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The polite academic debate about the Panic of 1837 and the subsequent depression comes down to a choice of hypotheses about what happened to the money supply. Did Andrew Jackson’s specie circular cause a fatal draining of the gold reserves of American banks? Did the political news from America shift the expectations of British investors so that they stopped sending gold to the U.S. to buy land and bonds? Or, as Peter Rousseau claims, the catalyst for the first great crash in American history was not a shortage of gold at all, but a movement of specie within the country from east to west. The New York City, Baltimore, New Orleans and Philadelphia (but not Boston) banks suddenly found themselves with near empty vaults not because money fled across the Atlantic to Europe, but because, against all smart money expectations, specie continued to flow to the state-chartered banks in the Mississippi basin even after Andrew Jackson had shortened the credit chain.
The data seems to confirm Professor Rousseau’s hypothesis. The specie circular’s requirement that purchasers pay gold instead of bank notes did reduce the volume of sales by the Public Land Office in 1837; but it did not immediately dampen the volume of overall speculation. That remained steady and, in some places, increased. Purchasers shifted their attention from public land auctions to bidding on private properties, especially urban real estate. There would be an international exchange crisis, but that would come several years later.
What is not easy to understand is how the continuing bull market in asset prices could produce a spike in consumer retail prices. While asset prices remained relatively unchanged, the price for consumer goods soared during the six months surrounding the 1836 presidential election and the first quarter of 1837. By the middle of February, three weeks before President Jackson would leave office, retail inflation had become so severe and frightening that it produced a riot in New York City sufficiently alarming for the New York Herald to see it as the beginning of a “revolution”.
THE HERALD
Tuesday, February 14, 1837
Great Public Meeting – Twenty Thousand assembled – The Revolution begun
Yesterday afternoon, one of the largest public meetings that we ever saw assembled in New York (and we have seen hundreds), met in front of the City Hall in the Park. From twenty to twenty-five thousand persons, of all ranks in society, met together to consult on the terrible oppressions of the times – on the high price of fuel, food, flour, rent, etc. The meeting began to assemble at 3 o’clock, a full hour before the period affixed by the call, and through the whole afternoon, the people crowded in thousands ….. A certain number of individuals, comprising probably several thousand, went down to Washington Street near the market, and made an illegal attack upon the extensive flour store of Eli Hart & Co. About five thousand persons broke in the building, smashed the windows, and turned out fifty or sixty barrels of flour into the street. Little boys were seen filling bags or sacks and staggering home under the burden. A general cry was raised against the flour speculators. The police came to quell the riot. The Mayor attempted to quiet the mob, but they cried out “bread”, “bread”, “bread”. For some time the crowd had complete possession of the premises. Justice Bloodgood was nearly knocked down, and the police were set at defiance. We understand that at the commencement of the attack upon Eli Hart & Co.’s store, an agent of the firm declared that if the multitude would depart peaceably, the flour should be sold to them at $8 per barrel. The only answer returned was – “too late – too late.”
The facts were as the Herald reported; but it had the hyperbole that is required for all forms of successful journalism. In 1837, consumers living in New York City did not buy flour by the barrel; they bought bread by the loaf. Even for the bakers and flour merchants like Eli Hart & Co., who dealt in wholesale lots, $8 a barrel was not the price that Andrew Jackson would have quoted. It was not the “gold” price but the currency price – the quotation for payment in bank notes from a New York bank.
In 1837, as in 2022, there was general certainty that prices were determined by the money supply – the quantity of legal tender circulating in the economy. What was very different was the belief that the poor and near poor would benefit from a leveling and even a shrinking of the money supply. Condy Raguet and President Jackson’s other populist supporters had demanded a return by the federal government to an absolute gold standard for money because that was guaranteed to produce greater economic equality. They had lobbied successfully for the abolition of the Bank of the United States because the removal of a central bank would be the end to the government’s printing of money. Limit commerce to the exchange of coin, and the poor and near poor would benefit from reduced prices.
By the end of Jackson’s second and final term, he and his populist supporters had gotten most of what they wanted. The Bank of the United States’ charter had not been removed; it would no longer be the depository for the custom houses’ collections of money paid for import tariffs, and its notes would no longer be legal tender. Thanks to the Deposit and Distribution Act, passed on the 4th of July 1836, the federal Treasury’s surplus of gold coin and bullion would be distributed to every state and territory in proportion to the population of the jurisdiction. Most important of all, from the point of view of the believers in hard money, the printing of currency by the state-chartered banks would be greatly restricted. Under the specie circular, every bank authorized by a state or territory to receive the deposits of federal Treasury gold would have to stop issuing and exchanging bank notes with a denomination of less than five dollars.
But even the gold price for a basic food commodity had nearly doubled in the two months from December 7, 1836 – the date on which had Martin Van Buren had been elected – to the February 14, 1837 date of the riot in New York City. If gold was not being drained from the United States and there was no crop failure, how could the specie price of flour rocket upwards? By all logic under the quantity theory, the specie prices for flour and other consumer goods should have declined. How could this happen when the supply of gold coin had remained unchanged and the supply of common currency had been reduced, when banks that had been issuing paper pennies were now only exchanging $5 bills?
The answer was the paradox of consumer credit and its feedback loop to the volume of physical exchange. By year-end 1836, banks and brokers in the Mississippi basin still had the money to finance land purchases, but – thanks to the specie circular restrictions – there was no longer any currency to lend to or receive as deposits from seasonable laborers. During 1830s, the United States Mint had greatly improved its production capabilities, but there was no way that it could stamp and distribute overnight the coins needed to replace the millions of dollars in fractional bank notes that could no longer be issued or exchanged. As one British visitor to Chicago noted in her diary on Thanksgiving 1836, the Americans were still wildly speculating on the prices for city lots; what could not be easily found were quarters, dimes, half-dimes and pennies needed to pay the daily and hourly wages for the people who were paid to cut, thresh, mill, and ship the grain.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
Read more articles by Stefan Jovanovic
The polite academic debate about the Panic of 1837 and the subsequent depression comes down to a choice of hypotheses about what happened to the money supply. Did Andrew Jackson’s specie circular cause a fatal draining of the gold reserves of American banks? Did the political news from America shift the expectations of British investors so that they stopped sending gold to the U.S. to buy land and bonds? Or, as Peter Rousseau claims, the catalyst for the first great crash in American history was not a shortage of gold at all, but a movement of specie within the country from east to west. The New York City, Baltimore, New Orleans and Philadelphia (but not Boston) banks suddenly found themselves with near empty vaults not because money fled across the Atlantic to Europe, but because, against all smart money expectations, specie continued to flow to the state-chartered banks in the Mississippi basin even after Andrew Jackson had shortened the credit chain.
