Panic of 1837
Profits, prices, and wages dropped, westward expansion was stalled, unemployment rose, and pessimism abounded.
The ailing economy of early 1837 led investors to panic, and a bank run ensued, giving the crisis its name.
Railroads had begun their relentless expansion, and furnace masters had discovered how to smelt greater quantities of pig iron.
Because of the peculiar factors of international trade, abundant amounts of silver were coming into the United States from Mexico and China.
[8] From 1834 to 1835, Europe experienced a surge in prosperity, which resulted in confidence and an increased propensity for risky foreign investments.
By 1836, directors of the Bank of England had allowed their monetary reserves to decline precipitously in recent years due to an increase in capital speculation and investment in American transportation.
[10] 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.
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,[13] a collapse in cotton prices had massive reverberations.
The Specie Circular of 1836 mandated that western lands could be purchased only with gold and silver coin, instead of bank loans.
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 the rampant speculation in public lands, which had fueled what is today referred to as a real estate "bubble".
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 (such as was used 100 years later by Roosevelt during The Great Depression), was accused by his opponents of contributing further to the hardship and the duration of the depression that followed the panic.
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.
[citation needed] The defaults, along with other consequences of the recession, carried major implications for the relationship between the state and economic development.
[23][22]: 137–138 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.
[27] The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply.
Intangible factors like confidence and psychology played powerful roles and helped to explain the magnitude and the depth of the panic.
When faced with such pressure, even healthy banks had to make further curtailments by calling in loans and demanding payment from their borrowers.
In other words, anxiety, fear, and a pervasive lack of confidence initiated devastating, self-sustaining feedback loops.
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.
