Last time we looked at the Panic of 1819 and saw how it shaped up as a classic example of an inflation-fueled boom/crash cycle born out of fiat money printing and specie payment suspension. Well, guess what the Panic of 1837 was like. Yep. You guessed it. Same story all over again.
The boom that preceded the 1837 panic and subsequent deep recession took on a little different form than the one that led up to 1819, but the fundamentals were basically the same. We might want to praise Andrew Jackson for ending the second Bank of the United States in 1836, but his own mistakes on monetary policy would just compound what the federal and state banks had begun:
Temin completely ignores the expansion in banking after President Jackson hinted in his first annual message (December 1829) that he would oppose a renewal of the charter for the second Bank of the United States. From January 1830 to December 1833, the number of banks increased from 330 to 506, a 53% increase. Then, from 1833 to 1837, the number of banks increased from 506 to 788, a 56% increase. The chartering of so many new banks meant that the banking system as a whole could inflate the money supply significantly even while maintaining the same proportion of reserves. Contemporary political economists (Gallatin, Gouge, and Raguet) all cited Jackson’s campaign against the federal bank as spurring a bank mania in the states. Bank projectors and state legislators rushed to organize and charter new banks in the hope not only of getting a share of the public deposits but a share in the bank business being forfeited by the Bank of the United States’ loss of prestige, circulation, and deposits resulting from the loss of its privileged federal status.
I bet that sounds familiar doesn’t it. Did you notice how many new banks popped up during the 2000′s? Lots and lots. Entrepeneurs aren’t stupid. If there’s a good investment to be made they will find it. Banking was just such an investment in the leadup to our most current bust, and it was a great investment in the 1830′s too. After all, with reserve rates low, low interest rates and plenty of government money to use as capital reserves who wouldn’t want a piece of that action. That’s easy banking right there.
And speaking of low reserve requirements, by 1837 reserves had fallen to 13.7% (that’s specie by the way, not paper. And the Fed reserve limit is 10% today). It’s at this point that the stage was set for some good ol’ fashion bank runs:
Furthermore, there is evidence that the state-bank depositories did lend out at least part of the public deposits with which they were entrusted. Treasury Secretary Taney informed them that they were expected to increase their discounts after receiving the government funds; and when the government in 1837 called on the banks to pay out the remainder of the surplus fund s deposited with them in previous years, the banks replied that the money was gone. Thus, it seems clear that by depositing the government’s funds in the state banks, President Jackson did contribute to the inflation of the mid-1830s.
But all of that isn’t even the best part. What makes the 1830′s boom so intriguing is that it had a major real estate/land bubble just like our most current crisis of 2008/09. And it was fueled by worthless bank note printing by state banks, similar to what happened in the run up to 1819:
Finally, Temin’s contention that the land boom of the 1830s had a deflationary effect upon the economy is simply insane. The government accepted state bank paper in payment for the purchase of public lands. When the Bank of the United States was the fiscal agent of the federal government (from 1817 through mid-1833), this money was deposited in the federal bank or one of its branches. As the B.U.S. was a specie-paying bank, and as merchants and the public felt less compunction about withdrawing specie from it compared to their local bank, the federal bank had to keep a large stock of specie. If state bank notes began to accumulate due to an increase in land sales, the managers would have to return at least some of them for payment. This acted to check or restrain the state banks from inflating. However, after mid-1833, the B.U.S. was no longer the fiscal agent of the federal government, so state-bank paper used to purchase public lands now ended up in a state bank. The state banks then lent it out again. The same money could now be used to purchase more land, or for other purposes. It could be lent out a third and fourth time. Federal land sales simply exploded after 1833. They went from $4.2 million in 1833 to $6.1 million in 1834, $16.2 million in 1835, and $24.9 million in 1836, and $6.9 million the first few months of 1837 before the panic. While the price of public land was fixed by law, its price could, and did, rise after it was sold to the first purchaser (often a land speculator who bought up large amounts only to sell it at a profit).
But a fiat printing bank is a fiat printing bank, whether it’s at the national or state level. Giving any institution the power to print money that isn’t backed by a commodity that has real value like gold, silver, etc. is going to guarantee a boom/bust will ensue. And that’s exactly why the Federal Reserve needs to be ended. It’s the most monstrous inflationary fiat money machine that the world has ever seen.