A mention of the Great Depression -- the classically cited reference when it comes to the modern big daddies of financial panic -- instantly calls to mind images of Black Thursday, the Dust Bowl and the vast shantytowns nicknamed "Hoovervilles." Millions lost their jobs in the ensuing economic chaos. In 1927, the unemployment rate was about 4.1 percent; by 1933, that number had skyrocketed to 24.9 percent [source: Ayers].
Although the devastating stock market crash on Oct. 24, 1929 -- and the subsequent plummet that followed a few days later on Oct. 29 -- started the ball rolling in a big way, there were many factors responsible for triggering the Great Depression. Among them were the concentration of wealth in the hands of the few, an overproductive agricultural sector, poor banking and investment practices, a fragile international economy and land speculation.
But the 1929 financial panic and resulting chaotic crisis is far from unique in U.S. history. Indeed, our economy crumbles and rebuilds itself with astonishing regularity. Simply examining the historical record demonstrates how the current recession was hardly surprising -- and not just when it comes down to timing. Many of the factors that cropped up a few years ago and contributed to the downturn have reared their ugly heads before: real estate booms, bad banking practices, increased credit lending. No, today's Americans are not as unique as they might sometimes suppose.
In this article, we'll delve into some of the more notable financial panics that have plagued Americans over the years. And although it's not a comprehensive list, it will give you a good look at the way our economy bobs like a bottle on the ocean waves.
The United States' economy had already gone through a few little hiccups in the decades following the nation's founding, but the Panic of 1819 was the first broad-scale financial crisis Americans would weather.
The United States had been a major exporter of agricultural products and importer of manufactured products before the War of 1812. During the war, imports were greatly diminished and as a result, the manufacturing sector exploded to meet the new demand. This overzealous expansion, coupled with lax banking practices, government overborrowing, returning international competition, a lack of hard currency, increased credit lending, a surging real estate boom and the widespread growth of speculation and development of public land, all helped set the stage for disaster. Sound familiar?
In response, the nation's banks entered a stiff contractionary period, calling in their vast network of loans and setting off shockwaves of bankruptcies and bank runs as people scrambled for cash. Prices of U.S.-made goods crumpled, property values plummeted and unemployment abounded in record numbers.
After a couple of rough years, things finally started to turn around, but as we'll see, the economy wouldn't stay sound for long.
After the Panic of 1819, Pres. Andrew Jackson began a fierce campaign against the Bank of the United States, the large national bank that had helped spark trouble during the financial crisis. Jackson wanted 100 percent reserve-backed banking to prevent the institutions from issuing mounds of bank notes that they couldn't cover.
He vetoed an 1832 renewal of the Bank of the United States' charter and disbanded the institution, removing the public treasury deposits and distributing them among other banks. Unfortunately, in the years following the 1819 panic, the Bank of the United States had continuously amped up the country's currency supply, contributing in part to steep inflation and spurring land speculation.
Because of this and other complex economic factors, currency depreciated and contractionary pressures returned. Prices fluctuated wildly and the banking system lost stability -- and consumer confidence -- once again. A wave of deflation followed, and panic struck people across the nation. Banks closed by the hundreds, and the country was once again mired in the throes of a depression for several years.
When a large bank fails, vast numbers of businesses collapse. It's like a dangerous game of dominoes -- and that cause-effect relationship isn't unique to modern economics. In September 1873, after overextending its resources to support railroad development, banking house Jay Cooke and Company was forced to declare bankruptcy. Following the announcement, a surge of panic shot through Wall Street investors, and the stock exchange took a massive dive. Over the next few years, thousands upon thousands business would fail in turn.
As for Jay Cooke, his name may not be widely remembered, but he had a large impact on the history of the United States. He was instrumental in financing the Union's Civil War effort and lobbied heavily for the National Banking Acts, which laid the foundation for our current Federal Reserve System. The National Banking Acts also led to the pyramid structure of reserves that was the major linchpin of the 1873 panic -- Cooke's bank was a sizeable chunk at the very bottom of the pyramid.
The Panic of 1901 was triggered by more competition over the railroads. Company consolidation was roaring along full swing at the turn of the 20th century and two businessmen -- James J. Hill and E. H. Harriman -- were in stiff competition for a key railway company. Hill and his backers managed to secure the deal, but not before Harriman and his associates tried to snap up one of his opponent's other main railway lines.
As Harriman snatched stocks from Hill's company, other railroad stocks started to show declines as people panicked. Soon, the whole market followed, and it wasn't long before absolute pandemonium raged across the floor of the stock exchange. Typically respectable men grew wild-eyed and violent, and the ticker tape lagged so far behind the extreme rush of transactions that the final one didn't tick by until more than 15 minutes after the closing bell rang.
In October 1907, the New York financial world experienced a great shakeup and an extended run on several trust companies, exposing certain weaknesses in the banking system of the day. It was also a catalyst for the creation of the Federal Reserve System and other operational procedures and regulations of the banking system that we still use in the United States today.
One of the most prominent causes of the Panic of 1907 was the lack of regulations over trust companies, corporations that served as trustees for the financial assets of estates, individuals and businesses. Their freedom to trade in riskier ventures with extremely low reserves made the trust companies ticking time bombs.
Enter businessman F. Augustus Heinze. In the middle of a tight money market and a slowing economy, he attempted to corner the stock of United Copper Company and failed, causing the trust company to go bust. The absolute madness didn't break immediately, however. It wasn't until a few days later that trust companies around New York City began begging desperately for aid.
J.P. Morgan, along with James Stillman of National City Bank and George Baker of First National Bank, were among several financiers who attempted to bail out some of the trust companies being hit hardest by bank runs. The relief funds -- offered only to those institutions deemed sound enough -- helped avert a complete disaster, but the financial world of New York City would be shaken to the core by the end of the panic.
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