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Sales of government land had become a major arena of

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Sales of government land had become a major arena of specula- tion, and though the revenue enabled the government to pay off the federal debt in its entirety, from around 1835 the value of many banknotes began to soften as banks expanded credit to fund land pur- chases, especially in western states, where the redemption of bank- notes for bullion was spotty. (The Second Bank was no longer around to keep the banks in line by demanding redeemability.) Stock prices peaked in mid-1835 and headed downward as the inflation intensi- fied in 1836. The open market value of banknotes fell against gold bullion. The government became worried about the quality of the banknotes it was accepting in trade for its land and demanded that all land sales (mostly in western states) should be paid in gold bullion (which was mostly in eastern states) beginning December 1836, a decree known as the Specie Circular. Around the same time, it was also decided that the government’s surplus revenues would be distributed from northeastern banks to banks in western and southern states. Both were highly destabilizing policies at a time when the transfer of gold or deposits from state to state could take days or weeks by wagon, canal, or horseback. Foreign banks, particularly in London, also began to doubt the quality of bank- notes from U.S. banks, and in early 1837 began redeeming them for specie. The result of all this turmoil was the Panic of 1837, which was further intensified due to the removal of the Second Bank from its role as a lender of last resort, a stabilizing force for the financial system. GOLD: THE ONCE AND FUTURE MONEY 48
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A secondary financial breakdown took place in 1839, due in part to the readoption of Treasury notes to fund deficits (the same odd device implicated in the inflation of 1812–1816), and in 1842 tariffs were pushed up. 1 The economy did not begin to recover properly until 1844, helped in 1846 by a tariff reduction, which produced one of the lowest tariff structures the United States had ever adopted. The period from 1844 to 1860 was a stretch of brisk expansion led by the development of railroad networks. James Buchanan took office in March 1857 after being elected on a platform of prosperity and an end to strife over slavery. Tariffs were lowered again in 1857. A full-blown liquidity-shortage panic appeared around September of 1857, which sent the country into a brief recession. The downturn set off a debate about relief measures, which ranged from free land for settlers to river and harbor improve- ments, a railroad to the Pacific, and that oldest of economic antidotes, a protectionist tariff, which was particularly popular in northeastern manufacturing states such as Pennsylvania. The economy recovered, but the Republican Party, which was staunchly antislavery, adopted all of these economic relief proposals into its platform for the 1860 election. The electorate chose to force a decision on the issue of slavery and elected Abraham Lincoln to the presidency. The South, infuriated by both the tariff and antislavery elements of the Republican Party’s policy platform, seceded soon after. The Republican governments pushed tariffs higher throughout the war, beginning with the Morrill Tariff of 1861. An income tax
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