Panic! Like It’s 1837

Tyler Durden's picture

Via The Daily Bell

180 years ago today, everyone panicked. On May 10, 1837, New York banks finally realized that the easy money they were lending was unsustainable, and demanded payment in “specie,” or hard money like gold and silver coin. They had previously been accepting paper currency that for every $5 was backed by only $1 in silver or gold.

Things culminated to that point after years of borrowing the paper currency to expand west, buy land, and build infrastructure. As silver came in from Mexico, banks lent out five times the amount of their deposits–fractional reserve banking.

At the same time, the value of silver was falling because its supply was increasing in America. Great Britain, which had been lending much of the money, was less interested in silver because they could pay for trade with China in opium. So even though Britain had a year earlier begun demanding payment in specie, the abundant silver in America did not hold the same weight, so to speak, it had previously.

Now, reflect on this for a second. The USA was depending on loans from a country that they had successfully revolted and seceded from fewer than 50 years earlier. Britain had also provoked The War of 1812 just 25 years earlier when they wouldn’t stop attacking American ships. But somehow it still seemed like a good idea to depend on British banks to form the foundation of American development.

So at the same time when American banks had to backstep their risky practices, Britain also just so happened to need 25% less cotton, which was the foundation of the American economy. This only exacerbated the trade deficit.

But still, despite whether or not Britain’s actions were nefarious, the whole situation would have been remarkably cushioned if fractional reserve banking had not been used. Because of this “easy money,” land was bought at enormous rates on credit, but credit that was not backed by actual value–only 1/5 of the actual value existed of what was being lent!

President Andrew Jackson was not entirely without blame either. When he deconstructed the federal bank, he deposited the money into state banks, and encouraged them to go ahead and lend, lend, lend! Of course, when the time came for the banks to return the deposits, the money was gone.

So when this massive real estate bubble burst in 1837, it caused a panic and ensuing recession that lasted until 1844.

Does any of this sound familiar to you? Perhaps especially the part about government creating incentives for home loans, which could not be paid back, culminating in the crash of 2008.

Some used President Jackson’s abandonment of the Bank of the United States as proof that a central bank was needed to stabilize the economy. Yet instead of prohibiting fractional reserve banking, the Federal Reserve exacerbated the practice. They required no hard money backing of U.S. currency, while still allowing banks to lend out much more money than they possessed. Not only do banks not have enough money to cover what they lend, but the money itself is still just paper.

In the years preceding the panic of 1837, state banks had basically done the same thing. They were printing money that held value only by fiat, and funding public works projects in order to circulate the money. The obvious problem was that the money represented nothing of value, and was thus primed for rapid devaluation, which contributed to the bubbles which burst in 1837.

Now, the stock market is higher than ever, and interest rates are basically lower than ever. This time is probably different.

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Kamehameha's picture

No one leaves Federal Reserve building *alive*.  Then fumigate the tunnels.  SpecOps can visit the BIS, and chase them to the ends of the Earth.

Deathrips's picture

You see ..promises from strangers are more valuable than silver and gold.

 

FML

 

RIPS

johngaltfla's picture

The Panic of 1837 and following depression brought us an American original:

The Sawdust sandwich.

Literally a sprinkling of sawdust on bread to provide filler to keep empty stomachs from hurting.

Coming to the iDepression of 2019 near you.

SolidAssets's picture

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johngaltfla's picture

I thought you got the BMW after taking Zuckerberg up your ass unprotected? Can't  you at least get your spam straight?

sixsigma cygnusatratus's picture

Canada has zero percent reserve requirement.  So when the needle is on empty, it means your tank is bone dry.  See, it IS different this time.

https://en.wikipedia.org/wiki/Reserve_requirement#Canada

JackT's picture

Can you imagine being demanded to repay in specie. How few people even know what that is?

SafelyGraze's picture

fortunately, we no longer have the problems of 180 years ago, since modern money is not backed by specie

which is good, because specie is not backed by anything

hugs,
FFC

 

armada's picture

"This time is probably different."

Suuure.

StackShinyStuff's picture

Yeah, panics are SO 180 years ago...

MEFOBILLS's picture

The daily bell is just another mises institute, and their spin always confuses neophytes.  

Here is key statement:

 New York banks finally realized that the easy money they were lending was unsustainable, and demanded payment in “specie,” or hard money like gold and silver coin

 

First of all, it wasn't easy money, it was easy bank credit.  Bank credit in those days, rode on top of gold in a 10:1 ratio.  During depressions, banks would not ask for their "credit" back, but instead ask for specie (metal money). This then drains the metal money toward bankers, which they then hoard.  What was dug out of the ground ends up in a vault. 

This is a failure in logic, in that it is unlike types.  When you borrow a lawnmower, you return a lawnmower.  When banks demanded metal in exhange for their credit, to then cancel debts, this is what is known as a swap.

Swap of unlike kinds are part of the slight of hand of banking.  Unlike things can never be equal, as they are different.  It is a feature of credit banking to then grab the world's metal.  This is why metal money systems of the past always failed.  (Some exceptions, such as Hanseatic league.)

The mises daily bell hypnotized in their article, with assumption that monetary "Fix" must be specie, because fractional reserve blah blah blah.  

Of course, they will not mention that the true nature of money is law, not metal.  There are other variables to money that specie cannot meet.  For example, volume of money in supply must match the volume of goods and services extant.

Another variable is velocity, and specie tends to be deflationary, as it goes off and hides.  It hides especially whenever there is some sort of trauma to the economy, as people become cautious.  

Mises, Daily Bell --- sophomorists, who continue to a-priori theorize out of their ass.  Actual historical accounts that diverge from their made up narratives are conveniently ignored.

If a monetary theory doesn't stand up to history's test, then it is crap theory.

WallHoo's picture

Very well said!Metal as money has its own problems and people here must learn!

JRobby's picture

The problem with all of it is a lack of sanity. Greed does that when you give in to it.

Greed is just another form of Satan.

Treason Season's picture

TDB also uses the misleading term Anglo-American instead of the more accurate Zionist Kosher Kabal to describe our banker overlords.

JEG4's picture

I'm not sure where you are getting the 10:1 gold ratio from, perhaps an estimate from some reading? There was no mandated gold ratio. Banks issued notes directly against eligible paper by law, primarily state bonds. It was up to the bank to decide how much specie to keep on hand to meet demand for redeeming notes. If they failed to redeem notes the bank was seized and the bonds were sold off to repay the note holders. In any case, people had a strong preference for paper money even during this period (Demand for Free Bank Notes, Minneapolis Fed).

Banks actually had to accept their own credit (notes) back. Now if you tried to pay off your debt with another banks notes (credit) then in a crisis a bank may not accept another banks notes because they are not sure the bank is solvent and can redeem the notes for specie. This is very similar to what happens today. In times of crisis, banks stop lending to each other, liquidity dries up, markets freeze, some bank transfers are not accepted, etc.

No monetary system can save you from a bubble crisis.

With regard to the volume of money, that was the whole point of banks notes. The supply of bank notes would flex and contract based on the demand for money. The difference today is that it is centralized at one private bank (GSE) that has a monopoly on note issue, the Fed.

Also, the Grisham's Law issue is exactly the same issue we face today. People hoard physical cash and banks hoard federal reserve deposits, which are as good as cash since they are backed by a printing press so the accounts can never default. Have you looked at excess reserves lately? Heard of any bank runs lately where people are demanding physical currency?

Fiat currency from a central bank functions as gold and silver did previously. The only difference is that there is one mine called a printing press and there is no limit how much they can mine. Just like gold was the base of the money supply during the gold standard and bank credit was built on top of it, today fiat dollar bank notes from the Fed are the base money supply and bank credit is built on top of that.

Ghordius's picture

+1 MOFOBILLS and a standing ovation

worth repeating:

"Mises, Daily Bell --- sophomorists, who continue to a-priori theorize out of their ass.  Actual historical accounts that diverge from their made up narratives are conveniently ignored.

If a monetary theory doesn't stand up to history's test, then it is crap theory. "

related to that: did you know that the whole thing about "Rothschild" in the US, all the memes still circulating in the US about them are directly derived from this Panic of 1837?

in 1837, British Lenders -> usually headed by Rothschild

in 1837, gold, specie -> Rothschild was the "market maker", globally

in 1837, Bank of England -> biggest shareholder was Rothschild (the "British House of", more exactly)

in 1837, the UK was the Hegemon of the World, the 800-lbs Gorilla In The Room, the biggest source of trade and in particular lending, and that lending was usually done in "consortiums", more often then not headed by Rothschild

specie was collected from creditor countries when needed, by British warships, which controlled all sea lanes

if you are interested on how those affairs went, see this article, it's fascinating: https://en.wikipedia.org/wiki/Don_Pacifico_affair

JRobby's picture

Good one Ghordo!

You don't like the Rothschild's?

Ghordius's picture

I see them as a historic feature, a fact, particularly in the last half of the 19th and the first half of the 20th Century

they were a fact you could not just ignore. meanwhile, I don't like the myths around them

Ghost who Walks's picture

Thanks again Ghordius,

I can see the similarities to events today.

Ghost who Walks's picture

Good work Mefobills,

Now I can see the fraud in "Gold Loans" to Junior Gold Mining Companies that must be paid back to the bank in real Gold.

I assume that the loan is really "Paper Gold" that is converted into whatever currency the mining company needs to develop its project.

Akzed's picture

Thanks for taking the time to explain in terms understandable by those not working in the financial sector.

Suleyman's picture

Yes, but new dollars can easily be created. So instead of an outright depression, we might get hyperinflation.

 

Fizzy Head's picture

just imagine the shrieks if you told Somone in 1812 in the future people will trade no reserve paper notes for digital numbers at 1700 a pop .... They'd be right to think we went absolutey insane.

JRobby's picture

They thought they said feces.

Then they found out the hard way that the whole system is feces. 

All of it. By that time, the bankers had converted their paper into "real wealth"

El Viejo's picture

"...one can see in Minsky's proposals an argument for the sort of system later adopted in Canada with zero reserve requirements from lowering the 'reserve tax' and interest paid on positive reserve balances or charged overdrafts.", from "Stabilizing an Unstable Economy, Hyman P. Minsky, McGraw Hill, 2008.

The mechanic to the car owner:
"You can pay me now or you can pay me later"

Keep short accounts.

New_Meat's picture

MDB's bot has been reprogrammed and the angels sing in the heavens.

This bot is very positive on the growth potential of fiat bot-ness.  why, most (((lawyers))) don't make 100/hour.

- Ned

OverTheHedge's picture

Want to earn between $15and $500 per hour?

Then get off the internet and get a fucking job!

 

JRobby's picture

I would rather visit you in jail. I would give you some instructional books to read (approved by the guards of course)

Ben A Drill's picture

That's a wish sandwich. I wish I had something between two slices of bread.

Or, if it's really bad. I wish I had a second slice of bread.

JackT's picture

Or..I wish I could remember what bread was.

Ignorance is bliss's picture

The upside is all those cheap blow jobs.

RiverRoad's picture

Yeah, surprise, surprise.... like when we found out in '09 that big banks were levered 44 to 1.  Who knew?!

man from glad's picture

Another trick was to fill one's belly with as much water as it could hold.

Déjà view's picture

"$awdust $andwich"...compliments Soup du jour...
http://www.prevention.com/eatclean/31-foods-that-contain-sawdust

That's right: There's wood pulp in your cheese. Scandalous, huh? Well, not really. Not only has cellulose been a safe, FDA-approved food additive since 1973,

Ironic...2 years after demise of Gold Standard...

BandGap's picture

This is called Roman Meal.

The Germans had a "white bread brigade" in WW2 because eating wood exacerbates/causes ulcers.

The filler in McDonald's "milk"shakes is actually microcrtsyalline cellulose. Yum.

vato poco's picture

Deathrips, 6:58PM: "you see, promises from strangers are more valuable than silver and gold"

that's the single best comment i've ever seen on ZH, and as opposed to the Soros Troll Boogereater Army that infests this place nowdays, I've been here basically since they opened the joint. WEAPONS-GRADE rhetoric; so good I'm halfway expecting congress to call an emergency session just to outlaw it. 

print it on t-shirts, get a Lebron or a Katy Perry or some other famous name to hawk it, and we'd crash the whole stinking rotten system in a year. We all might as well quit commenting: Mr. Deathrips has done gone and pured it. highest compliments

J S Bach's picture

The big difference between 1837 and today is that we are now the "World Reserve Currency".  This has allowed the charade to go on far longer... and the disparity between the 5-to-1 ratio in PMs to "specie" is also far greater.  The coming "panic" will be as a hurricane is to a gentle April shower.

johngaltfla's picture

The other big difference was gold was the world reserve currency. Right now to equate it to dollars in circulation, gold would have to be repriced somewhere near $900,000 per ounce.

FinsterF's picture

Actually the dollar would have to be repriced near 900,000 to the ounce.

TeraByte's picture

A paltry 30 000 Nixonites to buy one unite of the old currency in Gononomics, a 26 % debasement a year.

Yog Soggoth's picture

A professor of economics at the University of Basra d. Nabil Marsoumy in an interview with Alsumaria News for, " The accounting receipts used by most government departments in Iraq , where the amounts columns are divided into two parts , one dinar and the other fils, which is surprising because the penny is no longer circulating for more than thirty years , " noting that " government accounting receipts remain unchanged reflects the extent of the failure of management thought, so that the hand of reform did not extend so far intuitive to simple details are handled thousands of times a day. " They said for years now the plan was one to one, well, at first as a given to historical currency researchers. Now what happens? Central banks and their tools decide the fate of nations. Ask yourself as an investor, am I on the know?

Ignorance is bliss's picture

Slavery is coming back.History is a pendulum. The unprepared, the most indebted, the ones with the least useful skills will beg to be a slave. All for three squares and a cot.

Pop3y3too's picture

Ask everyone that endeavors to earn a "wage" day in and day out in order to put food on the table and a roof over their heads....we're already there.

Jethro's picture

Why did you leave out most of the federal agencies?