Birth announcement
As we race toward our big 250th national birthday bash on July 4, I’m continuing my review from the New To Las Vegas world headquarters of the financial history of the United States. In my assessment, it can be summarized in just three words: boom, bubble, bust. I recently described in Part 1, which you can read here, my perhaps-contrarian view of the first century of American independence. This is Part 2, covering the next half-century to 1926.
The big ups-and-down started early–in 1775, just three years after the Declaration of Independence, to be exact. I ran out of room at 1876, by which time the still-young country had experienced 12 BB&B cycles covering about 58 years. Less than half the century was not part of some economic rock-and-roll. We celebrated the Double O smack dab in the middle of the Long Depression, where I left off. The volatility didn’t lessen after that. So here we continue.
Again, some 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.
At the time the Long Depression originally was called the Great Depression, but that had to be changed after the really Great Depression of the 1930s that I’ll get around to in Part 3. (This is sort of like the way the Great War was renamed World War I after we got into World War II.) Economists differ on when the Long Depression, which began with the Panic of 1873 ended. The consensus is 1879.
This is good because that’s the year our next BB&B cycle began, exploding with the Depression of 1882. Like several BB&Bs before it, the principal cause was overbuilding of railroads, still the new hot technological thing. This stimulated agricultural production. All this involved more and more borrowing of money until there was too much of everything, and prices crashed.
The Depression of 1882 ran until 1885, likely extended by the Panic of 1884. Amid all this insane railroad building, Ulysses (Buck) Grant Jr., son of Ulysses S. Grant, formed a New York brokerage house with one Ferdinand Ward called Grant and Ward. (The former president was also an investor in the firm.). Ward lost money through bad investments, then started what decades later would known as a Ponzi scheme, raising money by promising fabulous returns but paying dividends from newer investors. The firm also borrowed money on easy terms from New York’s Marine National Bank. It was a giant embezzlement at the heart of the country’s financial center. When Grant and Ward failed in 1884, Marine National Bank failed, and a giant credit contraction gripped the land, causing lots of other failures. Grant was considered an innocent boob, but Ward was sent to Sing Sing for seven years.
Both the Depression of 1882 and the Panic of 1884 were over by 1885. But in short order we experienced the Recession of 1887 and the Recession of 1890, the later coinciding with something called the Panic of 1890. All had BB&B elements again, the first two involving–what else–railroads. But the Panic of 1890 was also called the Baring Crisis because it was triggered by the near-collapse of the London investment house Barings Brothers over its massive and imprudent investment in Argentina. British investors desperate to raise funds sold off their pumped-up American investment at fire sale prices, draining U.S. gold reserves and sparking a huge stock market collapse.
The Panic of 1890 was contained by year’s end. But it left the U.S. financial system in a damaged state. That didn’t stop investors from plowing forward by bidding up prices with borrowed money. The boom again, and then the bubble. This set the stage for the Panic of 1893.
On May 5, 1893, the Dow Jones Industrial Average fell a stunning 24%. Percentage-wise, that’s still its biggest one-day drop ever, even more than the 22.6% it fell nearly a century later on during the October 19, 1987, debacle known as Black Monday. That came two months after the fall of one of the country’s biggest companies, the Pennsylvania and Reading Railway Co. But the precipitating event–the pricking of the bubble–was the collapse the previous day of National Cordage Co., a trust working out of New York City, after it unsuccessfully tried with a lot of Other People’s Money to corner the American rope and twine industry. Amid all this economic turmoil, more than a hundred banks shut, many in the Midwest. The Panic of 1893 was considered the worst U.S. financial crisis up to that point. By year’s end 150 railroads, 500 banks and 15,000 companies went under. This was also the year that Katherine Lee Bates, a Wellesley College English professor, wrote “America The Beautiful,” with a stanza reading, “America! America!/May God thy gold refine/Till all success be nobleness/And every gain divine!”
Economic conditions had stabilized somewhat by mid-1894. But in short order the Panic of 1893 morphed into the Panic of 1896. Now, to be fair, this wasn’t so much a BB&B as it was a deflation caused by fears the currency would be devalued due to a surplus of iffy silver over tried-and-true gold. The inflation rate actually fell below 0%. Also falling: asset values (a very big problem for rich folks with a lot of assets). People also got paid less for their labor (if they managed to hold onto their jobs). It didn’t help that there was a lot of betting–with borrowed money, of course–on whether the U.S. would stop pegging its currency to the price of gold, and it was a big issue in national politics. The after-effects of the Panic of 1896 lasted through mid 1897.
I’ll breeze through two episodes. The Recession of 1899 was a classic BB&B event largely caused by wild speculation with borrowed money in cooper stocks, which promptly sank. The Recession of 1902 was more the result of agriculture crop failures with a touch of overpriced stocks falling sharply to more realistic levels.
All this set the stage for the really short but really intense Panic of 1907. It had intense elements of BB&B–speculators using giant gobs of borrowed money to manipulate the copper market. The resulting failure of that effort–prices crashed–led to the collapse of New York’s giant Knickerbocker Trust Co., a kind of bank willing to take risks (i.e. lend money to speculators) but without adequate financial reserves in case things went wrong. Which they did. Things really spiraled from there, as banks faced runs from their customers, and credit went poof. Unemployment spike from 2% to 8%. J.P. Morgan, the top financier of his day, led what proved to be a successful effort to save the economy. Acting as a one-man central bank, he forced other bankers and wealthy individuals to cough up vast sums to bail out trust companies, the New York Stock Exchange and large businesses. It took a year for things to become normal.
The Panic of 1907 was closely followed by the back-to-back Panic of 1910 and Recession of 1913. The Panic of 1910, which ran until 1912, was not a BB&B scenario, but rather a recession caused by the Federal Government more strictly enforcing antitrust laws that had been on the books for 20 years. (In other words, tycoons like John D. Rockefeller, who during the Panic of 1907 had become the world’s first billionaire, couldn’t get richer just by unfairly squeezing out competition.)
The Recession of 1913 had BB&B roots, but was more interesting for other reasons. It came as the Federal Government imposed its first federal income tax. Although the top marginal rate was 7%, which kicked in only on taxable incomes of $12 million in today’s dollars, the new levy sucked money out of the system, stressing over-leveraged borrowers and banks. The recession started the same year the Federal Government created the Federal Reserve, hatched during a secret meeting on a Georgia island of top financiers. This was the first central bank in nearly a century, and its stated goal was to use monetary policy changes to stop … booms, bubble and busts. However, what ended the Recession of 1913 after two years was not the Fed but the outbreak of World War I in 1914, which stimulated the economy.
The next boom quickly started, fueled by World War I. When the conflict ended in late 1918, the U.S. economy was riding high. Too high. Easy credit abounded. Businesses and farmers borrowed heavily to run stuff. Consumers borrowed to buy stuff. The inflation rate topped 14½%, eroding purchasing (and loan repayment) power. It was a frothy bubble all around, and it directly led to the Post-World War I Recession, also called the Depression of 1920, which–not surprisingly–started in 1920.
What pricked this bubble? Why, the brand new Fed in its first big test. It sorta flunked. Concerned about that soaring inflation rate, the Fed–flexing its muscles–aggressively and suddenly nearly doubled its own lending rate to banks. But that had the effect of taking liquidity out of the system, turning a modest economic decline into an economic downturn that also saw unemployment triple, to nearly 19%. Agriculture land values dropped 40%, leaving farmers way under water. Commodity prices sunk, and bankruptcies abounded. Finally, several individual banks within the Fed system–but not the Fed itself as a whole–saw the light and started lending to individual banks, stopping bank runs and closings. The Recession of 1920 ran into mid-1921.
Which ushered the country well into the Roaring 20s, a nearly decade-long period of legendary wretched excess on many fronts, especially financial. The Fed did better its next time out, in 1922 raising interest rates, but just a little, to put the brakes on inflation and aim for a “soft landing” that wouldn’t boost unemployment. The resulting Recession of 1923, not a BB&B event, lasted a year into mid-1924 and ended benignly.
By that time, the country was preparing for its sesquicentennial in 1926. The 150th birthday came at a hopeful time of rising prosperity–but hardly evenly. Over 15 decades, the booms and bubbles had been more than the busts, so the net result of all the completed cycles had benefited the overall American economy. But colonial America was significantly more egalitarian than the U.S. in 1926. While in 1776 the top 1% captured around 8% of all income, by 1926 the top 1% took in nearly 20%. The spiritual heirs of the Gilded Age robber barons–folks like Rockefeller, the Mellon brothers, William K. Vanderbilt, and J.P. Morgan Jr.–skewed the numbers. That new-fangled income tax, bitterly opposed by this moneyed classes, didn’t seem to hurt much.
Still, the 150th birthday came at a time of high hope. Stocks had risen 37% in 1925. Centerpiece of the celebration was a world’s fair in Philadelphia (where its sports stadiums are now) called the Sesqui-Centennial International Exposition that featured a 80-foot-high lighted Liberty Bell replica. President Calvin Coolidge, who a year earlier had proclaimed, “The chief business of the American people is business,” delivered the keynote address on July 4, 1926, highlighting the “spiritual insight” of the Declaration of Independence.
By the time “Silent Cal” stepped to the podium to speak in a drizzling summer rain that cut down attendance, the U.S. had experienced 23 boom-bubble-and-bust cycles consuming about two-thirds of its 150 years of existence. Periods of normal growth were infrequent and almost scant. But the country now had a a smart central bank to make sure things would go smoothly marching forward.
What possibly could go wrong? Stay tuned.