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Book Analysis: The Panic of 1837

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"Over-trading, speculation, and investments in unproductive undertakings became a dominant note in American society" - Reginald Charles McGrane

In his historical novel titled The Panic of 1837, former University of Cincinnati history professor Reginald Charles McGrane (1889-1967) recounts both the political and financial turmoil behind “one of the most disastrous crises this nation has ever experienced.” This crisis had entailed seven years of severe financial distress known today as the Panic of 1837 (1837-1844).

Students of history will readily recall the hotly contested feud between then President Andrew Jackson (1829-1837) and notorious banker Nicholas Biddle. This struggle had started in 1832, the year that the Second Bank of the United States had been up for re-charter. This dilemma had been at the very “front-and-center” of the general election pitting Andrew Jackson against Senator Henry Clay who strongly supported the bank. Below is a colorful cartoon personifying Jackson’s infamous struggle with Biddle’s Bank that takes the form of a “hydra-headed monster.” (See here for an explanatory video.)

Biddle had made a painstaking effort to keep this prominent institution afloat in the midst of widespread skepticism surrounding its constitutionality and reliability. Jackson, being its most outspoken critic, viewed the Bank as a monopoly that had been crafted with the intent of profiting bankers and politicians, not ordinary Americans. In order to see the peoples’ will fulfilled, Jackson acted swiftly by repealing the Bank immediately. This had taken place in 1836, the year before Jackson left office.

Less than a year following the Bank’s contentious repeal (1837), an epic financial disaster ensued. In the five years from the beginning of 1837 to the end of 1841, stock prices experienced a 47 percent decline. Similar to the Great Depression, there was severe deflation in both prices and wages while unemployment rose to as high as 25% in some regions. This severe economic plummet stirred widespread resentment against Jackson upon his departure from the White House. Below is one cartoon depicting the misery and assigning the blame to Jackson (note that his hat, spectacles, and clay pipe with the word “glory” appear in the sky overhead).

However, the seeds of this massive financial collapse had been sown a couple years beforehand. It was then that industrializing states all along the east coast had accepted millions of dollars worth in loans “supplied by the numerous banks, which sprang into existence between 1830 and 1836.” They took out these loans to fund a myriad of infrastructure improvement projects such as the construction of turnpike roads, railroads, and river improvements. These internal improvement efforts had lucrative contracts associated with them and thus generated further speculation among the citizenry such as advance purchase of necessary materials via futures contracts.

The excessive borrowing prompted by high hopes doubled the debt owed to these banks from $28 million in 1830 to $56 million at the Panic’s onset in 1837. The willingness of states to rapidly industrialize eventually superseded their fiscal limitations. The banks had issued a type of currency based on these loans known as “specie,” and the banks’ announcement of a devaluation of the specie initiated the Panic.

Another type of speculation that became widespread was the purchase of land out in the West. Similar to residential real estate in the mid-2000s, land was bought not for its potential future income but for the possibility of re-selling it for a quick profit. Unfortunately, the players in this game (farmers, manufacturers, and merchants) were already burdened with debt which would become impossible to service. Mcgrane asserts that “the rage to purchase these lands became excessive, and most extravagant prices were paid.” In fact, "the quantity of public lands sold in 1835 (2 years before the panic) was three times the amount of 1834." Like all market bubbles, this one too would eventually pop, leaving a wake of misery.

The harmful effects of this bubble’s bursting dealt a devastating blow to both Northeastern and Southeastern states alike. One example was Vermont in 1837 "whose business and credit system had taken a hard blow.” However, it was in the lower Cotton Belt of the South that the hardest blow had been dealt. This was where "the prospects that the price of cotton would fall still lower kept merchants from buying” which devastated this entire region's economy.

In the midst of this turmoil, Biddle had made efforts to salvage his finances by way of manipulating cotton prices and obstructing specie redemption. Unfortunately these actions would not save Biddle from getting arrested for fraud. While he had been acquitted, his final years had consisted of a series of civil suits. These scandals continued to haunt him up until his eventual death in 1847, only two years after his arch-foe, Andrew Jackson passed away.

The two lessons I draw from this book are to avoid getting caught up in whatever the investment-related excitement of the day is (e.g. dot-com stocks of the 1990s or homebuilder stocks of the mid-2000s) and to avoid pursuing an investment strategy based on anticipated government actions (e.g., the Fed raising interest rates). Index Fund Advisors specializes in helping investors to stay disciplined and resist any temptations to engage in speculation.