Panic of 1837 – Causes & Lessons for Today’s Portfolios

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

The Panic of 1837 was a significant economic crisis in American history that triggered a severe depression lasting nearly seven years.

This event, which had a profound impact on the United States’ financial landscape, can provide lessons to traders, investors, and policymakers.

By analyzing the causes and consequences of this financial meltdown (and financial history, more generally), we can gain insights into how to manage portfolios more effectively and avoid repeating past mistakes.

Below we explore:

  • the economic and political factors leading to the Panic of 1837
  • the role of the Second Bank of the United States
  • state banking practices
  • the impact on the American economy and society, and
  • the government’s response and effectiveness
  • lessons for today’s portfolios


Key Takeaways – Panic of 1837: Causes & Lessons

  • The Panic of 1837 was triggered by speculation, land boom, risky banking practices, and international factors. It serves as a reminder of the interconnectedness of economic and political factors in financial crises.
  • The absence of effective regulation and oversight, exemplified by the fall of the Second Bank of the United States and state banking practices, contributed to the spread and severity of the Panic. Proper regulation of financial institutions remains important in preventing similar crises.
  • Lessons from the Panic of 1837 emphasize the importance of sound monetary and fiscal policies, diversification of portfolios, risk management, staying informed about global economic trends, and maintaining adequate liquidity and cash reserves to protect against market/economic downturns and emergencies.


Key Things to Know About the Panic of 1837

  • Duration: The Panic of 1837 triggered a severe economic depression that lasted for approximately seven years, until the early 1840s.
  • Unemployment: The crisis led to a significant increase in unemployment rates across the United States. Many businesses failed, and job opportunities became scarce.
  • Bank Failures: Numerous banks collapsed during the Panic of 1837, resulting in a loss of savings for many individuals and businesses. The lack of a central bank and inadequate regulation contributed to the widespread bank failures.
  • Decline in Economic Activity: The panic caused a sharp decline in economic activity. Commodity prices fell, international trade declined, and both the agriculture and manufacturing sectors were severely affected.
  • Social Unrest: The economic hardships caused by the Panic of 1837 led to social unrest. Labor strikes and protests became more common as people struggled to cope with the financial crisis.


Economic and Political Factors Leading to the Panic

The Panic of 1837 (financial crises were known as “panics” in those days) was triggered by several intertwined economic and political factors, such as speculative fever, land boom, and risky banking practices.

The rapid expansion of credit in the early 1830s fueled a land boom, driving up property prices and encouraging speculation. (Generally, when prices go up in a sharp, fast way it encourages others to get in on the action.)

Additionally, the federal government’s Specie Circular of 1836 mandated that only gold and silver could be used to purchase public lands, leading to a sharp decline in available paper money.

Simultaneously, international factors like the Bank of England’s decision to restrict credit to the United States and the failing harvests in Europe further contributed to the economic environment.


The Role of the Second Bank of the United States in the Panic

The Second Bank of the United States played an important role in the Panic of 1837.

As a central bank, it had the power to regulate currency, manage the nation’s financial system, and serve as a lender of last resort. (The Federal Reserve did not exist until 1913, in the aftermath of another terrible Panic in 1907.)

However, President Andrew Jackson’s opposition to the bank (the US has traditionally been more disdainful of centralized power) led to its demise in 1836, leaving the nation’s financial system vulnerable to instability.

The lack of centralized control allowed state-chartered banks to issue excessive banknotes, fueling inflation and speculation.


State Banking Practices and the Spread of the Panic

The spread of the Panic was exacerbated by the state banking practices in place at the time.

With no central bank to enforce regulations, many state-chartered banks issued their own currency and operated with minimal oversight.

This led to a significant increase in the number of banks and a subsequent overextension of credit.

The widespread speculation and excessive lending practices eventually culminated in bank failures and a liquidity crisis when prices fell, causing the Panic to spread across the nation.


The Impact of the Panic on the American Economy and Society

The Panic of 1837 had profound consequences for the American economy and society.

The economic depression that followed saw businesses fail, banks collapse, and unemployment rates soar.

The crisis also led to a massive decline in international trade and widespread social unrest, including labor strikes and protests.

The hardships endured during this period exposed the fragility of the American financial system and highlighted the need for better regulation and oversight.


Government Response to the Panic and Its Effectiveness

The government’s response to the Panic was limited and largely ineffective.

President Martin Van Buren implemented the Independent Treasury system, which aimed to separate government finances from the banking system.

However, this measure failed to address the underlying issues of excessive speculation, unsound banking practices, and inadequate regulation.

The crisis eventually subsided as the economy slowly recovered, but the lessons of the Panic of 1837 still resonate today, emphasizing the importance of financial regulation, responsible lending practices, and diversified portfolios for traders/investors in the modern era.


What caused the Panic of 1837?


Lessons for Today’s Portfolios

The Importance of Sound Monetary and Fiscal Policies

The Panic of 1837 underscores the significance of prudent monetary and fiscal policies in maintaining economic stability.

Investors/traders should keep a close eye on government policies that could impact interest rates, inflation, and overall economic growth.

The Need for Proper Regulation of Financial Institutions

The crisis highlighted the role of effective regulation in preventing financial system collapses.

Proper oversight and regulation of financial institutions are always needed, as these measures are essential for maintaining a stable investment environment and preventing crises that are prone to occur due to poor bank liquidity, lax lending standards, and so on.

The Risks of Speculative Investments and Overextension of Credit

The Panic of 1837 was fueled by excessive speculation and credit overextension.

Investors/traders should be cautious when investing in speculative assets, as these can be highly volatile and expose them to significant risks.

Of course, this always applies to financial promotions, but even assets with intrinsic value (e.g., homes, land, commodities, cash-flowing companies) can be prone to speculative manias.

Moreover, maintaining a manageable debt/leverage/risk level is vital in protecting one’s financial health and ensuring long-term success.

The Role of International Economic Interactions and Global Markets

The Panic of 1837 was exacerbated by international factors, such as the Bank of England’s restrictive credit policy and failing European harvests.

The interconnectedness of global markets and the potential for international events to influence portfolios is always a factor.

Staying informed about global economic trends and geopolitical events can help traders identify risks and minimize the impact of such events on their portfolios.

For example, if someone is trading airline stocks they’re also making an implicit bet on oil.

The Need for a Diversified Portfolio and Risk Management Strategies

Diversification is a key lesson from the Panic of 1837. A well-diversified portfolio can help investors mitigate risks and weather economic downturns more effectively.

By spreading investments across various asset classes, sectors, and geographic regions, investors can reduce their exposure to any single risk factor and achieve a more stable long-term performance.

The Importance of Maintaining Liquidity and Adequate Cash Reserves

The liquidity crisis that ensued during the Panic of 1837 illustrates the importance of maintaining adequate cash reserves and liquidity in one’s portfolio.

Investors/traders should ensure they have sufficient cash or easily accessible assets to cover emergencies and unexpected expenses.

By doing so, they can avoid being forced to sell investments at inopportune times or take on excessive debt, thereby preserving their long-term financial stability.


FAQs: Panic of 1837 – Causes & Lessons for Today’s Portfolio

What exactly was the Panic of 1837?

The Panic of 1837 was a severe financial crisis in the United States that lasted until the mid-1840s.

Triggered by a speculative fever, the panic led to a nationwide economic depression marked by bank failures, high unemployment, a decrease in commodity prices, and a slump in agriculture and manufacturing.

How did the Panic of 1837 impact the American economy and society?

The Panic of 1837 had a profound impact on the American economy and society.

It led to widespread bank failures, severe unemployment, and a significant decline in economic activity.

The effects were felt throughout society, with many people losing their jobs and their homes/property, creating social and economic problems.

How did the government respond to the Panic of 1837, and was their response effective?

The government’s response to the Panic of 1837 included measures like the Specie Circular, which required payment for government land in gold and silver (i.e., money with intrinsic value), and the creation of an independent treasury system.

However, these actions were largely ineffective in the short term and the economic depression continued for several years.

What is the significance of sound monetary and fiscal policies in today’s investment environment?

Sound monetary and fiscal policies are important to maintain economic stability and investor confidence.

These policies can help prevent economic bubbles, manage inflation, and control public debt, thereby creating a predictable and stable environment for investment.

How can investors protect themselves from the risks of speculative investments and overextension of credit?

Investors/traders can protect themselves from the risks of speculative investments and overextension of credit:

  • by maintaining a diversified portfolio
  • setting clear investment goals
  • understanding their risk tolerance
  • avoiding what’s not tried and true, and
  • avoiding investments they do not fully understand

Why is diversification important for a modern investment portfolio?

Diversification is important for a modern investment portfolio as it helps to spread risk across various assets or asset classes.

This strategy can help mitigate losses if one or more investments perform poorly, providing a level of protection against volatility and market downturns.

Investors/traders can stay informed about global economic trends and geopolitical events by regularly reading financial news, using financial analysis tools, and consulting with financial advisors.