March 18, 2009

Economic Crises of the Past

With our current economic crisis, and because I just turned in edits on my next book releasing in September that deals with bank failures, I thought it might be interesting to share a little of past crises and how the people dealt with them. Quite different from today, that is certain.

If only the people today would learn from the past to solve the issues of today. They've happened before, and we've survived. Why do so many think they need to invent a new solution? (sigh)

America's First Financial Panic of 1819

The Panic of 1819 was the first major financial crisis in the United States. It resulted in widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, things would change for the US economy after the Second Bank of the United States was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war.

Economists who adhere to mainstream theory suggest that the Panic of 1819 was the early Republic's first experience with the boom-bust cycles common to all modern economies.

Government borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks' reserves of specie and led inevitably to a suspension of specie payments in 1814 during war & again in 1819-1821 during recession, violating contractual rights of depositors. The suspension of the obligation to redeem greatly spurred the establishment of new banks and the expansion of bank note issues.

This inflation of money encouraged unsustainable investments to take place. It soon became clear the monetary situation was bad, and the Second Bank of the United States was forced to call a halt to its expansion and launch a painful process of contraction. There was a wave of bankruptcies, bank failures, and bank runs; prices dropped and wide-scale urban unemployment began. By 1819, land measures in the U.S. had also reached 3,500,000 acres, and many Americans did not have enough money to pay off to their loans.

Proposed remedies included:

  • increase of tariffs (largely proposed by Northern manufacturing interests).
  • reduction of tariffs (largely proposed by Southerners, who believed free trade would stimulate the economy and increase demand).
  • monetary expansion; i.e., restriction or suspension of specie payment.
  • rigid enforcement of specie payment.
  • restriction of bank credit.
  • direct relief of debtors.
  • public works proposals.
  • stricter enforcement of anti-usury laws.
In the event, President Monroe, interpreting the economic crisis in the narrow monetary terms then current, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspension of specie payments to bank depositors, setting a precedent for the Panics of 1837 & 1857.

Economic Panic of 1837

This was a panic in the United States built on a speculative fever. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in specie (gold and silver coinage). The Panic was followed by a five-year depression, with the failure of banks and record high unemployment levels.

Of course, the initial Government intervention in the market had inadvertently been part of the cause of the problem, and further intervention might or might not have been useful. Jacksonian Democrats blamed bank irresponsibility, both in funding rampant speculation and by introducing paper money inflation. This was caused by banks issuing excessive paper money (unbacked by bullion reserves), leading to inflation.

Within two months the failures in New York alone aggregated nearly $100,000,000 in value. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered. The publishing industry was particularly hurt by the ensuing depression.

According to most accounts, the economy did not recover until 1843. However, the economy actually grew after 1838. Between 1839 and 1843, real consumption increased by 21 percent and real gross national product increased by 16 percent, despite the fact that real investment fell by 23 percent and the money supply shrank by 34 percent.

Economic Panic of 1857

The Panic of 1857 was a sudden downturn in the economy of the United States that occurred in 1857. A general recession first emerged late in 1856, but the successive failure of banks and businesses that characterized the panic began in mid-1857. While the overall economic downturn was brief, the recovery was unequal, and the lasting impact was more political than economic.

The panic began with a loss of confidence in an Ohio bank, but spread as railroads failed, and fears that the US Federal Government would be unable to pay obligations in specie mounted. More than 5,000 American businesses failed within a year, and unemployment was accompanied by protest meetings in urban areas. From its peak in 1852, to its trough in 1857, the stock market declined by 66 per cent compared with inflation.

Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the northern parts of the United States for a year and a half, and the full impact did not dissipate until the American Civil War.

Economic Panic of 1873

The Panic of 1873 was the start of the Long Depression, a severe nationwide economic depression in the United States that lasted until 1879. It was precipitated by the bankruptcy of the Philadelphia banking firm Jay Cooke & Company on September 18, 1873, following the crash on May 9, 1873 of the Vienna Stock Exchange in Austria.

In September 1873, the American economy entered a crisis. This followed a period of post Civil War economic overexpansion that arose from the Northern railroad boom. It came at the end of a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872, and the demonetization of silver in 1873.

At the end of the Civil War, there was a boom in railroad construction, with 35,000 miles (56,000 km) of new track laid across the country between 1866 and 1873. The railroad industry, at the time the nation's largest employer outside of agriculture, involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry and overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns.

In Vienna and Berlin, Paris and London, St. Petersburg and New York, the business cycle had run its course. The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, more slowly in Chicago, Virginia City and San Francisco.

Wage cuts and poor working conditions among American railroad workers resulted in the Great Railroad Strike of 1877, preventing the trains from moving, especially in Pennsylvania and the great railway hub of Chicago. Further trouble came in July 1877 in the form of a crash in the market for lumber, resulting in the bankruptcy of several leading Michigan lumbering concerns. The effects of the resulting second business slump reached California by 1878.

The tension between workers and the leaders of banking and manufacturing interests lingered on well after the depression lifted in the spring of 1879, the end of the crisis coinciding with the beginning of the great wave of immigration into the United States which lasted until the early 1920s.

Panic of 1893

Like most major financial downturns, the depression of the 1890s was preceded by a series of shocks that undermined public confidence and weakened the economy.

In the last days of the Harrison administration, the Reading Railroad, a major eastern line, went into receivership. That collapse was soon magnified by the failures of hundreds of banks and businesses dependent upon the Reading and other railroads. The stock market reacted with a dramatic plunge. Fearing further collapse, European investors pulled their funds from the United States, but depression soon gripped the other side of the Atlantic as well. An ongoing agricultural depression in the West and South deepened, spreading the misery to those regions.

Although thousands of businesses were ruined and more than four million were left unemployed, Cleveland did little. He believed, like most people of both major parties, that the business cycle was a natural occurrence and should not be tampered with by politicians.

However, Mayor Pingree in Detroit began what become widely known as "Pingree's Potato Patch" methods to rescue those who had fallen on bad times and still provide for the cities in need. It involved farming plots of land for vegetables and other food sources, giving the city additional food while allowing those suffering to continue working and maintain their pride. Many major cities adopted this method and by 1897, the panic had subsided.

* * * * *

Frequently, the government took a stand that it's all part of the business cycle. They allowed the mistakes they'd made or cycle to play out instead of continuing to make it worse. They intervened in small ways to help, but they relied more on the spirit and resilience of the people than in further meddling.

Shame we can't see that happening today.

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