San José State University|
Department of Economics
& Tornado Alley
In June of 1836 Congress passed the Distribution Act which called for the distribution of the accumulated treasury surplus be distributed to the states on January 1 of 1837. The surplus was to be transferred to state banks which were to make payment to the State governments in specie (gold and silver).
After Congress adjourned President Andrew Jackson issued his Specie Circular that required that after August 15, 1836 that only specie would be accepted in payment for government land sales. Jackson's purpose in issuing the Specie Circular was to curb speculation in land. The effect was to reduce the money supply by depreciating the value of banknotes which constituted a major part of the money supply.
The Specie Circular did not make the bank notes valueless, it simply made their value relative to specie substantially less than it had been before. This effective reduction in the money supply brought about a deflation which in turn resulted in the failure of many enterprises, including farmers, who had paid high prices for resources such as land with borrowed funds expecting to pay off the loans with production selling at the higher prices that prevailed when they borrowed the money.
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