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.

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.