The Panic of 1837

1837

The closure of the First National Bank of the United States in 1811 was a big mistake, and the 1812 war against Britain was a national financial catastrophe. The U.S. government quickly realized that a national bank was needed to stabilize the nation’s currency and funding position.

A Second National Bank of the United States was born (1816-1841). Although the U.S. did not have a national currency, the bank issued promissory notes that traded like cash.

The national bank rubbed against the beliefs of “Jeffersonian” democrats and free-spirited men like Andrew Jackson, who was elected president in 1829. Jackson is famous for disdaining fiat currency and declaring the land from coast to coast as America’s God-given right: its Manifest Destiny.

Jackson vetoed the bank’s charter extension, and moved federal deposits into crony state banks, nicknamed “pet banks.” Without deposits or a future, the credit of the Second National Bank of the United States immediately went from Triple-A to junk. Its debts were called in, and in 1836, the bank was dissolved.

In the first two months, losses due to bank failures in New York were about $100M, 40% of banks in the United States failed, and many states defaulted on their bonds.

Unsurprisingly, European nations lost confidence in American finance and began repatriating their gold and silver reserves. Crisis ensued, sparked by the loss of confidence, easy credit policies, rapid economic expansion and Western land price bubbles. This crisis lasted for decades.

Although the U.S. had many financial crises in the 19th century, the Panic of 1837 is considered the worst.

References:
Wikipedia - Panic of 1837