Panic of 1837

The Panic of 1837 was a financial crisis in the United States that touched off a major recession that lasted until the mid-1840s. Profits, prices, and wages went down while unemployment went up. Pessimism abounded during the time. The panic had both domestic and foreign origins. Speculative lending practices in western states, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Great Britain were all to blame. On May 10, 1837, banks in New York City suspended specie payments, meaning that they would no longer redeem commercial paper in specie at full face value. Despite a brief recovery in 1838, the recession persisted for approximately seven years. Banks collapsed, businesses failed, prices declined, and thousands of workers lost their jobs. Unemployment may have been as high as 25% in some locales. The years 1837 to 1844 were, generally speaking, years of deflation in wages and prices.

The crisis followed a period of economic expansion from mid-1834 to mid-1836. The prices of land, cotton, and slaves rose sharply in these years. The origins of this boom had many sources, both domestic and international. Because of the peculiar factors (Specie Circular) of international trade at the time, abundant amounts of silver were coming into the United States from Mexico and China. Land sales and tariffs on imports were also generating substantial federal revenues. Through lucrative cotton exports and the marketing of state-backed bonds in British money markets, the United States acquired significant capital investment from Great Britain. These bonds financed transportation projects in the United States. British loans, made available through Anglo-American banking houses like Baring Brothers, fueled much of the United States's westward expansion, infrastructure improvements, industrial expansion, and economic development during the antebellum era.

In 1836, directors of the Bank of England noticed that the Bank's monetary reserves had declined precipitously in recent years, possibly because of poor wheat harvests that forced Great Britain to import much of its food. To compensate, the directors indicated that they would gradually raise interest rates from 3 to 5 percent. Conventional financial theory held that banks should raise interest rates and curb lending when 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 (assuming equal risk among possible investments). In the open economy of the 1830s, characterized by free trade and relatively weak trade barriers, the monetary policies of the hegemonic power – in this case, Great Britain – were transmitted to the rest of the interconnected global economic system, included the U.S. The result was that as the Bank of England raised interest rates, major banks in the United States were forced to do the same.

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