Is the Federal Reserve a philosopher king or servant of the treasury?
An interesting byproduct of the recent financial crisis is the public’s greater awareness of the history of these calamities in the United States. Since 2008, economic historians have come forth with several accounts intended for the general reader. One such is Alasdair Roberts’ new book about a lesser-known instance, the Panic of 1837, and its aftermath.
A few up-front observations should be made regarding Roberts’ chosen topic. Although an agreed-upon definition of recession has been established, and one can say implemented, by the National Bureau of Economic Research (NBER), there is less agreement on what constitutes an economic depression. For example, author Tom Woods has made a name for himself based on the contention that the recession of 1920 to 1921 was actually a Great Depression, but he admits this is not a subject of universal agreement among historical observers. Unofficially, the most common definition of an economic depression is that it is simply a very long and very deep recession.
In point of fact, the NBER has not even designated the economic downturn of the 1830s and 1840s as a recession. This does not mean the downturn was not severe. Select economic data during that period is not up to the standards of more recent data and in many cases it is either non-existent or not reliable. Thus, the NBER does not even start its time series of business cycles until the 1850s. Similarly, the classic A Monetary History of the United States by Milton Friedman and Anna Schwartz does not start its full time series of monetary data until 1867.
However, Friedman and Schwartz do address what Roberts refers to as the first Great Depression in their chapter on the “Great Contraction” of the 1930s:
To find anything in our history remotely comparable to the monetary collapse from 1929 to 1933, one must go back nearly a century to the contraction of 1839 to 1843. That contraction, too, occurred during a period of worldwide crisis, which intensified the domestic monetary uncertainty already unleashed by the political battle over the Second Bank of the United States, the failure to renew its charter, and the speculative activities of the successor bank under state charter.
Thus, Roberts’ title seems justified in employing the term depression, although some might argue that the Panic of 1819 was in fact America’s first Great Depression.
Like many a financial crisis in the 20th and 21st centuries, the run-up to the Panic of 1837 was characterized by inflation and a real-estate bubble leading to malinvestment. Roberts notes the building inflation in the economy beforehand:
Across the country, prices were beginning to skyrocket. According to one index wholesale prices for key commodities in New Orleans increased by over 30 percent between January 1835 and April 1836 . . . The increase in commodity prices, although startling, was nothing when compared to the rise of land values.
However, it certainly appears that Roberts could have provided more detail. Inflation data from this period from Historical Statistics of the United States show that inflation was going down steadily from 1828 to 1833 and was going steadily upward from 1834 to 1837, earlier than the author noted with his example.
Roberts begins his discussion of the contributing factors to the bubble and malinvestment in Chapter 1 by noting that:
[s]ome citizens blamed state governments for granting charters for the establishment of so many banks . . . Other Americans blamed President Andrew Jackson for the bubble [because] Jackson vetoed a bill to renew the charter of the Second Bank of the United States.
Unfortunately, he does not cite any particularly reliable analysis to support these points. He refers to the political battles over the Second Bank of the United States and the withdrawal of federal deposits that were then placed “with about thirty state banks,” but does not make a convincing case for how this could have led to the Panic. The reader is only given the comments of a contemporary 19th century politician and a pair of 20th century historians (including famed big-government advocate Arthur Schlesinger).
Financial crises are often a decade or more in the making. Yet the author neglects to consider the Second Bank of United States as a possible culprit in the building of the bubble. It was, after all, the central bank at the time; not investigating its possible role reveals a lack of curiosity on the author’s part. The Bank was in existence beginning in 1816 and it was fully operational during the period that inflation was building in the economy. This gap may be due to his background not being in finance or economics, but in politics, the law, and public policy. (Like Schlesinger, he is an alumnus of Harvard.)
Later in this chapter, in discussing the Panic itself, he notes that many held Andrew Jackson responsible for the bubble and the crash. Jackson “had been hostile to the Bank of the United States because of the power which it seemed to wield through the manipulation of paper credit.”
The reader then gets a whirlwind tour of events: the Specie Circular of 1836; the distribution of revenues from the sale of government lands to the states according to their populations; the inauguration of President Van Buren; runs on Mechanics’ Bank and Dry Dock Bank of New York, and an apparent resulting contagion that led to the suspension of redemptions of bank notes in New York; interventions by the Bank of England; the flailing around of the Bank of United States after losing its official standing; and the ultimate closure of 200 banks in the United States.
What is not there is convincing evidence as to why Jackson was to blame. Again, the financial and economic aspects of the Panic of 1837 get short shrift, and this disappoints, for this is what any reader expects from a book on this topic.
In total, the run-up to and playing out of the crisis occupy a mere 35 pages in Chapter 1. Nor do the ensuing 125 pages of the book touch directly upon the crisis itself or its causes. Rather, Roberts delves into a more general history of the period by looking at: The States’ Crisis (Chapter 2); the Federal Government’s Crisis (Chapter 3); and Law and Order (Chapter 4). In each, Roberts does try to make some connection, however strained, between the crisis and the topic at hand. The side discussions seem disproportionate, however, to the material devoted to what is purported to be America’s first Great Depression.
To be sure, the troubled financial position of many of the states during this time is well summarized by Roberts. Several states actually defaulted on or repudiated their debts. Much of this borrowing was from British investors to finance canals, railroads, (state-owned) banks, and other projects. One particular passage on policy concerns a British proposal—by Barings Bank—to have the federal government backstop state bonds by providing a guarantee against default. Roberts writes that the proposal was “savaged by Democrats as a scheme to cover the losses of foreign bankers.”
The federal government chapter has at its core a graph that shows the volatile changes in federal revenues and expenditures from the 1820s to the 1840s. It traces the Jackson years and quotes Jackson as having “hated debt.” The federal debt was actually eliminated during this period. This was followed by the “bubble years” of the early and mid 1830s, when revenues and expenditures exploded. Post-Panic revenues and expenditures then plunged to levels not seen since the pre-Jackson years. Roberts goes on some tangents at this point, including a detailed consideration of the Oregon Territory and conflicting British and American claims on it.
Finally, the “Law and Order” chapter details some of the political unrest and violence of this period. Roberts tries to make a connection here leading with the declaration: “Economic troubles led to political turmoil.” He describes in detail the Dorr Rebellion in Rhode Island and the Anti-Rent War in the state of New York.
One could summarize Chapter 5, on the end of the crisis, as: We whipped Mexico in the war and the economy bounced back:
The U.S. victory in the Mexican War marked an end to the depression in two ways. First, it revived the nation’s spirits. In the eyes of many Americans, military success restored national honor, redeemed the democratic way of governing, and gave proof to Europe of the nation’s vitality. Second, the war was an unexpected tonic for the economy, and the mechanism by which the United States was fully reintegrated into international financial markets.
Roberts concludes by revealing a preference for heavy government intervention in an emergency like the Panic of 1837. Comparing it to the crisis we just endured, he writes:
[T]here is an important difference in the willingness of contemporary policymakers to intervene to stop panics, save tottering financial institutions and avoid depressions. Few today would take the view held by many Democrats in the early 1840s that the government should look after its own revenues and let the moneyed interests fend for themselves. Moreover, modern policymakers have tools for intervention that were unavailable in the 1840s. The United States now has a sophisticated central bank, in the form of the Federal Reserve; an equally sophisticated Treasury Department; and mechanisms for taxing and spending that make it easier to provide stimuli in a tailored and timely way.
So, jettisoning the substantive arguments, the author relies on some vague notion that most people believe in interventionist policies and that our sophisticated friends at the central bank and Department of the Treasury will make us financially safe. This, notwithstanding the frenetic and vacillating responses of the authorities during the crisis that hit late in the new millennium’s first decade.
Those looking for a generalized history of the 1830s and 1840s may find Roberts’ book of interest, but for a good economic and financial analysis of the Panic of 1837, one would have to look elsewhere.