#70 The Panic of 1837

In a continuation of our panic series today we will cover the Panic of 1837, but to do so requires rewinding clock back to the aftermath of the Panic of 1819. Again, I will draw heavily from Rothbard here in his “History of Money and Banking in the US” (a book which I cannot recommend enough).

The panic of 1819 led to a revival of Jeffersonian economic thinking. This is a topic I hope to cover more in depth at some point in the future, but for now its important to remember that Thomas Jefferson allowed the charter for the central bank of the United States to lapse during his term in office. For a bit more background on Jefferson’s thinking regarding money and banking refer to our earlier posts here and here.

Historians often refer to this revival of sound money principles and abolition of central banking following the panic of 1819 as Jacksonian economics and this is because Andrew Jackson (President from 1829-1837) abolished the central bank in much the same way Jefferson had decades prior. To reiterate, it was the panic of 1819 which birthed this revival in sound money and full reserve banking thought.

Rothbard writes:

“The Jacksonians adopted, or in some cases pioneered in, the Currency School analysis, which pinned the blame for boom-bust cycles on inflationary expansions followed by contractions of bank credit. Far from being the ignorant bumpkin sthat most historians have depicted, the Jacksonians were steeped in the knowledge of sound economics, particularly of the Ricardian Currency School.”

Their stances were that of free markets and free banking along with staunch opposition to the subsidy and monopoly privileges granted by governments. Rothbard goes on:

“They favored absolutely minimal government, certainly at the federal level, but also at the state level. They believed that government should be confined to upholding the rights of private property. In the monetary sphere, this meant the separation of government from the banking system and a shift from inflationary paper money and fractional reserve banking to pure specie and banks confined to 100-percent reserves.”

The Jacksonian thinkers had to face the overwhelming problem of overcoming the one party, one track thinking that emerged from the era of good feelings following the War of 1812. This era of emerging American imperialism had led to the Democratic-Republicans shifting away from their Jeffersonian roots and adopting the earlier Federalist policies of central banking and credit expansion.

From these events, came the creation of the Democratic party in the mid 1820s, specifically of the mindset that breeding a Jeffersonian economic revival was wholly necessary to secure the liberty of America and her people.

Rothbard continues:

“The Jacksonians eventually managed to put into effect vari-ous parts of their free-market and minimal-government eco-nomic program, including a drastic lowering of tariffs, and forthe first and probably the last time in American history, payingoff the federal debt.”

And following these policy changes came the abolition of the US central Bank under the Jackson administration in 1833.

To understand why the panic of 1837 happened we must look no further than the money supply. Again the quote Rothbard, “$109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent…[The] Bank of the United States, increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent.”

Interestingly, the money supply continued to increase following the 1833 abolition of the central bank, Rothbard attributes this to a massive expansion of specie due to monetary policy of the Mexican government at the time. “starting at the beginning of 1833, the total specie in the country rose swiftly from $31 million to $73 million at the beginning of 1837, for a rise of 141.9 percent or 35.5 percent per annum.”

In 1837 the Mexican government shifted its expansionary monetary policy due to a large outflow of its silver and gold into the United States and specie expansion promptly halted. This halt in specie expansion happened shortly after the Bank of England began tightening its money supply and contracting credit in 1836 which began to slow Cotton exports to Europe and had deflationary price effects on its price. Specie payments were promptly suspended by banks throughout the US and credit necessarily contracted back to reality.


Book of the Month:

The Road to Serfdom by F A Hayek

-“Although we had been warned by some of the greatest political thinkers of the nineteenth century, by Tocqueville and Lord Acton, that socialism means slavery, we have steadily moved in the direction of socialism.”

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