<P> When New York banks raised interest rates and scaled back on lending, the effects were damaging . Since the price of a bond bears an inverse relationship to the yield (or interest rate), the increase in prevailing interest rates would have forced down the price of American securities . Importantly, demand for cotton plummeted . The price of cotton fell by 25% in February and March 1837 . The United States economy, especially in the southern states, was heavily dependent on stable cotton prices . Receipts from cotton sales provided funding for some schools, balanced the nation's trade deficit, fortified the US dollar, and procured foreign exchange earnings in British pound sterling, the world's reserve currency at the time . Since the United States was still a predominantly agricultural economy centered on the export of staple crops and an incipient manufacturing sector, a collapse in cotton prices would have caused massive reverberations . </P> <P> Within the United States, there were several contributing factors . In July 1832, President Andrew Jackson vetoed the bill to recharter the Second Bank of the United States (BUS), the nation's central bank and fiscal agent . As the BUS wound up its operations in the next four years, state - chartered banks in the West and South relaxed their lending standards, maintaining unsafe reserve ratios . Two domestic policies, in particular, exacerbated an already volatile situation . The Specie Circular of 1836 mandated that western lands could be purchased only with gold and silver coin . The circular was an executive order issued by Andrew Jackson, and favored by Senator Thomas Hart Benton of Missouri and other hard - money advocates . The intent was to curb speculation in public lands, but the circular set off a real estate and commodity price crash as most buyers were unable to come up with sufficient hard money or "specie" (gold or silver coins) to pay for the land . Secondly, the Deposit and Distribution Act of 1836 placed federal revenues in various local banks (derisively termed "pet banks") across the country . Many of these banks were located in western regions . The effect of these two policies was to transfer specie away from the nation's main commercial centers on the East Coast . With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic along with the real estate crash . </P> <P> Americans at the time attributed the cause of the panic principally to domestic political conflicts . Some blamed Jackson for refusing to renew the charter of the Bank, resulting in the withdrawal of government funds from the bank . Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration preceded the panic by only five weeks . Van Buren's refusal to use government intervention to address the crisis (such as emergency relief and increasing spending on public infrastructure projects to reduce unemployment) according to his opponents, contributed further to the hardship and duration of the depression that followed the panic . Jacksonian Democrats, on the other hand, blamed the national Bank, both in funding rampant speculation and in introducing inflationary paper money . Modern economists generally view Van Buren's deregulatory economic policy as successful in the long term for its importance in revitalizing banks after the panic . </P> <P> Virtually the whole nation felt the effects of the panic . Connecticut, New Jersey, and Delaware reported the greatest stress in their mercantile districts . In 1837, Vermont's business and credit systems had taken a hard blow . Vermont had a period of alleviation in 1838, but was hit hard again in 1839--1840 . New Hampshire did not feel the effects of the panic as much as its neighbors did . It had no permanent debt in 1838, and did not have a lot of economic stress the following years . New Hampshire's greatest hardship was the circulation of fractional coins inside the state . Conditions in the South were much worse than the conditions in the East . Though the Old South was hit hard, the Cotton Belt was dealt the worst blow . In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops . New Orleans felt a general depression in business, and its money market stayed in bad condition throughout 1843 . Several planters in Mississippi had spent much of their money in advance, leading to the complete bankruptcy of many planters . By 1839, many of the plantations were thrown out of cultivation . Florida and Georgia did not feel the effects as early as Louisiana, Alabama, or Mississippi . In 1837, Georgia had sufficient coin to carry on everyday purchases . Until 1839, citizens of Florida were able to boast about the punctuality of their payments . It was in the 1840s when Georgia and Florida began to feel the negative effects of the panic . At first the West did not feel as much pressure as the East or the South . Ohio, Indiana, and Illinois were agricultural states, and the good crops of 1837 were a relief to the farmers . In 1839, agricultural prices had fallen and the pressure had reached the agriculturalists . </P>

Why did many banks go out of business as a result of the panic of 1837