Those who don’t know history are doomed to
1729 – 1797
Those who cannot remember the past are
condemned to repeat it.
Santayana, 1863 – 1952
Much has been written about the present financial
crises, recession, and or depression, whatever it is called today, that
we have been wallowing in for almost six years. There has been finger
pointing, misleading information, and a distortion of “facts” reported
by politicians, news readers, and the self proclaimed “experts” who
claim to know the causes that led us into our current financial crises
and the remedies. The fact is the reason that we are in the present
financial state is because of our failure, as a world society, to learn
from our previous mistakes.
The term “financial crisis” is often applied
broadly to situations where some financial institutions or assets
suddenly lose a major portion of their value. Since the 19th
century, many financial crisis have been attributed to bank or monetary
failures that, like falling dominos, resulted in either recessions or
depressions not only in the United States but worldwide.
A “financial crisis” is usually defined as a direct result of a
loss in paper wealth and unless there is a resulting recession or
depression does not change the real economy.
Although the world economists have offered numerous
theories about how financial crises develop and how they could be
prevented, they have yet to agree on any one particular theory or method
of prevention. And so financial crises remain a regular occurrence
around the world and all we have to assist us is to look at the past and
hope that we don’t repeat our mistakes, again.
The Panic of 1873
There are those who have stated and written that
the United States and also the world is in the worst financial crises in
history today. That is not correct. The Panic of 1873, caused a severe
international economic depression in both the United States and Europe
that lasted for almost twenty years. The Panic of 1873 was often known
as the Great Depression until the 1930’s and is now referred to as the
Long Depression. It lasted fourteen years longer than the Great
Depression of the 1930’s.
The Panic of 1873 was caused by an over expansion
of the railroad industry and the Coinage Act of 1873 that affected the
silver market. Contributing events were the infamous Chicago Fire, the
outbreak of equine influenza, President Grants’ monetary policies (that
increased interest rates while driving down the money supply), and the
failure of Jay Cooke & Company (read Lehman Brothers). During the period
of 1873 to 1875, the New York Stock Exchange was closed for ten days; 89
of the country’s railroads filed bankruptcy; 18,000 businesses closed
and the unemployment rate rose from 3% to 14%. Construction work
stopped, wages were cut, real estate prices fell and corporate profits
vanished at a time when only corporations paid income taxes.
In Europe the Vienna Stock Exchange crashed causing
several bank failures and the Berlin Railway went out of business. In
the United Kingdom the long depression resulted in bankruptcies,
unemployment, the stoppage of all public work projects, and caused a
major trade slump that lasted until 1897. The British net national
product ratio fell from 11.5% to almost half, 6%. France like the UK
also suffered a period of stagnation until 1897. During this period the
countries of the world including the U. S. began creating
protective tariffs for both its agricultural and industrial
The Panic of 1893
Just as the United States and the world began to
recover from the Panic of 1873 the U. S. experienced the most serious
economic depression it had ever encountered. The Panic of 1893 was
caused by continuing railroad and bank failures compounded by a “run” on
the banks and the United States gold supply.
In 1890 Congress had passed the Sherman Silver
Purchase Act in response to the agricultural growers lobby who wanted to
repay their debts in silver which would provide them cheaper dollars
than gold backed currencies. The Act required the U. S. Government to
buy millions of ounces of silver which contributed to the emerging
silver mining industry as it drove up the price of precious metal.
People then attempted to redeem silver notes for gold causing the
statutory limit for the minimum amount of gold in federal reserves to be
attained at which point U.S. notes could no longer be successfully
redeemed for gold. President Cleveland, after his election convinced
Congress to repeal the Sherman Silver Purchase Act thinking that this
would solve the monetary problem. Instead U.S. citizens withdrew their
money from the banks demanding payment in gold and created a financial
panic in the UK where investors sold their American investments so they
could purchase American
currency backed by gold.
Along with a series of bank failures, the Northern
Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka &
Santa Fe Railroad all failed. Over 16,000 companies and 500 banks closed
their doors forever. Unemployment rose to 19% causing middle-class
families the inability to meet their mortgage obligations. Many families
walked away from recently built homes having lost their life savings
when their bank was shuttered.
The Panic of 1893 saw the first populist march on
Washington, known as “Coxey’s Army” (read Tea Party) where unemployed
workers from all states came to the Capitol to demand a federal jobs
program. During the six years between 1893 and 1899 unemployment
remained at an average 14%.
The Panic of 1907
The Panic of 1907 was a financial crisis that
occurred in the U. S. when the New York Stock Exchange lost almost half
of its value from the previous year. The “panic” occurred during a
period of economic recession and there were many “runs” on both banks
and trust companies. Although the “panic” began in New York it
eventually spread throughout the country and caused many state and local
banks to close their doors. In addition, many businesses filed for
bankruptcy protection. The 1907 panic only lasted 13 months but during
that period the following
The American stock market lost 18% of its
The copper market collapsed,
The Standard Oil Company was fined $29 million for
Banking runs occurred in
On October 24, eleven bank and trust companies
closed their doors in New York City,
A failed attempt to control the copper market
resulted in the shares of the United Copper Company falling to under $10
a share from a high of $60 in a single day,
A bankruptcy filing by the City of New York was
averted when J P Morgan purchased
$30 million in New
York City bonds,
The failure of 50 stock exchanges in New York City
was averted with a loan of $19 million dollars from J P Morgan,
Teddy Roosevelt, approved the sale of the Tennessee
Coal, Iron & Railroad Company to
U. S. Steel, a company controlled by J P Morgan,
despite anti-trust concerns. This was significant because Roosevelt had
a reputation as being a “monopoly buster” and it was, until now, a
cornerstone of his presidency.
The Panic of 1907 is most significant because it
ultimately led to the creation of the Federal Reserve Act that Congress
passed and President Wilson signed into law on the same day, December
1930 The “Great Depression”
For many, 1930 is the most recognized worldwide
economic failure. Although it is most remembered and thought of as the
“worst” of all depressions it only lasted for 4 years and 5 months. Two
and a half years less than the average length of a depression.
The depression originated in the U. S. after the
stock market crash in October 1929.
Most other countries did not begin to suffer until 1930 when
Congress passed the Smoot-Hawley Tariff bill in June that led to a 50%
reduction in international trade. The average duty paid on imports
between the years 1921-1928 was 25.9%. After the passage of Smoot-Hawley
the tariff increased to 50% between the years 1931-1935. Many believe
that an ordinary recession grew into the Great Depression not only
because of Smoot-Hawley but also because of the actions taken by the
Federal Reserve to regulate interest rates, curtail bank failures, and
control the money supply.
Prior to the stock market crash in 1929, margin
requirements were only 10% of deposits. Brokerage firms would therefore
lend $9 for every $1 dollar an investor had deposited with them. When
the market began to decline brokers called in these loans, which the
investors could not pay back. Britain’s decision to return to the Gold
Standard is also considered a contributing factor although Britain
quickly abandoned the gold standard in 1931. Every major currency left
the gold standard during the Great Depression but not at the same time.
Countries that left the gold standard early recovered more quickly than
those that did so later on.
The administration of President Hoover initiated
several programs to turn unemployment around and restore the economy
quickly. Among the programs were the National Credit Corporation (a
consortium of banks organized to lend money), the Federal Home Loan Bank
(a government program designed to re-vitalize new home construction and
financing), The Emergency Relief Act and the Reconstruction Finance
Corporation (government programs created to provide funds for public
works, financial institutions, railroads, and farmers). All of these
programs were failures and did nothing to restore the economy, in fact,
the economy worsened after these programs were enacted. Interestingly,
under the Roosevelt Administration, these programs after being renamed
and packaged into the “New Deal” and the “Second New Deal” prospered and
were given credit for playing a critical role in ending the depression.
After the panic of 1929 and during the first 10
months of 1930, 744 U.S. banks closed their doors. Prior to Franklin
Roosevelt’s election in 1932, 5,000 banks failed and eventually another
4,000 banks would fail before 1939, bringing the total number of
depression era bank failures to 9,000. Many are of the opinion that had
the Federal Reserve requested “emergency powers” instead of doing
nothing while the large New York banks failed, the Great Depression may
never have come about. However, because the Federal Reserve did not have
the sufficient amount of gold on hand that was required at the time,
(40%), to back the outstanding issued Federal Reserve Notes, the Fed was
powerless to do anything as the banks began to fail. It was not until
1933, when President Roosevelt signed an Executive Order making the
private ownership of gold illegal, did the Federal Reserve have
sufficient gold on hand to rescue the remaining troubled banks. The Bank
Act of 1935, that raised reserve requirements, was also a factor in the
Fed’s effort to rescue the U. S. banks.
Between 1929 and 1933 unemployment in the U. S. was
as high as 25% and 33% in Europe. By the mid-1930’s the economy began to
recover due to the various programs in President Franklin Roosevelt’s
“New Deal” such as public works and farm subsidiaries. Full recovery,
however, was not realized until the start of World War Two and it is
believed that because Roosevelt continued trying to balance the U. S.
budget, during the depression, he never allocated enough money necessary
to bring about a full recovery.
Recessions & Depressions
Recessions and depressions are not new to the U. S.
and the world nor do they
happen infrequently. Since the Continental Congress of 1776 the U.S. has
gone through 42 recessions and 5 depressions. The average recession has
lasted 17 months while a depression has lasted no longer than 5 years.
It has yet to be determined if the Panic of 2007 is a recession or a
depression. What is known is that the U. S. and the world has yet to
recover and it has lasted longer than either the Panic of 1893 or the
Great Depression of 1930.
During the first six months of 2012:
The United States GDP has decreased to 1.9% (Bloomberg
The Bank of Spain has reported 66.2 billion euros
($82 billon dollars) has been transferred from the Spanish banking
system to other countries by worried depositors (Reuters),
Greece has reported that retail sales have declined
16.2% and continue to do so (Financial Times),
There are rumors coming out of China that they are
experiencing the beginning of a recession (British Guardian),
71% of small business owners in the U.S. do not
believe the recession is over (Business Week).
In May 2012, 20,000 people applied for 877 new jobs
at the Hyundai Motors Manufacturing plant in Montgomery, Alabama forcing
the company to suspend the application process. (USA Today)
During the past five years 40% of working adults in
the U.S. have seen their employer paid benefits reduced or eliminated
entirely. (USA Today).
Looking back through history, the periods of
financial crises appear to occur whenever government interferes with
commerce, whether through the enactment of laws, regulations, or
monetary policies. We also know that every election year we continue to
nominate and often elect the least qualified candidates to lead our
If we fail to pay attention to the writings of
Burke and Santayana, we will end up where we are today, again!
I wish you well.
David Balovich is an author, credit consultant, educator, and public
can be reached at
email@example.com or through the Creditworthy website.