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Economic Booms, Followed by Collapses

By Dale Lucht

It seems like this has happened before. Who is to blame? Bankers, politicians, and John Q. Public all have their share of guilt. For those who find history dull, skip down to 1929.

The Panic of 1819

The country’s first major bust was in 1819. There was a boom after the War of 1812. The U.S. government had borrowed heavily to finance the war and, in order to repay the debt, suspended payment through gold or silver and had issued paper currency backed by the promise of precious metals. New banks sprouted up, issuing unsecured banknotes and spawning an economic boom. The boom burst in the Panic of 1819. It brought on a wave of foreclosures, bank failures, massive unemployment and declines in agricultural and manufacturing production. It took five years for the economy to recover.

The Panic of 1837

This panic was pretty much caused by Andrew Jackson’s fight with the banks. Jackson did not believe that there should be a central bank. He believed that banking concentrated the nation’s financial strength in a single institution, it exposed the government to control by foreign interests, it served mainly to make the rich richer, and banks were controlled by a few select families. Jackson was able to revoke the Second Bank of the United States’ charter.

Banking was taken over by legions of local and state banks. This increased credit and speculation. Then in 1836, Jackson issued the Specie Circular, which required buyers of government land to pay in “specie” (gold or silver coins). The result was a great demand for gold and silver, which many banks did not have enough of. Many banks collapsed which brought the nation’s economy into a deep depression.

The Panic of 1857

After the U.S. seized a third of Mexico during the Mexican-American War, the economy was booming. Land speculation and the discovery of gold in California fueled the boom. In 1857 over speculation in real estate and railroads spooked the economy. Then 30,000 pounds of gold being shipped to Eastern banks from the San Francisco mint were lost when the ship sank at sea. There was also the failure of the Ohio Life Insurance and Trust Company. For the first time in history, thanks to the development of the telegraph, news of the bankruptcy spread within hours to New York, where panic gripped the stock market. The economy did not really recover until the Civil War.

The Panic of 1873

A huge infusion of cash from speculators caused frenetic growth of the nation’s rail system. When U.S. Grant decided to tighten the money supply to slow the pace, businesses were unable to get credit. Jay Cooke and Company, the prime investors in the Northern Pacific Railroad, was overextended and declared bankruptcy to void its debt. This shook Wall Street. In an attempt to calm the situation the New York Stock Exchange closed for ten days. The panic gained steam as nearly a quarter of the 364 railroads went bankrupt. Over the next two years some 18,000 smaller businesses closed, creating a 14% unemployment rate. This depression was characterized by violent clashes among workers, employers, and federal troops.

The Panic of 1893

Vast quantities of silver were being mined in the West. Speculators brought on the crisis by cashing in silver notes for gold in such quantities that the statutory limit for minimum gold reserves was soon reached. Rumors began to circulate that the government was in distress, depositors pulled out their savings and bankers called in their loans. Banks, especially in the West, began to fail. The Northern Pacific, Union Pacific, and Atchison, Topeka, and Santa Fe railroads failed. The crisis only got worse, taking down 15,000 companies and 500 banks. Before it ended 5 years later, one in five Americans were out of work. As a side note, L. Frank Baum wrote a book based on the Panic of 1893. It was titled “The Wizard of Oz”.

The Panic of 1907

Speculator F. Augustus Heinze and his bank, the Knickerbocker Trust Company, tried to corner the market on the stock of the United Copper Company. Their plan failed and the market collapsed. Fearing a complete collapse of the national economy, the U.S. Treasury ended up contributing $35 million to stem the tide. Banker J.P. Morgan also led an effort to redistribute money to banks. Within a year the panic eased. A congressional investigation led to the Federal Reserve Act of 1913, which mandated the creation of a central banking system that could move to put out the fire in any future panics.

The Panic of 1929

After World War I the United States economy took off. Money was flowing and the market was making people rich. A new wave of Americans began investing in the stock market, borrowing money to buy speculative stocks that weren’t actually invested in legitimate businesses. Banks across the country became weighted down with government bonds, vastly overpriced real estate mortgages, and shaky securities. By 1929 stock prices far exceeded the value of the companies. It was due for an adjustment and it came in October, with an unprecedented crash of $30 billion in stock valuation. Unemployment surged to 25% by 1933, Herbert Hoover at first tried austerity programs to stem the tide. When these didn’t help he started a few programs to get people working again. With FDR’s election in 1932, and his support in Congress, the tide turned and recovery was started. The nation would not recover fully until World War II. How many government jobs did that entail? One of the many acts Congress passed was the Glass-Steagall Act of 1933. This act required the complete separation between commercial banks that accepted deposits and issued loans and investment banks that distributed stocks, bonds and securities. Experts believed that the crash was caused by commercial banks that strayed into investment bank territory in a culture of fraud and conflicts of interest.

The Great Recession of 2008

Have you noticed something about these Panics? Firstly, most of them were caused by speculators. Secondly, they occurred roughly in 20 year cycles. One can only assume that the regulations and safeguards enacted during FDR’s tenure worked. Sixty–plus years of prosperity followed the Great Depression. Of course there were ups and downs, but not as severe as the previous 150 years. Slowly regulations were abandoned. The Glass-Steagall Act remained in place for 66 years until it was overturned by Congress after 12 years of intense lobbying by U.S. banks. Commercial banks were once again able to offer the speculative products of investment banks. Add to all of the deregulation of the banking and investment industries, two unpaid for wars and an immense unpaid tax break. Disaster was bound to happen. It did.

Aftermath

President Obama came into office, and with loans and stimulus money he was able to slow the recession. Did he do it the best way? Maybe not. The GOP now complains of the deficit, forgetting that their policies caused the deficit. Their main goal is to cut the deficit by getting rid of useless programs, such as food stamps, education, arts, or simply put, anything that people who usually vote Democrat use or require for survival.

What we need to do is increase our tax base, and we do that by creating jobs. Employers do not create jobs because they want to; they hire people assuming that they will make money off of them. More products created when demand is there mean more profits. The government needs to spend on infrastructure jobs, put people to work. The more people we have working, the more people we have spending and also paying taxes. It’s time to get the economy moving again. The Republicans in Congress do not appear to have America’s best interest to heart. They would rather have President Obama as a one term president than have a successful America. In my opinion that is Treason.

 

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