Panic of 1837 Begins as Banks Refuse Specie Conversion, Triggering Five-Year Depression

Just two months into Martin Van Buren’s presidency, major New York state banks refuse to convert paper money into gold or silver on May 10, 1837, having exhausted their hard currency reserves. Other financial institutions across the country quickly follow suit, triggering the Panic of 1837—a financial crisis that initiates the worst depression in U.S. history to that point, lasting approximately five years until the mid-1840s. The panic results from the toxic combination of Andrew Jackson’s destruction of the Second Bank of the United States, unregulated lending by state “pet banks” holding federal deposits, the Specie Circular’s sudden demand for hard money, and collapsing commodity prices—particularly cotton, which fell 25 percent in February and March 1837. Hundreds of banks and businesses fail, thousands lose their lands, profits and wages plummet, unemployment soars, and westward expansion stalls, demonstrating the catastrophic consequences when monetary policy serves political ideology rather than economic stability.

The panic’s causes trace directly to Jacksonian economic policies that prioritized destroying centralized banking over maintaining financial system stability. Jackson’s removal of federal deposits from the Second Bank and their redistribution to state pet banks selected for political loyalty rather than financial competence removed the regulatory restraint that had prevented excessive note issuance and speculation. State banks, flush with federal deposits and freed from oversight, engaged in rampant lending for land speculation and commodity purchases, creating an inflationary bubble particularly acute in western territories opened by Indian removal. Jackson’s July 1836 Specie Circular—requiring gold or silver payment for public lands—burst this bubble by demanding scarce hard currency that most buyers could not obtain at speculation-inflated prices. The credit contraction combined with international factors, including British banks reducing American credit and plummeting cotton demand in European markets, to create a perfect storm of financial collapse.

Van Buren inherits the crisis but receives the political blame despite its origins in Jackson’s policies. Van Buren attributes the panic to “greedy American and foreign business and financial institutions” and overextension of credit by U.S. banks rather than acknowledging the structural problems created by Jackson’s bank war. Van Buren’s Whig opponents immediately blame Democratic financial and monetary policies, particularly Jackson’s destruction of the Second Bank’s regulatory function. Van Buren follows “a course of action consistent with his Jacksonian belief in the limited powers of the federal government and a suspicion of paper money and easy credit,” calling a special congressional session in September 1837 to propose an independent treasury system that would keep government funds entirely separate from private banking. This ideological rigidity prevents government intervention that might have mitigated the depression’s severity.

The depression’s human toll is devastating: hundreds of banks fail, businesses collapse, unemployment reaches unprecedented levels, and farm foreclosures displace thousands who had purchased land on credit now impossible to repay with commodity prices halved. In the South, collapsed cotton prices drive recession well into the 1840s. Small farmers cannot meet loan repayments, and banks that survived the initial panic continue failing as debtors default. The depression lasts approximately five years, making it the longest and most severe economic crisis in American history to that point. Van Buren’s political career is destroyed—he loses reelection in 1840 to William Henry Harrison in a landslide, with Whigs running on the slogan “Van, Van, is a used up man.”

The Panic of 1837 demonstrates kakistocracy through the elevation of ideological purity over economic competence in monetary policy. Jackson’s personal vendetta against the Second Bank—rooted in a decades-old land deal where paper notes became worthless—shapes national banking policy with catastrophic results. The destruction of centralized banking oversight, replacement with a patronage-based pet bank system, and rigid adherence to hard money ideology combine to create financial instability that immiserates millions. Van Buren’s refusal to use federal power to intervene, citing limited government principles while the economy collapses, extends the suffering. The episode reveals how political leaders’ personal grievances and ideological commitments, pursued without regard for economic expertise or institutional safeguards, can destroy prosperity and stability while those responsible—Jackson, who left office weeks before the panic—escape accountability for the devastation their policies created.