster.
(‘Lending money to people across the water’. Geoffrey Williams)
The prosperity, youth, and credit of the United States economy were so great relative to the rest of the world during the 19th century that it attracted investors money from Europe in large quantities, therefore, the United States began quickly draining liquidity out of Great Britain. Fearing that the United States could become more prosperous than Europe’s leading economies and the lack of money becoming dangerous to England’s economy, in 1836 the directors of the Bank of England (BOE) began to take action against the United States economy (Davis, Joseph H. (2004).) One of the first actions the Bank of England took was to pull liquidity out of the United States market by limiting the loans that could be negotiated overseas. In addition, the BOE announced they would increase interest rates, making it more difficult and expensive to borrow money and slowing down growth in the economy. As a result of the interconnected economic system that was developed in the early 19th century, when interest rates increased in Great Britain, banks in the United States directly felt the impact of the restriction in money and had to increase rates for themselves, leaving businesses and individuals to go bankrupt (Temin, Peter (1969).
In addition to the Bank of England manipulating American markets through their lending practices to state banks, the price of cotton was going through extreme volatility that ultimately led to more bankruptcies, hunger, and economic turmoil.
As we previously mentioned, cotton was a large and important export for the United States into Great Britain because of the various goods and services that could be offered through the material; and as we know with economics, when the demand increases, so do prices. With cotton being fundamental to countries, during the early 19th century, cotton was viewed as vital security and even used as collateral around the world.
Another input affecting the price of cotton was transportation systems. In 1835 and 1836 railroads, boats and other transportation systems went through large innovations that made it easier to transport goods across the country or ocean. As a result of cotton becoming easier to transport, the price of cotton decreased. The banks that made outstanding loans to borrowers who used cotton as the collateral was losing large amounts of money and began demanding individuals to either pledge more collateral or pay up to keep the capital flowing. Small and Large cotton plantations defaulted on their loans and had to give up their land. Furthermore, the higher interest rates restricting the availability of money in the US economy lowered the demand for cotton, leading to cotton prices falling by over 25% in the Spring of 1837. (Jenks, Leland Hamilton, 1927).
While this was occurring, in 1836 Andrew Jackson ordered in the Specie Circular that mandated new land deals in the West must be purchased with gold or silver. This action severely hurt the ability to continue westward expansion and take loans from European families like the Barings. In addition, many critics point to Jackson not rechartering the SBUS leading to a decrease in the supply of money, and consequently a contraction in the US economy.
The overall causes of the bank are still disputed today, Jacksonian Democrats blamed bankers and the Whigs blamed Jackson for not rechartering the bank. Regardless of how you see it, a contraction in the money supply and a decrease in demand led to yet another panic within the United States.
(A ‘Hard Times Token’ Showing Andrew Jackson holding a bag and stating ‘I take Responsibility’.)
So, what did the panic look like? In 1837 critical food crops inside the United States went through bad harvests from disease, causing hunger to affect citizens across the country and subsequently stifling overall economic activity (Davis, Joseph H. (2004). The wealthy who were able to last through an economic correction made it through fine and were able to concentrate even more property and specie in their hands through borrowers defaulting on their loans. On the other hand, the lower and middle classes lost their jobs, lost their property, and starved while being at the will of powerful, unelected bankers controlling the supply of money in the United States and abroad.
By 1839 out of 850 banks within the United States over 400 failed, and State Banks within New York totaled more than $100 million in losses (Hubert H. Bancroft, ed. (1902). These losses served massive blows to the public’s confidence in the banking industry and caused bank runs that left the lower and middle classes forming large lines outside banks wondering if they will be able to retrieve their deposits. Money that people believed would be safe from speculation and manipulation was now lost and the nation's most poor felt the greatest pain.
You may be thinking that this is a century-old problem and these issues don’t exist anymore. However, try telling that to someone who held their deposits at Lehman Brothers during the housing crisis of 2007-2010. Ironically, the Lehman brothers were started in 1850 inside the United States, only a few years after the Panic of 1837 ended. In addition to individuals and businesses defaulting on their loans, eight states and the territory of Florida could not pay back their loans to international investors, severely hurting their creditworthiness and angering the wealthy families and institutions that extended those loans (Kim & Wallis 2005, pp. 737–739).
(https://www.thebalance.com/lehman-brothers-collapse-causes-impact-4842338)
The depression in the economy lasted until the mid-1840s and was only resurrected when gold from the California gold rush began to enter the economy and provide plentiful money. The gold rush allowed for the supply of money in the economy to increase and goods to circulate throughout the various states and territories while being purchased with specie, ending the Panic of 1837. By 1850 the economy of the United States was once again blossoming, However, there was another war coming about an issue that the US had been attempting to put in the shadows since its existence, perhaps the most important war in American history. A domestic war fought over slavery and money, the civil war.
