Panic of 1837: Jackson's Specie Circular, a Cotton Crash and Hessian Flies

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From 1834 to 1836 the United States boomed on silver from trade with Mexico and China, federal revenue from public land sales and tariffs, and British capital marketed through Anglo-American houses such as Baring Brothers to buy state bonds for canals and roads, all resting on cotton exports that earned British pounds. In 1836 the Bank of England, alarmed by falling specie reserves, raised its rate from 3 to 5 percent, forcing American banks to follow and freezing credit. Cotton prices then fell 25 percent in February and March 1837, while the Hessian fly and winter kill ruined the American wheat crop just as Europe enjoyed strong harvests and stopped buying.

At home, Andrew Jackson's 1832 veto of the Second Bank of the United States recharter freed state banks to lend loosely, and his 1836 Specie Circular required gold or silver for western land purchases, pulling coin out of East Coast banks as the Deposit and Distribution Act moved federal funds into so-called pet banks. On May 10, 1837, New York banks suspended specie payments. Of roughly 850 banks, 343 closed and 62 failed partially, deflation lasted until about 1844, defaulting states were locked out of international markets for a decade, and Martin Van Buren, inaugurated five weeks before the panic, refused federal relief. Recovery finally came after gold was discovered in California in 1848.

• New York bank losses neared $100 million within two months of the suspension.
• New Orleans was paralyzed and plantations went out of cultivation, while Ohio, Indiana and Illinois held out until prices collapsed in 1839.
• A false recovery in 1838 ended when the Bank of England and Dutch creditors raised rates again.
• Rioting by the unemployed in major cities helped push the creation of more professional police forces.
• Even during the depression, railroads expanded, pig iron output grew and coal began replacing wood.