Throughout American history, we have witnessed periods of significant price deflation, with the Great Depression being the most notable for many still living today. However, if we delve deeper into our past, we find an even more profound instance of price deflation that dates back to 1837.
The Panic of 1837 was preceded by an ambitious experiment in central banking. The Second Bank of the United States, which operated from 1817 to 1836, engaged in the excessive issuance of unbacked paper currency. This led to rampant speculation and significant inflation of prices. Similar to today’s economy, the interplay of central banking practices, legal tender laws, fractional reserve banking, and government deficits substantially increased the money supply and credit, prompting individuals to take out loans for purchases they couldn’t afford and to service debts they were ill-equipped to repay.
Murray N. Rothbard documented this era of monetary inflation extensively in his seminal work, A History of Money and Banking in the United States – The Colonial Era to World War II. Rothbard noted that the total money supply surged from $109 million in 1830 to $159 million in 1833, marking a 45.9 percent increase, or an annual growth rate of 15.3 percent. Much of this inflation stemmed from the Second Bank of the United States, which saw its notes and deposits rise from $29 million in January 1830 to $42.1 million by January 1832—an increase of 45.2 percent.
That was merely the beginning. By 1837, the money supply had skyrocketed from $150 million at the start of 1833 to $267 million, reflecting a remarkable growth of 84 percent, or an annual rate of 21 percent.
With such a significant influx of money circulating, it was inevitable that a speculative frenzy would ensue.
The Allure of Money Supply Inflation
Human nature often leads to whims that seem incomprehensible in hindsight. Bizarre fads, such as the beanie baby craze and the dot-com bubble, barely scratch the surface of past delusions. Yet, nothing has historically captivated hearts and minds quite like a land boom triggered by accessible credit.
The housing boom of the early 21st century is a classic example of an asset bubble fueled by cheap credit, as was the enthusiastic pursuit of farmland in West Kansas during the late 19th century. However, the public land selloff in the 1830s holds a unique place in American history.
Seemingly independent policy decisions can often lead to unexpected and significant outcomes. For example, the U.S. government’s early 19th-century Indian removal policy aimed at relocating Native American tribes west of the Mississippi River, coupled with the maneuvers of the Second Bank of the United States, resulted in a remarkable land speculation episode in the mid-1830s. Indeed, between 1834 and 1836, public land sales surged by 500 percent.
As with any fervent mania, elements of deception quickly intertwined with the fabric of the land boom. The tactics used mirrored current congressional practices of funding unsustainable entitlements by borrowing vast sums and paying with depreciating currency. In this instance, speculators obtained unbacked loans from state banks, which in turn piled on the credit they received from the Second Bank of the United States.
Throughout history, the phenomenon of monetary inflation tends to spiral out of control. Like all experiments involving paper money and central banking, the subsequent asset inflation inevitably led to an ensuing panic.
How to Sleep Well During the Great Dollar Panic Ahead
The Panic of 1837 was triggered by the Specie Circular, an executive order issued by President Andrew Jackson in 1836 that mandated government land be purchased using gold and silver. Furthermore, the demise of the Second Bank of the United States that same year, due to Jackson’s refusal to renew its charter, curtailed the government’s ability to augment the money supply.
Before long, the money supply dwindled, loans defaulted, and over 40 percent of the banks in the United States collapsed, leaving land speculators in dire straits. However, not everyone faced ruin; in fact, some individuals accrued massive fortunes amid the panic and subsequent crash.
Take, for instance, Jacob Little, dubbed the “Great Bear” of Wall Street, who profited significantly by shorting stocks as their values plummeted. Others, lacking Little’s financial acumen, still fared well by holding gold and silver coins. As the money supply contracted and asset prices fell sharply, these holders were positioned to purchase goods and property at steep discounts.
In the coming years, a similar strategy could facilitate a considerable wealth transfer to those who possess hard currency. While it’s improbable that any current president would revert to a gold or silver standard or dismantle the central bank, persistent forces in the capital markets, along with ongoing devaluations of federal reserve notes, could currently set the stage for a global crisis centered around paper currency.
Given the relentless money debasement policies pursued by the Federal Reserve and Congress, it’s not difficult to envision this scenario—or a variation of it—materializing. At the very least, investing in some gold may ensure a more restful sleep and potentially provide capital for remarkable buying opportunities in the future.
Sincerely,
MN Gordon
for Economic Prism
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