Panic of 1837

From 1830-1837, the number of US state-chartered banks increased from 380 to 780, and money stock increased from $105 million to $276 million. A real estate boom, fueled by an aggressive expansion of credit, ended in disaster. Leveraged speculators eagerly snapped up (mostly Western) land sold by the government, and found bankers all too willing to accommodate them. Public land sales zoomed from 4.7 million acres in 1834 to 20 million acres in 1836. Receipts were deposited in state banks, fueling aggressive expansion of credit and currency and an explosion in canal building.

By the time stocks topped in 1835, New York Stock Exchange volume averaged 8500 shares a day, up 50-fold in 7 years.
In the 1830s, American prosperity and inflation resulted in record trade deficits, yet inflows of speculative capital from sales of securities in Europe were so great that the U.S. actually imported 4 times as much gold as it exported between 1834 and 1837. The money from overseas financed domestic railroad and canal building. By July 21, 1836, the drain in British reserves prompted a clampdown. The Bank of England initially hiked its rediscount rate to 4.5%, before ratcheting it up to a full 5% a few weeks later. The upsurge in British rates combined with U.S. inflation to draw funds away from securities.

The US government announced two policy initiatives in 1836: A “Specie Circular”decrees that land can be purchased from the government only with gold and silver money. And a “Surplus Distribution”act that said that bulging federal surplus revenues after the national debt is retired will be distributed to States on the basis of population. Both measures drained Eastern money-center banks of specie reserves.

By the time President Van Buren took office in March 1837, currency shortages plagued the nation, with New Orleans banks in especially deep trouble. When some banks admitted their inability to honor drafts, the panic spread to Wall Street. Van Buren, resisted repeal of the Specie Circular.

Financial problems in London compounded the crisis. Between March 1 and April 10, 1837, stock in former highflier Morris Canal plunged 54%, from 96 to 44. By May 10, with runs a daily occurrence, all New York banks suspended operations. By early fall of 1837, 90% of eastern factories closed. Despite a temporary reprieve in 1838, the depression worsened over the next several years. Morris Canal went bust. Banks, which had accepted overvalued land as collateral for loans used to buy yet more real estate, took it on the chin. United States Bank shares, which hadn’t traded below 100 for 20 years, collapsed from 122 in 1837 to 4 in November 1841. The financial storm of 1837-42 led to more lenient bankruptcy provisions and passage of a federal bankruptcy law wiping out $450 million worth of debts. Nine US States defaulted on their debts in 1841-1842.