This past Monday, October 26th, my Rotary Club (Western Henrico Rotary Club) had an excellent speaker from the Virginia Historical Society who gave a historical perspective on the current recession we are in. I enjoyed his presentation so much, I asked him to send me his notes so I could share them. It was a 20-minute presentation, so this is a bit long for a blog, but I'm sure you'll find it well worth the read.
The Recession in Historical Perspective
Paul A. Levengood
Virginia Historical Society
As historians, one of the most
useful things that my colleagues and I can do is put the events of today into
context and perspective. We have all
been bombarded these last few months by news of the national and global economic
downturn. Breathless reports assert the “historic”
nature of today’s events. But how much
of this is presentism, a focus on our own times that ignores much of what has
gone before? To answer this question it
is useful, and perhaps reassuring, to review the recurring series of panics,
depressions, and recessions that have marked the American past just as surely
as have the great eras of prosperity. I
hope that I can help put a little perspective on what we are going through now
by briefly describing some of the major recessions we have experienced as a
nation over the past 233 years.
It is quite appropriate to be
writing these words in Virginia, because along with our status as the cradle of
the nation, we can also lay claim to being the site of the first economic
crisis in North America. From last
year’s commemoration, we remember that Virginia was established as a commercial
enterprise. Unlike later colonies, the
Old Dominion’s very reason for being was to turn a profit for its investors in
the Virginia Company of London. But far from producing the spectacular profits
envisioned by its backers, Virginia was near collapse by 1610, more than half
the colony’s settlers were dead and the company had seen no return on its
investment.
As dark as the times were, they sparked innovation that ultimately
allowed Virginia to be economically viable. John Rolfe—better known to
posterity as Pocahontas’s husband—guessed that sweet-scented tobacco might
thrive in Virginia. In 1614 he made the first shipment of tobacco to England.
This transaction forever altered the fortunes of Virginia, creating the great
wealth of the colonial period that made it the wealthiest of all British North
American dominions.
So
as we can see, Virginia has 400 years of experience to draw on in these current
hard times.
Panics of 1792 & 1797
Though we
rightly celebrate the momentous events of the birth of the United States, all
was not rosy in the first years of the Republic. In 1792 the young nation suffered a bank
panic when fears about the stability of the Bank of New York caused a bank run
on it and other institutions. In a move
that echoes today, Secretary of the Treasury Alexander Hamilton intervened with
an infusion of securities that reassured depositors and halted the panic. Relative economic calm lasted about five
years until the all-important Bank of England greatly pulled back on Britain’s
money supply, a move that resulted in a contraction of credit in the U.S. and led
to a wave of bankruptcies in this country.
Most prominent among those who landed in debtors’ prison was the great
financier of the Revolution, Robert Morris, who languished in a Philadelphia
jail for more than three years.
Panic
of 1819
Although the economy boomed in the years immediately following the
War of 1812, the prosperity came to a screeching halt in 1819 when the federal
debts for the war came due. To satisfy
international creditors, the government suspended specie payments, pulling gold
out of the U.S. financial system to satisfy its obligations. This prompted banks to issue notes to their
depositors, a practice that proved wildly unpopular and volatile. Commercial bankruptcies
skyrocketed, and many banks failed. Hardest hit were cities like Philadelphia
where unemployment reached an astounding 75 percent, and more than 1,800 people
were imprisoned for failure to pay their debts.
The panic proved difficult to overcome and lasted close to five years.
Panic
of 1837
After a period of growth, the U.S. economy again experienced a
sharp contraction when banks ceased payment in specie after a period in which
they had engaged in careless lending. The
result was the bursting of a credit bubble. [Does this somehow sound familiar?] The result was perhaps the worst wave of bank
failure in the nation’s history, which saw 343 of the nation’s 850 banks in the
United States cease operations. The
federal government had refused to renew the charter of the Second Bank of the
United States, and the lack of a central bank reserve system meant that there
was no coordinated response. Though he
had little hand in its causes, President Martin Van Buren bore the brunt of
blame for the crisis and lost his reelection bid as a result. Lasting six years, the Panic of 1837 was,
along with the Great Depression, one of the most severe economic downturns the
nation has experienced.
Panic
of 1857
When a major embezzlement caused the Ohio Life Insurance and Trust
Company to go belly up, it touched off a major crisis of confidence in U.S.
financial institutions. By itself, this
might not have been disastrous had it not caused British investors to pull money
out of U.S. banks and curtail investment in railroad expansion. This, coupled with sagging grain prices and
uncertainty about the slavery question in the territories (remember, this was
the same year as the Dred Scott decision), led to a collapse in land
speculation in the Midwest. In some
parts of the country, this crisis lasted until the Civil War. In a reminder of the interconnectedness of
the world’s economy that holds true today, the dominoes that started falling with
an Ohio company eventually toppled across the globe, as the panic came to
engulf Europe, Asia, and South America.
I should point out that although not a national recession, the era
of the Civil War and its aftermath did cause a long-term financial slump in
Virginia and the rest of the South. Many
individuals and institutions lost everything in this period. My own institution, the Virginia Historical Society,
for example, sank its entire endowment of $5,000 into Confederate war
bonds. Needless to say, the return on
the investment makes the current performance of our endowment look positively
robust! [We still have the bond certificate, by the way.]
Panic
of 1873 & Long Depression
The failure of Jay Cooke’s Philadelphia bank and the crash of the
Vienna stock exchange slammed the brakes on what had been an era of national economic
growth, fueled largely by a railroad-building boom. The ensuing credit crunch coincided with what
came to be known as “The Great Epizootic,” a nationwide outbreak of equine flu that
infected virtually every horse in the U.S. and killed tens of thousands of them.
In a nation that still relied greatly on horsepower, the economic consequences
were dire. Streetcars (all horse-drawn) ground to a halt, fire engines could
not reach fires, and coal could not be delivered to trains.
This panic of 1873 has been called the start of the Long
Depression, which lasted, in some form, until 1897 and included national labor unrest
that reached its peak with the great Pullman strike of 1894. Over the course of this two-decade slump, tens
of thousands of businesses failed. Certain industries were especially hard hit.
Nearly a quarter of U.S. railroads went bankrupt, including the Atchison,
Topeka & Santa Fe, the Northern Pacific, and the Union Pacific. As a result,
national unemployment reached double digits soon after the panic commenced and
stayed there for most of the 1870s.
1907,
or Bankers’, Panic
When news broke that a group of investors had unsuccessfully
attempted to corner the copper market in 1907, the New York City banks that had
loaned money for the attempt suffered runs by their depositors. As a result the
Knickerbocker Trust Company, the city’s third-largest trust, failed. As panic
spread, the New York Stock Exchange plunged 50 percent from its 1906 peak.
Worse was averted by J. P. Morgan (who, interestingly learned of the troubles
while he was attending an Episcopal Church convention in Richmond), who
organized a pool of bankers and industrialists that pledged large sums to
inject liquidity into banks. Morgan’s
successful intervention led directly to the establishment of the Aldrich Commission
and the subsequent creation of the Federal Reserve system to avert further such
problems. [And, of course, we haven’t
had a problem since!]
Great
Depression
I probably need not go into detail about the Great Depression,
because its events are better known than some of the earlier economic crises. But
because we hear so many questions about whether we are in the second Great
Depression, it is worth remembering a few facts. Between 1929 and 1932 industrial production
fell by nearly 45 percent, homebuilding decreased by 80 percent, and as many as
5,000 banks shuttered their windows. At
its height, in 1933, the Great Depression saw 13 million Americans, a quarter
of the nation’s workforce without a job. [By way of comparison, today
unemployment is about 10%.] Perhaps
another quarter of the workforce was under-employed.
President Franklin Roosevelt’s response to this dislocation, the New
Deal, gets a lot of airtime these days.
We hear from the left that we need a “new” New Deal, that only massive
government intervention and direct employment will avert the worst effects of
the current recession. From the right we
hear that the New Deal did not work, that maybe it made things worse, and
created a bloated bureaucracy that hurt us in the long run.
What strikes me, though, in many years of reading about the Depression
is that the actual, economic impact was far less important than the
psychological and political effects. The
notion that government did something was
very significant. And it is interesting
that though today we have heard calls for helping individuals in the New Deal,
so far it has mostly been large companies that have gotten government support.
What sets the Great Depression apart among the other economic
crises considered here were its long-term effects: it created conditions around the world that
set the stage for the rise of fascism and the outbreak of World War II, it
altered forever the scope and size of the federal government, and it left a
psychological legacy that would be carried by several generations of Americans
through their entire lives.
Recent Recessions
Although the period since the
Great Depression has been the most prosperous in our history, we have hardly
been recession-free. There were two in
the 1950s that often go unnoticed. These
were followed by the Oil Crisis of the early 1970s and the resultant
“stagflation”; the early 1980s recession; and those of the early 1990s and
early 2000s.
Running
through this litany is not intended to add to your sense of gloom and
doom. Instead it is offered as a
reminder that though we are going through hard time, hard times have been a
regular occurrence in our history. And it
is useful to remember that we have gotten through all the previous ones. I am not an economist and will not try and
forecast when the current recession will end.
But if history is any guide, it will end.
Our perceptions are largely about context. Is this a sharp recession? Yes. Is it of historic dimensions either in
severity or duration? No (at least not
yet). So then why does it seem so? Perhaps because never before has information
been more accessible to more of us.
Never have the intricacies of our economy and the government’s efforts
to maintain some semblance of order been laid more bare and subject to more
rampant speculation. And the high
profile cases of malfeasance, the Bernie Madoffs and the Allen Stanfords, been
so brazen.
It’s also interesting to note that this one also might feel bad
because recessions have been getting shorter and expansions longer. The average
recession during the past fifty years lasted eleven months, whereas the average
recession was more than twice that long in the nineteenth century. So we are not especially familiar with hard
times.
I hope this dose of history helps us keep current events in proper
perspective. And it can also aid us in
maintaining the sense of optimism, and even humor, that have always been our
hallmark as a people. We have weathered much as American and have not yet
collapsed into chaos—and we’re not about to now.
Paul
A. Levengood, Ph.D.
President
and CEO
Virginia
Historical Society
Phone:
804.342.9656
Membership
in the Virginia Historical Society is a great way to help to preserve the story
of Virginia's past. Join today at http://www.vahistorical.org/membership.htm
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