In the years after the war of
1812, the
United States initiated a series of banking reforms meant to control the ebb and flow of the
economy in order to stave off the slumps that occur every few decades.
As Martin Van Buren began his presidency the financial bigwigs were in an uproar over the rumors of an oncoming financial stagnation. A number of ideas were advanced for solving this problem, but the economy continued to decline during the administration.
In addition to a trade deficit, banks were offering credit to all comers and land speculation was out of control. Hard currency was leaving the country at high rates while businessmen were handing out credit in their own personal scrip.
Throughout the 1830s, land offices were experiencing amazing growth in business, and fly by night banking operations were shooting up like dot-coms at a Stanford graduation party. In 1836, land purchases increased ten times over the previous year. This led Andrew Jackson to release the Specie Circular, which was an Executive Order forcing all land offices to accept payment only in gold or silver.
Since most banks were operating on the credit of other investors, and had no hard backing of their own, the level of borrowing declined preciptiously. Numerous loans defaulted and the level of land purchasing plummeted.
Soon scores of financial houses collapsed rapidly, taking with them the fortunes of thousands, leading to a general collapse of prices and a shockwave throughout the economy.
The banking industry, and the economy in general, would not recover for almost six years.