The inflation of the 1830s gave way to the severe economic contraction in the late 1830s and early 1840s. It was the first of four “Great Depressions” in America’s history: During the late 1870s, the 1890s, and, of course, the 1930s America endured long periods in which economic activity was depressed. As this is written, some economists are beginning to talk about the period following the crisis of 2008 as a great depression, of not a great depression. Commodity prices rose during the inflation of the 1830s; however, asset prices rose even more: The stock market rose and in the South the prices of slaves rose. But most of all, it was in sales of public land that one could see the signs of speculative excess. In 1834, 4.6 million acres were sold, a record amount at that time, but in 1835, 12.4 million acres were sold, and in 1836, 21.2 million acres, a total never again equaled. So busy were the Federal Land Offices that the phrase “doing a land office business” became part of the language. Many sales were financed by mortgages provided by banks that issued notes to its borrowers with which they could buy land. To stop this practice, President Jackson issued his famous “specie circular” in July 1836 that required the land offices to refuse paper money and accept only gold and silver. At one time, the specie circular received most of the blame for starting the financial panic that followed in 1837. But recent research by Peter Rousseau (2002) shows that Jackson’s decision to distribute the federal surplus to the states required large transfers of gold and silver among the states and had an even more disruptive effect on the banking system.
Early in 1837 some major failures of financial institutions were recorded. The first to go was Hermann, Briggs, & Co., a cotton factory in New Orleans, which failed on March 4, 1837. The panic soon reached New York, where J. L. & S. Joseph, a firm that was heavily indebted to Hermann, Briggs, soon failed. Runs on the banks increased, and on May 10, 1837 the New York banks suspended specie payments. Money and bank credit contracted, the asset prices that had risen so rapidly in the preceding years fell, and a recession took hold. Mercantile failures increased, manufacturing declined, unemployment rose (although we don’t have exact measurements) and wages fell. The banks resumed specie payments in 1838 and there were some signs of recovery in the real (as opposed to monetary) economy. But in 1839 a new round of trouble began. Suspension
By the Bank of the United States in October 1939, the result of excessive speculation on cotton, was a major blow that led to bank suspensions throughout the South and West. The recession that followed was severe. Although statistics for these years are not as reliable as the statistics available today, it appears that real per capita GDP did not return to the 1839 level until 1845. Peter Temin (1969) has pointed out that unemployment in this depression was probably less severe than in subsequent depressions in part because prices were more flexible and in part because a larger fraction of the labor force was engaged in agriculture, a sector that tends to experience depressions more in low incomes and less in outright unemployment when compared with manufacturing. Even so, there is no doubt that America went through a prolonged bout of hard times in the early 1840s.
During the depression a number of states defaulted on their debts. (See English 1996). Four states (Illinois, Indiana, Maryland, and Pennsylvania) defaulted temporarily, three states (Arkansas, Louisiana, and Michigan) partially repudiated their debts, and Mississippi and the Florida Territory completely repudiated their debts. In most cases the states had gotten caught up in the same wave of optimism that had affected the private sector and had borrowed heavily to finance transportation and banking projects. Many of the bonds had been sold in London, but there was little that foreign bondholders could do to force the states to pay up: The constitution prohibited lawsuits and foreign creditors were not about to start a war with the United States. Nevertheless, in most cases the states made an effort to repay all or some of their debts so that they could obtain access to the capital markets.
The federal government did not utilize its borrowing power to invest in public works spending to create jobs and help the nation recover, and the states which had been driven into bankruptcy by financing such projects were not in a position to do so, even if they had wanted to. There was, moreover, no central bank that could use monetary policy to stimulate the economy. Gradually, however, the economy recovered without fiscal or monetary stimulus and by the late 1840s was again growing rapidly.
World History
