Panic Blogging: 1857

By request, a discussion of the Panic of 1857.

The boom and bust cycle of the pre-Depression American economy is remarkable. Every 15 to 20 years there was a huge bust: 1817, 1837, 1857, 1873, 1893, 1907, 1929. And a few smaller ones in between like 1883. Exuberance, get rich quick schemes, and shoddy financial policy, followed by bankruptcy and mass suffering was the American way.

It's possible that the Panic of 1857 holds a few lessons for today. This was a rapid but relatively brief downturn, which is different than the long-term depressions caused in 1837, 1873, 1893, and 1929. But recovery was slow (a jobless recovery one might say). Ultimately, little changed in the economic system because of this depression, but the political outcome was significant. In the end, ramping up production to fight the Civil War pulled the nation out of the slump.

The actual reasons for the boom came from the huge riches of the California Gold Rush, which began in earnest in 1849 and rapidly increased the monetary supply in the United States, leading to loose credit and high inflation. In addition, the problems with railroad overbuilding and speculation that would plague America in its later depressions was a problem here as well; a lot of people lost their shirts when those investments fell through. On top of all of this, American agricultural exports to Europe collapsed with the end of the Crimean War, drastically lowering prices in that sector.

The political impact had to do with the fact that the South had very few railroad investments, because they mostly decided they didn't want anything to do with American industrial or transportation technology. If anything, Southern railroad infrastructure was far underbuilt in 1857. In time, the South would rue these decisions as the northern industrial force crushed the Confederacy. But in 1857, Southern fireeaters laughed at the North and claimed that the Panic and the South's lack of suffering from it was proof that the slave-based plantation economy was far superior. This only emboldened Southern radicals more, convincing them that they could survive as their own nation.

What kind of long-term political implications the Panic of 2008 will cause I do not know. We clearly have learned nothing on the economic side of things; the entire economic system is racing their engines, ready to continue the dubious practices of inflated commodity prices, rapidly rising home prices, and credit-based consumer spending that blew the economy up in the first place. It's possible that a longer-term recession will create a real crisis of confidence in the corporate-dominated political system of modern America, but I find this quite unlikely. Only if voter anger over these issues convinces the hordes of Reagan and Clinton era Democrats who are beholden to corporate donations to reject Friedmanite economics will a major political shift take place.