The Panic of 1873

[Lloyd Bonafide]

The author says that our current economic problems are not really like the 1930's Depression, but are more like the Panic of 1873 and the resulting four year depression.

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

* Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit

* As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873

* They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value,

* When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States

The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

Hopefully, by the Fed investing hundreds of billions in banks, and printing lots of money, they can hold this to a recession.

 

[Crunch Hardtack]

In general, that is a really good article by Scott Nelson. Before further comment, I'm including a link to the 1870 census. Link: http://www.census.gov/prod/www/abs/decennial/1870.htm

I was a history major and the Panic of 1873 barely got a mention, although I suspect an economics major would have gotten more of a rundown on it. One thing to remember about these previous panics is that the population of the U.S. was much smaller than it was today and so a much smaller aggregate of people were affected. The U.S. population in 1870 was around 38 million for all classes of people. The following is an excerpt from the Green Bay website on the 1873 panic:

"After the end of the Civil War, railroad construction in the United States had been booming. By 1873 railroad mileage had doubled itself since 1869, and this was a cause of rash speculation. Between 1866 and 1873, 35,000 miles of new track were laid across the country. Banks and other industries were putting their money in railroads. While business was expanding the currency was contracting. Paper money had depreciated, and the conditions foreboded a crash. So when the banking firm of Jay Cooke and Company, a firm heavily invested in railroad construction, closed its doors on September 18, 1873, a major economic panic swept the nation.



Jay Cooke firm handled most of the government loans during the war and was financing the planned Northern Pacific Railroad. The first transcontinental railroad had been completed in 1869 and entrepreneurs planned the Northern Pacific as the second. Cooke’s firm was the financial agent in this venture and poured money into it. Then on September 18, 1873, the company realized it had overextended itself and declared bankruptcy.



The collapse was disastrous for the nation’s economy. Other strong institutions tottered and thousands of people in every rank of life were stricken with absolute ruin. The blow was felt for years in impaired credit, pressure for payment of dues, the lowering of securities and general dread of even safe enterprises. Savings were exhausted and many banks went under. The New York Stock Exchange closed its doors for ten days. Credit dried up, foreclosures were common. Factories closed, costing thousands of worker’s their jobs. A startling 89 of the country’s 364 railroads crashed into bankruptcy. In two years, a total of 18,000 businesses failed and by 1876, unemployment in this country was at 14 percent."

The Nelson article mentions that unemployment reached 25%+ in some cities. However, you are talking about an average of 14% unemployment on a population of 38 million or roughly 5 million people. By 1930, the U.S. Population had grown to over 122 million of which 25%-30% were unemployed or roughly 32 million unemployed. Today, with a population of some 300 million, it would only take an unemployment rate of about 10% to equal the number of unemployed during the great depression.( My gross unemployment numbers do not include an exception for those under the legal age to work so they are a bit off, but you get the point.) Accordingly, a 15%-20% unemployment rate today would affect far more people than either the Panic of 1873 or the Great Depression. In 1873 as in 1929 the major occupation was farming, although by 1930 over half of the population was living in urban areas.

The causes of the 1873 Panic may be more similar today than the causes of the Great Depression but the number of people affected was far less. Our situation today is potentially more dire in that if we have significant unemployment coupled with a lack of government assistance money (i.e. gov. runs out) people today are much less self sufficient than they were in 1873 or 1929 and we will have a numerically greater amount of people in trouble who cannot take care of themselves. It is no exaggeration that in a worse case scenario some of our citizens may face starvation.

 

[Mztk1]

Now I've heard the depression of 1857 was as bad as the depression of 1930, http://www.u-s-history.com/pages/h159.html, but I've always thought the 1873 depression was more mild than the one in the 1930s, which at least Wiki supports (if Wiki's support means anything), http://en.wikipedia.org/wiki/Long_Depression

I didn't read the article, though, I'll do that next.

The other thing, too, is before the Great Depression, the word Recession was never used. All "Recessions" were called "Depressions" and the 1930s Depression was called "The Great Depression" because it was the worst one in living memory. The word recession came into use. So a four year depression in 1873 means the same as a four year recession today (unless we have statistics that show it actually fit the criteria of depression that we use today).

 

[Couch Potato]

We don't have depressions anymore Jim, only recessions, severe recessions and deep recessions.

 

[Mztk1]

We've come full circle, Couch. I think you may be right.

 

[Terrel L. Shields]

severe recessions and deep recessions.

under the next administration, it will be "recession? What Recession? This ain't no stinking recession...this is a downturn.....don't worry, we're the government and we are here to help..."

Chas. Kindleberger has the best capsulated summary of the panics of the world and he (if still alive) is over 90 and updated a book from the 1970's a few years before this crunch and after the dot.com crisis. The book can be found on Amazon and other booksellers used. Its paperback and well worth the <$20. Called "Manias, Panics, and Crashes..A History of Financial Crisis", he pointed out that a land boom in Chicago spread to the point lots were selling for dollars per SF and it was claimed every other man and every fourth woman owned lots in Chicago. 1873 was preceeded by a similar boom/bust cycle in Europe months earlier. The effects were often global but is a must less time compressed manner than today.

Kindleberger, who has been writing financial works since 1937 is very readable and he laid out the classic way bubbles arise and are popped. The RE bubble we face now is totally classic, totally predictable, and totally the fault of government.

Kindleberger laid out every step, from velocity of money and over-trading to the entry of speculators and amateur ones at that, the defalcations that give rise to fraud, the eventual realization that not everyone can get out at the top of the market, leading to an orderly to panicked selling spree, often triggered by the collapse of a bank or exposure of a fraud (like Enron some years ago and the bank failures today); capitulation is reached as the Germans describe it, "Torschlusspanik" - door-shut-panic. Finally, the lender of last resort must step in or the markets simply freeze up.
This is the stage we are in. In 1873, there was no lender of last resort, the Government did not step in, and as a consequence the economy was slow to recover.

 

[airphoto]

However, in the prior losses (read: Depressions/Recessions) it was typical to have only ONE family breadwinner, and there was no welfare or unemployment compensation. Today the landscape is far different ..

 

[Restrain]

You also have to consider the arguments that were taking place between the rural states and the northeast regarding cheap money vs. expensive money, gold vs. silver, etc. It gets very esoteric, but these arguments driven by Congressional representatives also had a significant impact on recessions during this period.

 

[Austin]

I was an econ major and remember the first class we had on "American Economic History." I remember it all clearly all about 'the robber barons'. I even remember in my mind the front of the book with pictures of the bearded barons like J. Gould and big Jim Fisks who attempted to corner the gold market etc. Big bond sales and stock deals etc.

Econ is not that complicated when it comes to credit policy. The problem is playing with credit policy can make some people rich and the people that get rich can influence politicians and around she goes. It is always the same. Same story in 1837 for the same reason.

PS: I hate to mention this because some will take it as being a political stab, but the rural farming working class, Democrats, always want easy money so they can compete and be like the big boys. There are more of those type voters out there and to get elected the politicos always have to follow the easy money trail to get those votes. Then it gets out of hand causing a bubble and here we go again. I have learned how to deal with the situation, saw this coming years ago and put my retirement in places sure to survive.

 

[Terrel L. Shields]

Every crisis is different so the dimensions of our present dilemma cannot be ascertained with any certainty. The Panic of 73' lasted 4 years but it did so partly because there was no "lender of last resort"...a takeoff expression of the French phrase for the last appeal court.

The world IMF was once touted as that lender of last resort in a financial crisis but it appears to have no real part in the current affair and the large banks of the world are left to fend for themselves, unite across borders, or wait for the government to step in.

The FDIC was created to back deposits but the fear is (and was realized) that multiple accounts are created from persons over the insured limits which are then distributed (at a premium) to banks wishing to raise capital. These "brokered" deposits were a big part of the downfall of ANB Financial a few months ago. By paying above market rates, when losses occurred and those accounts still had to be serviced, the banks lost money bigtime.
The speculative bubble was created in part by breaking down the Glass Steagall wall which kept Investment Banks from lending depositor savings in risky deals. That is the seed of the Inv. bank crisis. They simply over-extended credit.

One other thing. In crisis after crisis, including the depression, the government when forced to act reiterated that the taxpayer would come out of this unscathed, that these valuless assets would be worth something...but in no crisis to date has that actually occurred. The taxpayers ALWAYS end up on the short end of the stick.