| Panic Of 1837 |
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The Panic of 1837 was an Economic Depression , one of the most severe financial crises in the History Of The United States . The Panic was built on a speculative fever. The bubble burst on May 10 , 1837 in New York City , when every bank stopped payment in Specie (gold and silver coinage). The Panic was followed by a five-year depression, with the failure of Bank s and record Unemployment levels. CAUSES Causes include the economic policies of President Andrew Jackson , including the Specie Circular and the withdrawal of government funds from the Second Bank Of The United States . Martin Van Buren , Jackson's hand picked heir apparent, who became President in March 1837, five weeks before the Panic engulfed the young republic's economy, was blamed for the Panic. His refusal to involve the government in the economy was said by some to have contributed to the damages and duration of the Panic. Democratic Jacksonians would probably have blamed bank irresponsibility, both in causing rampant speculation and by introducing paper money inflation. This was caused by banks issuing notes--paper money--they couldn't redeem in gold or silver coin (known then as "hard money"); these notes then lost value over time, so that more were needed to buy the same thing as had been bought before for less. There were many scraps of paper in circulation, each owner anxious to redeem them as soon as possible for "real" (i.e., hard) money; "dollar" was a relative term with bank currency. Inflationary boom of the 1830s The boom of the early 1830s was led by the construction of new canals and schemes that would eventually provide the first network of railroads. The Federal government encouraged the speculative fever by selling millions of acres of public lands in western states like Michigan and Missouri , giving us the term "Land Office business," meaning, they're giving it away!: mostly to speculators with ready cash, who resold and bought, in hopes of assembling well-located parcels that would quickly increase in value, real value as well as paper value, once the turnpikes and canals and the promised railroads brought settlers looking for land, who would drive the prices up. They set in motion local economies by settling, farming, and buying supplies from newly-sprung towns, usually located on those railroad lines and canals, and sometimes created more demand for some things than there were supplies of them, and more demand than supply causes inflationary prices as well. Soft (paper) money, issued by banks of problematical reputation, was overheating the nation's economy. The U.S. Treasury was accumulating a budget surplus, which members of Congress voted to distribute in the spring of 1837, passing the funds to their home districts, where the windfall was quickly invested -- in canals, turnpikes and railroad companies. Jacksonian hard money policy Meanwhile, the compromise Tariff Of 1833 was reducing the Federal government's income, which thus depended more heavily on excise taxes, while at the same time Andrew Jackson 's administration worked to pay off the National Debt , which was at long last accomplished in 1835. The Jackson Administration had an ideological commitment to hard money, that is, gold and silver with payments ''in specie'' (coins), and distrusted the multitude of paper money and notes from local banks. Jackson and his Secretary of the Treasury, Levi Woodbury , issued the Specie Circular , commanding that as of August 15, 1836, the U.S. Treasury cease to accept banknotes, afterwards accepting only gold and silver coin (specie) as payment for public lands. Many state banks and the 'wildcat' local banks did not have specie to back their paper. Instead of the expected flood of gold and silver coming to the national treasury, land sales dropped to a quarter of the previous year's level, companies started paying their workers in scrip, I.O.U's began to circulate, and specie payments plummeted. The Western demand for coin was quickly transferred to New York City, linked now to the west through the Erie Canal . During the first three weeks of April, 250 business houses failed in New York. Finally, on May 10, 1837, every bank in New York suspended all payment of notes in specie. Paper money could no longer be redeemed for gold, or silver. Economic historian Peter Rousseau (2002) says neither the official distribution of the federal surplus nor an international shock was the main cause. He points instead to a series of interbank transfers of government balances and to a policy-induced increase in the demand for coin in the west, which drained the largest New York City banks of their specie reserves and rendered the panic inevitable. EFFECTS AND AFTERMATH Within two months the failures in New York alone aggregated nearly $100,000,000 in value. "Out of eight hundred and fifty banks in the United States, three hundred and forty-three closed entirely, sixty-two failed partially, and the system of State banks received a shock from which it never fully recovered." {Link without Title} A central banking cushion of any sort might have prevented some local failures. A few large local banks, like the Suffolk Bank of Boston, acted like central banks, lending reserves to other banks, and alleviated the effects of the Panic of 1837 in New England . Though van Buren did not engender the Panic of 1837, he was harshly judged (and failed to be re-elected) because he was ideologically committed to keeping the government out of banking regulation, a resolve that many economic historians feel extended the effects of the Panic, which was not over until 1843. Van Buren even kept Jackson's Secretary of the Treasury, Levi Woodbury . Economist Milton Friedman explains (1960 p 10):
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