the tindog coffeehouse

The New York Times has a great article which compares the Panic of 1873 to today’s financial crisis.

Most people, of course, are familiar with the Great Depression of the 1930s, but nobody except us history geeks remembers the Panic of 1873. Like today’s crisis, the stock market crash of 1873 followed a huge economic boom fueled by speculation and easy credit.

Both the U.S. and Europe were greatly expanding in the early 1870s (following the Civil War in the U.S. and German unification in Europe). According to historian Scott Reynolds Nelson (emphasis mine):

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. 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, using unbuilt or half-built houses as collateral.

Sound familiar?

But then the house of cards in Europe began to crumble, causing multiple bank failures throughout Europe, eventually leading to a failure of some U.S. railroads, which themselves had been financed on shaky ground.

Then in September 1873, Jay Cooke & Company, a major financier of the Civil War, failed after the collapse of the Northern Pacific Railroad. This led to panic in the stock market and the collapse of other big financial institutions.

When the panic subsided, the U.S. and Europe found themselves in a deep economic depression that lasted for several years and had numerous long-lasting consequences. (I won’t go into detail here, but definitely read the New York Times article and the article by Scott Reynolds Nelson!)

While there are many, many parallels between 1873 and today, however, there is one important difference: the existence of a strong central bank. Andrew Jackson wiped out the Second Bank of the United States in 1833, and the U.S. wouldn’t have another central national bank until the Federal Reserve was created in 1913. Without a central bank, there was no way to regulate the money supply, and the U.S. experienced numerous depressions and financial crises throughout the 1800s and early 1900s.

I have complained a couple of times before about the growing power of the Fed, but clearly without it, our options for a quick recovery are very limited. But that’s not to say there won’t be some very serious consequences. If anything, history teaches us there are always consequences.