The Financial Panic of 1837: A Lesson in Unregulated Banking

The financial tumult that transpired in the United States in 1837 precipitated the insolvency of the nation’s credit, the disintegration of enterprises, and the widescale unemployment of laborers. It exacerbated the economic disparities and conflicting interests between the North and the South, thrusting the United States into its inaugural epoch of economic desolation, which laid the groundwork for the subsequent Civil War. An immense latent peril was thus entwined.

The amalgamated impact of internal and external factors:
At the onset of the 19th century, the United States had not yet established a central bank, thus precluding the issuance of standardized banknotes. On April 6, 1816, Congress passed the Second National Bank Act, conferring authorization upon states to establish the Second Bank of the United States. Soon after its establishment, the bank introduced a national currency that permeated the entire nation, its aggregate value amounting to twice the fiscal expenditure of the U.S. government. The excessive issuance of banknotes engendered a speculative bubble.

In 1829, Andrew Jackson assumed office as the seventh president of the United States. At the commencement of his tenure, he commanded the closure of the Second Bank of the United States and withdrew government deposits from the bank, redirecting them to select state banks. By the close of 1833, the majority of the government’s funds had been transferred to state banks, thereby emboldening state banks, which possessed diminished credibility, to issue more banknotes with unwarranted confidence.

In an endeavor to rectify speculation and dismantle the speculative bubble, Jackson endorsed the “Coin Circulation Order” in July 1836, mandating that all land acquisitions be settled in gold or silver coins. The issuance of this order tangibly applied severe restraints upon the U.S. economy, acting as a fiscal brake. Confronted with the dire predicament of an upsurge in demand for coinage, holders of domestic banknotes in the United States sought to exchange them for gold and silver coinage. Alas, due to the scarcity of precious metals, banks were compelled to resort to emergency loans for redress. By the conclusion of 1837, all banks within the United States had ceased their gold and silver coin exchange operations.

Simultaneously, the Bank of England, which maintained close credit ties with the United States, commenced a significant escalation in discount rates, inevitably exacerbating the plight of the U.S. financial industry. Under the collective influence of internal and external factors, the financial panic of 1837 ultimately erupted.

In May 1837, rumors of the chairman of the Mechanical Bank in New York City having taken his own life rapidly disseminated. A plethora of adverse tidings prompted depositors to hastily withdraw their funds. On May 8, New York City’s “Dry Dock Bank” experienced a run, swiftly spreading panic to other note holders. By May 10, all commercial banks in New York City suspended coin payments. In less than a week, all banks throughout the United States ceased their coin exchange operations. The U.S. financial industry was paralyzed, plunging the nation into its maiden era of economic depression and social upheaval. It was not until 1843 that the U.S. economy began to gradually recover.

The financial panic of 1837 precipitated a precipitous decline in stocks across the United States. Over 90% of companies succumbed to bankruptcy, the unemployment rate reached unprecedented heights, thousands of Americans were dispossessed of their land, and marginalized individuals, including people of color, were displaced. The societal trust in both the government and financial institutions plummeted. State governments that defaulted were barred from accessing the international financial market. Countless Americans lost faith in the incumbent government and financial establishments. President Jackson faced widespread criticism and was subsequently ousted from the 1840 presidential election.

With the rapid propagation of the economic crisis, the schism between the burgeoning bourgeoisie in the North and the planters in the South significantly intensified, causing severe ruptures within the social fabric of North America. The financial panic birthed novel social movements and political currents, laying the groundwork for the subsequent Civil War. Vast latent perils were thus sown.

The U.S. financial panic also reverberated across Europe and Latin America. British exports of goods experienced a substantial downturn. Numerous Latin American nations found themselves unable to meet their immense debts, resulting in defaults and bankruptcies of numerous banks and corporations within these countries. The reverberations of the American financial panic of 1837 continue to reverberate throughout the world to this day.

The primary catalyst behind the financial panic was the absence of oversight and regulation by external institutions and pertinent laws concerning state banks in the United States. An important contributing factor to the escalation of the financial panic was the U.S. government’s direct involvement in financial institutions that transcended state boundaries. The occurrence of a financial panic is intimately tied to the failure of the U.S. government to establish a deposit insurance system. We must adhere to a “multi-method linkageapproach to collaboratively address the challenges and congestion issues encountered in deposit insurance. Priority should be given to preventing the spillover and amplification of risks between different sectors, particularly commercial banks and investment banks, while striving to minimize the occurrence of bank runs.

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