Preliminary and Incomplete Draft – Comments Welcome Andrew Jackson’s Bank War and the Panic of 1837 Eric Hilt* Wellesley and NBER Katharine Liang Northwestern University Abstract: The role of Andrew Jackson’s Bank War in the Panic of 1837 has been the source of politically charged debate over most of the 180 years since the crisis occurred. We study the Panic of 1837 using comprehensive bank- level data, focusing on the role of the pet banks—the network of state banks chosen by Jackson’s administration to replace the Second Bank of the United States as fiscal agents of the federal government. These banks were closely tied to the Democratic Party, were lent tens of millions of Dollars in public money, and were granted a privileged position within the banking system. This produced a moral hazard problem, and the pet bank managers responded by taking on excessive levels of risk. Although many different factors contributed to the financial crisis of 1837, an important component of the commercial banking panic was the collapse of the pet bank system. Panel data regressions reveal that the pet banks saw their net liabilities fall and their banknote discounts rise at nearly twice the rate of other commercial banks in the years following the panic, relative to the pre-panic period. Counterfactual estimates of the national money supply indicate that the differentially severe contraction among the pet banks accounted for around 30 percent of the overall contraction in bank liabilities in 1837. * Emails:
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[email protected]. 1. Introduction The role of Andrew Jackson’s Bank War in the Panic of 1837 has been the source of politically charged debate over most of the 180 years since the crisis occurred.