Panic of 1837: Difference between revisions
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In the '''panic of 1837''', during the first three weeks of April 1837, 250 business houses failed in New York. Within two months the losses from bank failures in New York alone aggregated nearly $100 million. "Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered." <ref name="Bancroft_panic">Hubert H. Bancroft. [http://www.publicbookshelf.com/public_html/The_Great_Republic_By_the_Master_Historians_Vol_III/thepanic_ce.html The financial panic of 1837], from the ''The Great Republic By the Master Historians Vol. III''. Referenced 2011-01-13.</ref> | |||
==Causes== | |||
The price inflation began long before the panic of 1837. The wholesale prices reached a trough of 82 in July 1830 and then rose by 20.7 percent in three years to reach 99 in the fall of 1833. The reason for the price rise is simple: The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent. Breaking the figures down further, the total money supply had risen from $109 million in 1830 to $155 million a year and a half later, a spectacular expansion of 35 percent. This monetary expansion was spurred by the still-flourishing [[Second bank of the United States|Bank of the United States]], which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent. The total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84 percent, or 21 percent per annum.<ref name="Rothbard_History">Murray N. Rothbard. [http://mises.org/books/historyofmoney.pdf A History of Money and Banking in the United States: The Colonial Era to World War II] (pdf), p.95-96. Referenced 2011-01-13.</ref><!-- All these numbers should be cleaned up, ordered and duplicities removed... --> | |||
The notes and deposits of the BUS had risen, from January 1823 to January 1832, from $12 million to $42.1 million, an annual increase of 27.9 percent. This sharp inflation of the base of the banking pyramid led to a large increase in the total money supply, from $81 million to $155 million, or an annual increase of 10.2 percent. Clearly, the driving force of this monetary expansion of the 1820s was the BUS, which acted as an inflationary spur rather than as a restraint on the state banks. | |||
Furthermore, the inflationary boom of the 1830s began, not with Jackson’s removal of the deposits in 1833, but three years earlier, as an expansion fueled by the central bank. Thus, the total money supply rose from $109 million in 1830 to $155 million at the end of 1831, a spectacular expansion of 35 percent in one year. This monetary inflation was sparked by the central bank, which increased its notes and deposits from January 1830 to January 1832 by 45.2 percent. | |||
There is no question, however, that the money supply and the price level rose spectacularly from 1833 to 1837. Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later, an astonishing rise of 84 percent, or 21 percent per annum. Wholesale prices, in turn, rose from 84 in the spring of 1834 to 131 in early 1837, a rise of 52 percent in a little less than three years—or an annual rise of 19.8 percent. | |||
The monetary expansion, however, was not caused by state banks going hog wild. The spark that ignited the inflation was an unusual and spectacular inflow of Mexican silver coins into the United States—brought about by the minting of debased Mexican copper coins which the Mexican government tried to keep at par value with silver. The system of fractional reserve banking, however, fundamentally was to blame for magnifying the influx of specie and pyramiding notes and deposits upon the specie base. In 1837, the boom came to an end, followed by the inevitable bust, as Mexico was forced to discontinue its copper coin issue by the outflow of silver, and the [[Bank of England]], worried about inflation at home, tightened its own money supply and raised interest rates. The English credit contraction in late 1836 caused a bust in the American cotton export trade in London, followed by contractionist pressure on American trade and banks. | |||
In response to this contractionist pressure—demands for specie—the banks throughout the United States (including the old BUS) promptly suspended specie payments in May 1837. The | |||
governments allowed them to do so, and continued to receive the notes in taxes. The notes began to depreciate at varying rates, and interregional trade within the United States was crippled. The banks, however, could not hope to be allowed to continue on a fiat basis indefinitely, so they reluctantly began contracting their credit in order to go back eventually on specie. Finally, the New York banks were compelled by law to resume paying in specie, and other banks followed in 1838. During the year 1837, the money supply fell from $276 million to $232 million, a large drop of 15.6 percent in one year. Specie continued to flow into the country, but increased public distrust in the banks and demands to redeem in specie put enough pressure on the banks to force the contraction. In response, wholesale prices fell precipitately, by over 30 percent in seven months, declining from 131 in February 1837 to 98 in September of that year.<ref name="Rothbard_Mystery">[[Murray Rothbard]]. [[The Mystery of Banking]] ([http://library.mises.org/books/Murray%20N%20Rothbard/Mystery%20of%20Banking.pdf pdf]), Second edition, p. 198-211. Referenced 2013-07-07.</ref> | |||
==References== | ==References== | ||
Revision as of 08:54, 7 July 2013
In the panic of 1837, during the first three weeks of April 1837, 250 business houses failed in New York. Within two months the losses from bank failures in New York alone aggregated nearly $100 million. "Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered." [1]
Causes
The price inflation began long before the panic of 1837. The wholesale prices reached a trough of 82 in July 1830 and then rose by 20.7 percent in three years to reach 99 in the fall of 1833. The reason for the price rise is simple: The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent. Breaking the figures down further, the total money supply had risen from $109 million in 1830 to $155 million a year and a half later, a spectacular expansion of 35 percent. This monetary expansion was spurred by the still-flourishing Bank of the United States, which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent. The total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84 percent, or 21 percent per annum.[2]
The notes and deposits of the BUS had risen, from January 1823 to January 1832, from $12 million to $42.1 million, an annual increase of 27.9 percent. This sharp inflation of the base of the banking pyramid led to a large increase in the total money supply, from $81 million to $155 million, or an annual increase of 10.2 percent. Clearly, the driving force of this monetary expansion of the 1820s was the BUS, which acted as an inflationary spur rather than as a restraint on the state banks.
Furthermore, the inflationary boom of the 1830s began, not with Jackson’s removal of the deposits in 1833, but three years earlier, as an expansion fueled by the central bank. Thus, the total money supply rose from $109 million in 1830 to $155 million at the end of 1831, a spectacular expansion of 35 percent in one year. This monetary inflation was sparked by the central bank, which increased its notes and deposits from January 1830 to January 1832 by 45.2 percent.
There is no question, however, that the money supply and the price level rose spectacularly from 1833 to 1837. Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later, an astonishing rise of 84 percent, or 21 percent per annum. Wholesale prices, in turn, rose from 84 in the spring of 1834 to 131 in early 1837, a rise of 52 percent in a little less than three years—or an annual rise of 19.8 percent.
The monetary expansion, however, was not caused by state banks going hog wild. The spark that ignited the inflation was an unusual and spectacular inflow of Mexican silver coins into the United States—brought about by the minting of debased Mexican copper coins which the Mexican government tried to keep at par value with silver. The system of fractional reserve banking, however, fundamentally was to blame for magnifying the influx of specie and pyramiding notes and deposits upon the specie base. In 1837, the boom came to an end, followed by the inevitable bust, as Mexico was forced to discontinue its copper coin issue by the outflow of silver, and the Bank of England, worried about inflation at home, tightened its own money supply and raised interest rates. The English credit contraction in late 1836 caused a bust in the American cotton export trade in London, followed by contractionist pressure on American trade and banks.
In response to this contractionist pressure—demands for specie—the banks throughout the United States (including the old BUS) promptly suspended specie payments in May 1837. The governments allowed them to do so, and continued to receive the notes in taxes. The notes began to depreciate at varying rates, and interregional trade within the United States was crippled. The banks, however, could not hope to be allowed to continue on a fiat basis indefinitely, so they reluctantly began contracting their credit in order to go back eventually on specie. Finally, the New York banks were compelled by law to resume paying in specie, and other banks followed in 1838. During the year 1837, the money supply fell from $276 million to $232 million, a large drop of 15.6 percent in one year. Specie continued to flow into the country, but increased public distrust in the banks and demands to redeem in specie put enough pressure on the banks to force the contraction. In response, wholesale prices fell precipitately, by over 30 percent in seven months, declining from 131 in February 1837 to 98 in September of that year.[3]
References
- ↑ Hubert H. Bancroft. The financial panic of 1837, from the The Great Republic By the Master Historians Vol. III. Referenced 2011-01-13.
- ↑ Murray N. Rothbard. A History of Money and Banking in the United States: The Colonial Era to World War II (pdf), p.95-96. Referenced 2011-01-13.
- ↑ Murray Rothbard. The Mystery of Banking (pdf), Second edition, p. 198-211. Referenced 2013-07-07.
Links
- Democracy and Laissez-Faire: A New York Case Study by Arthur A. Ekirch Jr., 1977
- The Jacksonians, Banking, and Economic Theory: A Reinterpretation (pdf) by Jeffrey Rogers Hummel, 1978
- An Austrian Perspective on Some Leading Jacksonian Monetary Theorists (pdf) by James P. Philbin, 1991
- The Panic of 1837 and the Contraction of 1839-43: A Reassessment of its Causes from an Austrian Perspective and a Critique of the Free Banking Interpretation (pdf) by H.A. Scott Trask, March 2002
- The Independent Treasury: Origins, Rationale, and Record, 1846-1861 (pdf) by H.A. Scott Trask, March 2002
- New Technology, Old Scam by Clifford F. Thies, October 2002
- In Defense of Bank Failures by H.A. Scott Trask, December 2003
- The 19th-Century Bernanke by Daniel James Sanchez, September 2009
- Martin Van Buren: The American Gladstone by Jeffrey Rogers Hummel, from Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom
- Panic of 1837 on Wikipedia