President Andrew Jackson and some members of Congress feared the wild speculation and didn’t trust the national bank. They believed it caused the speculation by introducing and issuing inflationary paper money. The President vetoed a bill that would have re-chartered the Second Bank of the U.S., in July, 1832, ending its operations by 1836. Money poured into state-chartered banks in the West, according to the Deposit and Distribution Act of 1836. These state banks relaxed their loan standards and maintained unsafe reserves. The loss of reserves caused eastern banks to decrease lending.
Events in Great Britain added to the problems. Poor wheat harvests and excessive importing of food caused the Bank of England’s reserves to decrease. The bank decided to raise interest rates from 3-5% to increase these reserves. New York City banks were forced to do the same. The effects were harmful to U.S. securities.
The Specie Circular Act of 1836 added to the complications because it mandated that western lands could only be purchased with gold and silver (specie). Investors in real estate borrowed and held paper money issued by the banks for bank loans. In May 10, 1837, the New York City banks suspended payment of gold and silver at full face value for bank notes. By July, Chicago real estate investors were stuck with worthless money and were unable to function. Illinois and western agricultural states had good crop years, and farmers survived until 1839. In 1843, Illinois’ finances collapsed.
The panic lasted for seven years. Land values and tax revenue crashed everywhere. Improvement projects in Chicago were put on hold or paid with general funds. Banks failed and businesses went bankrupt. Unemployment rose to 25% as thousands of workers lost jobs.
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