A short history of North America’s financial panics

Panic of 1819

U. S. banks over- extended credit to speculators in public lands, and fuelled the bubble by printing paper money. When the central bank started curtailing loans to regional banks, they covered their exposure by foreclosing on the heavily mortgaged farms and businesses they had financed. But with the end of the Napoleonic Wars in 1815, European agricultural production rebounded, pinching export markets for the U. S. In the subsequent panic there were many bankruptcies, and massive unemployment. Some described it as a general collapse of the American economy. Deep mistrust and resentment of bankers and big business followed. Bank circulation fell by almost half.

Panic of 1837

President Andrew Jackson rode a wave of hostility toward financiers into the White House. He declared America’s national bank corrupt, and set out to thwart its activities. Private banks responded with rapid expansion, fuelling a real estate bubble. Jackson, who had paid off the national debt, insisted that public lands be paid for in gold or silver coin, causing a currency reserve crisis. Once again, banks foreclosed on mortgages, a crisis of trust triggered a massive business contraction, and in New York, 250 business houses declared bankruptcy in the first three weeks of April. Historians later described circumstances in which even the central government couldn’t pay its debts and “trade stood still, business confidence vanished, and ruin stalked unchecked over the land.” Jackson departed, leaving the problem to incoming President Martin Van Buren.

Panic of 1857

This has been called the first global financial crisis. A major shipment of gold from California was lost in a hurricane and banks couldn’t cover their loans to finance railway expansion, which had in turn sparked a speculative boom in mining and real estate. Mining and railway profits failed to materialize and farmers began to default on bank- held mortgages, setting off a run on bank deposits. On August, 24, 1857, Ohio Life Insurance and Trust failed and banks across the U. S. followed. The resulting depression lasted until the Civil War. This panic helps explain American enthusiasm for the Gold Rushes to the Fraser River in 1858 and the Cariboo in 1860.

Panic of 1873

This was the original “Great Depression” until it was superseded by the one that followed the stock market crash of 1929. A number of factors came into play, among them Jay Cooke & Company’s heavy investment in railroads, speculating on agricultural production. Unfortunately, while the areas to which the railways were built were productive, there were no settlers there to farm the land. When farmers didn’t supply the freight on which the railways were counting, profits collapsed along with share value, and the big bank failed. In the subsequent run on New York banks, deposits fell by two- thirds, and they collapsed with such rapidity that the New York Stock Exchange closed for an unprecedented 10 days. These woes were exacerbated by the German Empire’s decision to abandon the silver standard, affecting the American mining sector, and a general depression followed.

Panic of 1893

Once again, banks had financed railway expansion that outran the capacity to generate profitable revenues. Over- production flooded the precious metals markets with cheap silver, and there were sudden, steep declines in prices for agricultural commodities. Depositors stampeded to withdraw funds from banks in search of goldbacked securities, causing a secondary run on gold reserves and an unprecedented wave of bank failures — 600, according to a U. S. News and World Report article published on its 99th anniversary — and unemployment rocketed to 35 per cent in New York. The depth and violence of the contraction set off a worldwide depression.

Panic of 1907

San Francisco, still the source of much of the world’s gold supply ( including shipments from B. C., Yukon and Alaska), was flattened by a massive earthquake in 1906, causing a sudden, unexpected restriction in gold supplies that created a liquidity crisis. Already spooked by earlier financial mismanagement during the so- called Gilded Age of robber baron financiers, depositors began a run on banks that caused two major brokerage houses to crash. But it was one of the financiers who saved the day. J. P. Morgan came out of retirement to organize a rescue plan for stricken financial institutions. One of his measures was the creation of the U. S. Federal Reserve.

Panic of 1929

The U. S. economy had been surfing an unprecedented boom in technology, industrial growth and consumer spending driven by a new banking instrument — purchases on the “instalment plan” by which households got the new car or radio now but paid for it incrementally over months or years. Some thought the prosperity would never end. But greed and speculation were growing, too — 40 per cent of bank loans were used to buy stocks that seemed destined to endlessly rise in value. Over the last hour of trading on Oct. 23, prices on the New York Stock Exchange nosedived. The next day, the market fell again. Brokers took a breather over the weekend, but on Black Monday, it dropped again, and fell yet further the next day. There was a run on gold reserves and 4,000 banks and financial institutions failed. Scholars argue over whether the Crash of ’ 29 caused the Great Depression that brought such misery to the world for a decade, or whether it was merely a symptom. In the popular imagination, the two became synonymous.

Panic of 2008

Deregulation and low interest rates enabled banks and other financial institutions to market affordable mortgages to consumers who might not have qualified under earlier rules. People bought homes at subprime interest rates, speculating that they would rise in value. Sellers bundled these debts with better- secured loans into packages for re- sale to other institutions. But when interest rates rose again, the subprime housing bubble burst and housing prices began to fall. In many cases, people discovered their houses were worth less than their mortgages and chose to default, creating a liquidity crisis for the banks. Institutions that held the toxic debt secured with over- valued assets now in a price free fall were forced to write off billions. Investors had a confidence crisis and dumped stock in already under- capitalized financial institutions, which then began to fail. Failing banks sold themselves to bigger banks to avoid bankruptcy, once abundant credit tightened sharply, and despite the biggest bailouts in financial history by governments, the world slid into a recession from which it has yet to fully recover.