The Panic of 1837

Those who don’t know their history are doomed to repeat it. 

Especially after the speculative housing bubble burst of 2008, it’s crazy to find out that this sort of thing has happened in the U.S. about 180 years ago in 1837.

In a nutshell:

In the 1830’s the price of cotton went up, making land out west and down south even more valuable because the more land, the more cotton you can grow, the more you can capitalize on the higher price.

 Thus the beginnings of the speculative land bubble. People from the east started buying up lots of land on credit, sold them for a higher price, and used more credit to buy more land.

Jackson, the president on the $20 bill, didn’t like that the poor western settlers couldn’t compete with the “rich” easterner with their vast resources and credit. Seeing himself as the batman of the day, he issued the Specie Circular act of 1836.

This made it so that all public land must now be bought with gold and silver, no more credit.

Not only that, he issued the Deposit and Distribution act of 1836, which made it so that the U.S. treasury surplus from all the selling of public land must now be distributed throughout the banks of  country, mostly in the west, so that settlers can have a chance at obtaining gold and silver to buy land.

In the meantime, Britain was having their own problems. Because of a really low wheat harvest, they had to import a lot of their food, thus draining their federal reserves. To make up for it, they increased interest rates on bonds and limited their lending. In theory, they reckoned that gold and silver would move where it can gain the most interest (into their reserves), so if the New York banks wanted to keep their gold and silver in their reserves, they had to increase their interest rates too and curb lending, otherwise money would go to Britain.

Because the New York banks increased their bond interest rates, the price of bonds went down, making them an attractive investment (the price of bonds is inversely proportional to the interest). This caused people to move money from stocks and commodities to bonds. Not only that, the curbing of lending caused panic amongst the people who borrowed or needed to borrow more credit to pay for the land they were speculating in.

Because the gold and silver were being drawn out west and to England, that left the New York banks with little gold and silver. So when people went to withdraw money from the New York banks, there weren’t any to withdraw. This also helped to facilitate the panic in the stock and commodities market as people pulled out from lack of trust in the financials of the country.

States had to default on their loans because they couldn’t dig up enough money to pay for the borrowed money that they used to build canals and roads. The price of cotton fell drastically as people pulled out of cotton, making the land used to grow them cheap, and speculative southern plantation owners went bankrupt from over speculation and credit loads.

The country went through a recession for around 6 years after the Panic of 1837.

So basically, don’t buy on credit if you really don’t have to. Take your time, be patient. Don’t rush in when others are rushing in, chances are, it might be a speculative bubble.

-Jack over and out


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