Small Change and The Depression of 1837-1843 – Part Five

Both the modern narratives and the contemporary reports universally agree that the first great depression in American history was brought on by the Panic of 1837. The central event of the Panic – the decision of the banks outside of New England to suspend redemption of their demand notes for coin in May 1837 – was a scare. For the first time, when the country was not engaged in a foreign war, there had been a financial default. During the Revolutionary War and the War of 1812, Congress itself had been unable to redeem its obligations in coin; but this was the only time that the banks had chosen to suspend performance of their legal obligation to exchange-demand notes for legal tender.

There was a war going on; the second Seminole War was gobbling an increasing share of federal tax collections. But even when they ended in 1858, the cumulative tally of 42 years engagement in the three Seminole wars would not be a financial burden sufficient to cause a crisis. For 1837 and the depression years that would follow, the war’s most important finfancial events would be to bring to the public’s attention the names of the three generals who would be the Whig Party’s candidates for president: William Henry Harrison, Winfield Scott and Zachary Taylor.

If the Congressional appropriations for further war spending did not cause the country’s money center banks to default, neither did any shortage of gold bullion and coins. For the first (and it would turn out – the only) time in American history, the federal government was entirely free of debt. The federal government had a surplus of funds, including specie; beginning in January 1837 the Treasury had begun sending portions of the extra money to the bank accounts of the states and territorial governments. To satisfy the letter of the law – the Distribution Act of 1836 – the transfers were classified as permanent loans; but, like much of the money loaned in 2020 as part of the COVID-19 stimulus, there was no expectation or direct legal requirement that the loans to the states would be repaid. The money center banks in New York, Philadelphia and Baltimore had joined the rest of the qualified depositories in receiving their January and April 1837 quarterly distributions of the Treasury’s surplus coin.

Why, then, was there a Panic in May?

The federal charter for the Second Bank of the United States had expired two years earlier. If its supporters among the owners of the state-chartered banks had lost that war, they had also gotten part of the spoils. Beginning in October 1833, the Treasury had withheld future deposits to the Bank of the United States and sent the funds instead to state-chartered banks chosen by the president and the secretary of the Treasury.

The anti-Jacksonians instantly accused those institutions of being Jackson’s “pet” banks, and the accusation stung. Now, under the Distribution Act, every established state-chartered bank was a “pet” bank. Yet, a month before the inauguration of New York’s former governor and leader of the Albany Regency – the faction controlling the state’s legislature, the only news from America’s largest city was a report of a “bread riot” comparable to the one that began the French Revolution. If you were a loyal Jackson Democrat, you had to wonder if the news was not being manufactured to fit the needs of the opposition. The newspapers’ reports seemed to be as much about making Andrew Jackson and Martin Van Buren look bad, as they were about recording actual financial events.

There were two particularly good reasons for the very wealthy to be unhappy with the election of Jackson’s chosen successor. After the president and Congress had enacted the Distribution Act in June 1836 and Congress had left town, President Jackson had issued as an executive order the Specie Circular. Effective January 1, 1837 payments for purchase of land owned by the United States would be made only in coin. The federal land offices would join the customs houses in no longer accepting bank notes in lieu of specie payments. The sharing of the surplus under the Distribution Act was welcome, but it would not compensate the money center banks for the loss of being the pet banks of the Second Bank of the United States. As the depository for all tax collections and fund balances of the Treasury, the Second Bank had held the power to decide which banks’ notes were almost as good as its own. The friends of Mr. Biddle could hoard their coin for use in their foreign exchange business with London and the other European financial centers and use their notes for transactions with the western banks whose customers were buying the federal lands at auction. Now, the Specie Circular would require them to send coin to those western banks. The country was not short of gold; foreigners were still sending it. But it was not staying in the vaults in New York, Philadelphia and Baltimore.

Still worse, Martin Van Buren was planning to do something that George Washington and his national banker Thomas Willing had not done – detach the federal government’s deposits and payments from the entire banking system by establishing the Independent Treasury. On May 7, 1837, a delegation of New York’s wealthiest and finest, including Van Buren supporters, came to the White House. The New Yorkers told the first person ever elected president from their state that the Treasury needed to return to the practices of the Second Bank of the United States. Abolishing the Second Bank of the United States and imposing the Specie Circular could be justified as a necessary restoration of the constitutional rules regarding the government’s sovereignty over money; but the Treasury had to be able to accept state-chartered bank notes. The First Bank of the United States had not been a central bank of issue, but it had been solely responsible for intermediating exchanges between the U.S. Treasury and both foreign and domestic banks. At the very least, the country needed a national clearing house for bank notes that would allow the banks to retain their specie reserves.

Three days after the president failed to give his visitors the answers they wanted, the banks in New York, Baltimore and Philadelphia, including Nicholas Biddle’s now state-chartered Bank of the United States, suspended all disbursements of specie. The Boston banks did not; but they limited their continued exchanges of notes for specie to their local customers. The Boston merchants, whose ships were finding immense profits from the China trade, needed silver coin to pay for their Asian cargoes. Suspension would break the credit chain for the region’s commerce; domestic IOUs had to be exchangeable for the international money that was legal tender in Asia.

The other eastern banks had no such worries; all suspension would do was end the shipments of their gold to the western banks to pay for purchases of Federal Land. The Specie Circular remained in place; so did the Distribution Act. In July, the Treasury made the third quarterly payment, as scheduled. It was only with the October payment that the Treasury suspended the transfers because its own receipts from land sales had collapsed. In 1836, total receipts were just under $25 million; in 1837, they fell to slightly less than $7 million. For the first quarter of 1838, they reached a level not seen since the early 1830s – $548,000.

In April. the newspapers were happy to announce that the Panic was over. The banks announced that they would be resuming redemption of their demand notes for coin; and in May they did just that. They may have had no choice. Outside of the money centers, there had been no retracement at all in banking. In July 1836, there had been 578 banks in the United States that had been in business for one year or longer. The crash year of 1837 had seen 35 bank failures; but 20 of those were start-ups in Michigan that had the awful timing to have opened just after that state had passed its free banking law in March of that year. When the money center banks resumed exchanging their notes for gold and silver in May 1838, there were 674 banks in the country that had been in operation for over a year.

The celebrated “catastrophe of 1837” was, according to Walter Smith and Arnold Cole, “a relatively inconsiderable, though sharp, decline. The picture revealed contrasts markedly with that usually given by the non-statistical accounts of this period. As the scholars who did much of the original mining of the economic data for the period, Smith and Cole would go on to offer a description of the events of the year of Panic that we, in 2021, must find painful. Viewed against the “long-continued, broken, downward tendency of the years 1835-1843…the (1837) summer’s fever is seen to be but a minor part of an eight-year sickness.”

The sickness would be a combination of events that Americans had not ever seen before. The amount of money being exchanged would decline even as the volume of physical activity grew larger. The prices for the Smith and Cole Index of commodities would fall by more than a third and remain depressed even as the amount of actual commerce being done suffered only a minor slowdown.

Year	Commodity Price Index	Physical Volume of Trade	Commodity % Change	Activity % Change
1835	100	100	-	-
1836	114	103	13.60%	2.90%
1837	105	96	-8.00%	-6.50%
1838	102	92	-2.60%	-4.00%
1839	103	99	0.90%	7.30%
1840	80	88	-22.10%	-10.70%
1841	81	91	1.10%	3.30%
1842	70	88	-13.50%	-4.20%
1843	67	89	-3.90%	2.20%
1844	58	99	-13.00%	10.80%
1845	63	113	8.10%	13.60%

Yet, the bright future of miraculous growth and exponentially increased speed promised by the booming information media had, in fact, happened. In 1802, it had taken 18 days to travel from New York City to the newly incorporated town of Cincinnati, Ohio. By 1840, the time was down to a week; by the end of the 1840s, the journey would take two or three days at most, depending on the time of year and the weather. The town and then city of Cincinnati had grown in the two decades from 1810 to 1830 by 13,000 people. In the single decade of the 1840s, it would grow more than five-fold, increasing by 71,000 from 44,000 to 115, 000.

There had been no system-wide financial collapse. From January 1840 to February 1844, the number of banks in operation for a year or more would decline from 712 to 584, but that would be six more banks than the number a decade earlier. Of the 30 states in the Union at that time, 12 states would see no net decrease in the number of banks in operation; two states would see an increase; 19 states would see start-ups of new banks, with a total of 49. More than half of the 138 banks that did fail would come from two states – New York (49) and Ohio (27).

These numbers had no parallels in the Great Depression of the 1930s. Where the two periods had a dismal similarity was in their declines of GDP. Priced against the Smith and Cole Index, the United States of America’s annual gross domestic product would begin the period at par. From 100 in 1835, the measure would decline over the next 10 years to 71. The trough would come in 1844 at 57.

Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.

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