What Caused the Panic of 1837?
The origins of the Panic of 1837 can be located in the three years of rapid economic expansion in the United States from 1834 to 1836. Legislation that devalued the dollar in 1834, combined with the instability wrought by Antonio Lopez de Santa Anna’s rise to power in Mexico, attracted gold and silver from abroad. As a general rule banks printed more paper money when precious metals accumulated in their vaults. The money supply in the United States grew at an average annual rate of 30 percent between 1834 and 1836, a marked increase from the 2.7 percent growth during the previous three-year period. Inflation ensued.
New financial institutions engaging in risky lending practices facilitated the mutually reinforcing expansion of land sales, transportation projects, cotton cultivation, and slavery. Unshackled from any regulatory oversight at the national level, state governments began issuing dozens of charters for new state banks. This was especially true in the South and West. In 1836 alone, more than 100 banks opened their doors. Statistics show that state banks were appropriating fixed quantities of monetary reserves and shares of capital stock to issue more and more loans during these years, adding to their liabilities and risks.
Many of these risky financial institutions were founded upon the forced removal of Native Americans and the extension of slavery. In expansionary times a cyclical pattern emerged: enslavers took out loans to buy land and cotton, bought slaves to pick the cotton, sold the cotton, and after paying back their loans, used the proceeds to buy more land, cotton, and slaves. The so-called “property banks” (also known as land banks or plantation banks) throughout the South that set much of this process in motion were partially capitalized by land and slave mortgages, and partially by state-backed bonds. Northern mercantile firms and brokerage houses purchased these bonds and then sold them to European investors, showing how northern and European capital spurred and profited from slavery.