Wednesday, September 09, 2009

Panic Blogging: 1837

It's been a year since the financial crisis first hit. Thirty years of tearing down New Deal and Great Society regulations undermined the apparatus to stop financial panics from taking place. In my mind, the recent collapse has a lot more in common with 19th century panics than the Great Depression. But to explore this a bit more, I want to spend the next week examining the different financial panics in American history.

Let's start with the first truly great one: 1837. It's not all that easy to compare the 1830s to the present. But they do have one important thing in common: a populist anti-government president who channeled fears of the common people toward elite institutions of which they had little understanding.

This president of course is Andrew Jackson. A major issue for the early decades of the republic was the size of the federal government. Twice, presidents created the Bank of the United States. Twice, future presidents let it die. Twice, economic depressions took place. The Panic of 1837 was caused in no small part by Andrew Jackson ending the BUS and sending government deposits to poorly regulated state banks. When Jackson vetoed the rechartering of the BUS, it was supposed to have died in 1836. But unwilling to see the Bank live until then, Jackson withdrew all government deposits early, in 1832. Those state banks showed little restraint or responsibility and were issuing tons of notes with almost no backing to them. In particular, these notes were used to pay the federal government for public land purchases. Shortly before leaving office, Jackson issued his Specie Circular, banning such notes for use in paying the federal government.

In the Panic of 1837, 1/2 of American banks failed. Like many of these panics, recovery was slow--in this case 1843. Like in the Panic of 2008, unrestrained credit and shady financial practices were a major problem--without the use of worthless bank notes, western states had no way to acquire public land. Of course, the Panic of 1837 affected the poor the most, leading to huge unemployment numbers (though it's not possible to measure these things with any accuracy during this period) and even food riots in New York.

Again, I think it is ahistorical to draw too many direct links between 1837 and 2008. But there are at least a few important similarities--an anti-government mentality among large groups of people, a president to channel that anger (though at least in Jackson's case, he actually was not born an elite), an overabundance on credit and shady financial maneuvers, and a willful ignorance about the coming problem. Exuberance over bubbles blind people to their existence. In 1837, the bubble popped and the whole system collapsed, much as it did in 2008.