Declaration of Independence
With the semiquincentennial of the United States hard at hand, everyone, it seems, is opining on the history of the United States over the past 250 years. Much of the commentary touches on race and inequality, which certainly is fair enough.
So why not me? I’m a long-time financial journalist and a serious student of history since my days at dear old Rutgers. Accordingly, I offer my two cents explaining the course of American events since our official founding with the Declaration of Independence in 1776.
Here’s the Cliffs Notes version: Boom, bubble and bust. To me, New To Las Vegas, a place where for many gamblers it’s BB&B every day, it’s that simple.
Since John Hancock penned his famous signature on that famous parchment, the U.S. has experienced dozens of boom-bubble-and-bust cycles. They have been of various durations and intensities, lasting on average about five years. Some now are more famous than others. Indeed, the U.S. has rarely gone more than a half-decade without being caught up in a BB&B. Their patterns are remarkably similar. In my view, we’re clearly in yet another bubble right now.
Not every downturn has been caused by a bubble. Over time, the booms and bubbles have been more than the busts. So the net result of all the completed cycles have benefited the overall American economy. But not everyone in it, and not equally. It’s often been the Federal Governmental response–essentially encouraging the booms and bubbles, then trying to deal with the fallout from the busts in a way that protects the rich far more than the poor–that has helped create the great political and economic divide we now have in our country.
It’s the same old story.The history of BB&Bs explains most everything and provides lessons for today. So let’s start a loooong walk down Forgotten Memory Lane.
First, some basic definitions. A boom is a period of rapid economic expansion accompanied by rising asset prices (stocks, bonds, real estate, crops, metals, businesses or whatever) and higher profits. A bubble is a unsustainable rapidly accelerating increase in asset prices, often driven by speculators using borrowed money from expansive credit policies in what amounts to a euphoria. A bust is the sudden decline of asset prices and overall economic activity, often precipitated by a single event causing mass realization, panic selling (which pushes prices even lower), job losses, recession and a great sense of investor revulsion.
Although our birthday is pegged to July 4, 1776, it took the Founding Fathers a while to get their governing act together. Officially, the American Revolution ran for another seven years until a treaty in 1783, two years after the British surrendered to George Washington at Yorktown, Va. In 1781, the Articles of Confederation, which gave the federal government very limited powers, had came into effect.
Wars are often good for an economy, but eventually they stop. Pretty soon we had our first BB&B resulting in the Panic of 1785. Those military contracts went away, catching businesses over-expanded and unable to pay their debts. Peace was terrible for business. There still was no trade agreement with England, so commerce across the ocean was in the tank, along with trade among the new 13 states. With the Federal Government lacking much authority to do anything, the panic lasted almost four years of the six years of this BB&B cycle. One result: Demands for a stronger central government led to the current U.S. Constitution, which took effect in 1789 and has endured all these years with just 27 amendments.
The new charter was put to the test just two years later in the Panic of 1792. In 1791, Congress created the (First) Bank of the United States as a quasi-private central bank based in Philadelphia, then still the nation’s capital. The bank sold shares in what amounted to an initial public offering. Speculators and the common public borrowing money bought the shares as the price went up 10-fold in a month (because there was such demand for them). “It is impossible to say when the appetite for gambling will stop,” one future president, Thomas Jefferson, wrote to another, James Madison.
A leading speculators was William Duer, a slimy ex-assistant U.S. Treasury secretary heavily involved in personal market manipulation on the side while working for his cousin, Treasury Secretary Alexander Hamilton. What, family members of governmental biggies cutting their own deals? Duer was buying on margin–with borrowed money. In early 1792, he couldn’t make payments on his loans and declared bankruptcy. As word spread, the value of the bank’s shares and bonds dropped precipitously, triggering the panic. One judge wrote that Duer “has taken in almost every person in the city, from the richest merchants to even the poorest women and the little shopkeepers.” Duer, who could have been lynched, instead was sent to a debtor’s prison, where he died seven years later.
The Panic of 1792 ended within a few months when Hamilton arranged for the Treasury Department to buy Bank of the United State shares and enacted other confidence-building measures. It was one of Hamilton’s greatest achievements (but not mentioned in the hit Broadway musical “Hamilton”). Another outcome: The panic led to an agreement that year among brokers that eventually morphed into the New York Stock Exchange.
So two BB&Bs in the country’s first 16 years, with cycles covering six years. There were more to come, starting soon.
The Panic of 1796, part of a cycle that lasted four years, broke out broke out this way. American wheeler-dealers issued commercial paper–short-term debt backed by claims to land, much with dubious titles, in then (then) Western U.S. Many of the buyers using borrowed money were in Europe, where England, France and the Netherlands were engaged in various wars. When continental inventors grew wary and stopped buying, the American wheeler-dealers formed a land company to sell shares on margin. Boom bubble and bust. The collapse of the underlying land values sunk everyone, but especially speculators and threatened the Bank of England, which had been doing a lot of lending. One of the speculators: James Wilson, a sitting U.S. Supreme Court associate justice.(What, a high court member secretly dealing with financial biggies?) He earned the distinction of being the only person ever on the high court to be jailed, first in a county debtors prison in my native New Jersey for bankruptcy and later in North Carolina. His plight helped prompt Congress to pass bankruptcy laws making it a tad easier on debtors.
I’ll skip over the Recession of 1802, highlight of a cycle that lasted maybe three years and was caused by the bursting of yet another credit-fueled investment bubble, for the next big BB&B: the Panic of 1819. The boom had started with the War of 1812 and lasted through the war’s end in 1815. Speculators borrowed to buy land and back agricultural crops, like cotton (harvested by slaves) sent to England. Prices went up along with the borrowing. But all that cotton–slaves were really productive under the yoke of their masters–caused in 1819 a collapse in prices in England. The (second) Bank of the United States aggravated matters by tightening credit and calling loans with inadequate collateral. Suddenly, there were bankruptcies and mass unemployment. The crisis lasted four years and ended after Congress passed laws affording relief to–the speculators. So the BB&B cycle here lasted a full eight years. One interesting side result: The crisis prompted a gringo migration to a part of Mexico called Texas. which after a couple of wars became part of the U.S.
Meanwhile, there came the Panic of 1825. This was a classic BB&B involving speculative investing in Latin America mining bonds. More than 100 U.S. banks collapsed. The debacle sort of morphed into the Panic of 1826, during which a full 10% of all the companies listed on the New York Stock failed, their pumped-up shares purchased with borrowed money worthless. Fraudulent corporate behavior played a big role here.
That was the year the country celebrated its 50th birthday. Attending the party: seven BB&Bs, covering most of its existence.
The origins of the next frenzy, the Panic of 1837, began in 1830 for the usual reasons. The prices of land, agriculture products like cotton, produced by slaves–and the slaves themselves–rose sharply. This drew investments both domestic and foreign, increasingly with borrowed money. Hundreds of thinly capitalized banks sprung up in response to building railroads, a technological advancement akin to the Internet (and the Internet bubble) a century and a half later. Times were prosperous. Then President Andrew Jackson abruptly shut down the Second Bank of the United States, which also functioned as a quasi-public central bank, and mandated that public lands in the West could only be bought with gold or silver. Everything collapsed. State deprived of revenues defaulted on their bonds. It was left to Jackson’s hand-picked successor, Martin Van Buren, to pick up the pieces. He quickly acquired the nickname “Martin Van Ruin” and served only one term before being defeated for reelection. The BB&B cycle lasted a full 15 years until 1845.
Ah, gold. Its discovery near Sacramento in 1848 set off the mighty California Gold Rush and a dramatic expansion of the U.S. economy, featuring railroad building and and land speculation. The boom. All this was largely fueled with borrowed money on easy credit. “Easy credit” is a Latin phrase that means inadequate collateral for loans. The bubble. But there was trouble on the horizon, especially over slavery. The Supreme Court’s Dred Scott decision, holding slaves had no right to sue, aggravated tensions between North and South. In 1857 the Ohio Life Insurance and Trust Co., which despite its name was a major bank in the financial center of New York, collapsed, due to its own speculations, corruption and inability to repay depositors. The bust. A newfangled device–the telegraph–allowed news of the Panic of 1857 to spread immediately, causing runs on other banks across the country. Railroad building slowed down, and unemployment rose. The panic help sharpen divides between the industrial North and the agrarian South, leading to the U.S. Civil War. Indeed, it took the war, which started in 1861, to finally stimulate thing economically. So this BB&B cycle lasted 12 years.
As I’ve noted, wars are good for goosing economies–until they end. The conclusion of the Civil War in 1865 triggered the Recession of 1865. This had a BB&B pattern, but one caused not so much by wide speculation on credit as it was a contraction of the economy due to war’s end. Bills, though, still had to be paid. It took two years to righten things. If you count the run-up during the Civil War, this BB&B lasted seven years.
By that time, the origins of the Recession of 1869, mainly imprudent investing in railroads stimulated by the opening of the Transcontinental Railroad, had begun. But the precipitating event pricking this BB&B was a failed effort by speculators Jay Gould, James Fisk and Abel Corbin–who just happened to be the brother-in-law of President Ulysses S. Grant–to corner the gold market. (What, presidential relatives cutting sleazy deals?) The day of the price collapse, September 24, 1869, became known as Black Friday. The aftermath was felt for another 18 months.
Which leads us to a really big BB&B: the Panic of 1873. They were still building too many railroads not making money in the U.S. on borrowed money that had to be paid back. But wild speculations were taking place across Europe, source of much of the financing. This panic was a worldwide deal. The bubble was pricked on September 18, 1873, when Jay Cooke & Co., the major backer of the second transcontinental railroad being build, failed. unable to raise more capital. This triggered bank runs everywhere and even shut the New York Stock exchange. Hundreds of banks failed. This touched off what economists now call the Long Depression, lasting into the 1880s. All told, the BB&B cycle of the Panic of 1873 and the Long Depression lasted longer than a decade.
So by my count, as America celebrated its first century of independence in 1876, the country had experienced 12 BB&B cycles covering about 58 years, with only about 3½ years between each cycle. I’m hardly getting going. Stay tuned.