Panics, Part One: The crash of 1819

February 19, 2009, 6:29 PM UTC

panic-1819The little post begins a series I intend to pursue for a while, on and off, or whenever the spirit moves me, on economic panics throughout history. The subject seems appropriate an interesting at that point in time. I’m not quite sure why.

The nation had indulged in a huge real estate boom involving the western territories of the new United States. When that bubble burst, a number of state banks failed, leading to a collapse in the credit market. People had gotten used to borrowing to meet their personal and business needs, and it proved to be a hard habit to shake. Foreclosures proliferated, followed by a recession, and then a six-year depression.

The president at the time was James Monroe. His constituency had no experience in dealing with the situation, since this was the first in the boom/bust cycles that have since been integral to the character of American capitalism. In 1819, he addressed the nation, stating that, 

” The great reduction of the currency which the banks have been constrained to make in order to continue specie payments, and the vitiated character of it where such reductions have not been attempted, instead of placing within the reach of these establishments the pecuniary aid necessary to avail themselves of the advantages resulting from the reduction in the prices of the raw materials and of labor, have compelled the banks to withdraw from them a portion of the capital heretofore advanced to them. That aid which has been refused by the banks has not been obtained from other sources, owing to the loss of individual confidence from the frequent failures which have recently occurred in some of our principal commercial cities.”

In other words, the banks called in their loans and stopped giving credit. In response, Monroe cut taxes and otherwise floundered around until the end of the cycle.

Let’s see what elements may be found in this iteration of the story:

  • Wild speculation in real estate
  • Collapse of real estate market
  • Excessive borrowing and lending
  • Banks fail
  • Bigger banks survive but are almost mortally wounded and stop giving credit
  • Prices fall because people have no money
  • Depression sets in
  • New boom is required to break cycle.

I’d like to thank The History Box, an excellent website, for being such a good source on this. I’ll be back whenever I like to look at other examples of mass stupidity and hysteria throughout history, both here and elsewhere.

Two things are remarkable, in the end. First, how all such catastrophes essentially all look the same when you strip away the funny clothes, hats and languages, and second, why, if that is so, no one has demonstrated the ability to predict or avoid them.

Coming soon: Panic in Rome!