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Tuesday, October 19, 2010

A US History of 'Panic' - Part I

Most people believe the first economic crisis the US has ever had to deal with was the Great Depression (1929-41)  This is not the case.  The nation has dealt with many small-d 'depressions' also known as 'Panics' in its history.  Very little to nothing is known about these other economic downturns because the Great Depression tends to overshadow anything before it, and quite frankly, people wrongly believe history is 'boring' and 'dull' due to shoddy teaching of the subject in school, so most American History is foreign to its own citizens.

So here's a short lesson on the US history of Panics...

Panic of 1796-97 -  A series of downturns in Atlantic credit markets led to broader commercial downturns in both Britain and the US, first emerging with the bubble of land speculation in 1796. The crisis deepened into a broader depression when the Bank of England suspended money payments in 1797. The Bank's directors feared insolvency when English account holders, fearing a possible French invasion (Britain was at war with Napoleon), began withdrawing their deposits. In combination with the unfolding collapse of the U.S. real estate market, the Bank of England's action suffered deflation in the financial and commercial markets of the coastal United States and Caribbean through the turn of the century. By 1800, the crisis had resulted in the imprisonment of many American debtors.

 ~ 1819 Political cartoon

Panic of 1819-  This was the first major financial crisis in the US, which occurred during the end of 5th US President James Monroe's Administration. This was the nation's first failure of expansionary monetary policy (increasing the money supply). Government borrowed heavily to finance the War of 1812, which caused tremendous strain on the banks’ reserves of money, leading to a suspension of payments twice, 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, and this monetary inflation encouraged unsustainable investments to take place. It soon became clear the monetary situation was threatening, and the national bank at the time, called 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. In Philadelphia alone, unemployment reached 75%.

The Panic was also partially due to international events. European demand for American foodstuffs was decreased because agriculture in Europe was recovering from the Napoleonic Wars, which had decimated European agriculture. War and revolution in South & Central America destroyed the supply line of precious metals from Mexico and Peru to Europe. Without the base of the international money supply, poor Europeans and governments hoarded all the available money. This caused American bankers and businessmen to start issuing false banknotes and expand credit. American bankers encouraged the speculation boom but by the end of 1819, the bank would call these loans.

 ~1837 political cartoon

Panic of 1837- A financial crisis built on land speculation. The bubble burst when every bank began to accept payment only in gold and silver coinage, based on the assumption by former president, Andrew Jackson, that government was selling land for state bank notes of questionable value. The Panic was followed by a five-year depression, with the failure of banks and record-high unemployment levels. Within  the first two months the losses from bank failures in New York alone aggregated nearly $100 million. 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.

Economist Milton Friedman explained the Panic of 1837 as follows: "The banking panic of 1837 was followed by exceedingly disturbed economic conditions and a long contraction to 1843 that was interrupted only by a brief recovery from 1838 to 1839. This Great Depression is particularly interesting for our purposes. It is the only depression on record comparable in severity and scope to the Great Depression of the 1930s,  and its monetary concomitants largely duplicate those of its later mate. In both, a substantial fraction of the banks in the United States went out of existence through suspension or merger --around one quarter in the earlier and over one-third in the later contraction--and the stock of money fell by about one-third. There is no other contraction that even closely approaches this dismal record. In both cases, erratic or unwise governmental policy with respect to money played an important part"

 ~ 1857 political cartoon

Panic of 1857-   This was a sudden downturn in the economy with a general recession first emerging 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. From its peak in 1852, to its trough in 1857, the stock market declined by 66% and the panic/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.

The Panic ended a period of prosperity and speculation that had followed the Mexican-American War (1846–1848) and the discovery of gold in California in the late 1840s. Gold pouring into the American economy had inflated the currency. Changes in worldwide economic trade, caused by the Crimean War  between Britain and Russia, had pushed American firms into a precarious worldwide market. After a large increase in state banks in the early 1850s, by July 1856, banks began to lend far more money than they could back up in money even as deposits began to fall.  By October of 1856, depositors started runs on banks which motivated the decision of British investors to remove funds from U.S. banks, and raised questions about overall U.S. economic soundness.  Adding to this, the collapse of land speculation programs that depended on new rail routes, ruining thousands of investors.

Investor confidence was also shaken in mid-September when 15 tons of gold were lost at sea in a shipment from the San Francisco Mint to eastern banks. The gold and more than 400 lives were lost when the SS Central America sank during the North Carolina Hurricane of 1857.  Lastly, what added greatly to the economic tensions of the time was the Dred Scott case with the Supreme Court's ruling in 1857 that when a slave entered a free state with his master, he/she was still the property of his/her master and thus still a slave. The Court's decision threatened to open up all western territories to slavery, prompting the bonds of east-west running railroads to plummet in value, which in turn helped motivate a run on the major New York banks.

~ A US History of 'Panic'- Part II to come soon...

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