Tuesday, March 24, 2009

The Panic of 1837 (1)

In 1837, there occurred the first great business panic with which the nation has been visited, and New York was as hard hit as the rest of the country.

Unfortunately no practical measures were at first instituted to relieve the distresses of the working classes, and advantage was taken of the opportunity by politicians and demagogues to inflame the passions of the ignorant and the vicious.

The economic harvest of the Jackson years is the Panic of 1837, with an ensuing depression. During these years cotton production increased in the South, agriculture expanded in the West, cities grew, manufacturing replaced trade as the economic base in the North. These phenomena were accompanied by a rise in the sales of land, and also in the price paid for land. There was a need for internal improvements, roads, canals, etc. and these had to be financed by states and private companies. Inevitably, speculation and inflation accompanied such activities, and President Jackson hoped to curb the unhealthy aspects of a growing economy by extirpating the central bank, which he considered the root of the evil.

But with Federal funds distributed widely in "pet banks" and surplus revenues distributed among the states, the control exercised by the Bank of the United States is replaced by financial anarchy: the number of banks and the number of bank notes increase. In response to the President's Specie Circular issued in 1836, the local banks are faced with a critical situation, and call in their loans. (At the same time, a depression in Great Britain results in withdrawals of British investments and a decline in the demand for cotton.) First the New York City Banks suspend specie payment; then others follow suit. Lacking sufficient hard money, banks fail, enterprises go bankrupt, unemployment spreads. As the depression deepens, President Van Buren continues to follow Jackson's policy, with the ill-advised codicil of a plan to fragment the single treasury into a system of "sub-treasuries."

Sub-treasury System

The sub-treasury system of the United States is an outgrowth of the panic of 1837. In his special session message to Congress that year President Van Buren strongly recommended such a system (III, 324). Silas Wright of New York, introduced a bill in Congress in accordance with the President's recommendations. It prohibited Government agents from receiving anything but gold and silver. In 1840 the bill became a law and sub-treasuries were established at New York, Boston, Charleston, and St. Louis, the mint at Philadelphia and the branch mint at New Orleans having been also made places of deposit. The law was repealed in 1841 and reenacted in 1846.

To be continued: The Panic of 1837 (2)

Contact: miriam@thehistorybox.com or miriammedina@earthlink.net

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