Some matters in history do recycle themselves even though we tend to ignore that fact. The world has seen plenty of bubbles over the years. There was the Tulip Bubble of the Dutch East Indies Company in the 17th century then the South Sea Bubble in the 18th century followed by several more during the 19th century on into our own contemporary times. As long as we have a somewhat free market system we will have another in the future for sure. The Soviets didn’t have any bubbles during their 75 year reign and if they did we sure wouldn’t have been allowed to know about it. Our recent housing bubble is part of a legacy from bad economic decisions by those in the market place and inevitably exacerbated by government action or inaction in every case. One of the more profound of the bubbles was the Panic of 1893.
Of course our housing bubble was not the only cause of our recent financial distress. You can certainly add a big dose of idiotic government policies regarding the purchase of mortgages by Fannie and Freddie and the exuberance of some on Wall Street to market those mortgage-backed securities. Likewise the Panic of ’93 was caused by several factors. The railroads over build capacity by leaps and bounds. Indeed as part of this episode several rail roads went bankrupt. A few of them you would recognize by name because they were resurrected. Just as many believe the failure of Lehman Brothers in Sept. of ’08 was the true beginning of the financial crisis we have now, the failure of the Philadelphia and Reading Railroad in Feb of 1893 kicked off the Panic. Later the Northern Pacific, the Union Pacific and the Atchison, Topeka and Santa Fe railroads would all go bankrupt but they live on now after their revival. The country had undergone a great expansion for 15 years or so before this time in just about every category you can name–immigration, new railroads, mines, telephones, telegraphs, and industries of every sort plus the migration to fill up this still mostly vacant mid-west and west. Just before this the silver mine production had reached a peak. Our money was backed by both gold and silver at that time. But gold remained the favored metal. The government got involved which is always a bad thing in any market and required that millions of ounces of silver would be bought by the government. Meantime a drought struck the Mid-West and severely hurt the farmers for several years and many ended up defaulting on their mortgages. All this before worries about climate change and Fannie and Freddie, hard to believe isn’t it.
As these things occur, people started getting a little nervous about the economy. In 1893 the people moved on the banks. Many decided it was better to have gold than silver or any paper money. First it was just a trickle but soon a flood of demands on the banks. Like always the banks could not pay everyone at one time. No bank can ever do that if everyone demands all their money as the same time–remember “It’s A Wonderful Life”? Like now, there was also alarm in Europe and many there decided to sell American stocks and get gold. The price of silver and silver backed bonds dropped. The US reserves of gold reached their limit and the US had to stop redeeming for a while the gold backed securities which only made the panic even worse. All this was also made worse by the protective trade tariffs imposed in 1890 by McKinley. As usual those trade barriers have more negative effects than positive ones. For every job protected more than that are lost from diminished trade.
One notable difference in all this panic was that it was Wall Street that came to the rescue of the government rather than Washington allegedly riding to the rescue. It got so bad that in order to support the gold standard for our currency after we had tapped out, Cleveland had to go to J P Morgan and borrow 65 million in gold bullion for the government to bolster support for our money. Wonder how it would have been if he had declined? But he stepped up to the bar and helped out. He also was a major factor in the Panic of 1906 by helping to resolve which banks could survive and which would have to be closed.
Wm. Jennings Bryan and his group wanted the silver standard to be the only standard because this would cause inflation and the farmers, miners and others would be able to repay their loans with debased and cheap money. Fortunately that didn’t work out for them. Banks and money have to have some regulation but it should be the minimum. Set rules evenly applied and known beforehand without constant tinkering by politicians. There is no easy way to target with precision the “cause” of the Panic of ’93 anymore than we can pinpoint on Lehman or other matters now for our financial distress. Usually, they come from a series of bad mistakes, too much optimism and heavy-handed government interference. The government actions are always touted as well intended and necessary and the mistakes aren’t recognized as mistake at the time but opportunities (The Dotcom bubble) not to be missed. We can learn and hope we will.
In case you didn’t read it the Reconciliation Bill provides for 1 billion for “Federal administrative Expense” to implement the health care act. That used to be a lot of money. Can it really take that much to shuffle papers between bureaucrats? http://www.olcranky.wordpress.com
A Sage for the Ages 