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The Panic of 1837 set off the most severe depression experienced by the United States up to that point. Chief among the depression’s causes was a wave of land speculation, fueled by cheap and easy credit. Across the country, unemployment rose, businesses failed, and bankruptcy became commonplace. During the five years following the Panic of 1837, 343 of the nation's 850 banks went out of business entirely, with an additional 62 suffering partial failure.
President Andrew Jackson’s economic policies often are blamed for creating the conditions that caused the Panic of 1837. In 1829, Jackson, who mistrusted the National Bank and considered it unconstitutional, refused to renew the bank’s charter. He also withdrew all federal funds, depositing them instead in state and private banks.
As a result, credit was easily available from these institutions. State-funded and privately funded projects such as canals and rail lines encouraged westward expansion. Speculators were quick to buy cheap government property, hoping to sell it for a huge profit as expansion and infrastructure drove up property values. Businesses also relied heavily on credit, often using earnings to fund high return speculative investments rather than quickly paying down loans.
Banks were able to supply this cheap credit partly through the use of bank notes, money that they printed themselves. Foreign investors hoped to take advantage of the United States' boom, adding additional capital to the economy. With high levels of currency circulating, inflation was inevitable.
Speculation drove property sales to record highs. By 1837, land offices were reporting sales 10 times greater than in 1830. Hoping to curtail this land rush, Jackson issued the Specie Circular in the summer of 1836, requiring that specie — gold and silver currency — be used for all public land sales. State and private banks did not have sufficient specie funds, typically using bank notes for loans. With credit supplies suddenly cut off, many buyers defaulted on payments, the property market dried up and the Panic of 1837 was underway.
Foreign investors called in debts, refusing to accept U.S. currency. Already overextended, bank reserves were quickly depleted. Depositors attempted to withdrawal funds, resulting in bank runs. During the Panic of 1837, paper money became worthless as banks refused to exchange it for hard specie. Widespread business failure, bankruptcy and double-digit unemployment resulted.
When Martin Van Buren took office as president in January 1837, the panic was just beginning to take hold. By the end of June, more than 250 businesses had failed in New York alone. In September, Van Buren called a special session of Congress, demanding a national treasury system designed to make banks more accountable. Despite political efforts, the effects of the Panic of 1837 were felt for many years.