Panic of 1837

The Panic of 1837 was a severe financial crisis in the United States that triggered a multi-year recession, one of the most painful in the nation's history. Kicked off by a sudden collapse in cotton prices and a real estate speculative bubble bursting, the crisis was amplified by domestic and international policies of the time. In the preceding years, easy credit from state banks fueled a frenzy of land speculation. President Andrew Jackson's war against the Second Bank of the United States, the country's acting central bank, had removed a key financial regulator from the system. His subsequent Specie Circular of 1836, which demanded government land be paid for in gold or silver (hard currency), pricked the bubble. As confidence evaporated, people rushed to withdraw their money, leading to widespread bank runs. Hundreds of banks failed, businesses shuttered, and unemployment soared, leaving a lasting scar on the American economy and psyche.

Like most market crashes, the Panic of 1837 wasn't caused by a single event but by a perfect storm of speculation, questionable policy, and international economics.

In the 1830s, America was gripped by “land fever.” Westward expansion and the promise of untold agricultural wealth created a speculative mania. With the national bank neutered by President Jackson, state-chartered banks (often called “pet banks”) began lending recklessly, printing paper money that wasn't fully backed by gold or silver. This flood of easy money made it simple for anyone to buy up vast tracts of land, not to farm, but to flip for a quick profit. Land sales exploded, rising from 4 million acres in 1834 to a staggering 20 million in 1836. It was a classic bubble, with prices completely detached from any reasonable measure of productive value.

At the time, the U.S. economy was heavily dependent on exporting cotton to feed the booming textile mills of Great Britain. American planters often bought land and equipment on credit extended by British banks. In 1836, the Bank of England, concerned about its own dwindling reserves, raised interest rates. This move tightened credit across the Atlantic, causing the price of cotton to plummet by nearly 25%. American planters and the merchants who financed them suddenly faced ruin, sending shockwaves through the financial system.

A central figure in this drama is President Andrew Jackson, who held a deep distrust for centralized banking. He viewed the Second Bank of the United States as a corrupt institution that favored the wealthy elite. In 1833, he vetoed the recharter of the Bank and withdrew all federal funds, depositing them into various state banks. While done in the name of the common man, this action dismantled the primary institution capable of regulating the nation's credit and money supply, leaving the system unstable and prone to the very speculation Jackson despised.

With the bubble stretched to its limit, it only took a couple of policy missteps to bring the entire house of cards down.

In July 1836, Jackson issued the Specie Circular, an executive order demanding that all future purchases of government land be made with gold or silver coin. The goal was to curb the rampant speculation fueled by paper money. The immediate effect, however, was a panic. It created a massive demand for hard currency, which the banks, operating under a system of fractional-reserve banking, simply did not have. Confidence in paper money evaporated overnight.

On May 10, 1837, the dam broke. Banks in New York City, unable to meet the demand for gold and silver, suspended all specie payments. They refused to redeem their paper notes for hard currency. This financial contagion spread like wildfire across the country. A full-blown panic was on.

• People rushed to withdraw their savings, causing bank runs that toppled hundreds of institutions.
• Without access to credit, businesses and factories failed en masse.
• Unemployment skyrocketed, reaching as high as 25% in some cities.
• Prices for goods and land collapsed, a period of painful deflation.

The Panic of 1837 plunged the United States into a deep depression that lasted until the mid-1840s. It was a brutal reminder of how interconnected markets are and how quickly investor sentiment can shift from euphoria to terror.

History doesn't repeat itself, but it often rhymes. The Panic of 1837 offers timeless wisdom for the modern investor.

1. Bubbles Always Pop. Whether it's 19th-century land, 1990s dot-com stocks, or 21st-century crypto assets, speculative manias driven by easy money and herd mentality always end badly. A core tenet of value investing is to avoid assets whose prices are based on fantasy rather than a sober assessment of their intrinsic value.
2. Politics and Policy Matter. The “Bank War” and the Specie Circular were direct political actions that triggered a financial catastrophe. Today's investors must likewise pay attention to the macroeconomic environment. Changes in interest rates by a central bank, new regulations, or geopolitical tensions can have a profound impact on your portfolio.
3. Panic Creates Opportunity. This is the most powerful lesson. During a panic, fear drives investors to sell indiscriminately, pushing the prices of even the best businesses far below what they are truly worth. For the disciplined investor with a long-term mindset (and cash ready to deploy), a crisis is the sale of a lifetime. As Warren Buffett famously advised, the key is to be “fearful when others are greedy, and greedy only when others are fearful.”