The "Specie Circular"

The demise of the second Bank of the United States increased speculation throughout the United States, especially, but not limited to, purchases of land. This speculation led to inflation. Levi Woodbury, Secretary of the Treasury under Andrew Jackson, came up with the idea of requiring payments to the United States Treasury be made in silver or gold to reduce the rampant speculation that was feeding the inflation.

Prior to 1833, when payments to the Second National Bank of the United States halted, state banks would be required to keep gold and silver to offset any notes they printed. With the rise of "free money" state banks began printing as much currency as they needed.

The Specie Circular worked, better than Woodbury or Jackson (or anybody, for that matter) realized. Almost immediately state banks began to take back their currency so that they could cover payments to the Treasury. This process had begun to effect the economy when Martin Van Buren took office in March, 1837.

Still, the shrinkage in the economy was slow enough that while financial institutions were concerned and some state politicians initiated action, national politicians maintained a status quo approach. In early May, 1837, all that would change.

New York City banks had profited heavily from the national speculation frenzy. They were not prepared for the Specie Circular and once it went into effect they did little to accommodate it. As smaller banks, especially in the West, began to fail pressure was put on the hard currency reserves of these banks. On a single day (May 9, 1837), the New York City banks were forced to outlay much of their hard currency reserves.

The following day the banks suspended hard currency payment to everybody, not just the Treasury. The paper money issued by these banks was now worthless. The Panic of 1837 ensued.

Links appearing on this page:

Specie Circular was added in 2005