The Panic of 1837: When the Banks Stopped Paying
The Panic of 1837 was a financial crisis that tested America’s banking system and a new president’s belief that lasting recovery required separating public money from private banks.
On May 10, 1837, New York City banks did something extraordinary. They stopped exchanging their paper notes for gold and silver coin, a step known as suspending specie payments. Historian Jessica Lepler describes the moment as the end of “two months of transatlantic panic.”1 Banks in other American cities soon followed.
“Specie” was the term for money in the form of gold or silver coin. Much of the country’s circulating paper currency consisted of banknotes issued by private, state-chartered banks. A note represented a promise: its holder could present it to the issuing bank and exchange it for coin. Suspending specie payments did not automatically make a banknote worthless, but it meant the holder could no longer demand immediate payment in gold or silver, increasing uncertainty about the note’s value and whether others would accept it at face value.
Martin Van Buren took office on March 4, 1837, as the financial crisis was unfolding. By May, the suspension of specie payments had turned an expanding commercial emergency into a direct challenge to the federal government’s own finances. The crisis forced Van Buren, and the country, to confront a question that the Panic of 1819 had raised two decades earlier: when the banks stop paying, what should the government do? His answer was narrower than many Americans hoped.
The Road to 1837
The Bank War
The story begins with a fight over the Second Bank of the United States, the national bank chartered by Congress in 1816. President Andrew Jackson distrusted the bank. When Congress passed a bill to renew its charter early, Jackson vetoed it on July 10, 1832, and the bank’s supporters could not override the veto.2 After winning reelection, Jackson moved to take the government’s deposits out of the Second Bank. In September 1833, he named Roger B. Taney secretary of the Treasury, and Taney carried out the change.2
Levi Woodbury, who became Treasury secretary in 1834, continued the policy, placing federal funds in selected state-chartered commercial banks rather than the Second Bank.3 Opponents called these institutions “pet banks.”4 State-bank lending and banknote circulation expanded during the mid-1830s. Critics connected that expansion to the transfer of federal deposits and the weakening of the Second Bank, although scholars disagree about how much those changes contributed to the eventual panic. The Second Bank’s federal charter ran out in 1836.5
A Surplus and a Land Boom
By the mid-1830s, the federal government was in an unusual position. In December 1834, Jackson announced that the national debt would be fully repaid as of January 1, 1835.2 The government was soon collecting more money than it spent. Booming public-land sales helped swell federal receipts. Rousseau cites an estimate that public-land sales reached about $25 million in 1836.4
On June 23, 1836, Jackson signed the Deposit Act, which regulated where federal money was kept and provided for placing surplus funds with the states.2 The transfers were to be made in four quarterly installments beginning January 1, 1837. According to Rousseau, only three were made, totaling some $28 million.4 The Treasury Department’s own history concludes that this surplus was “a contributing factor to wild speculation and an expansion of credit resulting in a panic in 1837.”3 Rousseau emphasizes a different effect: moving such large balances between banks drew down their reserves just as other pressures were building.
The Specie Circular
Jackson also grew concerned that public land was being bought with paper money of doubtful value. On July 11, 1836, at the president’s direction, Treasury Secretary Levi Woodbury issued the order known as the Specie Circular.6 It cited complaints of “frauds, speculations, and monopolies in the purchase of the public lands,” aided by “excessive bank credits.” After August 15, federal land offices were to accept “nothing except what is directed by the existing laws, viz, gold and silver, and in the proper cases Virginia land scrip,” a type of certificate that could be used toward land purchases. Until December 15, actual settlers or bona fide residents of the state could continue to pay as before for up to 320 acres.
The order’s stated purpose was to keep public land from becoming a monopoly “in the hands of speculators and capitalists, to the injury of the actual settlers,” and to discourage “the ruinous extension of bank issues and bank credits.”6 Critics argued that it pulled gold and silver from the banks of the East, especially New York, and sent it west to land offices, leaving eastern banks with less coin to back their notes. Encyclopedia Britannica describes the circular as “highly deflationary” and says it “at least in part produced” the credit crunch that followed.7 Congress repealed it by joint resolution on May 21, 1838.
Did Jackson Cause the Panic?
A common version of the story blames the Panic of 1837 squarely on Andrew Jackson: his war on the Second Bank, his transfer of deposits to state banks, and his Specie Circular. Historians and economists have long debated how much weight those policies deserve.
Some scholars have emphasized pressures from abroad. Rousseau summarizes economist Peter Temin’s case for the role of British credit, pointing to two increases in the Bank of England’s discount rate in the summer of 1836 and its August 26 order rejecting bills from several Anglo-American firms.4
Rousseau gives greater weight to two domestic policies: the transfers of federal balances associated with the Deposit Act and the Specie Circular’s increased demand for coin.4 Together, he argues, they sharply reduced the specie reserves of New York City’s deposit banks between September 1836 and May 1837. His evidence, he writes, “reaffirms one important aspect of the traditional view, namely that the Specie Circular was pivotal,” while international events played “a contributing but secondary role.”
Rousseau’s account does not place the blame on Jackson alone. He also argues that Van Buren’s refusal to reverse his predecessor’s policy helped seal the outcome. The debate remains open. Readers can weigh the domestic and international causes and decide how much responsibility any one president should bear for an economy tied to banks, land markets, and cotton buyers across the Atlantic.
The Spring of 1837
Failures and Runs
In March and April 1837, commercial failures in Britain and the United States spread uncertainty through the networks that financed Atlantic trade.1 Creditors pressed debtors for payment, and debtors who could not pay faced lawsuits. Lepler writes that some people sued, some fled, and some died by suicide. In early May, the suspicious death of a banker intensified public anxiety in a crisis already under way, and crowds of New Yorkers went to their banks to demand coin. After a series of runs, the city’s bankers decided together to suspend specie payments on May 10.
Who Felt It
The crisis reached into nearly every corner of American life. Merchants could not be sure they would be paid, and workers faced job losses as businesses contracted. Van Buren himself acknowledged that the ruin caused by excessive credit fell “most severely on the great laboring classes, who are thrown suddenly out of employment.”8 Even the federal government lost access to funds it had placed in banks that now refused to pay in coin.1 Lepler emphasizes that the crisis touched people at every level of society, including “enslaved laborers who had been mortgaged to fund their own sales,” whose fate was bound up in the debts of the people who held them.
The crisis also changed individual careers in ways that would matter later. Elias Howe, then a young machinist at the Lowell Machine Shop in Massachusetts, lost his job during the Panic of 1837, according to the University of Massachusetts Lowell Library.9 A few years later, he would build the sewing machine that is the subject of the final article in this series.
What Should the Government Do?
A Special Session
On May 15, 1837, Van Buren issued a proclamation calling Congress into an extra session, citing “great and weighty matters claiming the consideration of the Congress.”10 Congress met on September 4. Van Buren’s message that day described “the general and almost simultaneous suspension of specie payments by the banks in May last.”8
Van Buren placed much of the blame on the credit boom itself. He pointed to overexpansion in business, fed by excessive issues of bank notes, and to what he called a “spirit of reckless speculation.”8 He also noted that Americans owed a large foreign debt, which he estimated at more than thirty million dollars, and that foreign creditors had pulled specie out of the country.
“Too Much” from Government
The most striking part of the message was Van Buren’s view of the government’s role. “All communities are apt to look to government for too much,” he wrote.8 He continued that Americans were prone to do so “especially at periods of sudden embarrassment and distress,” and added, “But this ought not to be.” Elsewhere in the message, he argued that the framers of the Constitution had “wisely judged that the less government interferes with private pursuits the better for the general prosperity.”
Van Buren resisted broader federal intervention in private business, but his administration did offer limited accommodations. He told Congress that “all the relief authorized by law was promptly and cheerfully granted” to merchants seeking more time to pay their customs-duty bonds, and he asked whether further postponement was appropriate.8 His principal proposal, however, was to change how the government collected, held, and paid out its own money.
The Independent Treasury
That proposal was an Independent Treasury. Rather than depositing federal funds in private or state-chartered banks, the government would collect, hold, and pay out its money through the Treasury and designated federal offices. In Van Buren’s words, the goal was “to separate the fiscal operations of the Government from those of individuals or corporations.”8 Supporters argued that this would protect public money from bank failures and keep the government from feeding speculation. Opponents, many of them in the emerging Whig Party, argued that it would pull money out of circulation when the economy most needed it.
The proposal took years to pass. Van Buren signed the Independent Treasury Act on July 4, 1840.11 The victory was short-lived. The Whigs repealed the act in 1841, and it was restored in 1846.12
The suspension of 1837 did not end the country’s economic troubles, and hard times hung over the presidential election of 1840. That November, Van Buren lost his bid for reelection to the Whig candidate, William Henry Harrison.11
A Note on the Date
May 10, 1837, is the date most often attached to the Panic of 1837 because it marks the day New York’s banks stopped paying in coin. But Lepler argues that the suspension marked the culmination of the initial wave of panic, not its beginning, and not the end of the economic distress that followed.1 In her view, the real panic was the two months of failures, bank runs, and personal crises that came before, and the later label “the Panic of 1837” made the crisis look like a single political event. Historian Joanna Cohen’s review of Lepler’s book The Many Panics of 1837 for the Institute of Historical Research sums up the argument: the New York suspension “was not the beginning of the crisis, but in many ways its end,” and “the Panic as a single entity was created by politicians, bankers and print journalists.”13 The crisis involved many local and personal emergencies as well as a national banking suspension. That wider view complicates the question of what government could, and should, have done.
Two Panics, Compared
The Panic of 1837 rewards comparison with the Panic of 1819. Both crises exposed the fragility of credit built on land, commodity prices, and promises to redeem banknotes in coin. In both, banks suspended specie payments, leaving Americans unsure what their paper money was worth.
But the two crises unfolded under different banking arrangements. The Second Bank was an important participant in the 1819 contraction, while its federal charter had expired before the 1837 crisis. Debates over relief also involved different institutions. After 1819, state legislatures passed debtor-relief laws, and in 1821 Congress passed a relief act for people who had bought public land on credit.14 It did not cancel their debts. Instead, it let eligible buyers give up land they could not pay for and apply what they had already paid toward the land they kept. In 1837, the debate centered on the president and Congress, and on how the national government should handle its own money. The two episodes were not a simple choice between government action and inaction.
Both panics also belong to a larger argument that ran through the 1820s and 1830s, the same argument at the center of the fight over the tariff of 1828. In each case, Americans were deciding how much authority the national government should have over the economy and how its costs should be shared among regions and groups. The tariff did not cause either panic. But the three episodes together show a young country still working out who would set the rules of a national economy, and who would pay when those rules failed.
What the Test Revealed
The Panic of 1837 tested what a national government owed its citizens in a financial crisis. Merchants, workers, farmers, and enslaved people mortgaged as collateral all felt its effects, though in very different ways. Van Buren drew a sharp distinction between protecting the government’s finances and assuming responsibility for private commercial losses. His response favored separating public money from private banks, with limited accommodations rather than a broad federal rescue.
That answer was controversial in its own time, and the argument over it has never fully ended. Later generations would revisit the question of how far government should go in responding to bank failures and economic downturns, and they would reach different conclusions.
The questions are left for readers to weigh. Who gained during the boom of the 1830s, and who paid when it ended? Was Van Buren right that communities “look to government for too much,” or did the government have a duty to do more? And what did this test reveal about the role government should play in the economy?
This article is the third in the series Building an Economy: Credit, Conflict, and Invention. The final article examines Elias Howe and the lockstitch sewing machine.
Companion articles: Andrew Jackson: An American Life and Legacy, From Coins to Greenbacks, and The Erie Canal.
Continue exploring the History Lessons.
Endnotes
1. Jessica M. Lepler, “180 years ago today,” Fifteen Eighty Four (Cambridge University Press blog), May 2017. https://cambridgeblog.org/2017/05/180-years-ago-today/
2. The American Presidency Project, University of California, Santa Barbara, “Andrew Jackson Event Timeline.” https://www.presidency.ucsb.edu/documents/andrew-jackson-event-timeline
3. U.S. Department of the Treasury, “Levi Woodbury (1834–1841),” Prior Secretaries. https://home.treasury.gov/about/history/prior-secretaries/levi-woodbury-1834-1841
4. Peter L. Rousseau, “Jacksonian Monetary Policy, Specie Flows, and the Panic of 1837,” NBER Working Paper 7528, National Bureau of Economic Research, February 2000. https://www.nber.org/system/files/working_papers/w7528/w7528.pdf
5. Andrew T. Hill, “The Second Bank of the United States,” Federal Reserve History, Federal Reserve Bank of Philadelphia. https://www.federalreservehistory.org/essay/second-bank-of-the-us
6. Levi Woodbury, “Circular from the Secretary of the Treasury to Receivers of Public Money and to the Deposit Banks,” July 11, 1836, issued at the direction of President Andrew Jackson, The American Presidency Project, University of California, Santa Barbara. https://www.presidency.ucsb.edu/documents/circular-from-the-secretary-the-treasury-receivers-public-money-and-the-deposit-banks
7. Encyclopedia Britannica, “Specie Circular.” https://www.britannica.com/event/Specie-Circular
8. Martin Van Buren, Special Session Message, September 4, 1837, transcript, National Park Service, Martin Van Buren National Historic Site. https://www.nps.gov/mava/learn/historyculture/martin-van-buren-september-4-1837-special-session-message.htm
9. University of Massachusetts Lowell Library, “Elias Howe Sewing Machine,” Early Lowell research guide. https://libguides.uml.edu/early_lowell/Elias_Howe_sewing_machine
10. Martin Van Buren, “Proclamation 43-D—Convening an Extra Session of the Congress,” May 15, 1837, The American Presidency Project, University of California, Santa Barbara. https://www.presidency.ucsb.edu/documents/proclamation-43-d-convening-extra-session-the-congress
11. The American Presidency Project, University of California, Santa Barbara, “Martin Van Buren Event Timeline.” https://www.presidency.ucsb.edu/documents/martin-van-buren-event-timeline
12. Miller Center, University of Virginia, “Martin Van Buren: Key Events.” https://millercenter.org/president/martin-van-buren/key-events
13. Joanna Cohen, review of Jessica M. Lepler, The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis (Cambridge University Press, 2013), Reviews in History, Institute of Historical Research, review no. 1914. https://reviews.history.ac.uk/print/review/1914
14. An Act for the relief of the purchasers of public lands prior to the first day of July, eighteen hundred and twenty, ch. 12, 3 Stat. 612 (March 2, 1821), via GovInfo, U.S. Government Publishing Office. https://www.govinfo.gov/content/pkg/STATUTE-3/pdf/STATUTE-3-Pg612.pdf
Image Sources
Martin Van Buren, by Henry Inman (ca. 1837–38): Henry Inman, Martin Van Buren, ca. 1837–38, oil on canvas. The Metropolitan Museum of Art, Gift of Mrs. Jacob H. Lazarus, 1893 (93.19.2). Public domain. Record: metmuseum.org/art/collection/search/11215.
“Uncle Sam sick with la grippe” (1837): Edward Williams Clay, Uncle Sam sick with la grippe, 1837. Lithograph, published by H. R. Robinson, New York. Library of Congress, Prints and Photographs Division. No known restrictions on publication. Record: loc.gov/item/2008661302.
Merchants’ Exchange Hard Times token (1837): Photograph by Centpacrr, via Wikimedia Commons. Licensed under CC BY-SA 3.0. Record: commons.wikimedia.org — 1837 Merchant’s Exchange Hard Times Token HT-293.