Book review: America’s First Great Depression

Early Lessons in Extravagance

“America’s First Great Depression” tells the story of how the U.S. dealt with the economic and political crisis that followed the Panic of 1837.

By ROGER LOWENSTEIN

In 1837, America’s economy collapsed. The depression was severe, the first to be visited on the young republic. In an echo of recent times, governments as well as private banks were among the culprits. Today the deadbeats include Iceland and Greece and possibly Spain; in the 1840s they included Pennsylvania, Michigan and Mississippi. No fewer than eight states (and Florida, still a territory) defaulted on their bonds.

Present-day Americans are outraged over the weakness of European politicians; well, Nicolas Sarkozy had nothing on Samuel Bigger, who became the governor of Indiana in 1840. The Indiana legislature, in 1836, had approved a mammoth investment in canals, roads and railroads. As Alasdair Roberts recounts in his affecting monograph, “America’s First Great Depression,” enactment of the Indiana project was greeted with fireworks. A legislator remarked on the “general rejoicing; the population turned out on the streets as upon a great holiday.” The enthusiasm lasted just long enough for Indiana to place bonds with British investors. By the late 1830s, the depression had halted work on Indiana’s canal and rail projects, and revenues to pay the bonds were insufficient. Nonetheless, the legislature cut taxes. “Our citizens,” Gov. Bigger allowed, “should be favored as much as possible.” That is to say, Indiana willingly chose default.

Contemporary readers may find it shocking to learn how often legislatures made “dishonorable choices about repayment,” as Mr. Roberts puts it. (Or perhaps they won’t be; in our era, legislatures promise pensions and decline to fund them.) Mr. Roberts mines the “crisis of the states” to drawa telling picture of American politics in the often-overlooked years after the Revolutionary generation had departed the scene. They were characterized byone-term presidents (Andrew Jackson was the sole exception), rising sectionalism, rampant but disorganized economic progress, and painful busts.

The author demonstrates that,contrary to common belief, laissez-faire was hardly the dominant ideology. The federal government, it is true, was small and inconsequential. “Easily three-quarters of the federal workforce consisted of Post Office employees.”But state governments played an active part in development.

There was a fierce competition to develop inland waterways and rails. Many state governments did not stop with infrastructure; Mississippi chartered a private bank in which it purchased a majority of the equity. Taxes being unpopular, legislatures preferred to fund such extravagance with debt. And “no one had a clear idea of how much state governments were borrowing.” Basking in their ignorance, foreigners were eager to lend. They were gulled by the likes of Sen. Daniel Webster, who, on a visit to England, vouched for the security of American bonds while avidly unloading his personal holdings in U.S. real estate. In one state, Pennsylvania, annual interest charges ballooned to almost $2 million a year—twice as much as the state’s yearly revenues.

Mr. Roberts correctly infers that America’s economy was still in a formative stage, its umbilical cord to Britain still attached. Roughly 60% of American cotton was shipped to Liverpool—trade that accounted for almost half of the value of U.S. exports. “Americans,” the author observes, “were not fully in control of their economic and political affairs.” He also blames overseas events, such as the interest-rate machinations of the Bank of England, for causing the American depression. But Jackson’s war on the Second Bank of the United States, which resulted in the bank’s chaotic dissolution and in money tightness, played a major role. In any case, the economy and commodity values in the 1830s were booming out of hand. Something had to give.

Once the crash set in, President John Tyler, citing the distinctions between state and federal government, disabused investors of any hope that Washington would make good their loans. Foreigners did not appreciate the subtleties of the federalist system; to them, state insolvency invalidated American democracy. Sydney Smith, an Anglican cleric in London and the unfortunate owner of Pennsylvania bonds, directed a petition to Congress charging: “A great nation has been guilty of a fraud as enormous as ever disgraced the worst King of Europe.” Foreign lenders sent agents to state capitals to negotiate or beg for repayment—with scant effect. Defaulting states did not begin to honor their debts until the mid-1840s—a few not until after the Civil War. At least in the absence of any bailouts (Ben Bernanke, please note), sobering lessons were learned. The crisis led to reforms in state constitutions, often including limits on borrowing.

The depression had ramifications beyond state finances: It disrupted the federal Treasury, exacerbated tensions between native-born workers and immigrants, and heightened disputes over tariffs. Tenant farmers, hounded for rent they couldn’t pay, resented that they were treated worse than failing banks. As the publisher of the New York Herald sarcastically complained: “None but . . . the financial, the brokers, the great commercial interests of society have the right to suspend their debts.” Plus ça change . . .

As long as “America’s First Great Depression” hews to the dire economic tidings of the 1830s and early ’40s, readers are likely to find much that is of interest. Regrettably, Mr. Roberts strays far from the depression to various tributaries and tangents, including the government’s effort to augment U.S. naval forces in the 1840s, border disputes in Oregon and Maine, and the development of urban police forces.

The book goes fully off track by turning, at great length, to the Mexican-American War, which the author calls “a product of the First Great Depression,” no matter that it began in 1846, two years after the depression ended. His causative chain is highly original: “Panic caused the depression, which caused default, which caused a war of words across the Atlantic, which caused a dissipation of good feeling, which now affected American policy on Texas. The U.S. was finally moved to war.” Like the long-ago politicians he depicts, Mr. Roberts overreaches, but unlike them, the only ruin he inflicts is on the reader’s interest.

Mr. Lowenstein is the author, most recently, of “The End of Wall Street.”

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One Response to Book review: America’s First Great Depression

  1. Paul Marks says:

    The State governments did indeed follow wild statist (no pun intended) policies. However, as with the Panic of 1819 (see M.N. Rothbard’s book on that) there was a Federal element to the crises. President Andrew Jackson is well known for his struggle against the idea of a (government backed) National Bank (the concept that had led to the credit money expansion that, in turn, led to such boom-bust events as that of 1819) HOWEVER President Jackson did NOT adopt a free market position.

    On the contrary – President Andrew Jackson put Federal tax money into State level “pet banks” which they promptly used it to build an inverted pyramid of debt (a credit-money expansion), thus leading to boom-bust.

    It was not till President Martin Van Buren (himself an ex banker – which might explain his lack of trust in banking practices) that Federal tax (and land sales) money was kept away from the bankers and kept in an Independent Treasury (to be spent on a real pay-as-you-go) basis. Ironically Van Buren got the blame for the depression – which had been generated by the credit-bubble policy that has existed before he became President.

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