We are undeniably in a world of economic hurt. People the world over are losing jobs, homes, life savings and even dreams.
Whether from the immediacy and intensity of the pain, an egocentric view of the world or simply short memories, we tend to think things have never before been this bad. But there have been plenty of true financial panics in the history of the United States, and we have managed to survive and prosper through them all. Here is just a small sampling, not including mere blips in the stock market like the internet bubble and the crash of 1987.
Panic of 1819 – The first major crisis to originate in the US marked the end of the expansion following the War of 1812. International demand for American farm products declined as Europe recovered from the Napoleonic wars. Efforts to deal with the large public debt from the war and the Louisiana Purchase put great pressure on state-chartered banks Tight credit and deleveraging forced a decline in general prices, and the price of cotton was cut in half. The sale of public lands had created many debtors, who demanded and got debt relief first from President Monroe and then from several of the states. The government cut back on large projects, including the National Road. The economy did not return to healthy growth until 1823.
Panic of 1873 – Unbridled growth following the Civil War, the absence of government in curbing abuses and the extreme overbuilding of the nation’s railroad system led to an actual depression. Jay Cooke and Company, the investment bank that had handled most of the government’s wartime loans and was the principal backer of the Northern Pacific Railroad, failed. The New York Stock Exchange closed for 10 days, credit dried up, banks and factories closed their doors, charities were overwhelmed by the victims of foreclosures and lost jobs and most of the major railroads failed. The ensuing depression lasted until 1878 and the antagonism between workers and bankers and manufacturers led to labor unrest for several decades.
Panic of 1893 – This panic, which was also caused by railroad overexpansion, shaky financing and bank failures, is sometimes considered part of the “Long Depression” that began with the Panic of 1873. The Sherman Silver Purchase Act of 1890 , passed in response to overproduction by western mines, required the Treasury to purchase silver using notes backed by either silver or gold. A selloff of US stocks by foreign investors led to a run on the gold supply and a collapse in the silver market. By some estimates over 15,000 companies and 500 banks failed and unemployment may have been as high as 17%. The economy began to recover in 1896 and confidence was restored with the Klondike gold rush.
The Great Depression – With its roots in rampant global speculation and the sudden collapse of the stock market in 1929, the effects of the Great Depression are still with us today. Government policy errors are blamed for worsening the crisis; the Federal Reserve raised interest rates, the Smoot-Hawley Act crippled trade and the Treasury Secretary’s prescription was to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate”. Unemployment was 25%, prices declined by even more and gross domestic product plunged by more than 30%. Despite Roosevelt’s New Deal programs, it took World War II to finally pull the economy back.
(For some perspective, consider where we are now in comparison to the Great Depression. Unemployment is at 8.5%, GDP has declined by 6% for the last two quarters and prices are pretty much flat. Social nets that we now take for granted, like unemployment and deposit insurance and food stamps, were unheard of in the 1930’s. Today, spending on food is about 10% of a family’s disposable income, compared to around 25% in 1930, so we have far more opportunity to reduce discretionary purchases.)
The 70’s – Unlike other panics, this decline was not triggered by a specific event or a speculative bubble but was more of a long slow bleed. Another postwar expansion was coming to an end as the rest of the world recovered its production capacity following World War II. The Vietnam War and its political turmoil, as well as soaring energy prices and inflation, contributed to a decade of malaise. The stock market declined by 63% from 1968 to 1982, unemployment was over 10%, inflation hit 13% and the prime lending rate topped out at 21%. A painful but ultimately successful tight money policy brought inflation under control and the beginnings of the transition from a manufacturing economy to an information technology and consumer economy led to the subsequent 20-year expansionary period.
All these disruptions had their unique circumstances as well as many similarities, and it is easy to see many parallels to our current crisis. There is certainly truth in George Santayana’s lament that those who cannot learn from the past are doomed to repeat it. Historian and author David McCullough’s observation may be more appropriate: History is a guide to navigation in perilous times. History is who we are and why we are the way we are.