How to Sleep Well During the Great Dollar Panic Ahead

Periods of epic price deflation have occurred several times in American history.  The Great Depression, of course, is the only period still within living memory for some.  But peering back another 100 years, there’s an instance of price deflation that was far greater.

Without coincidence, the Panic of 1837 followed a grand experiment in central banking.  Over issuances of unbacked paper money by the Second Bank of the United States – the U.S. central bank from 1817 to 1836 – led to rampant speculation and price inflation.  Much like today, the combination of the central bank, legal tender law, fractional reserve banking, and government deficits, dramatically increased the supply of money and credit…compelling people to borrow money to buy things they couldn’t afford with money they couldn’t repay.

Murray N. Rothbard documented the massive monetary inflation in his historic tomb, A History of Money and Banking in the United States – The Colonial Era to World War II.  According to Rothbard, the total money supply rose from $109 million in 1930 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent.  Much of this was accomplished by the Second Bank of the United States, “which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent.”

Yet this was just the ramp up period.  “For the total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astounding rise of 84 percent, or 21 percent per annum.”

With all this new money sloshing around there was bound to be a speculative fever for it to rush to…

The Magic of Money Supply Inflation

No doubt, man is prone to flights of fancy, which, in hindsight, are beyond comprehension.  Mad dashes for beanie babies and dot com stocks merely scratch the surface of recent delusions.  But for love and war, there’s nothing that softens the minds and warms the hearts of men to self-destruction than a good old fashioned land boom.

The great housing mania of the early 21st century, without question, was a classic case of a cheap credit induced asset bubble.  So, too, was the fervent drive for West Kansas farmland in the late 19th century.  But the selloff of public land east of the Mississippi in the 1830s has a special place in American history.

Often times seemingly independent policy actions conspire to have remarkable unintended consequences.  For instance, the early 19th century Indian removal policy of the U.S. government to relocate Native American tribes to west of the Mississippi River, along with the mischief of the Second Bank of the United States, combined for an episode of epic land speculation in the mid-1830s.  In fact, between 1834 and 1836 the sale of public lands increased 500 percent.

Naturally, like any good mania, an element of fraud quickly threaded its way into the fabric of the land boom.  The stratagem used was the same ruse used by Congress today to pay for entitlements it can’t afford…to borrow massive amounts of money and make payments with depreciating paper money.  In this case, speculators borrowed unbacked money from state banks, which pyramided their loans on the unbacked credit of the Second Bank of the United States.

Always and without fail, the magic of money supply inflation has a knack for getting away from itself.  Like all experiments with paper money and central banking, following the great asset inflation there was a great panic…

How to Sleep Well During the Great Dollar Panic Ahead

The triggering event in the Panic of 1837 was the Specie Circular, an 1836 executive order by President Andrew Jackson that required payment for government land to be in gold and silver.  Secondly, the demise of the Second Bank of the United States in 1836, when Jackson refused to renew its charter, diminished the federal government’s ability to expand the money supply.

In short order, the money supply contracted, loans went bad, over 40 percent of the banks in the United States failed, and land speculators were hung out to dry.  But not everyone went broke.  To the contrary, some people made unbelievable fortunes off the panic and crash.

For example, the “Great Bear” of Wall Street, Jacob Little, shorted stocks and reaped massive profits as stock values fell to 0.  Others, who didn’t have the financial savvy of Little, made out quite well by having their own personal reserve of gold and silver coins.  When the money supply contracted and asset prices collapsed, owners of gold and silver coins were able to buy goods and property at a dramatic discount.

In the years ahead, this same simple move could result in a massive wealth transfer to holders of hard money.  Although it’s not likely that any president today would return the nation to an immediate gold or silver specie standard, nor is it likely that they would scuttle the central bank, the forces of capital markets, and repeated debauching of federal reserve notes, could result in a global panic out of paper dollars.

Considering the ongoing and mass money debasement policies of the Federal Reserve and Congress, it doesn’t take much imagination to see this scenario – or a derivative thereof – coming to fruition.  At the very least, picking up a little gold would cover the cost of preserving a peaceful night’s sleep.  Alternatively, it could provide the capital for the bargain buying opportunity of a lifetime.

Sincerely,

MN Gordon
for Economic Prism

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