The Panic of 1837
Banking Collapse, Cotton Crash, and the Economic Depression that Changed America
By Stephen Campbell
Fiscal and monetary policies in the United States and Great Britain, the global movements of gold and silver, a collapsing land bubble, and falling cotton prices were all to blame for the multi-year economic depression that followed the Panic of 1837. Evidence of the panic’s effects ranged from mild to severe and can be found in higher rates of unemployment, bankruptcies, hunger, urban unrest, and deflation.
Seeds of Crisis: 1834-1836
The system of international trade and finance established by American and British merchant bankers provides an important backdrop for understanding the cycles of boom and bust of the early-nineteenth century. Countries were expected to peg their currencies to gold or silver at a fixed rate under the assumption that prices, production, and employment would be naturally self-regulating. In most cases, merchant bankers used credit instruments — forms of paper money that functioned as promises to pay gold and silver — and made notations in their account books in order to avoid the time, risk, space, and hassle of shipping precious metals over long distances to meet their obligations.
One of the merchant banking houses most responsible for facilitating world trade was Baring Brothers. Along with other merchant bankers, this London-based firm provided the credit facilities by which Americans could export cotton in exchange for importing British manufactured goods. British merchant bankers at this time would not accept American bank notes in settlement for debts. Because American cotton was in high demand, however — fueling Britain’s Industrial Revolution — they would accept foreign bills of exchange that represented the value of cotton shipments. These sterling-denominated bills were not just used to pay for American imports. Barings and other houses accepted foreign bills in payment for investors who owned “American securities,” the stocks and bonds that capitalized American banks, roads, canals, and municipal governments. Both trade and investment therefore figured into the overall balance of payments between the two countries. The United States often ran a trade deficit with Britain at this time, but when the value of American securities purchased in London money markets exceeded the trade deficit, gold flowed to the United States.
Meanwhile, the Chinese were beginning to purchase ever larger quantities of opium grown on plantations in British-owned India, a process encouraged by the British East India Company and the use of foreign bills drawn on Barings. Opium purchases by the 1830s reached about $10 million per year. For complex reasons, the result was that specie accumulated in the United States and Britain, setting up the preconditions for a bubble.
Key Triggers of the Financial Collapse
The origins of the Panic of 1837 can be located in the three years of rapid economic expansion in the United States from 1834 to 1836. Legislation that devalued the dollar in 1834, combined with the instability wrought by Antonio Lopez de Santa Anna’s rise to power in Mexico, attracted gold and silver from abroad. As a general rule banks printed more paper money when precious metals accumulated in their vaults. The money supply in the United States grew at an average annual rate of 30 percent between 1834 and 1836, a marked increase from the 2.7 percent growth during the previous three-year period. Inflation ensued.
New financial institutions engaging in risky lending practices facilitated the mutually reinforcing expansion of land sales, transportation projects, cotton cultivation, and slavery. Unshackled from any regulatory oversight at the national level, state governments began issuing dozens of charters for new state banks. This was especially true in the South and West. In 1836 alone, more than 100 banks opened their doors. Statistics show that state banks were appropriating fixed quantities of monetary reserves and shares of capital stock to issue more and more loans during these years, adding to their liabilities and risks.
Many of these risky financial institutions were founded upon the forced removal of Native Americans and the extension of slavery. In expansionary times a cyclical pattern emerged: enslavers took out loans to buy land and cotton, bought slaves to pick the cotton, sold the cotton, and after paying back their loans, used the proceeds to buy more land, cotton, and slaves. The so-called “property banks” (also known as land banks or plantation banks) throughout the South that set much of this process in motion were partially capitalized by land and slave mortgages, and partially by state-backed bonds. Northern mercantile firms and brokerage houses purchased these bonds and then sold them to European investors, showing how northern and European capital spurred and profited from slavery.
The Deposit Act of 1836
Though import duties provided the overwhelming majority of federal receipts in Washington, land sales were also a key source of public revenue. President Andrew Jackson took credit for paying off the national debt completely in 1835 and the following year, a record $25 million in land sales accounted for about half of all federal receipts. The U.S. Treasury now had a budget surplus with no public debt. How Congress and the president responded to the surplus, however, left the nation’s financial system vulnerable to external shocks. The Deposit Act of 1836 ordered the distribution of the federal surplus into various state banks throughout the country. The geographical orientation of these transfers was key. Normally importers and exporters in New York City required hard money to settle foreign balances, but the Deposit Act transferred precious metals from the coast to the interior of the country. Monetary reserves in New York City deposit banks fell from $7.2 million in September 1836 to $1.5 million in May 1837. The Specie Circular, an executive order issued by President Jackson in 1836 mandating that all public land sales over 320 acres be purchased in specie, similarly diverted precious metals from east to west.
In 1836, British financiers began expressing alarm over these events in the United States. When the directors of the Bank of England noticed that the central bank’s specie reserves had dwindled to just 4 million pounds, they adopted restrictive measures. While the exact reasons for England’s shortage of specie are disputed, the directors blamed the high value of American securities purchased in London. In August 1836, the Bank of England began raising its discount rate gradually from three to five percent. It stopped discounting commercial paper from the merchant banking houses that were financing Anglo-American trade. In turn, these actors ceased accepting the foreign bills of exchange that American import merchants had used to pay for British manufactured goods. American merchants could now send only specie to Britain.
Contemporaneously, overproduction and excessive supply of cotton began to pierce the bubble that had been forming for several years. From 1830 to 1837, U.S. cotton production nearly doubled from 732,000 bales to 1.428 million. Egypt was exporting 35 million pounds of cotton in 1837, up swiftly from just 6 million pounds in 1833, and ample supplies were also coming into Liverpool from India. It was thus the fall in cotton prices that triggered much of the Panic of 1837.
Scholars note that the lack of instantaneous communication over long distances and the absence of professionalized standards in journalism make it difficult to determine the precise beginning of the Panic of 1837. The first signs of trouble in the United States appeared in the early months of 1837, in New Orleans, where major cotton commission houses began to fail. Most notable was the failure of Hermann, Briggs & Company in March. If cotton prices crashed during the several-month period between cotton’s harvest and its ultimate sale in England, then cotton merchants could be on the hook for significant losses. With liabilities reportedly between $4-8 million and financial linkages with northeastern firms, the collapse of Herman, Briggs was large enough to bring down other firms. On March 17, the bill brokerage firm of J.L. & S. Joseph & Company of New York announced its failure, citing the Hermann, Briggs suspension. In May, New York banks suspended specie payments, prompting banks across the nation to do the same. Suspension did not mean that banks closed their doors permanently. In most cases it meant that banks refused to redeem credit instruments at full face value. The results were mixed: on the one hand, suspension could spread debilitating fear and anxiety but on the other hand, it might prevent stricter loan curtailments and liquidation.
Economic and Social Consequences
Available data paints a mixed picture on the severity of the Panic of 1837. Domestic trade fell a modest 15-20 percent and unemployment was most likely confined to major urban areas. The United States, with its high birthrate and robust population growth, experienced a rise in real GDP every year during the panic. Real GDP per capita fell only a few percentage points. Since the United States was still overwhelmingly agricultural, the panic did not produce the type of mass unemployment characteristic of twentieth century depressions.
None of this is to overlook the widespread pain associated with failure, displacement, bankruptcy, lost savings, and financial ruin. Stories abound of farmers losing their land and artisans being unable to meet their obligations. Credit market conditions deteriorated. Confidence evaporated. Failures and loan losses reduced the book assets of all state-chartered banks in the U.S. by 45 percent. Banking and insurance stocks fell by 31.9 percent and railroad stock prices fell by 63 percent between 1837 and 1843. Poor harvests compounded an already grim situation, leading to high food prices, and eventually, food riots in Baltimore, Albany, Boston, and New York City. Debtors who were unable to pay their creditors fled to Texas, an independent republic at the time that would not extradite absconders to the United States for trial. Thousands of people in manufacturing districts, both in the United States and Great Britain, lost their jobs as credit dried up. A few prominent businessmen committed suicide. Children born in the United States during the 1840s were five centimeters shorter than children born only ten to fifteen years earlier, suggesting that the Panic of 1837 caused nutritional hardship, while in Great Britain, the decade became known as the “hungry forties.”
There was a brief rebound in the price of cotton in 1838, due in no small part to Nicholas Biddle--who had previously served as president of the Second Bank of the United States--using his financial connections and resources to corner the cotton market, but hopes of a sustained recovery were dashed the following year. The Bank of England again found itself perilously low on bullion, which dropped from 9.3 million pounds in January 1839 to 2.5 million pounds in October 1839. British investors had resumed purchasing high volumes of American securities. Poor harvests forced Great Britain to import much of its food, contributing to a trade deficit that depleted specie reserves further. Accordingly, the Bank of England raised interest rates to six percent. To remain competitive in an open economy with relatively low trade barriers, New York banks had to do the same, adversely affecting lending, commodity prices, and bond prices. Cotton prices in Liverpool dropped again due to large shipments arriving from Egypt and India. In March 1839, the successor to the national bank, the Bank of the United States of Pennsylvania (BUSP), suspended specie payments, leading to bank failures throughout the rest of the nation.
In April 1841, the BUSP closed for good, triggering the failure of several Philadelphia banks and many others in the South and West. Bond markets for several individual states collapsed the following year. Despite several years of panic, many states had continued to subsidize internal improvement projects with millions of dollars. Total state debt reached $198 million in 1841, up from $14 million in 1830. By the summer of 1842, nine states and territories defaulted on their debts. Mississippi, Arkansas, and Florida repudiated outright. The South’s property banks fell victim to the carnage. To recoup their losses, northern banks and European investors unwittingly became owners of assets that were the easiest to sell under duress: human beings. In what was perhaps the greatest human tragedy of the Panic of 1837, untold thousands of African American families were torn apart in this domestic slave trade while behemoth slave trading firms like Franklin & Armfield and giant merchant bankers like Brown Brothers accumulated vast fortunes.
Recovery and Lasting Effects
1843 saw signs of recovery. The Panic of 1837 invigorated calls for territorial expansion as a means to prevent future panics and ensure continued prosperity. Imperialists who had long salivated at the opportunity to acquire Texas and California got their wish with the U.S.-Mexican War (1846—1848). The conclusion of the war by treaty, whereby the United States paid only $15 million to annex nearly one half of Mexico’s northern territories, coincided with the discovery of gold in California. Flush with new reserves, banks and mints began printing more paper money, providing relief to a nation that had recently experienced depression. As continental Europe became engulfed in revolution in 1848, the United States once again looked like an attractive investment. American state and national governments re-entered international money markets.
Further Reading
Beckert, Sven. Empire of Cotton: A Global History. Alfred A. Knopf, 2014.
Bodenhorn, Howard. State Banking in Early America: A New Economic History. Oxford University Press, 2003.
Campbell, Stephen. The Bank War and the Partisan Press: Newspapers, Financial Institutions, and the Post Office in Jacksonian America. University Press of Kansas, 2020.
Irigoin, Alejandra. “The End of a Silver Era: The Consequences of the Breakdown of the Spanish Peso Standard in China and the United States, 1780s-1850s.” Journal of World History 20, no. 2 (June 2009): 207-243.
Knodell, Jane. “Rethinking the Jacksonian Economy: The Impact of the 1832 Bank Veto on Commercial Banking.” Journal of Economic History 66, no. 3 (September 2006): 541-574.
Lepler, Jessica M. The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis. Cambridge University Press, 2013.
Rousseau, Peter. “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837.” Journal of Economic History 62, no. 2 (June 2002): 457-488.
Smith, Walter B. Economic Aspects of the Second Bank of the United States. Harvard University Press, 1953.
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