The Panic of 1837
The Onset of America's First Depression
Based on http://americanhistory.suite101.com/article.cfm/the_panic_of_1837
Isaac M. McPhee
Apr 17, 2008
There are many factors which contributed to the financial panic which took place during the Presidency of Martin Van Buren, all of which led to an economic depression.
When Martin Van Buren took over the Presidency from his predecessor, Andrew Jackson, the nation's financial situation seemed to be going fairly well. Jackson had successfully lowered the national debt to its lowest point since 1791 (a trifle $33,733.05), and the economy seemed to be growing rapidly.
By the time Martin Van Buren came to office in 1837, however, the bubble already seemed to be bursting, and within a few months America would be plunged into a depression which would last nearly eight years.
What could have caused such a dramatic downturn?
Like America's previous economic downturn, the Panic of 1817, a certain portion of the blame for this depression can be blamed on a naturally cyclical economy. These cycles are known as boom/bust cycles, where the economy grows naturally to a certain point where any more growth is unsustainable, sending the economy into a decline (the exact mechanism behind this is still debated by economists).
While this cycle very well may have played a part in establishing the conditions necessary for a recession to occur in 1837, it certainly was not alone.
Andrew Jackson's Policies
Probably the most blame for the panic is placed most often on President Andrew Jackson and his attitude toward the Bank of the United States.
Jackson is famous for having opposed the bank, which he not only refused to re-charter, but from which he withdrew funds (an act which earned him a congressional censure) in order to promote private banking and a more "free" economy.
Jackson viewed soft money (that is, paper currency which holds no value on its own, but "represents" some sort of accepted value) in a highly negative light, much preferring banks doing business in hard money (gold or silver currency).
As a result of the new power wielded by state banks, and the lack of regulation from a national banking system, the economy did flourish for a time - bank loans skyrocketed, the economy flourished, and foreign nations began investing heavily in the financial opportunities of America.
The boom was short lived, however, as inflation increased dramatically as banks printed exorbitant amounts of paper money. This was exacerbated considerably by one of the most controversial aspects of Jackson's economic policy - the issuance of a "Specie Circular" (or Coinage Act) which was an attempt to protect land speculators in the west from being left with devalued currency in the event of inflation.
As a result of this policy, however, the value of paper money began to deflate rapidly, providing the opposite of the intended effect, leaving many holding nearly worthless money.
To add to Jackson's economic policies in creating a national financial panic, there was a decreased investment in America among British banks as a result of the financial situation in England at the time. This lack of monetary influx meant that banks began to call in their loans, which many could not pay with their devalued money.
Van Buren's Solutions
As a result of these and other reasons, just a few months after Martin Van Buren arrived in office, the panic began in earnest. Banks, responding to the devaluation of soft money and the suddenly limited nature of hard currency reserves, refused to accept soft money for gold or silver.
Paper currency became practically worthless, leaving many poor and homeless, having been unable to pay their loans. Unemployment shot up dramatically, and the nation was plunged into the worst financial crisis it had yet faced.
Facing this crisis, the Democrat party declared it to have been the result not of Jackson's policies, but of the poor management of banks, which led to the inflation and devaluation of currency.
As a result, Van Buren's sole response to the panic (believing, like Jackson, in government staying out of such matters as much as possible) was to call a special session of congress in September of 1837 and propose a national treasury system that would keep banks more accountable.
Such a bill would not be passed, however, until 1840, but by then the depression had already last more than three years, and would continue for several more years before finally settling down in 1844.
In the end, the panic of 1837 was one of the first real tests for the American economic system, perhaps its sole benefit being as a means of economic reference to future economists, who could look at the mistakes made prior to this period in hopes of preventing such a thing from taking place again.
One look at the continuing history of America shows that such study has not been entirely successful, as there are still many mysteries and nuances as to what exactly causes an economy to decline.
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