The Panic of 1837 was the severest depression of the 19th century. A primary cause was the chartering of numerous banks which put more paper money into circulation through loans to finance speculation in the real estate market and infrastructure projects (canals, roads, etc.). The US government at this time had no income tax and the sale of US government owned land was a major source of revenue for the government.
US owned land had a fixed price. For example, a person could pay 25 cents an acre and buy 10 acres for $2.50. (Keep in mind the value of money was different in the 19th century.) The purchaser could then resell the land for a higher profit based on demand. In a prime location, a person could sell the land for 50 cents an acre and make a profit of $2.50. Big money back in those days!
This bank mania and quest for easy profits was fueled by the Jackson Administration’s efforts to eliminate the Second Bank of the US which was the Federal Reserve Bank of its time. Jackson ordered the government to withdraw its funds from the Second Bank of the US. This meant that the bank which had previously served as the fiscal agent of the government, no longer served in that capacity. State banks filled the void by acting as the fiscal agents of the US government in the purchase of land. Loans for land purchases were handled with state-bank paper money. The paper money’s value fluctuated so it was of dubious value.
The land speculation came crashing down when the US Government issued the Specie Circular Law in 1836. (Specie is gold and silver coins.) The law required that the US Treasury had to be paid for the sale of its land only in specie. Many of the state banks did not have enough gold and silver to pay the US Treasury so 40% of them defaulted and went out of business creating the depression or Panic of 1837.
Martin Van Buren, US President after Jackson, was asked to bail the banks out. He refused. The no- bailout response actually resulted in a quicker recovery for the nation, unlike the 1930’s Great Depression where the US government’s intervention prolonged the depression. (Cole and Ohanian Research)
History demonstrates that government bailouts and intervention in the economy retards recovery from a recession or depression. Yet the myth endures of the need for the government to pump billions into the economy to jump start it. The so-called experts still ignore the lesson of 1837. When will they learn?