@InCollection{ baptist2012,
    author = {Edward E. Baptist},
    title = {Toxic Debt, Liar Loans, Collateralized and Securitized Human Beings, and the Panic of 1837},
    pages = {69-92},
    editor = {Michael Zakim and Gary J. Kornblith},
    booktitle = {Capitalism Takes Command: the Social Transformation of Nineteenth-Century America},
    address = {Chicago},
    publisher = {University of Chicago Press},
    year = 2012,

In contrast to scholars who focus on the Specie Circular (anti-Jacksonians) or “the business community” and its paper credits (Schlesinger) as causes of the Panic of 1837, Baptist sees the panic as a systemic failure: cotton planters and financiers had developed innovative financial instruments to create new income streams from slaves and “hedge” their risks from rapidly expanding cotton production, including securitized slaves packaged into bonds by forerunners of Jackson’s pet banks, but in the absence of regulation, these market “solutions” failed. The complex instruments assumed cotton prices would continue to rise indefinitely. When they fluttered, nervous creditors began calling in their loans on each other and discovered that no one was able to pay (“toxic debt”).

p. 75:

Up and down the chain of (mostly white) people who sold, traded, shipped, and speculated on the cotton that enslaved people made, credit and risk were present at each stage and for each of the actors. … Dreams, futures, debts—all were denominated in the fluttering price of cotton, and all soared and rose with it.

Ways of “hedging” risk in the cotton economy:

  • Merchants sold on consignment so that the risk of dropping cotton prices was borne by planters until the final point of sale.
  • For planters, “enslaved human beings embodied the ultimate hedge” against risky debt because they could either be used to grow more cotton or could “be sold in order to generate the liquidity to pay off the debt” (p. 79).
  • Banks like the Consolidated Association of the Planters of Louisiana (est. 1827) used slaves as collateral to raise capital in Europe, which was then loaned back to planters to buy more slaves and expand cotton production. The state government pledged its own “faith and credit” to reassure nervous investors that slave mortgages were a sure bet (pp. 80-81). The CAPL “bonds allowed planters to hedge their risk and maximize their return, redistributing the risk undertaken by stockholders in the bank to all the citizens of Louisiana” (p. 81). “In effect, slaveowners were now able to monetize their slaves by securitizing them and then leveraging them multiple times on the international financial market” (p. 82).

After the Bank War, banks like the CAPL “proliferated. So did the securities emanating from the Southwest” (p. 85). Meanwhile, the interstate slave trade expanded. “Armed with repeated infusions of new cash lent by banks who handed it out with little concern for whether or not the mortgaged property actually existed, southwestern enslavers brought tens of thousands of additional slaves into the cotton states” (p. 86). The cotton boom continued, with “more people caught up in the swirl of euphoria, assuming the speculative bubble would never burst” because cotton prices would “rise and rise” (p. 87). Ultimately, however, the “bubble had encouraged overproduction,” leading to a dip in cotton prices in late 1836, tightening credit lines and causing companies and banks to call in loans.

While this pursuit of liquidity at a moment of crisis made sense on an individual basis, it locked up the system because no one could pay. “An attempt to restart the system on the basis of ‘post notes’—credit ultimately grounded on future receipts from the 1838 cotton crop—seemed to get things going again. But the 1838 crop was far too large, collapsing prices, and a second, bigger crash in 1839 finished off many of the survivors of the 1837 crash” (p. 88). Meanwhile, most creditors discovered that “most of the debt owed by planters and those who dealt with them was ‘toxic’… That is, it was unpayable” (p. 88). The result: “Massive numbers of cotton-brokerage and plantation-supply firms collapsed. By 1839, the next rank of dominoes began to fall: the southwestern banks, whose currency and credit were now worthless” (p. 88).

The consequences for enslaved people were even more dire: “Planters, merchants, and others who had lived off the cotton economy on slavery’s frontier struggled through constant legal troubles in the shape of suits for debt collection. The result was often the seizure of property, forced sales of slaves at rock-botton prices, or the surreptitious removal of slaves” (p. 89).