GTT: Gone to Texas - Real estate cycle 1820-1837

"After the war of 1812 the American social mind became introspective. Henceforth it was not to be concerned primarily with treaties, commercial bounties, impressment, embargoes, and matters of open sea and distant lands, but with turnpikes and canals, tariffs and manufactures, public lands, currency, banks, crises, poverty, state sovereignty and chattel slavery."
Algie Martin Simons, Social Forces, page 151.

"Speculation ! Speculation !! Speculation !!! Verily the people are mad."
Headlines, Niles Register, May 9th, 1835.

"The instant people saw that the government suspected the reliability of the banking institutions, distrust seized upon the public mind, and like fire in the great prairies, nothing could stop it."
Reginald Charles McGrane, The Panic of 1837, page 63.

In November of 1820, President Monroe was heard advising Congress of the 'prosperous and happy' condition of the country. He continued that it is "impossible to behold so gratifying, so glorious a spectacle, without being penetrated with the most profound and grateful acknowledgments to the Supreme Author of All Good for such manifold and inestimable blessings." Well that's not quite how things were; the country was still reeling from the previous year's economic collapse, including the mad scramble that took place for a cash position (a pattern to be repeated) and the availability of commercial goods at sometimes ruinous prices. The contraction of credit had seen the value of land sales drop sharply, and heated debate arose about the plight of 'poor' debtors - those owing money on past purchases, who could no longer afford to pay.

The largest group of debtors were those that had purchased public land (on credit) from the government, at what now looked like ludicrous prices, and still owed payment. The terms had been liberal enough; one-fourth of the land price due within forty days, the remainder in three installments, but if not paid in full by the fifth year, the land would be forfeit. By 1819, this class of debtor owed the government a collective $23 million, (Annals of Congress, 16th Congress, 2nd session, page 15), and its collection looked doubtful. What to do ? Interestingly, most of the 'men of influence' were, in the midst of the downturn, indeed at any time, strongly reluctant to see government interference in the running of the economy. Even the President himself was largely indifferent to the panic and unmoved for any government assistance to alleviate it, especially as regards private contracts made between individuals, such was the ideological beliefs of the time. Except however for the land debt. This one required a solution, i.e. government interference.

A good many within the government were debtors, or at least represented constituents who were, especially out West. And as the argument ran; they had incurred their debt whilst prices were high, but now had to repay when prices were low and what was worse, with the purchasing power of the dollar at record highs. Arrangements were suggested to government to resolve the issue; permitting debtors to hand back to the government a portion of the land to cover what they had failed to pay; complete forgiveness of any interest due; extension of the time for payment. Besides, it was the banks fault was it not ? The banks, in their expansion during the boom, "had liberally furnished money to the purchasers of public lands, inducing them to bid up the prices of the land to great heights. During the crisis, bank facilities were withdrawn, and banks were becoming bankrupt, their notes no longer receivable. The resulting destitution of the debtors (arguing one Senator) required government relief." (Rothbard, The Panic of 1819, page 26.) The fact that the government, if it did not get its money, would in fact get the land back and not be in any losing situation, seemed lost on all but one of the Senators (Allen of mid-Tennessee), such is the power of vested interests. The suggested relief was duly passed.

The land credit system itself was repealed in 1820. The minimum size of tracts to be sold after this date was reduced to 80 acres, with the price lowered from $2 to $1.25 per acre, payable in cash. (The reduction in the minimum size may or may not have been a reaction to the downturn and reduced government income, history does not seem to make this clear, though it became a repeating pattern after each downturn, whilst the government had a public domain to sell.) A writer, in 1820 said: "It has become common to see men after getting land, to maintain themselves in the first year without further resources than a gun, a net and a few tools, living from these like Indians and afterwards from their land. In a few years they were able to maintain themselves and their families comfortably..." (Chandler page 486). The widespread, popular feeling in the early nineteenth century was that the public domain was inexhaustible. The Secretary of the Treasury, Richard Rush, reported in 1827, that it would take no less than five hundred years to dispose of and settle the land of the public domain, though as we know, most of it was sold off within the next 50.

The fact that the frontier was seen as unlimited probably helped more easily restore confidence out of the 1819 collapse. What's more, the fact that land was actually available, the fact that if you did find yourself say, unemployed, or down on your luck due to the 1819 events, you could, if you wanted, simply move to the frontier, squat, and hunt, is of great significance to our study of the cycles. The Oakies of John Steinbeck fame did not have this option. In all downturns up until the great depression, the availability of 'free' land at least somewhere would have contributed to the downturns not having a prolonged devastating effect, in the face of a government and body of economists that believed these things to be pre-ordained, and something not to be fiddled with. By 1900 the frontier – essentially free land - had closed. This fact is overlooked by almost every single historian and economist who has sought to explain why the 1930's depression was so badly felt by all concerned. In 1820, you could have been say, the very family who did the following: "Daniel Brush and a small group of Vermonters settled in Greene County, Illinois, in spring 1820. 'A prairie of the richest soil,' Brush wrote, 'stretched out about four miles in length and one mile wide…complete with pure springs of cold water in abundance.' Once a cabin, 16 by 24 feet, had been built, they began the hard task of breaking up the prairie. This done, Brush wrote, 'no weeds or grass sprung up upon such ground the first year and the corn needed no attention with the plough or hoe. If got in early, good crops were yielded, of corn and fodder.' He added, 'provisions in abundance was the rule…no one needed to go supperless to bed." (Johnson, page 290.)

Such a lifestyle would have been one of self-sufficiency in reality; very few commercial transactions in a market or business sense. The downturn of 1819 would not have meant much to such persons, the settlers being too busy working their land so as to survive the next winter.

By 1828, fully two thirds of the population of Illinois for example were squatters; meaning they had simply got there first, paid over some money to the land office after surveying, but before the land had been fully sectionalised to be officially sold off. They did risk a possible title challenge by those more knowledgeable of the law - speculators in particular- but squatters banded together for protection, which often worked.

Rapid settlement of the western lands was everywhere. The first building in a new settlement was usually a church, protestant mostly. This quickly became the focus and rallying point for surrounding farmers. In true US fashion, a newspaper was begun next, then a bank, and then the lawyers, who would do their rounds and dispense justice on horseback until a courthouse was built. Growth was fast, as more and more settlers poured into the newly opening western lands. Once there however, getting around was another story.


John Steele Gordon notes in his book, The Great Game, (a story about how Wall Street emerged as a great power): "The cost of transportation made it extremely costly to ship produce back over the mountains to eastern markets. Instead the farmers had to either consume the produce themselves in a subsistence economy or ship it by one of two routes. The first, via the Great Lakes, the St Lawrence River, and Montreal, required a portage around Niagara Falls. It also wasn't available in winter, and passed through British territory. The other, via the Mississippi River and New Orleans, passed through Spanish territory. In the 1790's, the transportation of western produce was one of the major concerns of the new nation's leaders. Washington himself remarked that the loyalty of the western settlers was 'hanging by a thread' because their economic interests lay more with New Orleans and Montreal than with the eastern seaboard. Jefferson's purchase of Louisiana (from the French - sold by Napoleon for $11 million in cash) removed the threat of a foreign power closing the Mississippi to American commerce, but did nothing to solve the transportation problem. That was solved by a New Yorker named De Witt Clinton, who in doing so not only helped cement the Union and its western territories, but also quite accidentally assured that Wall Street would become the dominant market in the United States."

Clinton noticed the gap in the Appalachians near Albany, on the Hudson River. From Albany, through this gap to Lake Erie, the land does not get above 600 feet. Why not build a canal ? The idea put forward originally by Gouverneur Morris, laughed at initially, then dismissed as impossible technically, Clinton, as Governor, had the determination and political ability to build it, which he did. Started July 4 1817, with 83 locks over 363 miles - dug entirely by hand - it was ceremoniously opened Nov 7 1825, kicking off a wild mania in canal stocks.

Ron Insana, in Trendwatching, page 113, described the developing canal fever this way: "The first mania for canals and their financing vehicles, canal bonds, began in 1825 with the proposal of the Erie Canal… Its development…would 'require tools not even invented yet. And its structure needed material that science said couldn't be developed (like cement that could be poured and cured under 4 feet of water).' The 400 miles of canal, cut through mountains, swamps, and forests, cost the then sizable sum of $7 million… Thomas Jefferson referred to the project as 'sheer madness.' But the effort proved quite successful, helping to enhance New York City's status as a center of commerce. Bondholders who had financed this 'sheer madness' were fully repaid in 11 years. The success of this issue led to a wave of speculation in canal building... The ebullience created by this endeavour led to one of the early bouts of market euphoria in the United States."

The Erie was not the first canal built. That honour went to the Middlesex canal in Massachusetts, started in 1789, and completed 1808. The canals not only speeded up transportation, they were large providers of employment, lowered actual transportation costs, whilst at the same time kept the owners happy as the tolls levied tended to rise, not fall, and the population of the towns alongside often doubled or trebled. All good for business.

The new issues - IPO's - Blackstone Canal, and the Morris Canal of New Jersey to name two, were swamped and heavily oversubscribed. Few made profits, some were just outright fraudulent, others simply ran into overwhelming technical obstacles that rendered the building of the canal uneconomic.

But if the IPO couldn't make you money, perhaps beating the news could. Overstating the case for lack of transportation in early America as a limiting factor to development would be difficult. Clearly, development became, and rightly so, a national obsession. Up until this time, to get news from say Boston to New York could take a week. It was in fact possible to actually outrun the news; so much so that Philadelphia brokers at their exchange learnt to "dread the sudden appearance of a stagecoach full of Wall Streeters because it meant that they were in possession of important news from London that might make them a small fortune." (The Great Game, page 78.) Any wonder then that in the early 1830's, a semaphore line was put in place - men stationed on tall buildings or hills every few miles, with flags and telescopes - to signal Wall street opening prices, to get the info to Philadelphia in 30 minutes. (One wonders about the speculative use potential of that last semaphore position just before the Boston exchange…)

Nor was it just canal companies that increased the speculation during booms. Actually, turnpike corporations were the leading types of businesses formed in the north east United States between 1800 and 1830. (Then came the railroads.) These turnpikes however developed a poor reputation for return on capital. They were plagued by "expensive maintenance, and the widespread practice of 'shun-piking': travellers would simply walk or ride around the toll-gates, so often, in fact, that new paths appeared in adjacent fields, circumventing the only means turnpike companies had for collecting revenue." (Insana, page 54.)

The development of transportation at this time, especially the railroads, was for America as much about self-defence as anything else: to get to the Pacific Coast before someone else got there first.


American growth in the 1820's and '30's came in no small fashion from another field as well, the cotton industry. To try to put this in some sort of context for today's reader, let's quote a bit more from Johnson, page 307: "Until the end of the 18th century, the human race had always been unsuitably clothed in garments which were difficult to wash and therefore filthy. Cotton offered an escape from this misery, worn next to the skin in cold countries, as a complete garment in hot ones. The trouble with cotton was its expense. Until the industrialisation of the cotton industry, to produce a pound of cotton thread took twelve to fourteen man days, as against six for silk, two to five for linen, and one to two for wool. With fine cotton muslin, the most sought after, the value added multiple from raw material to finished product was as high as 900. This acted as a spur to mechanical invention. The arrival of the Arkwright spinning machine and the Hargreaves jenny in the England of the 1770's meant that, whereas in 1765 half a million pounds of cotton had been spun in England, all of it by hand, by 1784 the total was 12 million, all by machine. Next year the big Boulton and Watt steam engines were introduced to power the cotton-spinning machines. This was the big bang of the first industrial revolution. By 1812 the cost of cotton yarn had fallen by 90%. Then came a second wave of mechanical innovation. By the early 1860's, the price of cotton cloth, in terms of gold bullion, was less than 1% of what it had been in 1784, when the industry was already mechanised. There is no previous instance in world history of the price of a product in potentially universal demand coming down so fast. As a result, hundreds of millions of people, all over the world, were able to dress comfortably and cleanly at last…The new British cotton industry was ravenous for raw cotton. As the demand grew, the American south first began to grow cotton for export in the 1780's. The first American cotton bale arrived in Liverpool in 1784. Then, abruptly, at the turn of the century, American exports were transformed by the widespread introduction of the cotton gin. This was the invention of Eli Whitney. His was a case, common at the time, of a natural mechanical genius…Watching a cat claw a chicken and end up with clawfuls of mere feathers, he produced a solid wooden cylinder with headless nails and a grid to keep out the seeds, while the lint was pulled through by spikes, a revolving brush cleaning them. The supreme virtue of this simple but brilliant idea, was that the machine was so simple to make and easy to operate. A slave on a plantation, using a gin, could produce fifty pounds of cotton a day, instead of one. Whitney patented his invention in 1794, but it was instantly pirated and brought him in eventually no more than $100 000 - not much for one of history's greatest gadgets. But by 1800 - 1810 his gins had made the United States the chief supplier of cotton to the British manufacturing industry's rapidly rising demand. In 1810 Britain was consuming 79 million pounds of raw cotton, of which 48 percent came from the American south. Twenty years later, imports were 248 million, 70% coming from the South. In 1860 the total was over 1,000 million pounds, 92 percent from Southern plantations. During the same period, the cost (in Liverpool landing prices) fell from 45 cents a pound to as low as 28 cents."

There are important things to note here. As has been shown, ultimately the benefit of all human progress will inflate the purchase price of government granted licences and privileges, the largest of which is land value. Cotton was no exception. Land price captured the huge gains to be made in cotton, ultimately putting the south in permanent debt to the northern banks. Also for the US, a further huge slave trade grew up around the industry, even more so than in tobacco, though the slave trade is not our story here.

The other essential thing to understand: where land is not enclosed, i.e. still free, or at least by what is meant here, there is still land available without a fence around it and not yet owned by someone else apart from the crown, wages will be high. Johnson page 309: "America was a place where an industrial worker could save up enough in three years to buy a farm, and no immigrant would stay in the manufacturing industry if he could become an independent, landowning farmer. So the thrust to reduce the industrial headcount was enormous, and Whitney showed the way ahead."

McGrane gives the example in his Panic of 1837 of women workers in the shops in Massachusetts receiving wages as high as $5 and $6 a week, while few of their sisters in Europe could earn more than 20 cents a day, or $1 a week. Wages were high in 1830's America due to the open frontier. Cheap land and high wages, versus high land price and a surplus work force on low wages was a common vested interest debate in Congress throughout the 1820's. This was one factor - of many - which brought General Jackson to the presidency in 1828, of which we will see more shortly.

Such a situation caused a radical shift in thought between workers in the US and their brothers in Europe and the UK: the introduction of new inventions was not viewed by US workers as something that was going to take their jobs, or even reduce wages. US workers embraced the new inventions not just as labour savings devices, but as something that improved their working conditions. The situation was the exact opposite in Europe and England, where, because all land had long ago been enclosed - opportunities limited - labour saving devices were viewed with great suspicion, indeed downright contempt and were not wanted by the working class. Hence the revolts, especially in the UK. Most historians usually overlook this fact, indeed it is not understood by them at all - the relationship between wages and a land value permitted to capitalise into a tradable commodity. An understanding of this relationship will improve one's economic forecasting ability.

Where flows the benefit ?

Never forget the important question to ask; where does the benefit flow, and to whom ? With cotton, yes the consumer in one sense definitely benefited, cheaper prices and better clothing. The inventor saw a bit of money - but as history shows, few brilliant inventors end up very wealthy. (Unless they can convert their idea to a company and sell it to Wall Street, and still retain enough company shares for themselves). Ultimately, the inventive gain to society manifests as land value. For a great mathematical discussion of how this eventuates, see chapter three, Rent and the Dysfunctional Economy, in George Miller's On Fairness and Efficiency; the Privatization of the Public Income over the Past Millennium. For an even better but less mathematical discussion, see The wonderful Wealth Machine, by Phil Grant. By 1857, almost every single cotton plantation owner in the US was deeply in debt to the banks, loans to buy ever-escalating land prices being the culprit. Slavery takes all the credit in the US for the civil war, but behind the scenes was a debt problem. More on this next chapter.

Frontier religion, the great awakening.

At this time in the US, a strong religious revival of all shapes and sizes was taking place. For more on that subject, click here.

Politics of the time.

About the politics of the time, the 1820's, Johnson, page 326, says the following: "The Monroe presidency has been described, at the time and since, as the Era of Good Feelings, the last time in American history when the government of the country was not envenomed by party politics. But a case can also be made for describing the Monroe presidency, and the rule of John Quincy Adams which formed its appendage, as the first great era of corruption in American politics. Many Americans came seriously to believe, during it, that their government, both Administration and Congress, was corrupt, and this at a time when in Britain the traditional corruption of the 18th century system was being slowly but surely extruded. By corruption, America of the 1820's did not simply mean bribes and stealing from the public purse. They also meant the undermining of constitutional integrity by secret deals, the use of public office to acquire power of higher office, and the giving of private interests priority over public welfare."

So, the American citizen of the 1820's had good reasons to believe their congressmen and senators received fees and retainers from various sources for services performed. Well, laws are made on Capitol Hill, so if you want the laws changed to your advantage… The very wealthy J. J. Astor had Senator Thomas Hart Benton on a retainer. It was Benton that had the government's war department 'factory' system abolished, a system in direct competition with Astor's business. Congressman Webster was paid by the Second Bank of the United States (the BUS as it was known) for various services from time to time. "Astor seems to have had dealings with other men high in private life; indeed he even loaned $5000 to Monroe himself, this was eventually repaid though not for fifteen years. He lent the enormous sum of $20000 to (Congressman) Clay during the panic year of 1819 when credit was impossible to come by. Clay, like Webster, served the Bank for money whilst speaker." (Johnson page 327.)

We take the time to note this for our studies, because such early and visible corruption, coming as it did right on top of the aftermath of the 1819 panic, brought one General Andrew Jackson into the political fray. He campaigned in the 1824 election on this very issue; of corruption in government. General Jackson is credited as the first US politician to believe in the democratic will, and the result of his campaigning was the forerunner of the Democratic party: that residence was adequate qualification for the vote, that since all were subject to the nations laws, every freeman should have such a vote, and that such voting power, when used well, could be the remedy against government usurpation of power and corruption.

There were 5 persons who campaigned to be president in the 1824 elections. As it happened, Jackson won the popular vote against his closest opponent Adams, Jackson won more college electoral votes, and carried a greater number of states. But he did not receive a majority of the electoral votes, which meant a decision was required by the House of Representatives to decide the president from the top three candidates. Talk surfaced of a deal between several of the powerbrokers, Clay and Adams in particular. Adams was handed the Presidency; Clay turned up as Secretary of State in the Adams administration. Jackson won 1824 really, and he knew, that the people knew. He began immediate preparations for the 1828 presidential elections on the same issues again, federal government corruption, and the fact that government land sales were not putting land into the hands of those who used it best, actual settlers.

Jackson is important to our real estate story for several reasons. His campaigning began what turned into the 'endless election campaign'. A Jacksonian popular party formed after 1824 to win the next election for President, and began what turned into a two party system still in operation today, complete with the introduction of much of what we would recognize: electioneering, slogans, party organization and general election razzmatazz. Jackson won a decisive victory in 1828, and came to Washington with a clear political mandate for change. (Probably changing US politics forever at the same time.) His views, and he had plenty of them, ruled America from this time right up to the civil war of the 1860's. The relevance of this to us ? General Jackson hated banks. Well perhaps not banks per se, but how they operated at the time, (and still do), by what is termed fractional reserve banking. Jackson believed this process was corrupting the very soul of Americans, and he set about for their immediate destruction. Jackson's eight presidential years became a showdown; the Jacksonian's versus the banks. Jackson and many of his followers were 'hard money men'; those who believed banks should operate only on 100 percent reserves, i.e. backed fully by gold and silver. It began this way.

"Jackson was the first president not to come from a privileged background. Born in poverty and orphaned as a boy during the revolution, Jackson studied law and, in 1788, emigrated to Nashville, Tennessee, then little more than a collection of cabins. He soon prospered as a lawyer and began acquiring huge tracts of land, whose value rose quickly as settlers poured into the lush country of middle Tennessee. But when one land deal with complicated financing went awry, Jackson found himself responsible for another man's notes. It would take Jackson more than a decade to settle this matter, and as a result, he developed a lifelong horror of speculation, debt, and paper money." (From John Steele Gordon, The Great Game, page 62.) Now do note here, at this time in the US, "there was no national paper currency, and in its stead the country's circulation medium consisted of specie (gold and silver) and paper money issued by hundreds of local banks as well as by the expiring Second Bank of the United States. What this meant was that the nations private bankers had enormous power over the economy through their ability to expand or contract the amount of paper notes in circulation." (James Roger Sharp, The Jacksonians Versus the Banks, page 17.) In addition, Sharp had also noted, page 8, "Throughout the country there was a fervently held belief that privately issued paper money was an explicit device by which capitalists and bankers could control prices and the money supply. This, in turn, it was argued, gave these special citizens enormous political and economic power and made a mockery of a society that emphasized equal rights for all and special privileges for none." So General Jackson was not alone in his hatred of banks, their issuance of notes, and their holdings, or lack thereof, of specie.

The banks of course did not share such views and did not take Jackson's hatred lying down, especially the second BUS. Though the second BUS was incompetently managed at first, as John Steele Gordon points out, (The Great Game, page 63.): "When Philadelphia banker Nicholas Biddle took control in 1823, it quickly developed into the largest and most powerful bank in the country. Because it was nationally chartered, it was the only bank able to operate across state lines. As the federal government's fiscal agent, with a branch in every major city, its notes were accepted without question throughout the country. Biddle was an extraordinary man, one of the greatest bankers this country has ever produced. He completed all the work necessary to earn a degree at the University of Pennsylvania by the time he was thirteen, but the university refused to grant it because of his age. So he went to Princeton, earned a B.A. there in two years, and at the age of 15 was class valedictorian. By the time Jackson became President, Biddle was probably the second most powerful man in the country…"

Biddle always commissioned leading architects to design all SBUS buildings, in Greek Revival granite and marble. And as noted in the section on banking, over the centuries this process of bank design has been done on an ever-grander scale. One might label this an unconscious desire by bankers to try and solidify a process - credit creation backed by lending on government granted licenses and privileges - built on sand. Things are rarely what they seem.

Battle lines were drawn. Jackson won his 1832 re-election bid by a landslide, the first landslide in US history. Perhaps the people seemed to like his approach to government - minimalist in the extreme - 'no frills and no pretensions to world greatness' (Johnson page 345.) More likely for Jackson however, as Bill Clinton was to find to his benefit also, he was governing at a time of vastly increasing national wealth - albeit some built on sand - and the people were making money. Who cared about anything else ? The politics and events of this era, for the 1837 panic, flowed from here.

John Steel Gordon noted this of the era (page 65): "At the heart of national prosperity was a land boom developing in the West, financed by new state-chartered banks. In 1829, only 329 banks existed in the entire country. Just eight years later there were 788. But while the number of banks more than doubled, the face value of the notes these banks had issued more than tripled, from $48.2 million to $149.2 million. And the loans outstanding almost quadrupled, from $137 million to $525.1 million. Many of the states had slapdash banking laws, and many of these new banks were badly - if not fraudulently - managed, undercapitalized, under-regulated and overly sanguine about the future." We will come back to the subject of banking and bank fraud in a minute.

The land speculation.

Again there is no need to re-invent what has already been already well written; this from McGrane, The Panic of 1837, page 43: (One of the reasons I am taking a liberal number of quotes from various books, is to show that all of the US economic downturns have been extensively studied and written about, though mostly the various authors have specialized in just one or maybe two of the downturns, and not gone on to analyze the common themes in them all. A few have, but it's rare. Significantly, absolutely no author has offered the thesis that the cause of each downturn might perhaps be that of bank credit, created out of nothing and loaned against the value of government granted licenses and privileges, also created out of nothing. In other words, every downturn has been extensively covered, but no writer ever links the similarities: i.e., a downturn, if preceded by a land boom financed with a liberal dose of bank credit, will be more severe and consequently much harder to recover from. Anyway, back to McGrane and page 43.)

"One of the most prevalent forms of the speculative mania that infected the Americans of the (eighteen) thirties was connected with the occupation and sale of the public lands…All classes and all sections of the country were guilty of the same offense, all were impelled by the same craze for speculation. The farmer, the manufacturer, and the merchant, instead of paying their debts, bought land and speculated in land. The conservative eastern capitalist, the reckless easy-going southern planter, and the wary, doubtful western farmer joined hands in their efforts to purchase land. Villages and cities sprang up overnight in every direction, lots increased at the rate of 200 and 300 per cent per year, fortunes were made and lost in a few moments. All who had money or credit plunged headlong into the stream. Companies were formed, and through the generosity of the banks the mad rush to destruction was facilitated. The face of the country was checkered with new, well-mapped boom cities. The sale of the public land for 1834 was 4,658,000 acres; for 1835, 12,564, 000 acres, and for 1836, 20,074,000 acres. Naturally the increase in sales enlarged the amount of public deposit, and this in turn stimulated the banks to extend still further their issues. The public deposits, by the close of 1836, amounted to $49,000,000, while the deposit banks, with an aggregate capital of $77,000,000 showed discounts to the sum of $115,000,000. But in this transaction, as Jackson pointed out, the government received little more than credit on the books of the bank. 'The receipts from the public lands were', as the president stated, 'nothing more than credits on the bank. The banks let out their notes to speculators, they were paid to the receivers, and immediately returned to the banks to be sent out again and again, being merely instruments to transfer to the speculator the most valuable public lands. Indeed, each speculation furnished means for another.' Public men, representing both parties, reiterated and strengthened Jackson's contentions. Representatives and senators from the West called attention to the hardship the connection between the banks and the speculators necessarily had upon the settlers. The land office report substantiated these charges of connivance between certain of the land offices and the land grabbers. Unquestionably, speculation and bank juggling often went hand in hand."

Nor was the feverish speculation confined solely to the frontier areas and western lands. "The rise in the value of real estate in New York was one form the speculative spirit assumed in the East. From $250,000,000 in 1830, the valuation of real property in New York rose to $403,000,000 in 1835, being and increase of 50 percent in five years. The eagerness for land, declared Miss Martineau, is extraordinary." (Miss Martineau being one of the historians of the time and unusually for the era, female.)

Sound familiar ? Speculators were having a field day. The process went something like the following, the example being a Mississippi land sale of the 1830's: "On the morning of the second and third days of the sales, a short time before the sales were open, R.J.Walker called the attention of the people before the tavern door about thirty yards from the land office, and read an arrangement, announcing that a company was formed to buy the land, and that settlers as would comply with the terms proposed by the company should be protected; the settlers were to abstain from bidding; were to give into the company of speculators the number of the land, and one-eighth of the land, including the settlers improvement, was to be transferred to the settler on his paying on the day it might be sold, the amount to be paid to the United States; and if one-eighth of a section would not cover the improvement, then the settler was to have one-fourth section. In general, people deemed it best 'to close with the terms offered to them.' A few persons refused, and some of these were forced to pay as high as $10 per acre. After the company had finished its purchases, the settlers were disposed of: the settlers lands were portioned off to them, agreeably to the first and main designs of the company, and the residue was then put up at public sale, and was sold to the highest bidder, without any fixed price other than the first cost of the same…For the lands sold the company received various prices, from one dollar and a quarter up to six and seven dollars per acre, and in one instance of a supposed town site, $20 per acre." (McGrane, page 50) In this one instance, noted McGrane, the actions of the speculators lowered the return to the government of the sale of the public domain by some $65,000 or so.

Nor did the government land officials and 'public criers' at land sales miss much of the action. Again from McGrane, page 50: "One of the public criers on the part of the united States…and I understand to be one of the speculators, and who resides in Alabama, when opposition bids were made, would frequently stop crying the land, and say, 'Gentlemen, you had better compromise among yourselves; you are fooling away your money.' "

The fever to speculate was everywhere. One visitor to the US, the French economist Michael Chevalier, noted in his writings, Society, Manners and Politics in the United States, page 305, and published 1839: "Everybody is speculating…the whole country is an immense Rue Quincampoix. Thus far, every one has made money, as is always the case when speculation is in the ascendant." Sokalski noted, in his book The Great American Land Bubble, page 234: "When, in the early thirties, the speculative fever raged throughout the country, and government lands, as well as other property, could be purchased with 'rag money', created by 'wild-cat banks', then 'the land office business' began in earnest. The auctions were attended by veritable mobs. They were scenes of great excitement. Premiums were paid for choice locations near the auctioneers, and bribery and corruption in the process of receiving and registering bids were common."

Roy Robbins noted, in Our landed Heritage, page 60: "From a Wisconsin newspaper came the estimate that in the newer sections of the country, real estate investment for the ten years between 1825 and 1835, paid a 20 to 30 per cent return per annum…The speculators in Maine nearly beggared the state. Men left their warehouses, counting-rooms and stores and rushed off to buy townships, village lots or mill privileges." In Milwaukee, it was being reported, perhaps a bit tongue in cheek, that speculators went to bed at night hugging themselves with delight over the prospect that the succeeding morning would double their wealth.

It was at this time, 1825 or so to 1840, that 'the Texas Fever' raged. Moses Austin was the man who, to repair a previous lost fortune in Missouri, trekked all the way to Texas in 1820, where Spain ruled at the time, to press for a land grant that he had heard was still being given by Spain to any colonizers within that territory. To cut a long story short, it was eventually his eldest son, Stephen, who took up the grant and undertook efforts to colonize the family's holdings. He did this by advertising for settlers to simply settle and take up plots. Austin's eventual success in the matter encouraged others, helped on no doubt by persistent rumors after 1827 that Mexico might sell Texas to the United States, and soon after, the efforts by the US government to indeed purchase the land. An offer of $5 million was subsequently made. Speculators moved in, and land grabbing took over. Sakolski tells us, page 219, that: "From 1820 to 1840 the Texas wilderness was the lure of land-hungry, adventurous Americans. From the swamps of Florida and Louisiana to the hills of Kentucky and Ohio, the sign 'G.T.T' (gone to Texas) could be found on many cabin doors. Some went to find new homes, but many went to get land grants, and to form Texas land companies." (Texas, and a fair chunk of California, some 522,568 square miles, was eventually annexed by the US, after war with Mexico and payment of a bit of cash, around 1848.)

One of the best states to study for the working of this land mania, noted McGrane on page 53, was Illinois. "The large amount of refuse land in the state afforded abundant occasion for investments, while the ever increasing stream of migration westward stimulated the desire to possess land. By 1835 Illinois was in a most prosperous and flourishing condition." Well as luck would have it, we can have a look at the Illinois of this time, Chicago in fact, as a result of some amazing studies done by the American Homer Hoyt in his University thesis, subsequently a book, titled 100 Years of Land Values in Chicago. One of those absolute must read books. Following is a bit of a summary of events in this wonderful city, up to the panic of 1837. A review of the locality's geography is in order too, but just before we do that, let us go back to the subject of banks.


We have seen already how from the experiences of the 1819 downturn and panic there emerged a school of thought dedicated to a particular style of banking reform. Known as hard-money men, libertarian in outlook, these men wanted to see the eradication of fractional reserve banking, elimination of the only federally chartered bank, (the 2nd Bank of the United States, or BUS), and a federal government with as little activity as possible. These men believed in it so much they managed to take their ideas right to the top, in 1928. But where speculation in government granted licenses and privileges is concerned, they were bound to be defeated. In fact their program of reform ultimately added fuel to the speculation, though they may not have seen this at the time.

Once the first BUS had been dealt with, state governments simply chartered all the banks they could, to better facilitate their aggressive transportation development, kicking off the so-called era of free banking. There seems no doubt state governments, banks and the individuals behind them were often one and the same, or at least closely connected. Of these banks, noted Sobel (Panic on Wall Street, page 38) few could be classified as conservative. In Pennsylvania, banks were issuing ten paper dollars for each one of silver in their vaults, with some acknowledging the ratio as high as thirty-to-one. New banking laws in Michigan State meant that almost anyone could open a bank, which of course they proceeded to do. "During the last months of 1837, forty-nine banks were opened in the state, with a nominal capital of $3.9 million, but with actual reserves of less than $1.8 million. Some of the banks in the West did business, transacted loans and printed currency with no initial reserves."

Rothbard, in his book A History of Money and Banking in the United States, noted one further significant development that occurred in the early 1830's: an increase in specie. He says, page 98: "the enormous increase in specie was the result of two factors: first and foremost, a large influx of silver coin from Mexico, and second, the sharp cut in the usual export of silver to the Orient." It seems China was finding more interest in opium rather than silver, but more important, the then Mexican government had decided to finance its deficits by minting highly debased copper coins. "Since the debased copper grossly overvalued copper and undervalued gold and silver, both of the latter metals (gold and silver) proceeded to flow rapidly out of Mexico…the Mexican government was forced to rescind its actions in 1837 by shifting the copper coinage to its proper ratio. The inflow of Mexican silver promptly ceased." Note the year. Increasing flows of specie coming into the country, easy access to banks and more of them than ever before printing currency as economic expansion continued. Opportunities were sought everywhere. "Canals and railroads appeared interesting, but much of the money went into that favorite American speculative vehicle: land." (Sobel, page 39.) Land companies were being created in all parts of the US to facilitate the speculation. "Banks accepted land as collateral for loans, issued paper money based on land, which was then used to buy more land, repeating the cycle again and again." (Sobel page 40.) Now, back to that review of Chicago, the geography first.


Homer Hoyt, (100 Years of Land Values in Chicago), notes page 7: "The reason for the fortunate position of Chicago could be traced back a million years to the Ice Age when the glaciers scoured out Lake Michigan but did not cut a channel deep enough to turn the waters of the Great Lakes permanently into the Mississippi Valley. The St Lawrence River and the chain of Great Lakes formed the first highway into the heart of America from the East. The great network of rivers that emptied into the Mississippi was the first road to penetrate the interior of America from the south. Taken together, the two systems formed a huge arc around the English settlements on the Atlantic seaboard, and, if properly fortified, would have formed an insuperable barrier to westward expansion. At one point these two great waterways almost joined, and the land barrier was so slight that it was the route most frequently used for portage between them. This vital spot was Chicago."

Of course such a spot necessitated any invading army to pass that way as well. So the first building was a fort, Fort Dearborn. This was established after the US bought six square miles from the native Indians around the mouth of the Chicago River. Around the fort a few rudimentary huts were built - a congregation of fur traders and trappers mostly. It had already been recognized that a continuous waterway for boats linking that described above, would be useful, and in 1816 the appropriate land was again bought off the Indians. The state of Illinois was admitted to the Union in 1818, with slightly adjusted boundaries to take account of the new canal to be built from Chicago to La Salle. In 1825 the Illinois legislature incorporated a private company to dig it. Things got underway once Congress extended a land grant to the state, the land sales thereby being used to help finance the digging. Even so, by 1830 there were still only 12 cabins in what might be called Chicago at this time. However, the way West, to Chicago, was progressively becoming 'easier', and things developed that just happened to put the city on a direct route to New York. Once the US army had defeated what was regarded then as the Black Hawk Indian menace, around 1832, a steady but increasing flow of settlers were attracted to the area. Growth exploded. In 1833, the notable rise in population suddenly began to be reflected in a sharp increase in land values within the original improved (if one could call it that) section of the town. A lot bought for $42 in September 1830, was sold for $800 in November 1833. The fever was on, described this way by Hoyt: "At first the purchases were what might be termed legitimate, a lot sold for cash on which the purchaser would erect a building or store. The legitimate demand soon absorbed the floating supply and prices began to rise under the competition of anxious buyers. Lots purchased one day for $50 were sold the next for $60 and resold the next month for $100. It did not take long under such circumstances to develop a strong speculative fever, which infected every resident of the town and was caught by every newcomer. At the close of the year 1834 the disease had become fairly seated." (Hoyt page 26.)

The rise in land value gained momentum in 1834. "The entire United States was beginning to engage in feverish land speculation, and people were coming to Chicago with visions of the future city at the mouth of the Illinois and Michigan canal. In June 1834, the corner of South water and Clark Street, 80 by 180 feet, sold for $3500, thirty five times as much as had been paid for it two years before. A year later it sold for $15,000." (Hoyt page 27) The speculation climbed still further when in 1835, digging actually started on the canal, the State Bank of Illinois was chartered with a capital of $1.5 million to be re-loaned on Illinois real estate, and when a government land office opened in the town on May 5th. Hoyt had already noted in regards to the new banks opening up that "one of the most potent devices for raising land values, liberal credit to land buyers, was thereby created." The land office was now putting these buyers, flush with credit, into close proximity with the original seller.

Hoyt continues, page 27: "The fame of Chicago real estate was so great in New York City that Chicago lots were sold there at public auction. The high prices paid for these lots in the eastern city astonished the local speculators and stimulated fresh advances when the news finally reached the West. The report of a sale by Mr Hubbard of a half interest in a tract of eighty acres at the corner of Halsted and Chicago Avenue for $80 000 in New York in 1835, which represented a profit of $77500 made in a few months, was at first not believed to be true. When confirmed…local landowners revised upward their opinion as to the value of their holdings…the bills of the state banks of Michigan, Indiana, and even Wisconsin were even more numerous in Chicago than the bills of the state bank of Illinois. New batches of Michigan bills could be secured almost at will by a law which authorized such notes to be issued in exchange for private obligations secured by mortgages on the lands of that state."

News of further land sales and auctions, to the Chicagoans themselves, were now being announced by riders on horseback through the streets. The story goes that a prominent physician, busying himself in his office selling town lots, was called away by a messenger with the news that a lady was in urgent need of his professional services. Reluctantly leaving his office, he diagnosed the lady's ailment and made haste to leave again for the office. "Why Doctor," the woman called, "you don't say here how to take the medicine". "Ah yes", shouted back the doctor, "Canal terms; one quarter down, with the balance in one two and three years."

At the speculative peak, July 1836 in Chicago according to Hoyt, (which accords with our public land sales data for the US as a whole), scams and frauds were the order of the day. So too the amount of speculation in subdivided lots. McGrane quotes numerous examples, this one from page 54: "Paper towns were laid out and advertised in the East as being at the 'head of navigation' or the 'handsomest location for a city in the world'." One wag suggested to many of his speculator friends that in view of the fact that so many towns were being planned, it might be an idea to reserve a plot or two for farming.)

Of course the lots of many of these towns today are, continued McGrane: "the sites of some farmer's field. Kankakee City, Illinois, was an outgrowth of speculation, and is a good illustration of this mushroom type of town. In its best days the population numbered 75; lots were sold in New York and Chicago for thousands of dollars, but the city fell with a crash in 1837, and today the site of the once promising Kankakee City is a farm."

So much for Chicago in its very first boom. By 1839, most land values had plummeted 90 to 95 percent. Very very few persons were not ruined.

Such rampant speculation in the sale of the public lands, and such obvious losses of revenue to the government begs the question why the government did not put a stop to it. As the speculation in the sales of the public domain intensified, it is probable the government must have felt increasing pressure to do something about it; even if some in the government were the most active speculators and real estate men themselves. McGrane notes, page 61: "The people of the West thought they had just cause in protesting against the methods employed in disposing of the public lands. The speculator with his ready cash, his advance knowledge of good lands acquired by shrewd agents, his connivance with the registers and the banks, and the pressure he could bring to bear on the legislatures, had every advantage over the poor settler. The country people, (quoting correspondence between politicians at this point) 'waking or sleeping, eating or working', never thought of anything but land, and how to procure their equitable rights. To them the whole land-office system was odious, and as they formed a large portion of the new states, they were able to turn the scale of public opinion in many an election when they united. Their protests had to be listened to; and it was to handle the evils of this situation and to appease these men that Jackson, in July of 1836, issued his famous Specie Circular."

John Steele Gordon (The Great Game,page 66) put it this way: "Sales by the government's General Land Office had totaled a mere $2.5 million in 1832. By 1836 sales totaled $25 million and in the summer of that year were running at the rate of nearly $5 million a month… Jackson understood perfectly well what was happening… typically, Jackson resolved to stop this speculation in its tracks. He proposed to his cabinet that the Land Office accept only specie - gold and silver - in payment for land. But the cabinet, many of whose members were deeply embroiled in the speculation themselves, strongly opposed him. Congress, equally involved, would also have nothing to do with the plan. So Jackson simply waited until July 11, after congress had adjourned for the year, then issued the so-called specie circular as an executive order. It required, with a few exceptions, payment in gold or silver after August 15."

Another summary of conditions at this time - essential reading - is given by Johnson, page 356, whom I will again quote directly: "The orgy (of speculation) was encouraged further by Jackson's decision to hand the federal government's cash surplus, which accumulated when the national debt was paid off in 1835, back to the states. This amounted to $28 million, and though described as a loan was understood to be an outright gift, and spent as such. The surplus was the result of government land sales jumping from $1.88 million in 1830 to $20 million in 1836, and as the land boom continued the states assumed that federal handouts would continue and increased their borrowing on the strength of it. Banks of all shapes and sizes, many with outright crooks on their boards, poured oil on the smoldering embers of inflation by keeping their presses roaring. In the meantime, nature intervened, as it usually does when men construct houses of straw, or paper. Bad weather in 1835 created a crop failure in many parts of America, and the consequences began to make themselves felt in 1836 with an unfavorable balance of trade against the United States, a withdrawal of foreign credit, and the need to pay suspicious foreign creditors, who did not like American paper, in gold or silver. Jackson, who was nearing the end of his term, increased the tension by issuing, on July 11, 1836, a Specie Circular…this move was made in a simple-minded desire to get back to 'sound finance', but it had the predictable effect of making gold and silver even more sought after…Its effects at the end of 1836 coincided, almost exactly, with the failure of big financial houses in London, the world financial capital. This in turn hit cotton prices, America's staple export. By the time Jackson finally retired in March 1837, handing over to his little heir apparent, Van Buren, America was in the early stages of its biggest financial crisis to date."

The downturn.

The worsening business conditions were not immediately obvious to all, and the worsening did not simply take place overnight - more a gradual process. In the 1836 November elections Van Buren, a follower of Jackson, had just managed to win himself the Presidency, but economic conditions were deteriorating. As a response to the specie circular, bank notes were being returned to issuing banks, especially out West, to be redeemed for gold. England had been raising its discount rate to keep its gold in the country, and was about to suffer the failure of several of its banks. Complicating matters further, the price of cotton was going lower, which brought on the failure of several US mercantile houses that traded in this commodity. The failures in the cotton region were contagious and soon spread to New York where, by March, a panic looked imminent.

John Steele Gordon in The Great Game, page 67 summed it up this way: "Jackson had hoped that his action would dampen speculation in land, but it did more than that, bringing it to a screeching halt. As the demand for specie soared, holders began turning in bank notes and demanding gold and silver. Banks, to raise the needed money, called in loans as fast as they could. Western banks drained gold and silver from eastern banks, but they then held on to the metal as best they could, because of yet another government program. With the federal government running large surpluses and having no debt, money tended to pile up uselessly in the Treasury and was deposited in the pet banks. But in 1836, Congress decided to give much of this surplus money to the various state governments to use as they saw fit. It directed the Treasury to withdraw $9 million every quarter, beginning in January 1837, from its bank deposits and divvy it up among the states according to population. The banks had to be ready to absorb this considerable shrinking of their deposit bases. The weaker ones, with small gold reserves and large note issues, began to fail. The country's businessmen, who needed bank credit to operate, were crippled…the New York Herald reported on January 2, 1837, the day the first $9 million was transferred from mostly eastern banks to the state governments, that interest rates that had been 7 percent a year had risen to 2 or even 3 percent a month. Bankruptcies began to spread. When the Bank of England raised interest rates to prevent gold from flowing out of that country, British cotton purchases declined, further injuring the American economy. With higher interest rates at home, British capitalists were less inclined to invest in American securities, and prices on Wall Street plummeted still further…By the end of the next month every bank in the nation, at least those that had not already failed, suspended gold payments. Government revenues, which had reached $50.8 million in 1836, plunged to a mere $24.9 million the following year, and Andrew Jackson's vision of a debt-free federal government vanished, never to be seen again. By the early fall of 1837, about 90 percent of the country's factories had closed, and the country's first (and still its longest) great depression was underway. Given the depth and extent of the depression of 1837, it was fortunate that the vast majority of the American population still lived on farms and outside what economists call the cash economy. They could make do, providing for themselves, until better times returned. Those in the cash economy, the factory workers and owners, the merchants, and of course the brokers on Wall Street, suffered far worse."

A severe contraction of bank credit was now well underway. Short selling, the art of selling a share you do not yet own, was invented at this time by Jacob Little, the first great Wall Street bear. This is probably indicative of the volatility that was now available to be exploited by speculators.

The poor crops had reduced the tolls collected by the canal operators. The states, who for some years had been building all sorts of infrastructure to facilitate better transport, with money loaned from banks, both local and overseas, were forced to scale down the building, if not cancel the projects entirely as revenue declined and the interest expense could no longer be met. The state of North Carolina reported a decline of 50 percent as regards most of the states active and tangible property, on land yet more, with many lots selling for about the costs of improvements only. Thus the action of credit in reverse.

The web site gives May 10 as the panic day of 1837, (9 months after the specie circular) though no source is quoted. This was the day the banks in New York suspended specie payments, though things had been getting slowly worse for months prior to May. Business failures had continued through April, with several Wall Street offices like that of Hicks Lawrence & Co closing as well. Those now unemployed held protest meetings demanding work, one in Greenwich Village attracting 50,000 workers, riots broke out in Boston and Philadelphia. "Stock prices on Wall Street fell sharply as gold seemed to vanish." (Sobel, page 67.) Lightner, History of Business Depressions, page 135, quoting excerpts from the New York papers of the day, says John Fleming, President of Merchants Bank "fell dead from excessive anxiety with regards to the affairs of the bank May 4th, from which a run set in on all banks. The failures grew worse over the next two days, and US Bank stock fell below par for the first time. On May 9th there was a "furious run on all banks", May 10th, "chaos".

(With dates and W. D. Gann market timing techniques in mind, Sobel noted, page 68, that the stock market "had fallen throughout the late March and early April auctions, actually rose sharply on April 10 and then rallied for the next four sessions." In other words, a low and possible overbalance 30 degrees prior to May 10 'chaos'. Further investigation of such Gann timing is pending.)

Land sales peaked in 1836, with the dollar value of federal government receipts indicating the peak was in the 2nd quarter, April to June. Hoyt indicates July for Chicago land transfers. Smith and Cole, (Fluctuations in American Business, 1790-1860), specifically rule out the land sales peak being attributable to immigration, going on to state (what is to my mind the bleeding obvious): "peaks in the sale of public lands uniformly preceded the outbreaks of the several crises…and frequently recovery in the volume of land sales preceded that of general business." (Page 54).

Interestingly, railroad stocks peaked in 1835. So it seems even back then, stocks were doing what they do best, discounting future business activity, i.e. stocks are lower well before a downturn is obvious to the public. (One would expect this to be even more pronounced back then. In the absence of any stock market regulation whatsoever, insider activity would have been rampant, - as later cycles spectacularly reveal - and it is the insiders that know their stocks best.) The railroad index also appears to have bottomed first in 1842, heralding the forthcoming business upturn. Smith and Cole put it this way, page 83: "The characteristic relationship among these three curves (stock prices, interest rates and commodity prices) may be said to be a sequence in which stock prices moved first, commodity prices second, and discount rates last. Thus in the culmination of the cyclical movement surrounding 1837, railroad stocks attained their maximum in May 1835, and broke precipitously after June 1836; commodity prices continued to rise until February 1837; and interest rates did not begin to fall decisively until after May of the latter year." So, the speculative indices moved first, anticipating the corresponding movements of other indices. This ought to be what one would expect, any other sequence would be the exception to the rule. As for banking policy, it was particularly expansionary in general up to 1833, a tightening in 1834, and then further expansion of credit through to 1837. Thereafter it followed a consistent conservatory policy of reigning in loans and rebuilding specie.

By 1840, the money in circulation, mostly notes, had contracted by two thirds. So many individuals and businesses were now bankrupt that Congress was forced to pass new bankruptcy laws to avoid overcrowding even further, already overcrowded jails. Some forty thousand bankrupts as a consequence were then able to avoid paying their debts. Crowd psychology played its part too. "The instant people saw that the government suspected the reliability of the banking institutions, distrust seized upon the public mind, and like fire in the great prairies, nothing could stop it." (McGrane page 63.)

Further quotes.

We can round out our study of this particular cycle with some further small quotes from a couple of books that I found of interest, illustrating the extent of the reversal from boom to bust.

McGrane page 117, in describing the Mississippi region: "The currency of the state was in a terrible condition, as the banks refused to pay coin, and proposed to shave their paper. By 1839 extensive plantations were thrown out of cultivation and lying waste for want of hands to till them, the slaves having been seized under execution and carried off by the sheriff. The greatest embarrassments…were mostly confined to the old counties, as the new counties had been created and settled too late to embark in the extravagant purchases of land and Negroes at twice their value which had been so common within recent years in the lower counties."

McGrane page 118: "Lands…that once commanded from twenty to fifty dollars per acre may now be bought for three or five dollars, and that with considerable improvements, while many have been sold at sheriff sales at 50 cents, that were considered worth ten to twenty dollars. The people, too, were running their Negroes to Texas and Alabama, and leaving their real estate and perishable property to be sold, or rather sacrificed…So great is the panic, and so dreadful the distress, that there are a great many farms prepared to receive crops, and some of them actually planted, and yet deserted, not a human being to be found upon them."

"Barter was resorted to in Illinois to carry on trade, and notes were sometimes drawn, payable in a cow, or a horse, or other farm products." McGrane page 127.

"The hardships among the laboring classes were intense. One-half to two-thirds of the clerks and salesmen in large commercial houses in Philadelphia were without work by June 1837. Mothers were begging in the streets of New York for their children by the close of that year. The almshouses and poorhouses were full to the brim, while hundreds unable to gain admittance suffered from cold and starvation. As the cold months came on the suffering of the poor became so aggravated, and the number of unemployed increased to such a degree, that the ordinary means were inadequate to relieve even those who were destitute of every one of the necessitates of life. Some died of starvation. Some were frozen to death. Many, through exposure and privation, contracted fatal diseases. A large number who had never before known want were reduced to beg." McGrane page 131.

"It was upon the well-to-do land operators in the West and the eastern capitalist who had invested so heavily in lands that the panic fell with the greatest force." McGrane page 133.

We might also include a summary of a few salient points about this episode noted by Charles Kindleberger in his classic study of business cycles, Mania's Panics and Crashes. Monetary expansion, he observed, had been underway since the 1830's, particularly as a result of the English textile boom. In the US so called 'wildcat banking' and importation into the country of a lot of silver fed speculation in cotton and land, especially so in land used for cotton production. In the UK, joint stock banks, a new creation, assisted the further speculation in cotton, cotton textiles, and railroads. At the height of the speculation in the US, French banks were assisting one Nicholas Biddle of the Bank of the United States in his attempt to corner the cotton market. The dates Kindleberger gives for the emotional moments at the turn: speculative peak UK, April 1836, panic in December, speculative peak US, November 1836, panic June 1837.

From The Stock Market Barometer, by William Peter Harrison, quoting Charles Dow: "The year 1837 brought a great commercial panic, for which there was abundant cause. There had been rapid industrial and commercial growth, with a multitude of enterprises established ahead of time. Crops were deficient, and breadstuffs were imported. The refusal of the government to extend the charter of the United States Bank had caused a radical change in the banking business of the country, while the withdrawal of public deposits and their lodgment with state banks had given the foundation for abnormal speculation."

Chandler page 489: "Many of those who had experienced the distress of the collapsed land boom and panic of 1819 having passed away, and affairs being guided by a newer generation, all classes and in all sections of the country were, in the 1830's infected with another land gambling mania. "

It seems that quite a fair proportion of the settlers out west ended up as squatters by the early 1830's. Chandler noted (page 488): "It was said that two-thirds of the entire population of Illinois were squatters, and that there were more than thirty thousand squatters on public lands as far west as Iowa at that early day. This condition was a forceful reason for granting free homesteads, and yet Congress delayed for thirty years more. Congress in 1832 (had) compromised, and reduced to 40 acres, at $1.25 per acre, the minimum size of tracts saleable, thus making it possible to buy a farm outright for a cash payment of $50. This should have been done at the outset, but it was opposed by land speculators and by influential eastern and southern landholders, and by members of Congress, because it would draw their people to the west and depreciate land values in their sections. Fur companies were opposed, to prevent settlement of the western sources of their fur supplies. Western settlement not only tended to retard a natural rise in the price of eastern lands, but it reduced the supply of workers in industry, which caused Senator Foot, of Connecticut, to offer a resolution in the senate to stop the survey of public lands and abolish the office of surveyor-general. After congress authorised the sale of land in small tracts, a new crop of active speculators hired others to serve as dummies in making entries for them. By this method large areas of the best contiguous land and mill-sites were obtained and held until increasing population created a demand at increased prices."

"Senator Walker, of Mississippi…reported, in 1836, that of the thirteen million acres sold, during the past year, he believed 8 million acres were bought for speculation. " (Chandler page 489.)

Again from Chandler, page 490: "Saying that the time had come to put an end to wildcat bank inflation on which speculation was feeding, and to save the new sates from absentee landlordism, 'one of the greatest obstacles to the advancement of a new country and the prosperity of an old one,' Jackson, in 1836, wisely (but for which he was viciously attacked), issued his famous specie circular. This required buyers of land, except actual settlers, to pay for it in specie, which was so great a shock that the panic of 1837 suddenly broke. Stimulated by rising land prices, caused by the rapidly increasing population, many of the states had created bond issues for unwarranted development. When the panic broke, land values evaporated, bringing broken banks, and defalcations by bank officials who had indulged in the speculation, and defaults by state governments"

A bit on the banking frauds:

The severe downturn brought out into the open, what had probably been going on for years - banking cover-ups, counterfeiting, and outright embezzlement by bank officers. Click here for some examples. Stories were told that in Maine, the bank commissioners discovered in some instances loans having been made to share holders before the capital had been paid in: stories in New York that bank capital had been paid in only to be borrowed immediately by the stock holders under pledge of stock. (McGrane page 14.)

Mystery and concealment were the characteristic features of the banking process in Mississippi. "Often the capital stocks of the banks…were paid in the notes of the stockholders. Charters gave an opportunity for this in using the words 'secured to be paid'. The issues of the banks were consequently not issued upon what the shock holders had paid into the bank, but on what they owed to the bank, thus making their indebtedness, and not their actual capital, the basis of their circulation. In many instances the directors borrowed nearly the entire capital of their respective institutions, while all the banks gave heavy discounts to their officers. By 1840 the bank commissioner could definitely state that he knew for certain individuals were indebted to the banks of Mississippi for sums of from one-half million to one million dollars, who, a few years previous, were not worth one dollar, but by virtue of the credit system they had been able to secure loans from the banks to purchase property. This property gave them additional credit, and from one bank they proceeded to another, extending their credit and increasing their property…" (McGrane page 25.)

In Georgia, the bank charter would be granted, and the incorporated gentlemen, "to comply with the precautionary regulations of the legislature, borrowed, for a few days, the amount of specie required to be placed in the vaults before operations could be commenced. The bank would open under these auspices, the specie would be returned to its proper owner, and the notes of the stock holders would be substituted for it." (McGrane page 27.)

Banking is a highly privileged sector within any modern economy, wielding often enormous power. In referring to Pennsylvania, McGrane reported that the members of the state legislature proved "most pliable to outside pressure" when offered tempting internal improvements in their districts, and "Nicholas Biddle was to find this an efficient means for securing desirable legislation." (McGrane page 13.) When Biddle's bank, the 2nd BUS, collapsed in 1841, notably after a failed speculation in cotton, one of the bad debts, as listed, was an amount of $114 000 owed by Congressman Daniel Webster, Secretary of State and outspoken supporter of the bank.

A few notable quotes of the era that highlight the emotion:

Ebullience at the top:
"On whatever side we turn our eyes, we are greeted by the gratifying evidence of universal prosperity."
New Yorker, October 1936

Politicians have other agendas:
"I leave this great people prosperous and happy."
New York American, Feb 21 1837, quoting outgoing president Andrew Jackson, when clearly it wasn't.

So too the bankers:
"Our banks are all pretty safe."
Bicknell's Reporter, Philadelphia, Mar 28 1837, when clearly they weren't.

The reversal to fear:
"The United States were never in such a perilous condition as they are at this moment."
New York Herald, March 30 1837

"The present commercial revulsion is without a parallel in our history. The distress pervades all classes - the prudent and the foolhardy, the regular merchant and the speculator, the manufacturer, tradesman, laborer, banker - all are involved in one general calamity."
New York Evening Post, May 1 1837

Blame the government:
"What good has the administration done us with all its experiments upon us ? Eight years of experiment has brought us to the verge of bankruptcy, where the country stands now."
New York Daily Express, April 18 1837

"The cause of our calamities is traced mainly to misgovernment."
Washington D C Daily National Intelligencer, May 13 1837.

"The great danger to our system lies in the tendency to an excess of power in executive hands, a system fast yielding to dispositions which are favorable to despotism."
New York Tribune, Oct 11th 1841.

Blame anything, except the speculation in government granted licenses and privileges:

"The present evils which afflict the country have been produced by overbanking, overtrading, overspending, overliving, overdashing, overdriving, overreaching, overcheating, overborrowing, overeating, overdrinking, overpraying, oversinning, overthinking, overplaying, overriding, overstepping, overfiddling, and over acting of every kind and description, except over ploughing."
New York Herald, May 3 1837

"Loans for land speculation defy any estimate as to their quantity, probably constituted a large percentage of total assets during the entire period - larger than the percentage assigned to business loans, and in the years 1834-39, they possibly exceeded all other loans combined." Sharp, The Jacksonians versus the Banks, page 34.

In summation then:

An expansion of bank credit - it doesn't matter how this happens, just note that it happens - fuels an increase in speculative activity in government granted licenses and privileges. As more people pile into this activity, the action feeds on itself. The creation of credit to finance the buying and selling of these government granted licenses cannot, however, go on forever. At some point, an event, or combination of events, will take place that forces a contraction of available credit. If this event is enough to erode public confidence at the same time, especially if it involves land value, a recession, perhaps a panic, is inevitable. Sure as night follows day.

Such an event, or combination of events, does not have to be out of the ordinary. It is just that towards the peak, the economy is less able to withstand the shock, built as it is upon that notoriously sandy idea of the creation of bank credit to finance the speculative buying and selling of government granted licenses and privileges.

For the 1837 cycle: After the BUS was put out of business, the federal government still had to put its own collected revenues somewhere, formerly deposited with the BUS. The decision was to divvy it up amongst selected state banks. Such banks could thereby extend their own lending further, and did so. It seems clear many new state banks were chartered in the hope of gaining a share of such government deposits, amongst other things. The sale of public lands far exceeded what might have been expected as the cycle developed. Soon the federal government actually had no debt outstanding, building up the surplus even further, that was eventually handed back to the states.

Speculation in all sorts of things developed; reckless over-investment as it turned out. An inflow of specie out of Mexico allowed banks further license to print money. Distributing the federal surplus funds on deposit with selected banks, and transferring them to the states, put pressure on the reserve holdings of the banks involved. Poor crops from the previous year - the result of the Hessian fly apparently - found the US importing more the following year, bringing pressure from English banks to settle payment. The Bank of England, for its own reasons, was now increasing interest rates, shifting the flow of capital back in the direction of England. Suddenly credit, once abundant, was now that much harder to get…

Follow up articles of interest:

American Heritage, May 2001 issue, Volume 52 Number 3, Perils of the Surplus
American Heritage, Aug / Sept 2002 issue, Volume 53 Number 4, The Man Who Invented the Newspaper

Further Reading:

Grant, Phil. The Wonderful Wealth Machine, 1959.

Insana, Ron. Trendwatching: Don't be fooled by the Next Investment Fad, Mania or Bubble, Harper Collins, 2002.

Lightner, Otto C. The History of Business Depressions, Northeastern Press, 1922.

McGrane, Reginald Charles. The Panic of 1837, University of Chicago Press, Phoenix edition 1965.

Miller, George. On Fairness and Efficiency; the Privatization of the Public Income over the Past Millennium, The Policy Press, 2000.

Sakolski, A. M. The Great American Land Bubble. The Amazing Story of Land-grabbing, Speculations, and Booms from Colonial Days to the Present Time, Harper and Brothers, 1932. Chapters X and XI in particular.

Sharp, James Roger. The Jacksonians versus the Banks, Columbia University Press, 1970.

Smith W. B. and A. H. Cole, Fluctuations in American Business, 1790-1860, Harvard University Press, 1935

Sobel, Robert. Panic on Wall Street, A history of America's Financial Disasters, Macmillan, 1968.

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