In Martin Van Buren’s inaugural address, in March of 1837, he boasted of the prosperity and expansion of commerce that had occurred under his predecessor, Andrew Jackson. Just months later, the Panic of 1837 would begin. Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 502.
In retrospect, the Panic came about as a result of “the chronic shortage of capital in the United States and the country’s dependence on inflows of foreign money.” Id. Tremendous amounts of pressure was placed on the American economy, as it had taken a bigger role in the global economy.
For example, at the time, the United States was importing silver from mines in Mexico, then selling them to China, to pay the unfavorable balance of trade with China. Id. Then, in the 1830s, China changed its preference from silver to bills of credit from British banks, and American traders were able to provide those bills of credit because the British were lending Americans money. Id. However, silver built up in the reserves, and American banks began issuing more currency, which increased domestic prices. Id. Meanwhile, Americans were buying British goods at a faster rate, and British investors made up the trade deficit “by extending credit to cotton factors and buying American securities.” Id. When a poor harvest happened in Britain, the Bank of England curtailed the credit of British firms with American investments, and pressed American debtors. Id.
The Democrats blamed the banks, and Whigs blamed former President Jackson. Id. at 503. For a period of time, historians thought that generally the Democrats were right, but analysis revealed that the pet banks that held American money had not acted inappropriately. Id. This led many to conclude that Jackson’s policies had more of an impact on the genesis of the Panic of 1837 than did the pet banks.
To some extent, this is true. There was a need to pay the Treasury for land purchases in specie, which drained specie out of the banking system. Id. This drain left the banks exposed to sudden shifts in the economy, and with Jackson’s policies, which were skeptical of state banks, the American public was quick to panic and start a “run” on banks. Id.
In May of 1837, this was exactly what happened. New Yorkers withdrew “a million dollars in gold and silver,” far more than any bank could withstand. Id. at 504. New York banks had to quickly suspend specie payment, and banks around the country would follow suit. Id.
In the face of this crisis, President Van Buren’s administration was left with no choice: America had to borrow money. The debt that President Jackson had worked so hard to pay off now reappeared. Perhaps most shockingly, not since the Panic of 1837 has the United States had a national debt of zero. Id. citing John Mayfield, The New Nation (New York, 1982), 125; Herbert Sloan, Principle and Interest (New York, 1995), 216.
While typically a president’s policies do not have a significant effect on the wellbeing of the American economy, the seismic shifts in policies that occurred in President Jackson’s administration created much of what led to the Panic of 1837. With this, the Whigs gained stature as they could persuade many that the economic turmoil was as a result of Democratic policies.
Nonetheless, significant damage was done to the American economy. In retrospect, the Panic of 1837 was proof that the American banking system was not equipped at the time to deal with fluctuations and corrections in the market. In some ways, perhaps this reflected the fact that the American economy was becoming increasingly global in reach and not having a system robust enough to sustain economic success. Americans would come to remedy this issue. However, for the time being, it was the Whigs who would gain traction and have an opportunity to supplant the Democrats, formerly led by Jackson.