Amidst the Panics of 1837 and 1839, the Whigs enjoyed significant gains in Congress, which led to Robert M.T. Hunter, a pro-states’ rights southerner, becoming Speaker of the House. Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 506. Further, besides the changing composition of Congress, the federal government’s policies would change, as a result of the Panics.
With the Panic of 1837 manifesting itself, in September 1837, President Martin Van Buren called a special session of Congress, asking for legislation to “authorize removing the taxpayers’ money from all banks, placing it in an Independent Treasury.” Id. at 507. With this, each major city would have a Sub-Treasury they could draw from for convenience. Id. This proposal would stall out in Congress, amidst dissension by Whigs and “soft money Democrats,” and it would not be enacted until July 1840 as the Independent Treasury Law. Id. At least part of this was due to President Van Buren’s relaxed style in the White House, as it was only forced through after the Panic of 1839 had come and manifested itself, further deepening the economic troubles. See id. citing Major Wilson, The Presidency of Martin Van Buren (Lawrence, Kans., 1984), 99, 114.
As the federal government eliminated the pet banks, this meant that states would take up bank regulation. Most Democrats opposed the governments taking such a role, as they were generally more “interested in building their political party, not in pioneering government regulation of the banking industry.” Daniel Walker Howe, What Hath God Wrought: Transformation of America, 1815-1848, 507.
Then, eight states plus the Florida Territory defaulted on interest payments on bonds, which were mostly held overseas. Id. at 508. The federal government did not bail out these defaulting states or the Florida Territory, much to the detriment of American creditworthiness. Id. Many states would resume payments on interest as the economy rebounded, but some (Arkansas, Mississippi, and Florida—which became a state in 1845) repudiated the principal owed on their bonds. Id.
The bondholders would not soon forget this. When the “Confederacy tried to market securities in London, British banks remembered that their worst credit experiences had been with southern states and that Jefferson Davis of Mississippi had defended repudiation. Accordingly, they limited their commitment.” Id. citing William Graham Sumner, History of Banking in the United States (New York, 1896), 395; Jay Sexton, “Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837-1873” (D. Phil. thesis, Oxford University, 2003), chap. 1.
The Panics of 1837 and 1839 would fundamentally alter the American economy, and it would help America develop a more sophisticated system that could cushion future blows. In some ways, it was simply reacting to President Andrew Jackson’s policies, which made the American system prone to not just slowdowns but panics. Nonetheless, these formative years for the American economy would refine it, bringing Americans to adopt a more sustainable system. While these policies would hurt American creditworthiness and raise doubts as to the prosperity of the American economy, this would not be a permanent consequence.