Panic of 1837

Within two months the failures in New York alone aggregated nearly $100,000,000 in value. "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."

---

The Panic of 1837 was built on a speculative fever. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in specie (gold and silver coinage). The Panic was followed by a five-year depression, with the failure of banks and record high unemployment levels.

Purported causes include the economic policies of President Andrew Jackson who created the Specie Circular by executive order and also refused to renew the charter of Second Bank of the United States, resulting in the withdrawal of government funds from that bank. Martin Van Buren, who became President in March 1837, five weeks before the Panic engulfed the young republic's economy, was blamed for the Panic. His refusal to involve the Government in the economy was said by some to have contributed to the damages and duration of the Panic. Of course, the initial Government intervention in the market had inadvertently been part of the cause of the problem, and further intervention might or might not have been useful. Democratic Jacksonians blamed bank irresponsibility, both in funding rampant speculation and by introducing paper money inflation. This was caused by banks issuing excessive paper money (unbacked by bullion reserves), leading to inflation.

When analyzing the suggested causes of the bubble preceding the Panic 1837, empirical evidence would actually imply the opposite. Suggesting that banks were carelessly lending and creating a credit boom would imply a large drop in reserve rates.

...snip..

.The banking panic of 1837 was followed by exceedingly disturbed economic conditions and a long contraction to 1843 that was interrupted only by a brief recovery from 1838 to 1839. This Great Depression is particularly interesting for our purposes. It is the only depression on record comparable in severity and scope to the Great Depression of the 1930s, and its monetary concomitants largely duplicate those of its later mate. In both, a substantial fraction of the banks in the United States went out of existence through suspension or merger --around one quarter in the earlier and over one-third in the later contraction--and the stock of money fell by about one-third. There is no other contraction that even closely approaches this dismal record. In both cases, erratic or unwise governmental policy with respect to money played an important part....>

http://en.wikipedia.org/wiki/Panic_of_1837

and they've been in the news a lot lately, as more people have to resort to selling heirlooms to survive.

You are an education. Two exceptional posts tonight. Many thanks, and from now on I'll click on anything Dover says!

Especially after Jackson pulled the plug on the Bank of the United States, any flim-flam artist could set up his own "wildcat bank" in the boonies, issue "banknotes" for depositors' gold and silver, and hightail it out of town with the precious metals in the middle of the night, leaving depositors high and dry with worthless paper.

The Bank of England was the model for the original Bank of America. The function of the Bank of England was to provide credit to its government and exercise the license to issue currency against that debt - treated as an asset. That's the simple definition of how a semi-regulated fiat currency system works, and the description of how a national government becomes the military wing of an expanding corporate imperialism (!).

So there are completely valid perspectives for Jackson's refusal being the ballsiest thing any US president has ever done (FDR excepted) and a defining episode in US history. There are also valid perspectives for the crisis of 1837 being one of many minor financial blips. Reading the economic history of the US, there is hardly a ten year period without its share of panics and crises, yet things march on.

One thing worth noting is the value of the dollar: a dollar paid to a revolutionary war soldier had a value fairly equivalent to a dollar paid to a WW1 soldier (if someone has exact figures that would be welcome). But then the Fed was created - the long delayed establishment of our new Bank of England type system. Under their watch the dollar has lost about 97% of its value, but more critically our national government has come to resemble, by its actions in the world as a whole, the military wing of an expanding corporate imperialism.

That is, they were backed by gold and silver, which is the opposite of a fiat currency. In fact, George III of England had been so obsessed about NOT having a fiat currency that he did not allow for the minting of copper coins for all but a few years of his 60-year reign. And in the US, it was Jackson who was trying to "fiatize" the US currency by encouraging fly-by-night banks to issue paper in return for depositors' gold and silver, and Nicholas Biddle and the Bank of the United States were standing in the way of this scheme.

And speaking of the Revolutionary War, soldiers were paid with Continental Currency, not dollars, which did not even exist at the time. If a soldier was lucky, he might be paid in Spanish colonial coinage, which was much more common in the 13 colonies at that time than coinage from the Mother Country (King George did not even want the American colonists using "his" money, and demanded that they send all their gold and silver money to him. That was one major reason for the Revolution).

The US dollar didn't get started until 1793, when the first national coinage (copper cents and half cents) was issued. Silver coins, the first truly legal tender money of the United States, debuted the next year and their denominations were based largely on their Spanish equivalents (silver dollar = Spanish 8 reales, helf dollar = 4 reales, quarter = 2 reales). The silver in a silver dollar was decreased slightly bewteen 1794 and 1836, and then remained relatively constant until 1935, when the last of the truly silver dollars were minted. Fractional denominations essentially became subsidiary coins that contained less silver per dollar face value than a silver dollar did. And the silver in a silver dollar eventually became less valuable than the gold in a gold dollar. And paper money was often accepted at a discount to gold and silver money. It was not like today, where everything being passed as money is just tokens or paper with no actual intrinsic value.

I am less than an expert...

But isn't issuing "paper in return for depositor's gold and silver" the definition of a "backed" currency, and the opposite of a fiat currency? I have only one author as an authority on the issue and impact of Jackson's banking policies, so I could be entirely wrong, though general studies in banking history do seem to support the claim...

So-called "wildcat banks" would take depositors' specie (gold and silver money) and issue paper money which they claimed was backed by the specie. The notes would be issued with the bank's name and denomination, giving depositors the false impression that this was real money. Then, when the "bankers" decided they had fleeced the depositors sufficiently, they picked up stakes and left town in the dead of night (perhaps where the phrase "fly by night" came from), leaving depositors high and dry. Many of these depositors had purchased land from the government, but had only paper "assets" from now-defunct banks. But Jackson demanded that the borrowers repay their loans with gold and silver, which they couldn't pay because they had lost it to fradulent banks. This helped to bring about the Panic of 1837.

Below is an example of a "wildcat banknote". Uncle Sam did not get started in the paper money business until the Civil War era.

I know very little about the 1830s.

It's the kind of thing which could have easily happenned now if Bush had listened to the ideologues in his cabinet and taken a laissez-faire approach. Or appointed some hack like Larry Lindsey.

While you can argue the specifics of what Paulsen and Bernanke did over the last few months, they might have staved off a real calamity like this.