3.19. THE BUBBLE BURSTS: THE 1837 FINANCIAL PANIC

The Chicago that Ogden had inherited, and that now greeted Van Osdel was not unlike this fallen wall. The optimism that had been unleashed with the final payment of the Federal debt in early 1835 had been largely financed by the local issue of paper currency from regional and private banks, with or without state charters, that had been backed by Jackson’s distribution of the government’s financial revenues away from the 2BUS. Jackson had tried to gain control over this economic frenzy by regulating “Wildcat” banks that had been approving loans for the purchase of land with paper currency without sufficient reserves of specie. On July 11, 1836, he issued an Executive Order that required the Secretary of the Treasury to initiate the Specie Circular that required the department’s land offices not to accept bank notes, but only gold or silver toward the purchase of public land by speculators (however those who actually intended to settle the land were exempt). This had the effect of draining species out of the banking system faster than anyone had thought would happen. For instance, New York City banks’ specie reserves plummeted from $7.2 million on Sept. 1, 1836, to $1.5 million on May 1, 1837.

Meanwhile, despite Jackson’s opposition to the 2BUS, its actions had just begun to bring the national economy out of recession, that led to a marked increase in imports without a corresponding balance in exports. Once again the country faced a deficit in its balance of payments that was being ultimately financed to a large degree by the Bank of England. By early 1837, the BOE’s investment in the U.S. deficit had reached £6 million with no end in sight. Precisely at this moment, the BOE was forced to curtail its financial support of British merchant bankers who were financing the U.S. debt, in order to cover a large outflow of specie to Europe to pay for a major crop failure in Britain that had occurred during the preceding fall. These dual crises converged, unfortunately for newly-elected Pres. Van Buren. Within a month of his inauguration, cotton brokers in New Orleans began to fail due to the withdrawal of British financing in March. In April, New York creditors began feeling the credit crunch and on May 1, the banking house of Arthur Tappan collapsed, sending the country into a financial panic. With the economic decline, the demand for cotton fell accordingly, leading to the downward price of cotton, the country’s main export. The crisis swept the country, ruining fortunes made solely on the anticipation of the potential of the West. On May 24, 1837, only twenty-two days after Ogden’s election, the Chicago Branch of the State Bank of Illinois suspended all specie payments. Prices of land in Chicago, valued as high as $1,000 in 1836, crashed to their pre-boom worth of fifty dollars. While land values had caved in under the pressure, bringing them back into line with their real worth, the loans made on these same lands remained at the inflated values. Wholesale bankruptcy brought Chicago’s meteoric growth to a screeching halt.

The pressures of financial ruin grew so great that the only publicly perceived salvation for the city was repudiation of the debts: “Let us have stay laws, anything to save us from our bitter enemies, the creditors!” At a meeting called in anticipation of repudiation, however, Mayor Ogden quelled the hysteria and, more importantly, saved the city’s credit rating by appealing to the residents’ conscience and sense of civic honor: “Above all things, do not tarnish the honor of our infant city.” Van Osdel’s timely appearance in June to erect Ogden’s house only a month after the start of the Panic, can be seen as another endeavor by the Mayor to restore public confidence and salvage what little was possible from the worsening recession. Ogden even went so far as to personally borrow funds to help pay the city’s debts. While at face value his actions were noble and thoroughly based on moral and legal principles, in reality, he, and even more so Arthur Bronson, one of the city’s largest creditors, had a vested financial interest in making sure that the city’s debts were repaid. Besides having loaned money to the city and to back the canal bonds, Bronson was heavily committed in private mortgages to settlers of the canal lots that Ogden had arranged for a percentage of the loan. In fact, Ogden, even during his one-year tenure as Mayor, was still the leading mortgage agent in Chicago representing many Eastern capitalists, and had reaped the benefits of the flood of mortgage money during the land boom.

Ogden’s heroic, yet somewhat self-serving efforts were of little consequence to the nationwide malaise. It was virtually impossible to sell any land in Chicago during 1838. Construction of the G&CU, which had just started in early 1837, was suspended in June 1837. The railroad construction initiated throughout the state by the Internal Improvement Act of 1837, stretched fitfully into 1839 before it was halted by the legislature’s repeal of the act. The political “wisdom” of starting all nine railroads simultaneously from both ends had left Illinois $6 million in debt with little to show for the expenditure except eventual state bankruptcy in 1842. Although the Federal engineers under Lt. Davis had successfully opened a 200-foot-wide channel through the sandbar at the lake in 1834, it had been a continuous struggle to keep it clear of new sandbars created by the lake’s strong current. The deposits against the north pier had pushed the shoreline north of the river’s original mouth some 700 feet eastward into the lake.

Map showing the growth of the sand deposits against of the north pier. (Andreas, *History of Chicago-I*)

By 1838, the piers had been extended over 1,800 feet into the lake at great cost and questionable effectiveness. The financial panic caused Federal appropriations to be reduced to a level that attempted only to maintain what had already been completed. At the start of 1839, even dredging operations had to be halted, and by April the newest sandbar had completely formed across the channel’s opening, preventing ships with draughts greater than eight and one-half feet from entering the harbor. The only enterprise, therefore, that continued to pump needed cash into the city’s economy was the construction of the canal because the state funds earmarked for the canal had been kept separate from the railroad funds of the Internal Improvement Act. However, even the canal’s contractors had to eventually make financial concessions to enable the canal work to continue until the state declared bankruptcy in 1842. Nonetheless, the expenditure of over $5 million during the six-year period of canal construction would greatly help Chicago to weather its first depression.

In the four hectic years since Chicago’s organization as a town, hundreds of buildings had been erected, the majority being located south of the river’s Main Branch. All of these, with the exception of perhaps twenty brick structures, were constructed with wood, the majority of which had employed the new balloon framing technique. One of the larger balloon-framed business blocks stood at the southwest corner of Lake and Dearborn. It had a frontage of one hundred feet along Lake Street that had emerged as the principal commercial district by 1837. This was summarized by Andreas:

“Lake Street was well built up from State Street to Franklin. The streets running north and south from the river were well-sprinkled with buildings. A court-house, a jail, and an engine-house adorned the present square. There were seven hotels and seven churches. No church had a steeple, and, as one approached the city either from the lake, or south, out of the oak woods, no structure rose above the height of the chimneys of the town. The city lay low down on the marsh ground,… and was to the sight of the new-comer, a most unsightly place to live, or even die in… The speculation which had been rampant for the past three years was gone, but a grim determination showed in the lineaments of each true Chicagoan’s face, which meant that although fortunes had fled, Chicago was still left.”

While the Panic of 1837 did, indeed, stop Chicago’s adolescent growth in its tracks, the financial crisis was felt equally across the country. Unfortunate as it was for the short-term financial viability of the new city, the Panic bought the one, most important commodity that Chicago needed for its long-term success at this precise moment that neither Chicago nor even William B. Ogden could buy: Time. The time to catch up with Cincinnati, the largest economy and city west of the Appalachians, the time for the region’s new farmers to establish their farms, the time for the technology of the railroad to evolve, and the time during which the country’s politics began to critically divide the North and the South to a point beyond which it would be impossible for them to be united in the construction of a railroad, let alone a turnpike, that ran through the middle of the country from Washington, D.C. through Cincinnati and on to St. Louis, to which Chicago in the north and Memphis in the south could be linked by feeder lines. All told, the Panic of 1837 would be a Godsend for Chicago’s future.