Financial Panics

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FINANCIAL PANICS, events during which bank depositors attempt to withdraw their deposits, equity holders sell stock, and market participants in general seek to liquefy their assets.

Panic of 1785

The panic of 1785, which lasted until 1788, ended the business boom that followed the American Revolution. The causes of the crisis lay in the overexpansion and debts incurred after the victory at Yorktown, a postwar deflation, competition in the manufacturing sector from Britain, and lack of adequate credit and a sound currency. The downturn was exacerbated by the absence of any significant interstate trade. Other factors were the British refusal to conclude a commercial treaty, and actual and pending defaults among debtor groups. The panic among business and propertied groups led to the demand for a stronger federal government.

Panic of 1792

The panic of 1792 arose from speculative activity following the adoption of the Federal Constitution, the founding of the First Bank of the United States (BUS), and the emergence of securities markets for bank shares and other government securities in New York City. Almost immediately after its establishment in 1791, the BUS overextended notes and discounts, and then sharply reversed its course. Speculators in the bank's shares quickly sold their holdings, which had risen markedly over previous months, and the nation's first true securities market panic took hold.

Panic of 1819

The Second Bank of the United States, seeking to curb speculation in commodities and western lands following the War of 1812, sharply contracted its extension of credit, provoking the panic of 1819. The downturn hit the southern and western states hardest, and many banks suspended specie (coin money) payments or closed their doors. The BUS went through a period of recrimination, congressional investigation, and financial rehabilitation. Commodity prices declined, manufacturers clamored for more protection, and debtors demanded relief legislation, which was enacted in several western states. The economic picture had improved by 1823.

Panic of 1837

A series of events led to the panic of 1837: On 11 July 1836, President Andrew Jackson issued an executive order (the Specie Circular) that attempted to end speculation in western lands by requiring specie for their purchase; the Deposit Act, passed on 23 June 1836, ordered that the more than $34 million in surplus that had accumulated in the Treasury be redistributed to the states, in proportion to their relative populations; the Second Bank of the United States dissolved following Jackson's veto of an act to recharter in 1832; and England introduced a tightened monetary policy designed to "recover" specie presumed lost to the United States. By early 1837, these factors had dislocated the nation's specie reserves out of New York City and into the interior and the hands of the public. With its specie base depleted by more than 80 percent over a six-month period, the public lost confidence in the New York banks and withdrew their deposits. Within two weeks, all of the nation's banks had suspended specie payments. This first general suspension in the nation's history started a six-year economic downturn that was the most severe of the nineteenth century.

Panic of 1857

The failure of the Ohio Life Insurance Company in August 1857 was the catalyst that initiated the panic of 1857, which spread quickly from the Ohio Valley to the eastern money centers. Unemployment grew, breadlines formed, and ominous signs of social unrest appeared. The depression was most serious in the industrial northeast and in the western wheat belt, where the new Republican Party saw increasing support. The cotton belt was less affected by the panic: cotton crops were good, prices were high, and banks were sound. These factors brought over-confidence in the South, an impulse to protection in the East, and a drive for free land in the West. Economic conditions became as potent an issue as slavery in the subsequent election of 1860.

Panic of 1873

The failure of several important eastern firms in September 1873—including the New York Warehouse and Securities Company; Kenyon, Cox and Company; and the famous banking house, Jay Cooke and Company—precipitated this panic. The stock exchange closed for ten days, and bankruptcy overtook a host of other companies and individuals. Some causes of the panic and ensuing depression were international, including a series of wars and excessive railroad construction in central Europe, Russia, South America, and the United States. Domestic factors included currency and credit inflation, losses from fires in Boston and Chicago, an adverse trade balance, and overinvestment in railroads, factories, and buildings. In the following depression, 18,000 firms failed during 1876 and 1877, a majority of the American railroads declined into bankruptcy, and more than two-thirds of the nation's iron mills and furnaces fell idle. Wage reductions led to strikes among Pennsylvania coal miners and New England textile workers, and to a railroad walkout in 1877. In 1878 the depression began to lift.

Panic of 1893

The panic of 1893 originated in the usual factors of the business cycle, including overinvestment and falling prices in the 1880s. The uneasy state of British securities markets in 1890—culminating in the liquidation of the banking house of Baring Brothers and Company—stopped the flow of foreign capital into American enterprise, and the sale of European-held securities caused a stock market collapse in New York, accompanied by substantial gold exports. The financial crisis was postponed, however, by strong exports of agricultural staples over the next two years that reestablished gold imports. Uncertainty returned in the winter of 1892–1893 as renewed gold exports raised the possibility that the nation would be forced off the gold standard by a decline in the U.S. Treasury's holdings. The nation also suffered with decreased federal revenues and heavy expenditures, including the purchases of silver under the Sherman Silver Purchase Act of 1890.

The gold reserve had fallen below the accepted minimum of $100 million by April 1893, and the failure of the National Cordage Company in May touched off a stock market panic. By the end of 1893, about 4,000 banks and 14,000 businesses had failed. President Grover Cleveland sought a repeal of the Silver Purchase Act as the one absolute cure for the depression. By 30 October the repeal had passed both houses of Congress. In the meantime, imports of gold had stabilized the monetary situation in New York somewhat. The depression did not lift substantially, however, until the poor European crops of 1897 stimulated American exports and the importation of gold.

Panic of 1907

Sometimes called the "rich man's panic," the panic of 1907 was preceded by speculative excesses in life insurance, railroad and coastal shipping combines, mining stocks, and inadequately regulated trust companies. Several profit-dampening reforms were enacted in 1906, such as the Hepburn Act (giving the Interstate Commerce Commission power to set maximum railroad rates) and the Pure Food and Drug Act, yet the economy seemed healthy in January 1907. In fact, most financiers believed that improved banking controls made it impossible for panics like those of 1873 and 1893 to recur.

In early 1907, when Henry H. Rogers of Standard Oil had to pay 8 percent interest to float a $20 million bond issue, the stock market dropped sharply—the so-called silent panic. The economy seemed to recover, but failure of the United Copper Company in the summer of 1907 precipitated runs on the Heinze and Morse chain of banks. When the Knickerbocker Trust Company closed in October, runs on the Trust Company of America and several others followed, and there was panic on the stock market. To halt the panic, Secretary of the Treasury George B. Cortelyou authorized large deposits in several banks. Investment banker J. P. Morgan headed a banking group that used a borrowed emergency fund of nearly $40 million to rescue banks and firms they deemed savable, and whose survival was crucial. To rescue the brokerage house of Moore and Schley, Morgan arranged to have the United States Steel Corporation buy the brokers' holdings of the stock of a major rival, the Tennessee Coal, Iron, and Railroad Company. This arrangement strengthened the steel trust. By the end of the year, the financial situation was normal again.

Although the panic did not lead to heavy unemployment or a wave of bankruptcies, it seriously damaged the image of the big financiers. It also had repercussions over-seas, as the United States temporarily imported a large amount of gold, and interest rates abroad rose. On 30 March 1908, Congress passed the Aldrich-Vreeland Currency Act, which provided for contingency bank currency in the event of another stringency. The act also created the National Monetary Commission, which produced the Aldrich Report of 1911. This was a major step in setting up the Federal Reserve System in 1913–1914.

Panic of 1929

The panic of 1929 had many causes, most importantly annual private and corporate savings in excess of the demand for real capital formation, a large export trade in manufactured goods supported by foreign lending, a low discount Federal Reserve policy designed to support the British pound, and increasing use of stock-exchange securities rather than commercial paper for bank loans. The period of prosperity from 1924 to late 1926 had been largely aided by buying consumer durables in installments, particularly automobiles, real estate, and construction. When the automobile industry became temporarily saturated in 1927, a downturn was to be expected, but the construction boom showed surprising vitality until mid-1929. The Federal Reserve pursued a relatively easy monetary policy, and exports continued to be buoyed up by foreign lending. When opportunities for real investment sagged after 1926, top-income investors poured cash into the stock, bond, and mortgage markets. Banks made large loans on the security of blocks of the common stock of a single company to keep their depositors' money employed.

By June of 1929, some bankers had become alarmed by the continued rise of the stock market, and in August the Federal Reserve raised the discount rate. This move attracted more domestic and foreign capital into the call loan market, thus applying a final lash of the whip to the runaway boom in security prices. The stock market peaked right after Labor Day, but on Friday, 18 October, it began to decline rapidly; 29 October was the most devastating day in the history of the stock exchange. Yet during the month-long decline, the Standard and Poor Index fell by less than 40 percent, and public statements held that no harm had been done to normal business. Unseen factors that led to the nation's deepest depression, however, were large bank loans that could not be liquidated and the accompanying pressure of failed banks on healthy ones, the collapse of European finance in 1931, a monetary policy by the Federal Reserve that vacillated between meeting domestic and foreign needs, and the lack of any large capital-consuming technological development to re-stimulate private investment.


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———. Lessons from the Great Depression. Cambridge, Mass.: MIT Press, 1989.

ElmerEllis, L. C.Helderman, Donald L.Kemmerer,
Reginald C.McGrane, AllanNevins, SamuelRezneck,
Peter L.Rousseau

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Financial Panics

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