A Short History of American Panics, Recessions, Depressions: Why Conservative Economics Can't Work - Part I
PART I - 1791 - 1960: I finally had to break into to parts, it became so long. At the end of each part is a link to a petition I recently posted on the White House web site We The People. I hope you go sign it.
PART II covers 1973 - 2009.
[For those of you returning for the next installment, you will either be happy or sad to know that I have completed this effort, sort of ... the manuscript was sent out for professional editing and is now back for my part.
10/19/18 - Lots of time has past and the editing is finished. I just sent the manuscript in for publishing - YEAH!
12/24/18 - Sent in the first fixes to the publisher's initial draft. I have an ISBN :-)
1/11/19 - I am published :-) !!! I am PUBLISHED!!! :-) ISBN 9781524627096
As I can, I will update this hub with the edited edition sans two sub-parts, a political background, which begins each section, and a concluding summary, both of which will be part of the book.
For those of you into Meyers-Briggs I am an INTP, with a huge emphasis on the 'P', which some people say stands for Procrastination. It's been 18 months (scratch that, try 24 month by now, I think) since I got the manuscript back and just now picked it up again for its final run through (I had been working on it off-and-on prior to this). What I will also do is insert the final edits into this hub as I go along.
I highly recommend AuthorHouse as a publishing medium. Except for some initial confusion, they have been good to their word of trying to assist me in publishing this tome and have been very patient with my very slow response to their entreaties to get off my butt and finish the damn thing so that they, and I, can earn some money!]
If you happen to own or buy this book, I would appreciate your feedback.. ME.
An Introduction ...
THIS BOOK (to be published in Oct 2016,scratch that, Jan 2019, I hope) IS A HISTORY
When Americans went to the polls in November 2016 to choose a new president and Congress, I believe few people understood the awesome responsibility resting on their shoulders; first in deciding to vote at all and second in deciding which candidate for which to vote. The choice between Secretary Hillary Clinton and
businessman Donald Trump as well as between conservative and moderate/liberals running for Congress was stark; both in rhetoric and vision. For a whole host of reasons including extreme frustration with gridlock in Washington, two very unpopular candidates, a polarized electorate, interference in the election by Russia, and even missteps by the former Director of the FBI Further America made a very unexpected choice. Against all odds, they elected a man with no political, economic, or policy experience as well as a self-confessed disregard for tradition and deep thinking. The people also elected a Congress guaranteed to continue the destabilizing gridlock of the past six years.
The decision the people made will determine the economic stability of America for decades to come, which is the subject of this book. Unfortunately, economics doesn’t lend itself to empty sound-bites, bumper stickers, slogans, one-liners, and other simplified forms of communication our political discourse has devolved to; istening to and taking them to heart often leads to very bad decision-making. No longer are you allowed to hear intelligent conversation about important issues of the day, and then you must take time to sort through the billions of words on the Internet and print media to find something meaningful in print.
You aren’t allowed to hear relevant information for two basic reasons; 1) ratings and 2) the need for politicians to stay on message. If television and cable start pulling a Walter Cronkite on you and delivering real news, they fear their ratings will fall (as well as advertising income) and if politicians try to tell you the truth using more than ten words, they fear they will lose you, or worse yet, make a single mistake and be shot down in flames. As a consequence, I have found little value any more in the spoken or written word with only a few exceptions such as Sirius/XM’s POTUS (Politics of the United States for the People of the United States) and no, they didn’t pay me for the plug, and neither did CNN, Politico, and the Hill.
SO, why should you read this book? Because it contains relevant information regarding economic issues, of course; hopefully presented in a manner that makes sense to you. Further, who am I who thinks he can present such information with any semblance of authority? After all, I start with quite a handicap. I have no PhD in economics, although I do have a Masters in Operations Research; there are no other books to my name, this is my first; I have never taught this subject in a formal school, although I have taught economic analysis during my career in the Air Force.
On the other hand, what I have done is spent a career with the Air Force as a professional Cost and Economic Analyst specializing in operations and support costs. Without too much exaggeration, it was my job to figure out what it cost to operate everything from a squadron of F-16 fighters to the whole Air Force, literally. Once I was lent out to NATO to help Slovakia figure out how much their Air Force might cost to operate for a period of time if they bought various types aircraft while others worked on the cost to acquire the aircraft. My point, of course, isn’t to pat myself on the back, but to make clear that I know my way around large data sets, statistics, analysis of large systems, and all of the other things needed to present, knowledgeably, the information that is to follow as well as to draw the conclusions that I do.
And it isn’t really that hard either. Whether you went Wow, gave me the raspberry, or went oh-hum over my resume, most of the time esoteric calculus, deep statistical methods, or complex numerical analysis wasn’t needed. Generally, it was minor statistics and mathematics, but most importantly, an ability to understand systems and the relationship of the parts of the systems to each other and the whole, see patterns, and recognize what they are telling you. In terms of the Air Force, that would be 1) personnel, 2) supply, 3) maintenance, 4) operations, 5) logistics, 6) resource allocation, and 7) Congress. For this book, those functions would be 1) supply, 2) demand, 3) employment, 4) interest rates, 5) money supply, 6) monetary policy, 7) fiscal policy, 8) the Federal Reserve, … and 9) Congress. To reach the books conclusions, no math is actually needed, just some chart making abilities and around 25 panics, depressions, and recessions where each will tell roughly the same story which began with similar economic conditions. The results devolve into two strikingly different patterns that are easy for the eye to discern, no statistics needed, even though there is enough data available to provide a clear empirical story.
1 It is now Christmas, 2018. Donald Trump has been our president for almost two years and my fears of electing a president with his lack of experience and chaotic personality have born out - in spades. The stock market is crashing, he has alienated every ally we have, he is in the process of isolating America from the rest of world, he forced a well respected Secretary of Defense to resign in protest because on dangerous decisions in foreign policy, and the list goes on. It has been an unmitigated disaster which will probably lead to a recession worse than the one in 2008 and probably a depression. All for the same reasons which I will explain to you in the next 250 pages.
… and a Little History
[Final] THIS BOOK IS A STORY of two competing economic theories, the Austrian/Classical School, favored by the political Right, and the relatively new Keynesian theory, favored by moderates and the political Left. Those have essentially the two economic models followed in America’s 200+-year history. Proponents of the Austrian School were Presidents Thomas Jefferson, Grover Cleveland, Ronald Reagan, and George W. Bush. We can also include the list of Republican presidential hopefuls since President Reagan, with the possible exception of Donald Trump.
Those who might have supported the Keynesian model, had it been around then, are Secretary of Treasury Alexander Hamilton, President John Adams, President Theodore Roosevelt, who was the politician that initiated the creation of the Federal Reserve, and President Franklin D. Roosevelt. Those who went on the record in support of it were Presidents Truman, Eisenhower, Kennedy, Johnson, Nixon, Carter, Clinton, and Obama. As you will see, which theory prevails has an enormous impact on our lives and should influence your choice for who you want to elect to represent you.
What I hope to present in the following sections is a record of significant American depressions and recessions, along with an assessment of the fundamental causes, who was in power leading up to the depression/recession, what got us out of it, and who was in power when that happened. I think this will be educational as we assess the results of the 2016 presidential election and the 2018 midterms.
The National Bureau of Economic Research (NBER) determined that the United States of America has suffered at least forty-nine economic downturns since 1790. Of those, five were classified as depressions; the last of which was the Great Depression of 1929. For my purposes, I am only considering economic downturns that not only meet the normally accepted criteria for a recession (explained later), but also lasted longer than one year or had significant contractions. This is why the recessions in 1990 and early 2001 are not included for they were neither long nor felt by a large part of the population.
Some might wonder why the year 2001 isn’t included. After all, wasn’t there a huge stock market crash and a steep rise in unemployment? Well, yes and no. Even with the crash, the economic contraction only lasted eight months, the third shortest in history. Two other recessions were shorter and four more were tied. Unemployment topped out at 6.2%, not much above normal unemployment, and decline in GDP was only -0.3%, hardly a decline at all. In fact, some say that without the 9/11 terrorist attacks, there might not have been a recession at all.
Let me close this section by giving you a few things to look for as you work your way through this history. The point of this book is to first identify a set of common characteristics that precede each recession or depression which are financially-based. I will tell you now that these are 1) greed, 2) easy credit, 3) an asset which people find valuable, 4) uncontrolled speculation in that asset, 5) an over-leveraged financial sector, and 6) lack of central government regulation of the financial sector or unwillingness of government to enforce available regulations. If any one of those ingredients is missing, the chances of a bad economic downturn are slim to none. After that, one must determine which form of economic theory was being utilized by the Federal Government and, if it existed, the Federal Reserve.
And at the risk of sounding too simple-minded, that is the difference between the Classical-Austrian-Conservative economic schools (pick your term) and the various forms of Keynesian economics; Keynesian economics, through government intervention, tries to remove one or more of those legs needed for a major economic downturn to happen.
(THERE IS A POLL AT THE BOTTOM - PLEASE VOTE)
When Recessions Are Bad
[Final] Below is the list of panics, recessions, and depressions that will be covered in this book. As explained above, it by no means is a complete list of all of the downturns America has seen, just those that met certain criteria of severity and/or length.
Under review are: (Wikipedia, n.d.)
The Panic of 1796 - 1797
The Recession of 1802 - 1804
The Depression of 1807
The Depression of 1815–1821
The Recessions of 1822–1823
The Recession of 1825–1826
The Panic of 1836 - 1838 followed by the Depression of 1839.
The Panic of 1857
The Long Depression of 1873–1885: It Includes the Panic of 1873 and Recession of 1882
The Panic of 1893
The Panic of 1896
The Panic of 1907
The Panic of 1910
The Recession of 1913
The Recession of 1918–1921
The Great Depression of 1929–1942 including the Recession of 1937
The Recession of 1945
The Recession of 1958–1961: Comprised of the Recession of 1957 – 1958 and the Recession of 1960 - 1961
The Recession of 1973
The Recession of 1980 - 1982
The Great Recession of 2008
TABLE 1- SIGNIFICANT PANICS, RECESSIONS, AND DEPRESSIONS
[Final] THE TABLE BELOW CONTAINS my brief assessments of the causes and the fiscal philosophy responsible, if there was one, for each of the recessions I analyze. I identify the philosophies as either conservative or progressive, for political labels like Democrat and Republican change over time. For reference though, conservative is identified primarily with the majority of Republicans currently elected to federal offices today, while progressive applies to most Democrats. (Many conservative Democrats were voted out of office in November 2010, and replaced with even more conservative Republicans.)
I also want to take a moment to explain my use of the political/philosophical terms “conservative”, “progressive”, and "liberal". These terms might don’t mean what you might think they do; especially given how they are used today. In today’s vernacular, progressivism, or more generally, liberalism, is often confused with socialism, which, without explanation, I will tell you they are two, quite different philosophies. In point of fact, socialism (along with true, Edmund Burke-type conservatism) and progressivism/liberalism have distinctly different ancestries. Likewise, America, in the main, isn’t Conservative either although conservatism has a much stronger foothold in America than socialism does. Nevertheless, Americans generally believe in liberalism which is based on the rights of individuals; there is no room for Classes in a liberal society. Socialist and Conservatives, on the other hand, believe that society cannot function without a Class structure of some sort, different ones obviously, but a defined structure in any case.
What divides America instead is to what degree of central government involvement in our day-to-day lives should be; and this is key to which economic system ought to become U.S. economic policy. Socialists and Active State Liberals believe there is a strong role for the federal government to play while Minimal State Liberals and Conservatives believe just the opposite. For the sake of variety, I will use most of these terms in this book; but know that when I use “progressive” or “Active State Liberal”, I am talking about people who think the Federal Government should play an active role in American lives. Likewise, when I use the terms “conservative” or “Minimal State Liberal (MSL)”, I am referring to people who think the Federal Government has no business in our business.
Active-state Liberals, but oriented toward industry
Minimal-state Liberals and true Conservative, mainly agrarian-based
Democratic - Republican
Mix of Active-state & Minimal-state Liberal, and True Conservative
Democrat (1829 - 1837)
Minimal-state Liberal and True Conservative
Democrat (1837 - 1920)
Minimal-state Liberal and True Conservative
Whig (1841 - 1853)
Active-state Liberal, but oriented toward industry & True Conservative
Republican (1861 - 1909)
Active-state Liberal, but oriented toward industry
Bourbon Democrat (1876 - 1904)
Republican (1940 - )
Minimal-state Liberal and True Conservative
Blue-Dog Democrat (1932 - )
Minimal-state Liberal and True Conservative
Democrat (1921 - 2006)
Mix of Active-state and Minimal-state Liberal, and True Conservative
Democrat (2006 - )
Active-state Liberal for the Most Part
Tea Party (2010 - )
Extremely Minimal-state Liberal and true Conservative
PARTY IN POWER
Great Recession of 2007
Repeal of Glass-Steagall Act of 1932 and Deregulation of the Financial Industry leading to the creation and bursting of the real estate bubble and collapse of the financial industry
Return to strong laissez-faire
Recession of 1980
Rising price of oil brought on by the overthrow of the Shaw of Iran and rise in the Prime Interest Rate to bring down high inflation resulting from previous economic turmoil
Recession of 1973
The stresses of the Vietnam War, the inflexibility of the gold standard, economic imbalainces from Nixon's wage and price freeze, all capped by the 1973 Oil Crisis finally pushed the robust economy of the 1960s into the overall worst recession since the Great Depression period.
Modified Keyensian economics and progressive regulations
Double-dip Recessions of 1958 & 1960
Tight monetary policy by the Federal Reserve to combat inflation and other problems are behind both of these smallish recessions. The 1958 recession was made worse because of a world-wide economic dowturn as well.
Keyensian economics and progressive regulations
Recession of 1945
Caused by the decelleration of the economy resulting from the end of WW II
Keyensian economics and progressive regulations
Recession of 1937
Roosevelt and the Fed tried to return to fiscal and monetary conservatism too soon causing a severe contraction during the recovery from the depression
Switch to Keyensian economics but still fiscally conservative
Great Depression of 1929
The greatest economic depression in American history and it didn't have to happen. However, the classic forces were at work again, no regulation; boom times; although there was now a Federal Reserve, it did nothing; a reliance on the gold standard - the rest is history
Social Progressive, Fiscal Conservative Repulican
Laizzez-faire with a Federal Reserve
Recessions of 1918 and 1921
A double-dip recession caused by the economic contraction that generally follows any war, in this case WW I and then greatly exascerbated by an overreaction of the Federal Reserve to rapidly rising inflation
Liberal Democrat followed by Conservative Republican
Newly formed Federal Reserve - 1913
Panic of 1910 and Recession of 1913
Follow-on to the economic turmoil resulting from the 1907 Panic and the results of the anti-monopoly activities of the government
Anti-monopolistic sentiment with no Central Bank
Panic of 1907 (The Banker's Panic)
Stock manipuation by Augustus Heinze and Charles Morse, no banking regulations
Laissez-faire with no Central Bank
Panic of 1896
No regulation of the banking industry
Laissez-faire with no Central Bank
Panic of 1893
No regulation of business and financial sectors plus governmental inflationary action to help a particular economic sector. Conservative policies made it worse
Progressive economic policy with no Central Bank
The Long Depression of 1873 - 1885
No regulation of the financial markets, easy credit with little review, land speculation once more lead to a financial Panic
Laissez-faire with no Central Bank
Panic of 1857
No regulation of the financial markets, easy credit with little review, land speculation once more lead to a financial Panic
Laissez-faire with no Central Bank
Panic of 1837 and Depression of 1839
Easy money available without oversight or due diligence and no regulation of the financial institutions
Laissez-faire with no Central Bank
Panic of 1825
This is the first recession caused soley for economic reasons, speculative investments in Latin America that went bust.
Laissez-faire with Central Bank (Second Bank of the United States)
Depression of 1815 and Recession of 1822
These two financial crises are together because there was only a few months between the end of one and the beginning of the other. The Depression was the first true American financial depression and it looked a lot like the ones in 1929 and 2007; foreclosures, bank failures, real estate price collapse, high unemployment, PLUS a collapse in agriculture and manufacturing. The Depression lasted until 1821. In the recovery, commodity prices rose high and fast until 1822 when they crashed and sent the country back into a year long recession.
Laissez-faire with Central Bank (Second Bank of the United States, established in 1816)
Depression of 1807
The Embargo of 1807 was the reponse by Thomas Jefferson and the Democratic-Republican Congress to problems with England but was strongly opposed by the Progressive Federalists. It's intent was to deny critical material to England but its effect was to destroy the American economy, as predicted by the Federalists, and lead to the War of 1812.
Laissez-faire with Central Bank (First Bank of the United States, disestablished in 1811)
Recession of 1802
Good economic times in America providing supplies and material to the war between England and France came crashing down when peace broke out. Pirates off the Barbary Coast exaserbated things leading to the First Barbary War
Laissez-faire with Central Bank (First Bank of the United States)
Panic of 1797
Unregulated financial industry, speculation in real estate leading to bubble, bursting of the bubble by the near collapse of the Bank of England and the loss of backing of the fiat currency by gold
Laissez-faire Austrian economic school with Central Bank (First Bank of the United States)
I Ask This Question Again at the End of this rather Lengthy Hub to See if Your Opinion Has Changed---PLEASE VOTE
What do you think is the primary cause of most of the Recessions/Depressions/Panics in American History?
A Short Primer on Economics
[Final] I AM OFFERING THIS SECTION, as well as the glossary at the end of the book, because I think it will be very helpful in understanding the two basic schools of thought about how the economy works, which, in turn, is necessary to understand the fight between the Conservative/Minimal-state Liberals (MSL) and the more progressive, Active-state Liberals (ASL). One school describes the conservative economic philosophy, and the other school describes that of moderates and progressives. The essential difference between the two philosophies is as follows:
1. Conservatives and MSLs believe the market is a self-correcting mechanism and is supply-driven; leave it alone, and it will take care of itself (the Austrian/Classical School or family of conservative economic thought).
2. ASLs think the market is demand-driven and not always self-correcting, and will need government intervention from time to time (Keynesian School or family of progressive economic thought).
Both Conservatives and MSLs, from the late 1700s to today, have followed some variation of the Austrian/Classical (which from here on out I will simply call the Classical) School of economics. So strong was the belief in this system that it persisted as the dominant economic philosophy of all major political parties until the 1900s (this could be a book on its own). Periodically, over that era, economic progressives tried to implement different policies; but they were largely short-lived until President Theodore Roosevelt began making permanent changes to federal policy. Ultimately, it took the Great Depression to usher in the progressive Keynesian School of Economics, which was developed in 1936 John Maynard Keynes. The current incarnation of the Classical School is known as Supply-Side Economics or, derisively, “trickle-down theory.” The progressives are less inventive in their descriptive titling; the latest version of progressive theory is called the New Keynesian Economics.
I have talked a lot about schools of economic thought like you knew what I was talking about, and probably many readers do. But for those who might be drawing a blank and wondering why it is so important or why I waste so much ink on it, let me explain them a little bit. I hope more experienced economists forgive me the lack of exactness in my use of terminology and the broadness of my explanations, but all I am really trying to make clear is the fundamental differences between the way conservatives and progressives think in terms of how and why the government should or should not be involved in the policy aspects of the economy as it relates to business activities and the individual–economic interface. The fact that there are such things as elasticity and inelasticity in demand or that luxury items flip the price-demand curve on its head or that eigenvectors and values play some part in the deep esoteric economic calculations that I have long forgotten is interesting, they nevertheless play no part here. The point I am trying to get across is the fact that Classical economists think microeconomics is all that is important while Keynesian economists think macroeconomics is important as well and is useful in preventing damage caused by an out-of-control microeconomic period; otherwise known as boom-bust cycles. Therefore, let me, if you don’t mind, spend a little more time drilling into these two theories; we will revisit them again in the Analysis Section.
Classical/Austrian Economic School
[Final] US Representative Ron Paul, a presidential contender in the 2012 Republican Presidential Primary race, has been one of the loudest proponents for returning to the Classical School (he calls it Austrian); he mentions it in several of his speeches. The remainder of the candidates in that election, while not referring to it so directly, tick off its characteristics when talking about what their economic policies will be. So what is a Classical School exactly?
According to Wikipedia, the Classical School of Economics is a school of economic thought that advocates methodological individualism and a deductive approach to economics called praxeology. Whew! What is methodological individualism? Again, turning to Wikipedia, methodological individualism is the theory that social phenomena can only be accurately explained by showing how they result from the intentional states that motivate the individual actors. And, what is praxeology? It is the “deductive study of human action based on the action-axiom,”.” Sheesh, another strange phrase, action-axiom.
With a definition of this final term, we can start walking our way backward to actually understanding the Classical School of economics that conservatives love so much.
Okay, here we go: “Action-axioms are of the form “IF a condition holds, THEN the following should be done”. Decision theory and, hence, decision analysis are based on the maximum expected utility (MEU) action-axiom, in other words which action is most likely to happen.” What these rather imposing strings of words are trying to say is that people base the choices they make on logical rather than for emotional reasons, and that their choices are biased toward those things they think will provide the most benefit to themselves. To put it more bluntly, people always make cold, calculated choices that benefit them the most.
This idea forms the foundation of the Classical School, the economic system Ron Paul and the other Republican presidential hopefuls believe is best for our country. It is the same economic theory followed by American governments for virtually all of the 1800s and the first two decades of the 1900s. What are the ramifications of this theory?
The consequences are that for all practical purposes, only the actions of the “individual actors” within the economy make a difference on the economy. The theory of supply and demand was developed to explain what takes place in this environment as well as the whole theory of microeconomics—individual action in the economy.
Those who accept the Classical School, along with buying into the precepts of that theory, also deny the applicability of other possible influences on the economy, more specifically macro influences, which is the interaction of major economic sectors like aggregate output, unemployment, and inflation. In other words, microeconomics is all you need to predict economic behavior and balancing the forces that are at work at that level is all that is needed to make the economy function properly because in the short to long-run, the economy is self-regulating. Macroeconomists disagree, of course.
The Keynesian School
[Final] Complementing microeconomics is macroeconomics. It should be patently obvious from Charts 1, 2, and 3, that the period prior to 1940 was very unstable. John Maynard Keynes and several others searched for reasons for this seeming inability of the prevailing economic theory to account for obvious discrepancies in economic behavior, such as goods being left unsold while workers are left unemployed or why there has been such a long, frequent series of sometimes violent boom–bust cycles. As a consequence of his research, in 1937, Keynes published the General Theory of Employment, Interest and Money (Keynes, 1936). It was a seminal work that changed history, and not just economic.
What Keynes brought to the table was the idea that not only did individual decisions play a role in determining the activity within the economy, but so did overall unemployment, inflation, and interest rates, as well as how these factors interact with one another … and emotion. This latter idea, which is the basis of macroeconomics, is rejected by many Conservatives and Minimal-state Liberals. One reason for this aversion is that a consequence of Keynesian economics is the requirement for the government to intervene in the economy from time-to-time to modify fiscal and monetary policies in order to keep unemployment, inflation, and interest rates in balance. Keynes maintains that by doing so, one can introduce a “negative feedback” loop to dampen swings in the economic cycle that are getting out of control; something microeconomics cannot deal with; in fact, history shows Classical economics introduces positive feedback when the economy gets seriously out of balance, which has the unfortunate habit, despite the word “positive”, of making things even worse than they otherwise would be. It is Keynes belief, and history bears this out, that the overarching relationships between unemployment, interest, and inflation at the macro-level have a significant impact on supply and demand as well as on individual decision-making itself at the micro-level.
This last point might be a little hard to swallow until you think back to the 1970s, if you are old enough to remember how the psychological effect the out of control inflation had on people’s buying and investment decisions. Or, for the younger crowd, it was 2004 when unemployment and interest rates were so low which, when coupled with the economic floodgates of money being released with the final deregulation of the financial and banking industry, that led to the mad grab for profits in a rapidly rising housing market (a bubble); this was a decade where Classical-type economics ruled.
It wasn’t until the reaction to the Panic of 1907 did the Classical School and MSL’s fundamental belief in a laissez-faire (aka classical liberalism) approach to business by government face its first challenge. It came in the form of President Theodore Roosevelt’s anti-monopoly efforts and the creation of the Federal Reserve. It was the Great Depression which brought Classical economics down, however. Under President Franklin Delano Roosevelt, the progressives finally had their chance. From that time, until around 1970, what became known as the Keynesian School dominated economic policy in America. After 1970, the Conservatives, starting with Nixon, began to (this would include President Carter, a fiscal conservative, as well) chip away at what the progressives had built. This slowly continued until 1981 when Ronald Reagan turned it into more of a landslide with the introduction of Supply-Side economics and the deregulation of such industries as telecommunication, transportation, and pharmaceutical. Even President Clinton was not truly progressive, economically speaking, for he signed a law sent to him by the conservative Congress that repealed the Glass-Steagall Act of 1937 that kept commercial banks separate from investment banks, one of the most important laws to come out of the Depression. Most of the remaining vestiges of the progressive era were removed in 2000 and 2001 with the deregulation of the final major industry, the commercial financial markets.
In practice, the difference between the two schools can be summed up with this quote from Democrat William Jennings Bryant (1860–1925) in his Cross of Gold speech:
“There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.” (Kazin, 2006)
The first sentence represents supply-side economics, while the remainder is Keynesian. The reference to Democratic however, is problematic in that during during this period, party identity to a particular social or financial ideology was in a great state of transition with both parties having significant elements of each philosophy represented within their ranks. This persists today in the Democratic Party with the Blue-Dog Democrats representing the fiscally conservative ideas. The Republicans, on the other hand, have all but eliminated any non–fiscal conservatives from their Party
A QUICK REVIEW of the COMPETITORS
[Final] As I pointed out in the last section, two schools of economic thought have dominated our country’s history, each championed by opposing political parties. Having said that, in the formative years of America most people who cared about economic activity were of the classical liberal-type, e.g., laissez-faire economics. This didn’t mean as much then as it does today because capitalism didn’t really exist then, nor did industrialization, at least in America. But even so, politicians had their differences and one particular nasty disagreement ought to sound familiar, whether to establish a federal reserve-type institution, the First Bank of the United States.
The contestants were pro-administration Secretary of the Treasury Alexander Hamilton and President Washington on the side of the bank (and government intervention) and anti-administration Secretary of State Thomas Jefferson and Representative James Madison who vehemently opposed the federal bank. In the end, President Washington sided with Hamilton and the bank was chartered. This tension continued between the Federalist (pro-intervention) and Democratic-Republicans (non-interventionists); then Whigs (pro-interventionists) and Democrats (non-interventionists); Republicans (pro-interventionists) and Democrats (non-interventionists); and finally Democratic (Keynesian-interventionists) and Republican (non-interventionists).
Who were these opponents, and what did they really believe in, considering it has stayed with us through the centuries? The two viewpoints came into being during the fight to ratify the US Constitution. The anti-Federalists, who became anti-administration forces, were those who opposed the ratification of the Constitution; instead they believed a slightly beefed up Articles of Confederation, which had established the Continental Congress, would suffice to unite the States. Anti-Federalists were first and foremost state’s rightists, having a firm conviction of the supremacy and independence of the various states (colonies), with respect to any federal government. In short, they believed in a united States of America, the one conceived in the Declaration of Independence. I use the small case ‘u’ to differentiate those who believe the States should be supreme to the central government, or at least on equal footing; these people believe the word “expressly”, as in “not ‘expressly’ delegated”, is assumed to be part of the 10th Amendment. The uppercase ‘U’ is reserved for the role actually envisioned in the Constitution; that of a nation, united together in a perpetual common bond with a supreme central government filling in where the several states are found incapable.
On the other side of the fence sat the Federalists—those who created and signed the US Constitution during the Constitutional Convention. They absolutely believed in a United States of America, as defined in the new Constitution. They thought that the federal government, albeit one with limitations, should be supreme to the various states and that the states, while still being autonomous, where nevertheless bound, by Law, through the Constitution, to the federal government and subordinate to the federal government in matters that affected the United States as a whole. The fight between these two opposing viewpoints was fierce and sometimes violent, just like it remains in the twenty-first century.
More specifically, the Anti-Federalists, who in the beginning were joined by former Federalists who opposed Alexander Hamilton, and who in today’s terms would be the conservatives/MSLs, stood for the following ideals:
-Weak central government
-Political base was primarily in the South and agrarian
-Originally opposed the wealthy interests
-Wanted low tariffs to promote agricultural trade
-Wanted a laissez-faire governmental approach to business
-Believed in what today is called the Classical school of economic philosophy
-Did not approve of a central bank.[klr1]
The only real difference from Anti-Federalist in the 1700s and the conservatives of 2016 is that conservative and minimal-state liberals are no longer pro-French, and they certainly do not shun the moneyed class.
Hamiltonian Federalists, what we would call progressives or liberals today, as it pertains to business and slavery, thought that the best set of ideals would be:
Strong central government with limitations on total power
Wanted the Federal Court to be the ultimate law of the land
Believed in a court who primarily used purpose and consequence as guiding principles
Political base was primarily in the North, large cities, and industrialists
Supported England in war with the French
Opposed the anti-American French revolutionaries
Support high tariffs to protect American manufacturing
Supported a national bank to manage money supply
Believed in an economic philosophy that ultimately was codified in Keynesian economics
Famous Anti-Federalists (later known as anti-administration after they lost the ratification battle, and later still, Democratic-Republicans) were:
Richard Henry Lee
The Federalists, which became the pro-administration faction and the Federalist Party, were represented by such personages as:
James Madison (Federalist who became anti-administration)
Thomas Jefferson (Federalist who became anti-administration)
In some respects, the battle over the ratification of the US Constitution has never ended. The Conservatives, whether they were known as anti-Federalists, anti-administration, Democratic-Republicans, Democrats, and finally today’s Republicans have been fighting hard to make the federal government over into its own image; one that tends to parallel a united States paradigm. Conversely, the progressives, whether they were known as Federalists, Whigs, Republicans, and finally Democrats fight just as hard to keep the idea of a United States alive with a strong, but nonetheless limited central government.
 There were no political parties yet, they came after President Washington’s terms were finished.
 Ironically, James Madison, when he was President, created the 2nd Bank of the United States to help come out of a recession.
 Now, to be fair, the first two times “pro-interventionist” is mentioned, it refers to intervention on the side of business; not for social issues. It was only with Theodore Roosevelt, setting aside the 13th – 15th Amendments which were effectively nullified by subsequent Supreme Court decisions, did vestiges of social reform begin to appear.
The First Ingredient - Greed
[Final] IT TAKES MANY INGREDIENTS TO MAKE A GOOD RECESSION and the fundamental one is greed. It is needed in all recessions and unfortunately it is ubiquitous … it is always present. With the establishment of the First Bank of the United States, securities were sold to fund it. Like with many initial public offerings today, prices sky-rocketed and then crashed. To stabilize the market, Alexander Hamilton worked with the Bank of New York to purchase $150,000 in Bank of United States securities. (Cowan, 2009)
Prices began to rise and in the Winter of 1791 financiers William Duer and Alexander Macomb, along with other bankers, decided to speculate; the second necessary ingredient. Duer and Macomb schemed to take over the US debt securities market and create a second bank in New York to challenge the Bank of New York. In doing so, they created their own credit market (easy credit) by endorsing the others loans, the third necessary ingredient, easy credit (Cowan, 2009).
The Fourth Ingredient – Asset Bubbles
[Final] RESULTING FROM THE DUER-MACOMB SPECULATION in US debt securities, prices were driven up to unsustainable levels, thereby creating an asset bubble; all good recessions need something to burst. So long as Duer-Macomb remained solvent, the market could hold its own for a while. But, in March 1792, both men’s empires collapsed, the fifth ingredient, taking the United States infant economy with it.
The Bank of the United States takes some of the blame as well for it amplified the easy credit problem by overextending itself and letting speculators make withdrawals from the Bank of New York. By February 1792, the Bank of United States liabilities exceeded $2.17 million and its discounts were greater than $2.68 million (Cowan, 2009). When prices collapsed, loans were called, credit dried up, banks became weak and were about to fail as the Panic took hold and the runs soon emptied the banks reserves.
The First Debate about Government Intervention
[Final] IT WAS WITH THE PANIC OF 1792 THAT THE FIRST DEBATE apparently took place over whether the federal government ought to intervene (ultimately a Keynesian view) to mitigate the damage or just “let it happen” (the Classical view) and let the banks fail as they might with whatever social damage that may cause. The argument was between Vice President John Adams, Alexander Hamilton on the “Keynesian” interventionist side and Thomas Jefferson and Attorney General Edmund Randolph on the “Classical” non-interventionist side. These men, along with Supreme Court Chief Justice John Jay who did not participate, made up the Sinking Fund Commission of the Bank of the United States. The decision was whether to bail out the Bank of New York with a $100,000 “open-market” purchase of securities. Soon, however, Randolph came around to Hamilton’s view and the open-market purchases were allowed.
It came with a price however. The Bank of New York had to keep lending through the Panic. To soften the blow, Hamilton authorized a guarantee to purchase another $500,000 in securities, if needed; ultimately, an additional $150,000 was spent before things returned to normal a month later (Cowan, 2009).
The Panic of 1797
- The Political Situation
IN THE YEARS the years leading up to the Panic of 1797, momentous events occurred, not the least of which was the birth of the United States of America as we know it today. Prior to that time, America was simply the united States of America that preceded it. England had lost its war with the revolutionaries in America and was now heavily engaged in a war with France. America had gone through its tumultuous ratification process and George Washington was nearing the end of his second term in office. Because Washington would not allow the creation of political parties, those in Congress broke into two polar opposite factions, the pro-administration faction comprised of the Federalists who supported the new Constitution and the anti-administration faction made up of those who had opposed the ratification. Soon after John Adams was sworn in as POTUS #2, in March 1797, the two factions organized themselves into the Federalist Party, led by John Adams and Alexander Hamilton, and the Democratic-Republican Party, led by Thomas Jefferson. Even though all these great occurrences had become reality, it had little impact on the start of or course of the ensuing panic.
- Déjà Vu
This is a hvery interesting recession because it should sound familiar to you, so let us start with a summary of the Panic of 1797 from Wikipedia regarding America’s first economic disaster:
"Just as a land speculation bubble was bursting, deflation from the Bank of England (which was facing insolvency because of the cost of Great Britain's involvement in the French Revolutionary Wars) crossed to North America and disrupted commercial and real estate markets in the United States and the Caribbean, and caused a major financial panic. Prosperity continued in the south, but economic activity was stagnant in the north for three years. The young United States engaged in the Quasi-War with France. (site: Thorp, Willard Long (1926). Business Annals. NBER. pp. 113–23. ISBN 0-87014-007-8. http://www.nber.org/books/thor26-1.)"
Does this have a familiar ring to it? Something akin to the Great Recession of 2008? Hmmmmm
- The Panic
The Panic of 1797 lasted around three years from 1796 to 1799. There aren't very many economic measures to relate to as nothing was established back then, there were no real standards. That said, several of the resources I looked at classified this panic as a Depression.
At that time in history, in both Europe and the infant United States, monetary policy was not controlled by the governments but by an oligarchy of private financiers both in England and America. While there was fiat currency being used at the time, it was back by species - gold and silver. The dominant commercial bank at the time was the Bank of England which was heavily involved with the rampant land speculation that was going on as America began its great expansion. Even though Bank of England was England's Central Bank, it was privately owned and had been authorized to set interest rates and print money. Many today say this is how the Federal Reserve works but that is not true. The Federal Reserve is a government institution, not a private institution.
During 2006 - 2007 ... er, sorry, ... 1796 - 1797 there was a series of downturns in the credit market that led to broader commercial downturns on sides of the Atlantic. In 1796, the land speculation bubble burst as well. To make matters worse, England and France were at war and the English were afraid of an invasion by France. Consequently, there was a run on the Bank of England. The Parliament, in order preserve their remaining gold reserves and prevent insolvency, ordered the Bank of England to suspended payment for fiat currency in species thus making the fiat currency basically worthless.
At this point in history, the US Government had relatively little control over monetary policy; there was no Federal Reserve. There was the First Bank of the United States, a private bank set-up to serve as the US Treasury's bank but it didn't have quite the same functions as the Bank of England and didn't play much in the Panic of 1797.
So, who is to blame for this recession? It doesn't appear to be Congress or the President at this point. They were simply too new on the scene to have set up the machinery that might have managed the situation. Basically you had the kind of unregulated, free-market free-for-all that is the apple of today's Conservatives eye. The wealthy bankers set the interest rates and credit policies and printed the money (except in America) and the wealthy industrialists in the North began the decades long process of consolidation and monopolization without restraint. The well-off middle class and wealthy speculated to their hearts content until the recession, partly from their own making, bit them in their you-know-where. And like the Tech bubble of 2000 and the Housing bubble of 2007, when they burst, as they always will, disaster always follows. There were zero fail-safes built into the system so when you have a shock like the run on the Bank of England, there isn''t much you can do but stand back and let the tsunami wash over you.
The Man Who Financed the Revolutionary War
- FALLOUT and SOLUTIONS
One, little known fall-out from this, America’s first depression, was the financial demise of Robert Morris, who, along with George Washington, may be considered the man most responsible for the colonies winning the Revolutionary War.During the Revolutionary War, Robert Morris was a very well connected and wealthy financier.It was to Robert Morris to whom George Washington turned after the several States turned their backs on the Continental Congress, and therefore, the Continental Army and refused to continue to fund the war effort.It was Robert Morris who, on more than one occasion, cobbled together enough financing for Washington to see the war to its successful conclusion.And, sadly, it is the same Robert Morris who went bankrupt during the Panic of 1797 and was ultimately sent to debtor’s prison.
But, it didn’t stop there.Many prominent Federalists had joined Morris in his various ventures and, when he failed, so did they with the consequence that the Federalist Party was significantly weakened which ended up being partly responsible for loss of political control to Thomas Jefferson’s Democratic Republicans.
What might have stopped it from happening? Sensible regulation of the credit, finantial, real estate markets for one. Another would be government organization set-up to intervene and provide oversight to separate the irresponsible power brokers who are in the game regardless of who gets hurt from the responsible power broker who wants to keep the host alive while still feeding off of it.
The Recession Of 1802
- WHILE PRESIDENT JOHN ADAMS began his presidency with a depression, Thomas Jefferson was presented with a recession. Much had changed in four short years. President Adams started the Quasi-War with France then sued for and won a peace with them. He signed the four Alien and Sedition Acts in an attempt to subdue Jefferson’s Democratic Republican Party. Adams also saw the fracture of the Federalists Party after its glue, George Washington, died. A major fight broke out between Adams and Alexander Hamilton. The peace with France, a very unpopular move which Adams is, nevertheless, most proud of; the Alien and Sedition Acts; and the fracture of the Federalists Party all led to Adams’ defeat to Thomas Jefferson, POTUS #3.
- THE RECESSION OF 1802 was a significant recession in that it lasted two years and was fairly deep. After recovering from the Panic of 1797, the economy in infant America boomed, in part from providing supplies and material for the war between England and France. Ultimately, in March 1802, the Treaty of Amiens was signed, which ended the war, temporarily at least.
Along with ending the war, it ended the need for war material and supplies, which caused a massive slow down in the nescient American economy. To add insult to injury, the U.S. government had been paying a substantial portion of its treasury in tribute and ransom to Algeria to stop the piracy along the Barbary Coast and buy back our captured sailors. The economy simply couldn't survive such a series of blows and consequently it crashed and didn't recover for two long years.
The Depression of 1807
ONLY FIVE YEARS HAVE PASSED since the last recession, Thomas Jefferson was still president, and America was set for its first formal Depression, although many historians think the Panic of 1797 was also a depression. Another first is that this depression was self-inflicted rather occurring because of events outside of our governments control.
It is self-inflicted because Jefferson, his Congress, and his Democratic-Republican Party were at fault. ck edit above to add content to this empty capsule. The cause and effect are pretty straight-forward and clear-cut. However, before getting into the details behind the Depression, a little background might help.
Thomas Jefferson was a Democratic-Republican as well as POTUS #3. He followed George Washington, of no political party, and John Adams, a Federalist, as president. During George Washington's eight years, there were no defined political parties in Congress; they simply grouped themselves as pro-administration (Federalists) and anti-administration (anti-Federalists).
During John Adam's four years, true political parties formed, this began the period of the First Party System which consisted of the Federalist Party (former pro-administration) and the Democratic-Republican Party (former anti-administration). Thomas Jefferson, a moderate anti-federalist with a social reformist bent*, along with James Madison, founded the Democratic-Republican party. Together, they beat John Adams in what was probably the most vicious Presidential election America has ever witnessed! In the process, the Democratic - Republican Party swept Congress in a way that would make Newt Gingrich proud. By the end of Thomas Jefferson's second term, the Democratic - Republican Party, whose platform, you see reflected in today's Conservative/Tea Party political doctrine, had overwhelming control over the government.
In the 10th U.S. Congress, the Democratic-Republicans had more than an 81% -19% advantage over the Federalists in each House! In the 11th U.S. Congress, they lost a little power because of the worsening economy, but still had a whopping 79% to 21% advantage in the Senate and a 67% to 33% advantage in the House! There wasn't a damn thing the Federalists could do to stop any initiative the opposition put forward. Consequently, what happened next was because of the Democratic-Republican Party’s economic philosophy.
* Because of these views, e.g. separation of church and State, equal rights, anti-slavery (thing's conservatives oppose or opposed until as recently as the 1960s), and other similar views, I dneo not think Jefferson would pass the famous litmus test that has been lately created to find "true" Conservatives.
England and France were at war with each other over the control of Europe. America was a plaything they thought they could use to each other's advantage when necessary. Jefferson did not want war and thought America had the power to assert itself economically to achieve its goals. This is because England and Europe now depended a great deal on American goods.
Consequently, Congress passed and Jefferson signed the ill-conceived Embargo Act of 1807, along with several other measures, that forbade U.S. ships from sailing to any foreign ports. This not only included British and French ports, but all other foreign ports as well! Further, this action was in conjunction with other Acts already passed, such as the non-Importation Act (from England).
In the next year, 1808, Congress found loopholes in the various laws and moved to close them with a vengeance. The Federalists, who opposed the embargo, were powerless to stop them. In fact, Jefferson's own Secretary of the Treasury, Albert Gallatin, was against the embargo saying:
"As to the hope that it may...induce England to treat us better," wrote Gallatin to Jefferson shortly after the bill had become law, "I think is entirely groundless...government prohibitions do always more mischief than had been calculated; and it is not without much hesitation that a statesman should hazard to regulate the concerns of individuals as if he could do it in a superior way than themselves" ("Gallatin to Jefferson, December 1807" Vol.1, p.368. Adams, Henry (1879). The Writings of Albert Gallatin. Philadelphia: Lippincott.)
DISASTER! America's first Depression. The one good benefit of the Embargo Act is that it helped initiate American industrialization; the rest was misery for Americans. By the Spring of 1808, commerce had ground pretty much to a halt; the depression started, and unemployment was rampant. Honest American businesses started going bankrupt, while dishonest ones made it through by flouting what were barely enforceable laws. England was hurting, no doubt, but they found new sources in South America, while America, because of the total embargo, had no place to turn.
A year later, President Jefferson finally understood his mistake which was his lack of understanding of the economics of commerce. In March 1809, he signed into law the Non-Intercourse Act which repealed the Embargo Act that limited its provisions to only England, France, and their possessions; which was still totally unenforceable.
Because it was unenforceable, Jefferson, a vocal and passionate proponent of "as little federal government as possible," found himself in a rather ironic position; one common with politicians who try to govern purely by principle, without using pragmatism to integrate those principles with reality. From 1807, until the end of his Presidency, Jefferson was forced to increasingly use the power of the Federal government to enforce his Embargo!
In May 1810, the Macon Bill #2 was passed, which replaced the Non-Intercourse Act. This was a carrot instead of a stick approach and it also signaled the beginning of the recovery from the Depression; three very long years later. The new Bill promised to reinstate the provisions of the Non-Intercourse Act against the belligerent countries who did not remove restrictions against American commerce.
France accepted, so America reinstated the Non-Intercourse provisions against Britain. France, however, reneged on their pledge. Even so, America did not retaliate. In June 1812, Britain finally agreed to remove their restrictions as well, but, before the word reached America, James Madison declared war on Britain, thus beginning the War of 1812.
Seven years later, in 1819, America experienced another depression, but with a twist. For the first time, this involved the financial collapse of the economy precisely like we recently experienced in 2007.
The Depression of 1815 - 1821 and Recession of 1822
- POLITICAL HISTORY
PRESIDENTS JAMES MADISON AND JAMES MONROE were leading America when the next major economic downturn occurred; their Congresses were solidly conservative Democratic-Republican. If James Madison lived today, he would supersede John Kerry and Mitt Romney for the title of flip-flopper. When he was fighting for ratification of the Constitution and writing the Federalist Papers with John Jay and Alexander Hamilton, he believed in and supported a strong central government over States Rights, as you can observe in reading his essays.
By the time Madison became President, however, his position had changed and he no longer favored a strong national government; instead, he sided with Thomas Jefferson and opposed John Jay, John Adams, and Alexander Hamilton in his philosophy regarding the role of the Federal government vs. State governments. He also opposed Alexander Hamilton regarding the need for a National Bank and believed they were detrimental free enterprise. Consequently, Madison let the charter for the First National Bank of the United States, America’s first central bank.
Hamilton’s thought America needed such a bank to accomplish three goals:
- Establish financial order, clarity and precedence in and of the newly formed United States.
- Establish credit—both in country and overseas—for the new nation.
- To resolve the issue of the fiat currency, issued by the Continental Congress immediately prior to and during the United States Revolutionary War—the "Continental".
He was successful in overcoming objections from Jefferson and Madison during the second term of President George Washington. Madison’s principal objection the establishment of a central bank was unconstitutional for it was not one of the enumerated powers invested in Congress by the new Constitution. It was issues like these where James Madison parted ways from the Federalists and joined Thomas Jefferson to form the Democratic-Republican Party after George Washington left office.
Even though the central bank met the objectives Hamilton envisioned and proved of great value, Madison, with strong support from his Congress, let the charter expire in 1811. Within four years, America was in its next major Recession.
- THE ALMOST FIRST ECONOMIC RECESSION
THIS IS REALLY A THREE-FER: the depressions from 1815 to 1819, the Panic of 1819, and the Recession of 1822. The cause, without yet laying blame to any political person(s), party, or philosophy, is the lack of regulation over the Second Bank of the United States.
While the next recession is credited with being the first one due solely to economic reasons, this one comes close. As we shall see, this recession started with an external factor, the War of 1812. After that, it was all economic and economic philosophy and, as we will see, our old buddy greed; which is at the root of it all. When you finish this story, I suspect you are going to say, "deje vu all over again!"
It all started in 1816 when President Madison (Democrat, VA), POTUS #4, chartered the Second Bank of the United States, which was patterned after the First Bank which lost its charter in 1811. Although this was against the Conservative, Austrian School of economic philosophy, he felt he had no choice because of the financial chaos ensuing from the inflation caused by all the private state banks issuing their own bank notes resulting from the huge cost of the just-ended War of 1812.
The U.S. government had racked up considerable debt and had no way of paying it off (sound familiar?); inflation was making it all the harder, while the multitude of different bank currencies with no common valuation made trade hugely complex. The economy was unstable, bouncing around, therefore President Madison had to swallow the bitter pill.
Congress chartered the Second Bank of the United States and gave it special privileges as the sole recipient of federal funds, but no oversight authority. Those privileges gave this bank, a private bank, great leverage over all other state banks. As with TARP, this 20-year charter came with very few strings attached, such as regulations. The Federalists (Progressives) had all but disappeared as a party after the War of 1812, which they had bitterly opposed; America was, for all intents and purposes, a one-party country (Conservative) for the next 20 to 30 years.
This so called "national" bank was actually "national" in name only. It wasn't anything at all like the Federal Reserve Bank of today. It must be noted that the bank did what was intended, after a year or so. It brought inflation and the economy under control as well as established, once again, a single US currency that had a predictable and dependable value. In short, it allowed the US government to get a handle on its debt once again. But, and it is a very big But, - it allowed the bank to also do its own thing with very little, if any, governmental oversight; - laissez-faire at its very best.
Then came the speculators and more loans and, of course, loan fraud and more greed. On and on it spiraled up, this time without any regulators to notice. Nobody else noticed either until one day in 1819; then, somebody in the Second Band finally did become aware. Sound familiar? They saw how massively over extended the bank was, started calling in their loans and instituted a policy of contraction which, yep, you’re right, stopped the land sales dead in its tracks.
There went the land prices, just like what happened in 1929 and 2008, the Panic of 1819 was on! Two very long years later, in 1821, the depression was over, recovery began. Commodities prices surged upward in a big way, sort of like the 2000 stock prices, only to fall right back down again into a double-dip recession. This recession ended a year later in 1823, but only for a couple of years, then America was at it again.
The Panic of 1825 and Recession of 1825 - 1826
THE RECESSION OF 1825 - 1826 is notable because it was the first economic downturn caused solely for economic reasons and not other external causes such war. While England was most affected by this recession, America did not escape its clutches either. All totalled, seventy banks failed.
Again, the cause is simple and straight-forward - greed and lack of regulations. The basic facts are in the years leading up to 1825, there was increasing speculation in Latin America funded by many major banks in England and America. People even invested heavily in the country of Poyais, an invention (scam) by the Scottish soldier/adventurer Gregor MacGregor. The leader of this stampede was the Bank of England, a for-profit bank, which had been given the same responsibility and powers to regulate the English economy as the Second Bank of the United States, also a for-profit bank, did for America.
The Bank of Englands job was to police the other banks and protect the public. Instead, it allowed banks to facilitate the speculation by not doing due diligence on the loans they were backing, one of the main causes of the 2007 recession, so that when the Latin American bubble burst, the banks were holding on to a lot of worthless paper.
The stock market first crashed in England and was closely followed by those in America. The Bank of England raised lending rates to protect itself and its investors instead of lowering them to protect the public they had the responsibility to protect. Credit dries up, markets stop functioning, and once again America, along England, Latin and South America was facing economic collapse. Apparently, France knew better because they bailed out the Bank of England and kept it from being bank number seventy-one.
From the previous recession forward you are going to be seeing a common theme among those recessions whose causes are economic in nature, such as this one. The theme running through all these is that unregulated capitalism will succumb to greed every time. It is not capitalism that is the problem, capitalism is the greatest thing since sliced bread, the true problem is, however, unchecked human greed. I will have more to say later.
The Panic of 1837 and Depression of 1839
AMERICA FINALLY CATCHES A BREAK, 11 years without a major economic disruption; the previous record was seven years. But, when a downturn started again, it was a doozy and was also caused for economic reasons; this depression finally motivated the American citizens to put into power a President and Congress that believed in a more hands-on approach to government (Progressive Whigs) regulation of America's economic engines than the mosty hands-off philosophy of Conservatives (Democrats).
Leading Up To The Great Fall:
PRESIDENT Andrew Jackson continued the long-standing Conservative economic philosophy of staying out of the way of business, laissez-faire, as much as possible. Several policy decisions by President Jackson set the stage: 1) allowing the Second Bank of the United States' charter to expire, 2) massive sales of government land to raise money, 3) the Tariff of 1833, and the coup de grace, 4) his issuance of the Species Circular.
By allowing the Second Bank charter to expire, there was no brake on returning to the status the Second Bank was chartered to stop and then prevent, the formation of a multitudede of State and wildcat banks. Multiple bank paper currencies reappeared which made money much more available and there was no regulation of their activities.
The sales if public land and the Tariff of 1833 brought in massive amounts of cash to the US Treasury. This accomplished the goal of every Presidency, regardless of party, paying off the National Debt. It didn't stop there either; the United States accumulated a large surplus; so much so that Congress divided it between the States. The States reinvested that largess in major infrastructure projects which as paid for with State bank notes rather than species, e.g., gold and silver.
All the ingredients necessary for economic failure were now in the mixing bowl; the same basic ingredients that were at the bottom of the Great Recession of 2007 - easy money and little or no regulation and regulators of American financial institutions; the fuze was lit.
THE years leading up to the Panic of 1837 were good times for all because cheap land was available from the government which could be readily sold to willing buyers, in the form of companies employed to build the railroad construction, canal construction, and other infrastructure projects the States were paying for with all that surplus money the Federal government had returned to them; worthy projects all. You also had lots of people employed from all of these projects and the resulting economic stimulus they provided. Add to this a bevy of unregulated State and wildcat banks loaded with money, from all those employed citizens, who were willing to lend to those who wanted to buy this cheap land from the government and what have you got? The beginning of the end of the good times.
Why? Because the fuse was lit that exploded in rampant speculation; from an annual average of $1.3 million in land sales around 1829 to an unbelievable $47 million in 1836, a poison to sustained economic expansion. Where the 2003 - 2007 speculation, just as spectacular and debilitating, was primarily centered around the housing market, the 1830s speculation were land tracts that, hopefully, would be in the path of one of the railroad or canal projects. With no controls on those lending the money, there were no controls on the fast and continuous turnover in land ownership. Land prices skyrocketed, fortunes were made, and this time the good times will never stop ... sound familiar?
While the 1837 panic and subsequent depression were more or less predictable, much as it was for the 2007 recession, and would have probably occurred on its own anyway, President Jackson's issuance of the Species Circular guaranteed it. Of course, this wasn't Jackson's intent, but, if he had understood how the market truly worked, he would have seen the obvious consequences his action.
What the Species Circular required was that all debts to the U.S. Government would be paid in species, meaning gold and/or silver, rather than what was becoming worthless paper money issued by the unregulated State and wildcat banks; worthless because of inflation that was brought on by the printing of so much of these various paper currencies; from $61 million in circulation in 1834 to a whopping $140 million just three years later. President Jackson was properly worried about this huge inflation of paper currency and sought to put a halt to it; hence the Species Circular.
President Jackson left office shortly after issuing this executive order and left the fall-out to incoming President and fellow Conservative, Martin Van Buren. If there had been plenty of gold and silver laying around in the bank coffers to back all of the paper currency in circulation, things would have continued until the speculation bubble burst of its own weight. In 1834, this might have been the case but in 1837, with over double the paper notes in circulation, they weren't even close and the inevitable happened, credit dried up. With no more credit, land sales all but vanished and consequently so did the upward pressure on land prices. Now that the support for the massively inflated land prices had vanished, there was only one direction prices could go ... DOWN.
Since you just lived through the 2007 financial collapse, you know the rest of the story; banks failed in droves, unemployment skyrocketed and the economy sunk into a deep depression. President Van Buren, following his Conservative economic philosophy, did virtually nothing to intervene save for signing the Tariff of 1842, five years later. Economists do say there was a brief recovery in 1938 - 39 but was cut short when banks in England and the Netherlands raised their interest rates. The American economy did not recover until 1843 after six years of unprecedented unemployment and business inactivity.
Panic of 1857*
THE DYNAMICS LEADING UP TO THE PANIC OF 1857 is a series of financially based recessions, which began during President Franklin Pierce’s term (conservative Democrat) and continued into the beginning of President James Buchanan’s term (conservative Democrat), at which point the recession officially began.
While neither president did anything in particular that can be pointed to as having directly facilitated the Panic—such as President Jackson’s issuance of the Specie Circular, which was tied closely to the 1827 Depression—neither did either one do anything to prevent it nor alleviate its devastating consequences afterward. This philosophy of non-intervention was in line with their conservative political philosophy of laissez-faire and the consequences of it, as will be developed as we go, should have been no surprise, for in the intervening years before their presidencies, the same economic policies that were in place during the Depression of 1815, the Panic of 1825, and the Panic of 1837 were still being followed in the years leading up to the Panic of 1857 as well as into the recovery that followed.
According to Wikipedia, “The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy.” It so happened that the Panic occurred while President Pierce was consumed with other critical domestic issues, which ultimately cost him being nominated for re-election. In any case, it is not likely Pierce would have done much to control what was going on, since that would run contrary to his conservative economic philosophy of leaving the essentially unregulated business and financial markets to run their course.
.- The Build-up:
So what were the particulars that led up to the Panic of 1857? As was true with the previous three financial recessions, and as we will see for most of the future financial recessions as well, the country was enjoying very prosperous times. Banks were lending, people and businesses were buying, and the railroad industry was booming due to the mass migration of Americans to the West. Once again, land speculation was on the rise. Because the good times were so good, everybody started taking risks: banks relaxed their rules, and banks, citizens, and businesses started taking on massive debt. This was true in both America and Europe. Then, starting in 1857, the bubble slowly and then quickly burst.
- And Then The Collapse:
It started with the European economy beginning to slow down, thereby reducing demand for American products, especially products from the newly and rapidly expanding West. This, in of itself, was not surprising because, as economists had recently found out, business runs in cycles. What followed next would not be surprising either: there was an economic slowdown in America resulting from lack of demand. Again this is nothing to panic over (pun intended).
The problem—and since there was a panic in 1857, there had to a problem—the slowdown was magnified in the West. Consequently, business in the West started drying up, causing concern in the East, especially with eastern banks. The downward spiral had begun. As the mad rush to the West slowed down, railroad profits began to fall, which caused the eastern banks to become cautious and make loans harder to get, and these eventually dried-up altogether. In fact, because the conservative government had yet to reinstate a single currency—because they were opposed to a central bank—some eastern banks stopped accepting western currency! Now the downward spiral, a naturally occurring phenomenon, became a death spiral.
The rest follows what has become, and still is, the playbook on recessions and depressions. Land prices in the West collapsed, which in combination with disappearing demand, caused businesses, including farms and railroads, to begin to fail. Eastern farmers who had bought land and then mortgaged it to western farmers, began to foreclose. Additionally, the Illinois Central; Erie; Pittsburgh, Fort Wayne, and Chicago; and Reading Railroads shut down or went bankrupt, throwing countless people out of work and reducing demand even further.
One of the business activities President Pierce did facilitate was the building of the Intercontinental railroad; which had unintended consequences, fatal ones unfortunately. The West-to-East railroad interconnected the two economies, and the failure in the West began to be visited upon the East, and soon the eastern United States’ economy was on its way down.
There was another unintended consequence that played a large role in setting the stage for the Panic: the March 1857.Supreme Court’s Dread Scott v. Sanford decision that ruled slaves were not American citizens; although the fact that the US Constitution allowed the states to count each slave as being worth three-fifths of a person when determining how many electoral votes a state received. The ramification of this is that it threw the western states open to be slave states. This was in-line with President Pierce’s pushing for and signing the Nebraska-Kansas Act that invalidated the Missouri Compromise. This left political and financial turmoil in its wake, causing even more downward pressures on land values and prices in the West.
The tipping point, the Lehman Brothers of 1857, was the collapse of the Ohio Life Insurance and Trust Company in August 1857. Unlike the Barclay Bank purchase of the bankrupt Lehman Brothers in 2008, the immediate financial impact of Ohio Life’s failure was mitigated by interconnected banks co-insuring each other against runs. But like Lehman Brothers, the word was out: the economic problems were now in the public domain. Where the response in 2008 was extreme volatility in the stock markets followed by the final collapse in December 2008, the response in 1857 was similar—economic volatility and inevitable collapse of the economy. The Panic of 1857 was now in full swing!
- Delayed Recovery:
The similarities with the 2008 collapse continue just a little bit longer before diverging from each other in a fundamental way. Presidents Buchanan and Obama have one thing in common: they inherited a collapsing economy upon their assumption of office. While the economy had entered its free-fall just before President Obama was inaugurated in January 2009, the Panic of 1857 didn't really reach its crescendo until about four or five months after President Buchanan was inaugurated in March 1857.
This is where the similarities end. Obama, using a progressive social and economic philosophy, immediately implemented a strategy to try to mitigate as much as possible the devastation that could have caused a full depression, which stopped the acceleration of job loss within two months of implementation and returned job growth within twenty-one months—the result was a major recession rather than a depression. Buchanan, on the other hand, following a conservative social and economic philosophy, did nothing!
Actually, “did nothing” is not quite accurate; in December 1857, President Buchanan did develop and implement a strategy he called “Reform, not Relief,” which basically stated, “the government sympathized but could do nothing to alleviate the suffering individuals”! Consequently, the Panic continued to run its own course, wreaking havoc on the Western and Northern economies and citizens. As it turned out, the South was not hurt too much by this Panic, because their economy was not as closely tied to the West’s, where the economic bubble burst, or the North’s, which was the country’s financial Mecca and, as such, had financed the western expansion.
Almost two years later, in 1859, the economy began to stabilize, but inflation was still high. Finally, Buchanan took some measures to try to bring it under control. He took a rather unprecedented step of banning paper currencies above $20 in an attempt to drive the country toward a specie-based system again.
In a panic full of unintended consequences, there was still one more that would make its presence known. Because of the terrible impact of the panic on the North, the South believed the North would finally be more amenable to Southern demands. In the face of rising tensions between the North and South over slavery, the South slowed down its demand for secession, thinking that would help keep slavery alive in America. Even so, America would be at war with itself just two years later.
In a panic full of unintended consequences, there was still one more that would its presence known. Because of the terrible impact of the panic on the North, the South believed they would be more amenable to southern demands. In the face of rising tensions between the North and South over slavery, the South slowed down their demands for succession thinking that would help keep slavery alive in America. (Huston, James L. (1987). The Panic of 1857 and the Coming of the Civil War. Baton Rouge: Louisiana State University Press.) Even so, America was at war with itself just two years later.
The Recession of 1865*
FOLLOWING THE PANIC OF 1857, there came a series of moderate Republican presidents (and one moderate Democrat), backed by moderate to liberal Republican Congresses. Only one conservative, Democrat Grover Cleveland, held office during that time. The string of moderate and progressive presidents, which ran from the election of Abraham Lincoln in 1861 to 1913, outlasted the moderate and progressive Congresses, which ended in 1875, but began again in 1895.
During that timeframe, economic practices in government shifted dramatically, especially after the Panic of 1907. Prior to that, the most notable shift in Congressional attitude was on the social front, where longstanding conservative American bigotry against minorities and women began its decline.
After Wars Come Recessions
IT IS ALMOST AXIOMATIC THAT AN ECONOMIC downturn will follow a war, and the recession of 1865, following the end of the American Civil War, was no exception. The primary reason for any post-war recession is that industry has been geared during wartime to supply all the goods and services required with a labor force depleted of the men—and now women—fighting the war. Consequently, unemployment has been low and business activity very high. With the end of hostilities, the demand for goods and services falls sharply, and industry scales back quickly. This results, of course, in higher unemployment only magnified by the soldiers returning home.
Obviously, there is pent-up demand just waiting to be filled, but it takes time for industry to re-tool to provide different goods and services than war required. As a result, a momentary recession will normally occur. Further, until after WWII, there were no governmental macroeconomic mechanisms, influence employment and interest rates, available to dampen the large swings in supply and demand leading to cycles of mini-booms and busts while the countervailing pressures of microeconomics (supply and demand) to smooth out these cycles. Needless to say, this is not a fast process.
The Civil War Was No Exception
WHEN THE CIVIL WAR ENDED, DEMAND dropped, industry scaled back to retool, workers returned home, and recession hit, just as we covered above, from 1865 to 1867. In addition, Congress, consisting of socially progressive but fiscally moderate Republicans, wanted to return to the gold standard, a very popular concept with the public. There has never been public acceptance of paper money not backed by gold (not until the 1980s anyway), but sometimes, in order to prevent economic disruptions that can result from this practice, governments occasionally stop trading paper currencies for gold. One of the primary reasons to do this is to expand (inflate) the money supply, which attempts to off-set the contractionary forces of a recession or to simply to provide more currency for financing government debt.
That is why President Lincoln and Congress stopped converting paper currency into gold on demand in 1862; they needed to finance the war. Upon the end of the Civil War, this need disappeared, so Congress quickly reestablished the gold standard by passing the Contraction Act in April 1866. One problem, however: as quickly as dropping the gold standard expands the economy, reestablishing it contracts the money supply and, therefore, the economy. This is exactly what happened, which helped to drive the United States into a recession in 1865.
Panic of 1873
The Long Depression of 1873 - 1885 *
THIS depression began with the Panic of 1873 and ended with the Recession of 1882. Like the Panics before it, the cause was the now familiar boom-bust cycle, this time with a heavy dose of government involvement , both foreign and domestic. President Ulysses S. Grant, POTUS # 18, had the unfortunate luck to havjng to live through first the Boom period during his first term and the Bust period during his second term as President. The beginning of this "Long Depression", as the Europeans like to call it, began much earlier, however.
When the Civil War ended in 1865, the boom began. It was fueled by, dare I repeat myself, the now familiar government land grants followed by land speculation, railroad expansion followed by economic expansion, over building, too much cash flow in the economy, very easy credit, and the worst of all ... the belief that it would never end. And why not, it was one of the longest growth cycles America had experienced to-date, eight years before the rug was pulled out from under them. Further, it wasn't only in America that was feeling its oats, all of Europe was as well. Then, like Wiley Coyote always does, the world ran past the edge of the cliff and was hanging in mid-air.
The House of Cards Begins to Collapse
It didn’t start in America, but in Germany. Following the Franco-Prussian War in 1871, Chancellor Otto von Bismark extracted a large indemnity of gold from France. As a consequence, he stopped minting the German silver Thaler coins and abandoned the silver standard thereby letting the value of silver float freely on the European markets. This was unfortunate for America because our western mining interests were the main source of supply for the silver used in minting the German Thaler.
This action by the Chancellor had some rather unintended and very damaging consequences; the destruction of the European economy and the fuse that led to the Panic of 1873 in America. Two things happened when silver was no longer the standard backing German currency: 1) silver's value fell and 2) the money supply dwindled with the elimination of the silver Thaler.
With the fall in silver prices those investments which were based on silver lost value as well let alone the instability in the markets such a decision causes. Given what followed, these weren't insignificant effects. Nor was the result from the constriction of the money supply resulting from removing the Thaler from circulation. This had the effect of raising interest rates which in turn began to reduce lending.
In normal times, the economy could probably absorb these perturbations, but, these were not normal times. Like in America, the European economy was extremely overheated and extremely fragile. This double hit was enough to start the death spiral in Europe and make America's future more uncertain.
- Now It is America's Turn
The fuse was lit, but, there was time to put it out; instead, our government managed to only fan the flames. As it was previously described, America's economy was booming after the end of the Civil War. By design, there were no governmental regulatory constraints on the economy and consequently business followed the natural path sought by pure, marginally regulated capitalism. The natural result, as it had been in 1815, 1825, 1837, and 1857 was an overheated economy just waiting for the right contractionary episode(s) to occur causing it to collapse, rather than decline.
In 1873, those episodes were, first, the demonetization of silver in Germany in 1871 and secondly the coup de grace was the Coinage Act of 1873, by the Grant administration, which accomplished essentially the same thing to silver in America. As a consequence both Europe and America were now on a de facto gold standard, the only metal that was backing the paper currency in circulation. The problem, of course, is that there was lot of paper currency floating around and not so much gold, now that silver was no longer being used. The impending avalanche was simply waiting for the small canon to go off sending the first snowball on its way down the way down the mountain side.
The end came quickly once the effects of the minting of the German Thaler stopped in 1871 - 1872. Demand for silver from the mines in the Western United States began to drop, together with the fall in silver prices. As time went on, this decline accelerated since there was nothing to replace it.
The instability in silver prices, which were set by law in America but were free to rise and fall, mainly fell, in Europe. This trend was beginning to cause many problems in American financial markets. New silver finds in the West increased supplies at a time when demand for silver was falling causing consternation in its relationship to its value with gold.
Finally, while increased employment from some mines opening because of the new silver fields, even more mines were closing due to the lack of demand. Thereby decreasing employment and decreasing demand for the support services of those who had lost their jobs ; keep in mind, there was no unemployment insurance back then so the effect on a person being out of work were more pronounced and immediate on the surrounding economy, not to mention the working-class guy and his family.
Because of all of the problems with silver, Congress began to move to demonetize silver in America and accomplished this with the Coinage Act of 1873. However, as Americans have always had a penchant to do, and still insist on doing, we do not learn from others mistakes and we forget the ones we have made in the past. In this case, we weren't watching what was happening in Europe, and we should have because they were struggling.
Why was Europe struggling? It was partly due to demonetizing the Thaler; it destabilized the economy. So, what did America go ahead and do in the face of what was starting to be a declining economy, the same damn thing! Go figure.
Panic of 1873
- The House of Cards Came Tumbling Down
On February 13, 1873, one can probably say America began its death spiral into depression. Silver prices were immediately depressed and now they could float freely based on market forces and not government rules; the Western mining interests labeled this Act the "The Crime of '73". The Coinage Act took all silver coins out of circulation thereby reducing the money supply which raised interest rates. If this were a normal economy, this wouldn't be too big of a deal but this wasn't a normal economy.
It was an enormously overheated economy with tons of paper currency floating around and not enough gold to back it up; uncertainty abounding regarding the silver market; credit was drying up because of rising interest rates; and the railroad boom was in its last stages.
In the previous years there were minor shock waves; the Black Friday Panic of 1869, the Chicago Fire in 1871, and the equine influenza of 1872. Then, on May 9, 1973, the Vienna stock market crashed signaling the beginning of "the Long Depression" in Europe that didn't end until 1896.
In late 1873, J. Cooke & Company, a major US bank, was heavily invested, as many other investment companies and banks were at the time, in railroad companies. Right when they were all trying to get more capitalization for further expansion, President Ulysses S. Grant instituted a monetary policy of money supply contraction.
J. Cooke had been working on a project for years to create a second transcontinental railroad called the Northern Pacific Railroad; ground had already been broken in 1870. In September 1873, J. Cooke, in face of Grant's monetary policy, tried to sell millions of dollars in bonds to finance the project ... and couldn't. Even though they were about to get a $300 million government loan, J. Cooke's credit became worthless and was forced into bankruptcy on September 18, 1873; and the final lynch pin holding the economic house of cards together, the Lehman Bros. of 1873, had been removed.
The failure of J. Cooke and Company was quickly followed by Livermore, Clewes, and Company, one of the largest marketers of government bonds, and then many more banks. Ultimately, the New York Stock Exchange had to be temporarily shut down. We aren't talking weeks and months like what was experienced in 2008, we are talking days. The New York Stock Exchange closed for ten days starting September 20, 1873!! It was that fast.
Obviously, the impact was felt quickly in New York, more slowly in Chicago, and slower still as you moved West. But the results were certain, lost jobs, increasing unemployment, and bankruptcies. When it was all over, out of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876, three years after the depression began (by comparison, in the Great Recession of 2008, unemployment peaked at 10.4% in 2009 and started falling in the same year). Construction work halted, wages were cut, real estate values fell and corporate profits vanished. (Rezneck - 1950)
- In Summary
By all standards, this was a terrible depression. It was deep, it was wide, and it was long; 12 years long. Just think how that would go over in today's political environment. While there is probably nothing that could have been done to prevent such a strong economic downturn, if intelligent minds had prevailed instead of political ones, it wouldn't have been as bad.
I say this even if you consider the lack of a central bank and any real government regulation for business and financial operations, which on their own can have a fundamental impact on the economy, or, given the degree to which the economy had become overheated.
What could have altered the course from the debacle that did occur is if the government in power abandoned their economic philosophy and opened their collective eyes to what was happening around them and then formulated activist policies to counteract what was happening. You don't institute policies that amplify the downward spiral which is what the Grant Administration and Congress did!
Passing the Coinage Act of 1873 was an egregious mistake given the clear evidence from Europe of what would result. Instituting further contractionary money supply policies when expansionary policies were needed was inexplicable. Following the current Democratic (Conservative) hands-off, no interference, with both the citizenry and business, policy when the economy goes south contributed greatly to the large number of business bankruptcies; the high, long-term unemployment rate; and the depth and length of the depression cycle while not surprising, was certainly unfortunate. I would hope no one would argue that if the government had actually tried to intervene and mitigate the effects of the depression, things would not have gotten worse.
The Panic of 1893
I MUST apologize for repeating myself, but I guess I must. It is said the Panic of 1893 was the worst economic downturn until the Depression of 1929 and that once again, it was the result of financial mismanagement within the business, financial, and governmental sectors of the American economy.
After America had recovered from the longest depression it and the world had ever experienced in 1879, the economy boomed; it really boomed. Then it boomed some more until the once again booming railroad industry bubble burst, the banks which once made sound loans and then got caught up in the good times and greed (sound familiar) started making bad loans and overextending themselves into bankruptcy.
This might have not been enough to push the economy over the edge, although it was certainly a good start, but the government helped set the stage with its economic policies.
These economic shocks might not have been enough to push the economy over the edge on its own, although it was certainly a good start. The government helped set the stage with its economic policies that (had) weakened the economic structure just enough to allow this round of unconstrained business excesses to finish the job.
- GOVERMENTAL ACTIONS
Foremost among these was the Sherman Silver Purchase Act of 1890 which, among other things reestablished bimetallism, gold and silver, rather than using a single metal on which to peg the value of American currency. This has been a long standing debate between Republicans and Democrats and continued until the 1970s when President Nixon finally took the United States, much to the outrage of what in 1893 would have been the Democrats, but in 1972 and 2011 were and are Conservative Republicans; sort of makes your head spin, doesn't it. By the way, there is a strong movement among the Conservatives of 2011 to reestablish the gold standard.
The reason for the Sherman Act was to support farmers going broke due to a series of droughts by causing inflation from the purchase of vast quantities of silver by the U.S. government. Another reason for the Act was to have a major buyer for all the new silver being produced by all of the new silver mines being opened in the West being supported by, you guessed it, and ever expanding railroad.
The consequence of this maneuver did what everybody wanted, it inflated the dollar, making the farmers debt worth less and easier to pay off as well as providlng a ready market for silver. This would have normally depressed the price of silver, but now it was fixed to the dollar and gold. For reasons I won't get into, this caused a run on gold drastically depleting the amount available in banks to back the species dollar, which was back in vogue again. All of this was happening between 1890 and 1893.
- BUSINESS AND FINANCE
As I said, this Panic was caused by the overexpansion of the railroad system into the West and other areas resulting, one more time, in land speculation as well as the inevitable financial overextension of financial institutions. Add to this the government’s mishandling of the economy, and all that was left was the predictable hic-cup which will ultimately lead to bank failures and bankruptcies that ultimately led to massive unemployment. This hic-cup in 1893 was the failure of the Philadelphia and Reading Railroad, February 23, 1893. Further compounding the problem was the Conservative non-interference economic theory which prevented the government from taking any action to mitigate the impact so, as a consequence:
· Bankruptcies rose to over 15,000
· Bank closures exceeded 640
· Unemployment hit a high between 12 and 19%, depending on who is counting, but both sources, Lebergott or Romer, agree that unemployment rose above 8% in 1893 and didn't fall below 8% until 1899.
- REPUBLICAN INFLUENCE
In the lead-up to the Panic of 1893, there was a succession of Republican Presidents who came into power after the Democrats were largely blamed for the Long Recession of 1873. Succeeding Democratic President Ulysses S. Grant (POTUS #18: 1869-1877), there were Republicans:
· Ruther B. Hayes (POTUS #19: 1877-1881)
· James Garfield (POTUS #20: 1881-1881)
· Chester A. Authur (POTUS #21: 1881-1885)
· Benjamin Harrison (POTUS #23: 1889 – 1893)
While it wasn’t until President Harrison’s term that the Republican’s pushed through the Sherman Silver Purchase Act which helped cause the Panic of 1893, the Republican’s who preceded him heralded in the first change in overall government philosophy since Thomas Jefferson beat John Adams in 1801.
It wasn’t so much a shift in economic philosophy as of yet, although there were certainly major differences between single and bimetallism, there was the need for a national bank, and tariffs since it was the role of government and how it operated. With President Hayes and the “progressive” Republicans came the first outright attempt to move government away from the “spoils” patronage bureaucratic system to a more “merit”-based system of professional bureaucrats who would become experts in various operations of government.
President Hayes, in 1877, also had to call on federal troops to protect federal property and aid States during the greatest railroad strikes the nation had yet seen. The strike was the result of pay cuts and other actions the railroads took trying to survive the Panic of 1873; and it was nationwide. When it was over, President Hayes made the comment,
"The strikes have been put down by force; but now for the real remedy. Can't something [be] done by education of strikers, by judicious control of capitalists, by wise general policy to end or diminish the evil? The railroad strikers, as a rule, are good men, sober, intelligent, and industrious."
Here we see the first indications that government might have an interest in taking a more activist role in both labor and the control of business. It was also in President Hayes’ term that there was a strong push to go back to bimetallism in order to help alleviate some of the terrible impacts of the ongoing 1873 depression by inflating the money supply.
This was something the Republicans were generally in favor of, but Hayes thought dangerous and unethical in this situation and vetoed a compromise bill, the Bland–Allison Act of 1878 that came out of Congress; only to be overridden by Congress, so, America was more or less back on bimetallism again.
Hayes did back the passing of the Specie Payment Resumption Act of 1875, which required the treasury to redeem any outstanding greenbacks in gold which had the reverse effect of deflating the economy. As it turned out, between these two measures, the economy finally improved enough so by 1879, expansion was about to begin.
In 1885, Bourbon Democrat Grover Cleveland (POTUS #22: 1885 – 1889), was elected president. He tried, unsuccessfully to 1) reduce the high tariffs favored by the Republicans which favored businesses and 2) go back to the gold standard. Both play into the upcoming Panic of 1893.
In the first case, the Republicans believed the tariffs helped business because of their protectionist attributes and were needed in any case to pay off the cost of the civil war. But, since the war was now paid off, the government was running high budget surpluses and the Democrats those surpluses should be returned back to the people (talk about role reversal).
In the second case, because America was on a bimetal standard and Europe wasn’t, but both were now on species currency, it was cheaper for Americans to pay their debts in silver, which was worth less than gold, in America. However, Europeans would only accept payments in gold; the result was an ever decreasing supply of gold in America to back its dollar. Both of these forces were at work in the background during that huge boom in the 1880s I described earlier. President Cleveland lost his bid for reelection largely due to his failed bids on these to issues.
Republican Benjamin Harrison (POTUS #23: 1889 – 1893) won in 1889 and, as has been previously mentioned, passed the Sherman Silver Purchase Act of 1890 and finally made bimetallism fully in effect in America; remember, the Bland–Allison Act of 1878 was only a compromise. This action by the Harrison administration was all that was needed to set the wheels in motion for the economy to leave the tracks three years later.
- THE COLLAPSE
The high tariffs were part of President Harrison’s downfall in the next election, they drove very high prices in America; he also suffered from an economy on the verge of collapse as well as a split in the Republican party with the Populist wing. Ex-President Grover Cleveland was about to become unique in American history and win his second term which was not consecutive with his first only to be faced with the worst depression in America’s history; it started with the collapse of the Philadelphia and Reading Railroad, on February 23, 1893.
This was quickly followed by the Northern Pacific Railroad and such great names as the Union Pacific and Atchison, Topeka & Santa Fe Railroads plus the multitude of banking institutions that financed them. The resulting unemployment drove many more banks into failure because so many homes and farm mortgages went into foreclosure which left the banks with no assets.
President Grover Cleveland did try to reverse the economic effects of bimetallism by repealing the Sherman Silver Purchase Act, this was in accordance with his conservative economic theory. What was also in agreement with his strong Bourbon Democrat beliefs is not to interfere with the natural course of economic events.
While they were in the midst of the Panic, Texas was in the middle of a terrible drought and Congress sought to alleviate some of the pain and misery of the combination of the two catastrophes by passing the Texas Seed Bill. This bill was passed after a drought had ruined crops in several Texas counties, Congress appropriated $10,000 to purchase seed grain for farmers there. Cleveland vetoed the expenditure and in his veto message, he espoused his theory of limited government which resonates with many Conservatives today:
“I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the government, the government should not support the people. The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.”
It is this philosophy that led to the worst depression in America's history until 1929.
- IN SUMMARY
This is one of the more complex economic collapses to-date which involves both governmental and business actions that led to the catastrophe, followed by further governmental inaction which deepened and lengthened the resulting disaster. So, to try to summarize the various moving parts let me offer the following:
· The Republican government created a fragile economy with the passage of the Sherman Silver Purchase Act of 1890 and the Bland-Allison Act of 1879. These were efforts by a "progressive" Republican effort a social engineering, to wit, protect the farmers and silver miners.
· Business and financial interests did what came naturally in a laissez-faire environment during boom times, they over did it and lived beyond their means; bubbles were created which finally burst leading to economic downturn.
· What the Republican economic policy decisions ultimately did was set the stage for a run on gold when the economy started its downward spiral which led to bank failures and ultimately a crash of major proportions.
· The depth and breadth of the depression were then exacerbated by the Democratic president's Conservative non-interference policy. The results were:
· - Bankruptcies rose to over 15,000
· - Bank closures exceeded 640
· - Unemployment hit a high between 12 and 19%, depending on who is counting, but both sources, Lebergott or Romer, agree that unemployment rose above 8% in 1893 and didn't fall below 8% until 1899; six very long years. By comparison, unemployment during the current 2008 recession has been above 8% for only two years, yet, the political rhetoric would want you to believe this has been the longest recovery in history.
The Panic of 1896*
MANY consider this depression just an extension of the Panic of 1893, which would make it a double-dip depression, in today's parlance. Like the previous several recessions and depressions, this major economic downturn was primarily a financial crises. Unlike the others, however, the Panic of 1896 was primarily involving bank failures that then drove business failures rather than the reverse.
The main culprit, however, is once again the lack of regulations or "free banking" as it was called. The specific cause was the collapse of silver reserves brought about by the by President Cleveland’s repeal of the Sherman Silver Purchase Act in his attempt to shore up the economy in 1893. The result of this collapse was a destabilization in the linked gold standard followed by deflation (remember the Sherman Act was intended to cause inflation) which brought down commodity prices and caused a stock market crash.
The first domino to fall was the National Bank of Illinois in Chicago. This was quickly followed by a run on many other banks which also failed. By the time the economic peak fell to its trough, economic activity had decreased by about 25% nationally. Recovery began in the Summer of 1897; a rather short period as stand-alone depressions go but remember, this is just an extension of what really began in 1893.
The Panic of 1907 Aka the Banker's Panic*
THE PANIC OF 1907, while almost identical to the Panic of 1896, is unique in one major respect because it is this recession is the reason the modern Federal Reserve System exists today and why Jekyll Island, GA has become famous (to conspiracy theorists) and why, almost single-handedly, one man was, at the same time, responsible for stopping this Panic from becoming a 1929-size disaster yet became reviled as a danger to the country after he saved it; only in America.
The Panic of 1896 resulted from instability in the economy, for a variety of reasons, which led to runs on banks and their subsequent failures. This financial instability then spread to the rest of the economy leading to bankruptcies in industry, unemployment, and overall economic slowdown; normally the process is reversed. The Panic of 1907 followed basically the same course, although the causative reasons are different and the consequences have ramifications that are still influencing what is happening today, in 2012.
The Wealthy and the The Greedy
- The Culprit Was Stock Manipulation
THIS PANIC WAS the result of several things, 1) the wealthy playing games in the stock market trying to become wealthier, 2) lack of regulation of the stock market, 3) lack of regulation over banks and other financial institutions, and 4) no Federal Reserve, as we know it today.
It all started in October 1907, when F. Augustus Heinze, his brother Otto, and his partner Charles W. Morse, decided to corner the copper market in Heinze's United Copper Company. In addition to owning the United Copper Company, Heinze and Morse served on at least six national banks, ten state banks, five trust companies and four insurance firms; this will be important in a bit. The plan was intricate but, what is important to this story is that it failed. It failed big and it brought down the United Copper Company on October 16, 1907.
Before we go on, a little stage-setting first.
It Devastated San Francisco and Unsettled New York City
- Economic Conditions Prior to 1907
IN 1832, President Andrew Jackson, the first of the very Conservative (Jacksonian) Democratic presidents, let the charter for the Second Bank of the United States, a precursor to the Federal Reserve System, expires; the nation no longer had a central bank and wouldn't have another one for almost 100 years. The economic impact was to let the money supply fluctuate with the ebbs and flows of an unregulated economy. It was this lack of a central bank, and its ability to act as a "shock absorber" to help dampen the wild swings common to an unregulated economy, that allowed the devastation caused by the panics after 1832.
In New York City's case, remember New York was the financial hub of America, the economy fluctuated with the annual agricultural cycle. Interest rates were raised and lowered in opposition to the cycle to keep foreign money flowing in when the agricultural cycle had it flowing out. When times are good, this works well, but, when things starting getting out of whack, positive feedback's can start an avalanche; the April 1906, San Francisco earthquake was one such destabilizing event by causing large amounts of money to flow out of New York to help rebuild the devastated city to the West.
In January 1906, the Dow Jones Industrial Average hit its high at a whopping 103, but began a modest correction from that point on indicating an economy that was cooling off (which normally nobody notices at this point because the stock market is considered a "leading" indicator). In April, there was the San Francisco earthquake and later in 1906, the powerful Bank of England raised its own interest rates; slowing down money filtering into New York.
In July 1906, The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law. As a result, the value of railroad stocks fell and began dragging down the stock market in general; between September 1906 and March 1907, the market fell almost 8%, and in March 1907 alone, fell another 10% (sometimes called "the rich man's panic"). As the Summer progressed, such stocks as the Union Pacific Railroad and Standard Oil Company (due to anti-trust actions) took big hits; the market was down almost 25% in the first nine months of 1907; the financial economy was very unstable, not necessarily the industrial economy. Also during that time, the copper market collapsed and there were bank runs occurring outside the United States.
It wouldn't take much to set off a financial meltdown; the Heinze-Morris failed attempt to corner the copper market was all that was needed.
- The Collapse!
THE Knickerbocker Trust Company was New York City's third-largest trust and was controlled by Heinze; it, among many others, helped finance the Heinze-Morris play to corner the market. In mid-October 1907, when their scheme failed, it brought down Knickerbocker Trust with it; the first domino.
This failure spread fear throughout New York's financial district and other trusts and regional banks began drawing their reserves out of New York City. This, in turn, started runs on banks, beginning in New York, and then spreading across the nation; bank failures were scattered around everywhere. At this point, there wasn’t any fundamental weakness in the economy, just fear in the financial markets because of the greed of a couple of wealthy men; yet, the die had been cast for a massive depression, if something wasn't done.
What was to be done? There was no central bank to provide liquidity to the markets; conservative President Andrew Jackson pointedly did not renew the charter of the last one back in 1836. Even though a progressive Republican, Theodore Roosevelt, was in the White House, the government, as was the habit of the time, did not get involved. So, how do you stop an economic meltdown in the making? Can you spell TARP!
Well, not TARP exactly, but definitely a bank bailout, although not a government one. Who then? None other than the legendary J.P. Morgan. the very wealthy financier and banker. He immediately stepped in and led a rescue effort, convincing other solvent banks to prop up failings ones. In order to shore up public confidence, Morgan formed two committees. One to work with the clergy to preach calm from the pulpit and the other to work with the press to explain what he was doing. It worked. By November 1907, the first phase of the panic subsided; almost.
Next on the failure agenda, early in November of 1907, was one of the New York Stock Exchanges largest brokerage houses, Moore & Schley; it was heavily in debt and in danger of collapse. They had used Tennessee Coal, Iron and Railroad Company (TC&I) as collateral and its stock price was in danger of collapsing. With a major railroad company and a major brokerage house about to go bankrupt, the combination potentially would cause a crash of the market. At nearly the same time, because of nagging and continuing bank runs, Trust Company of America and the Lincoln Trust could fail to open.
J. P. Morgan came to the rescue once again, this time bringing U.S. Steel with him to acquire TC&I. By force of will, he convinced the most powerful financial brokers to form a cartel in order to provide the financing to keep the banking system from collapsing. An agreement was reached but one more thing needed to be done, stop President Roosevelt from turning his anti-trust crusade against U.S. Steel.
Morgan's envoys to the President even used some subterfuge even to get an audience with Roosevelt and once they did, it had to be the same as Bernanke and Paulson trying to convince President Bush to go against his deeply-held principles and approve TARP in order to stave off a certain depression. The envoys cajoled President Roosevelt to set aside his and allow U.S. Steele's acquisition to go forward to avoid a similar fate; Roosevelt relented and the depression was averted.
But wait, that is not the end of this story.
- The Surprising Aftermath
A DEPRESSION had been avoided, but a recession wasn't. The economy was already contracting prior to the Heinze-Morse stock play set-off the series of bank runs and near stock market crash: their move made it much, much worse. J.P. Morgan's version of a privately funded TARP bail out of the financial system prevented a disaster from happening; production fell by 11% and imports by 26% while unemployment rose from 3% to 8% and lasted until June 1908.
The similarities to our current 2008 recession are uncanny. While the causes were different, once it kicked off, the responses were nearly the same; multiple bank failures, industrial collapse leading to rapidly rising unemployment, and both were stopped from worsening by a massive and multiple infusions of money into the banking system, not by the government though, as it was in 2009, but by a cartel of private banks and wealthy businessmen led by John Pierpont Morgan. Who would have thought that the much maligned TARP by the party of the corporate America was actually the reapplication of the same solution used by corporate America 100 years earlier to stop the same type of financially caused recession from becoming a disastrous depression. Was 2009, history repeating itself?
- The Phoenix Rises
WHEN F. Augustus Heinze's and Charles W. Morse, unsuccessfully attempted to manipulate the stock market in order to accumulate even more wealth, they never realized the sea change in the financial world they were going to visit on America. Since the end of the civil war in 1865, there were panics (recessions), of one degree of severity or another, in 1873, 1884, 1890, 1893, 1896, and 1907; several of which have been reported on above. Three events motivated the 60th U.S. Congress to begin seeking a solution to avoid future crises such as the one they had just experienced, they were: 1) the high frequency of panics prior the Panic of 1907, 2) the severity of the Panic of 1907, and 3) the ubiquitous power of J.P Morgan to control the American financial market.
The first two reasons are obvious; however, the last reason was unique. While the country and the politicians were extremely grateful for what J.P Morgan did to save the country from disaster, they were also stunned by the immense power and influence this single business and finance man had; he could literally manipulate the American financial market which he exhibited in saving it. This scared a lot of people. The public and the politicians feared a plutocracy of the wealthy had formed, independent of the government, the luster on J.P. Morgan began to fade. Congress convened the Pujo Committee, named after Representative Arsène Pujo, (D–La.7th), the chair of the House Committee on Banking and Currency, to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion).
Consequently, Congress passed the Aldrich–Vreeland Act in May 1908 to study the situation and come up with a solution. The Act established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. Senator Nelson Aldrich (R–RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems. What he found was that they had one thing which America didn't that made a difference; a national banking system where in times of low cash reserves, the government could extend the supply of money to offset the economic downturns.
With this information in hand, in November of 1910, at a secret meeting held off the coast of Georgia on Jekyll Island at the Jekyll Island Club, Senator Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department) met with a number of the nation's leading financiers who included: Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan). At this meeting on Jekyll Island, these men produced a design for a "National Reserve Bank", which is today's Federal Reserve System. (This is where the various conspiracy theories regarding the Fed originate.)
Congress fought and debated for the next three years, during which time there was one more Panic (1910) and a recession (1913); on December 23, 1913, the Federal Reserve System came into being. Its charter was to address banking panics, to furnish an elastic currency, to afford means of rediscounting commercial paper, and to establish a more effective supervision of banking in the United States.
Thus began the life of the Federal Reserve System.
The Panic of 1910 and Recession of 1913*
THE PANIC OF 1910, while still a financially based downturn, wasn't very severe, only a 15% and 11% decline in business and trade/industrial activity, respectively, but it was long, 2-years long, and, there was deflation which classifies it as an economic depression. By comparison, the downturns on either side of this one were in the 20 - 30% range. The main causes of this panic were the disruptions in business and the upheaval in the stock market brought on by the enforcement of the Sherman Anti-Trust Act, especially with the breakup of the Standard Oil Company. Even unemployment wasn't badly affected and only rose to 6%.
At this point in time, there was still no central bank to act as a shock absorber to monetary upheavals; the creation of the Federal Reserve System was still three years away. There had now been a Progressive Republican government in power long enough to actually effect long-term policy.
The Panic of 1910 ended in January 1912. Just a year later, in January 1913, another long recession started. There is very little information I could find on this particular recession but a few things are known, 1) there was no Central bank just yet to act as a shock absorber to wild swings in money availability in the economy and support banks; the Act that created it wasn't signed into law until December 1913, 2) the Progressive government was still trying to bring overreaching corporations into line and establish protections for laborers, 3) the reverberations of the Panics of 1907 and 1910 were still bouncing around. All of this led to a fragile economy.
When productions and real income began to decline late in 1912, maybe because of government action, there was nothing in place to stop the downward cycle. The cycle continued downward for 23 months and didn't improve until the start of World War I which increased demand. Even though this financial recession was a little shorter than the previous financial recession that had just concluded, unemployment increased, about 7.5%, and a very sharp a 26% and 20% decline in business and trade/industrial activity, respectively.
The Men In Charge
Post-war 1918 - 1921, Double-dip Recession/depression
AS A GENERAL RULE, following any war, there is recession of depression. The recession of 1918, was no exception. Its causes are simple to understand and were non-financial in nature.
This was a brief but very sharp recession which was caused by the end of war production generated during WW I as well as an influx of labor from returning troops. With the end of demand from the War Department, demand plummeted, unemployment rose because there was no work yet for the returning troops, and the cost of the war created a huge deficit. All of this is a recipe for the normal economic contraction leading to recession following cessation of major hostilities.
By the time the first part of the recession had run its seven month course, the combined effect of the recession and returning troops and driven unemployment up to 5%, not nearly as bad as past recessions or of what was to come, from 3%. Business activity, however, declined by a whopping 24.5% and industrial activity declined by 14%. The economy improved for a short time in about seven months, but unemployment didn't stop rising.
Ten months later, the economy contracted again, still suffering and adjusting to peacetime conditions. There were two new factors however, that turned what might have been a double-dip recession into a recession followed by a sharp Depression.
That was inflation and the newly created Federal Reserve's reaction to it. It is a characteristic of being on the gold standard, which we were at the time, and with no central bank, which, until 1913, there wasn't, for inflation and deflation to run rampant, this is the classic "Boom-Bust" cycle with its associated happiness and unbelievable misery. With the advent of the Federal Reserve, tools were made available to mitigate the effect of this cycle by controlling the money supply and business activity; its primary tool is the ability to set interest rates at which banks can borrow money.
With the good, there is always bad and, according WIkipedia's citation of Milton Friedman and Anna Schwartz, in A Monetary History of the United States, the Federal Reserve sort of over did it. In order to combat rapidly rising inflation, they raised interest rates drastically. They had, you see, no history to work from; they were creating history. In any case, they raised interest rates way too much and brought the economy, according to Friedman-Schwartz, to a halt and tied with all the other factors going on, a sharp, devastating depression ensued that set several records that still stand today.
With the rapid economic collapse, probably like 2008, nobody had any money to spend, so banks failed left and right, people lost their savings because deposits were not insured, businesses closed from lack of sales, etc. etc. Unemployment finally topped out at about 9% in 1921, business activity declined an astounding 38%, and industrial activity declined 33%; huge numbers indeed; the largest in the nations history to-date. Also setting a record was the largest recorded one-year deflation rate, between 13% and 18% at the retail level and about 39% at the wholesale lever; in total, the Great 1929 Depression was worse, but not in a single year.
When the Federal Reserve understood what had happened and why, they quickly reversed themselves and started lowering interest rates; the economy recovered and the Roaring 20s ensued ... until 1929.
It was also during this period where we see the first signs of government action to mitigate the effects of the depression on the populous at large. President Warren Harding convened a President's Conference on Unemployment at the instigation of then Commerce Secretary Herbert Hoover as a result of rising unemployment during the recession. An economic conference and a committee on unemployment was formed with branches in every state having substantial unemployment, along with sub-branches in local communities and mayors' emergency committees in 31 cities. The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.
Tariffs were still in vogue and still hotly debated between Republicans and Democrats. In 1921, President Warren G. Harding signed the Emergency Tariff of 1921 and the Fordney–McCumber Tariff which was supported by the Republican Party and conservatives and generally opposed by the Democratic Party and liberal progressives.
The First Set the Stage, the Second Tried Conservative Policies and Failed, the Third Tried Government Intervention and Succeeded.
The First One Was so Great, so Let's Have an Encore
The Great Depression of 1929 was actually a double-dip depression with the second dip occurring in 1937; the causes of the second depression, however, are different but nevertheless dependent on the first depression and consequently deserves its own discussion in the subsequent section.
To begin this particular tale, please consider the following without considering we are talking about 1929. In the previous six years, the economy has been booming, everybody, the poor and the wealthy alike, but especially the wealthy, were participating in the good times. The stock market was having the best run in its history; nobody thought things could ever go bad again (why is it we never think things can go bad again?). While all of this was going on, interest rates were falling; margin rates (the cost to borrow money to invest) were almost non-existent; people of ALL income classes were taking on debt they could not pay back IF the good times stopped. Asset prices have become enormously overvalued and financiers are playing fancy with the stock market and other financial and real estate deals all the while making huge financial bets things will go wrong.
Behind the scenes though, things weren't looking so rosy. The stock market had peaked and turned down a little bit; so had industrial production; so had some commodity prices and nobody noticed, except the few very wealthy who were now making investments that would pay off if the market collapses.
Soon, these bets didn't go unnoticed by other investors, things start to get shaky; the stock market does collapse; banks start calling in loans; people can't pay and go bankrupt; banks fail; the economy begins collapsing. Prices of assets rapidly fall reducing profits and value of businesses values which bring great instability into the stock market and finally collapse there as well; businesses are now failing. Consequently, demand falls driving more unemployment, hundreds of thousands a month, and the vicious death-spiral is well on its way. Commodity prices are now plummeting as is industrial and business output, farms by the thousands stop producing and the Federal Reserve sits idly by doing nothing. The country falls into depression.
Does all of this sound vaguely familiar? It could be 2008, couldn't it?
The Face of a Depression
The Worst Economic Downturn in Modern World History
INSTEAD, WHAT I JUST RELATED WAS THE BEGINNING OF THE 1929 DEPRESSION. Even though America never entered a deflationary period between during the Great Recession of 2008, we came very close to becoming a full-blown depression of probably greater proportions, if the government hadn't intervened as it had! That is what Secretary of Treasury Paulson and Federal Reserve Chairman Bernanke were, one day in October 2008, advising President Bush was going to happen; according to President Bush during an interview later, he blinked, he turned away from his Conservative economic principals (as Greenspan, Paulson, and Bernanke had already done) and agreed to propose and push for the Troubled Asset Relief Program (TARP).
The 1929 depression has been recognized as the Great Depression because of the enormity of the devastation it caused world-wide in all sectors of the economy. It isn't that there haven't been longer depressions or probably deeper ones or ones that effected the whole world, there have been. The 1929 depression lasted 4 years and 7 months and had a decline in GDP of 26.7%, as well as peak unemployment of 24.9%. Compare that to the Panic of 1873 which lasted 5 years and 5 months or the Panics/Depressions of 1836, 1839, 1873, 1882, 1893, 1907, and 1920, all of which had declines in business activity between 29% and 38%! Virtually all of these Panics and Depressions had global implications.
What made 1929 unique, I believe, is that America was simply different by then. It had a much bigger population-wise and it was definitely much more interconnected, internally and internationally. In the 30 years since the turn of the century, electrification of the country had occurred as had the spread automobiles; Henry Ford had introduced the assembly line, industrial engineering was developing thereby introducing skilled labor; people in America had become mobile, breaking the bonds that tied a laborer to their employer via the company store made famous by the lyrics in Tennessee Williams' song "Sixteen Tons";
Some of you might remember: " You load sixteen tons, what do you get; Another day older and deeper in debt; Saint Peter don't you call me 'cause I can't go; I owe my soul to the Company Store."
All of these factors hadn't coalesced until around 1930, and I think they magnified the effects of what had become a norman business-cycle depression over the last 115 years. The fundamental causes of the 1929 depression were not so very different from the nine financially-based, major panics/depressions that occurred since 1815; that is one almost 1929-style depression every 12.8 years for 115 years! This does not count the other non-financially-based depressions and numerous recessions that also occurred during those same 115 years. Americans definitely have a short memory. Throughout 95% of those 115 years, only one economic philosophy was being followed in America, the same one that was in force just prior to the Great 2008 Recession.
IN OCTOBER 1929, there was another Conservative President in the White House, Herbert Hoover, who faced the same problem. The Federal Reserve, fresh from making a terrible decision in 1921 by raising interest rates precipitously which caused a deeper recession than necessary. faced a similar predicament. In both cases, the President and the Federal Reserve chose to do nothing to intervene, which is the Austrian (Conservative) Economic School's solution to these situations; the market place needs to correct itself with no government intervention, that was the Conservative's answer in 1929 and that was their answer in 2008 - 2009.
The 1929 Depression started in August 1929, just before the peak of the stock market on September 4, 1929. It ended four years seven months later in March 1933, only to be followed by a sharp recession in 1937, that lasted for another 13 months. Often, these two events are looked at as just that, two separate events, given the time difference between the end of the last depression and the beginning of the next recession. In this case, however, the depression was so deep that the economy didn't come close to recovering before the next recession came along. Consequently, the 1937 recession is often looked at as a recession occurring within a depression.
As with most large market downturns, it is easy to look back and see the signs of impending doom; astute investors, and there aren't many of them, see them only a few months in real-time after they become obvious when viewed in hindsight. For the rest of us, the damage is done before we are aware enough to do anything about it. In any case, it works something like this:
- As the economy improves, professional investors start buying more and selling less in a prudent manner, driving prices up
- So long as the economy keeps improving, this activity feeds on itself with additional, but less experienced investors getting into the game
- If the economy really heats up and starts to boom, money becomes easy to get, margin rates drop, (in the case of 1929, you could borrow $.90 for every $.10 you put up), everybody who can, begins investing, driving prices up well beyond what the future value of the underlying assets are worth
- Economically, the boom has run its course, production is no longer increasing and may even be falling, but only the true professionals notice. The feeding frenzy is on in the investment arena and there is no government oversight or control; nobody wants to miss out on making their fortune; even the professionals are making investment bets, except they are betting the market will fall. Buyers still outnumber sellers at this point, but now you see a rise in "short sellers"; those who sell "borrowed" stock at high prices on the hopes they can buy it back at low prices so they can repay what they "borrowed"
- More people start noticing the economy has slowed down, not a problem in normal times, but these aren't normal times, these are boom times in an unregulated market. More investors start selling; people are getting nervous; more short selling happens.
- Economic numbers tumble and the selling panic is on, now there are many more sellers than buyers; with one hitch, all those short sellers must buy now to cover their bets, that gives the markets a temporary lift; but only temporary.
- After one or two more minor attempts at recovery, it is straight to the bottom for the market and the economy, because contemporaneous with all of this happening in the financial markets, is the failure of the banking institutions and businesses whose value collapsed along with the economy thereby throwing millions of people out of work.
INDUSTRIAL PRODUCTION had already peaked in May 1929; by September 1929, there was little doubt to the very professional investors the boom had run its course and they started exiting the market. Normal investors, rarely read the tea leaves, just what everybody else is doing and finally decide they need to do the same before they lose out on all of that money being made; this happened in 1929, 2000, 2008, and many times before and in between; it is a familiar pattern.
One thing that happens when you get this "panic" buying is that the value of stocks, in general, become overvalued, meaning they are actually worth less than what they are priced at. Often, business and industrial output doesn't decline precipitously and markets have time to adjust, but 1929, as you can see by the chart at the right, industrial production cratered after July 1929. When industrial production dramatically declined in mid-1929, the most experienced professional investors started leaving the market or betting against it, but everybody else kept on buying. By September 1929, more people began to notice production had fallen off and now unemployment had been increasing and that these were out of sync with the rising stock market; they began selling as well and the market peaked.
Come mid-October 1929, the market was extremely volatile, very similar to Oct 2008, because as some people sold, others, not believing the good times were over, kept buying what they thought were bargains. Similar to the activities of J.P. Morgan in 1907, private bankers tried to save the day with market intervention because the Federal Reserve, who was put in place to mitigate such money supply problem and production problems remained on the sidelines doing nothing; this was probably a result of 1) the conservative economic philosophy of the Federal Reserve Boad and 2) getting burned by overreacting in 1920, turning a minor recession into a major one.
The conservative Congress, however, was trying to do one thing, pass a tariff, the Smoot–Hawley Tariff Act , in order to drive production back into the U.S.
(the problem was, of course, when the Act was passed in June 1930, it started a protectionist war which opponents, such as Henry Ford, J.P. Morgan, and Franklin Roosevelt, convinced conservative President Hoover that it would do and, as a consequence, gained his support as well, made the world-wide depression even worse. Even though Hoover initially switched sides, he nevertheless succumbed to his party's pressure and signed the bill. It cut U.S. exports and imports by half and helped drive unemployment rate, that had not reached 10% and was in decline, up into high double digits while negatively impacting American farm, industrial, and business production.)
The dam started bursting on Black Thursday, Oct 24, the market lost 11% on the opening bell and panic began to set in. The latter-day J.P. Morgan-types tried his 1907 ploy again and bought large blocks of "blue chip" stocks at above market prices; that worked ... for a day; the market closed up 6%. On Black Monday, Oct 28, investors decided it was still too risky to stay in the market and started selling again and the market fell another 13%; the panic was on. One Oct 29, Black Thursday, the market fell another 12% or 25% in two days!
Gold Standard - One of the Culprits
THE GOLD STANDARD is one of the Conservative economic theorists mainstays; some are calling for the return to it even today; it is opposed by modern economists. In and of itself, having a currency pegged to gold or silver or some other material that has intrinsic value is not a bad thing ... in a stable economy. If that economy becomes unstable, however, it can be a terrible thing, providing positive feedback to a deteriorating situation thereby making it even worse. That is what being pegged to the gold standard did during the Great Depression of 1929.
You can see from the chart to the right when America left the gold standard, the economy began to recover. Now, untying the dollar from gold didn't make the economy improve, it just removed a major impediment that was preventing it from improving.
What the chart doesn't show you is 1) that the few countries who were on a silver standard, did not suffer very much, if at all from the world-wide depression, 2) those countries who left the gold standard sooner, recovered sooner, and 3) those countries that left the gold standard later, recovered later. That is pretty damning evidence that having a gold standard is clearly a double-edged sword that probably should be avoided. Had the world been on a gold standard in 2008, a full-blown depression would probably have been unavoidable.
When the Gdp Actually Recovered During the Great Depression
CURRENT GDP B $$
REAL GDP IN 2009 B $$
Recovery, Sort Of
THE RECOVERY FROM the Great Depression began in late 1933. that was when economic growth first began. The GDP did not return to pre-1929 levels until 1936, but unemployment didn't return to normal until WW II. The economy recovered until 1937 when too much belt-tightening by President Roosevelt in order to bring the deficit, which resulted from his efforts to dig America out from the crushing Depression, under control, drove the country back into a recession. As you can see from the Table to right (Chart 4 above is in current dollars), it wasn't until 1939, that GDP finally returned to normal again; two years before the beginning of WW II, which is normally, but erroneously credited with ending the economic portion of the Great Depression.
Historians point to many causes for the recovery. Most economists agree on the following: 1) President Roosevelt's "New Deal" policies, 2) the positive effects President Roosevelt's words and actions on the mood of business and the country coupled with the lack of negativism from the opposition party, 3) leaving the gold standard, and 4) the rebuilding, restructuring, regulating, and overseeing the financial institutions; regulations and oversight that remained in place until the period of deregulation that lasted from 1981 - 2008, when the Great Recession of 2008 brought on a new round of rebuilding, restructure, and re-regulating.
FINALLY, AMERICA HAD LEARNED a huge lesson about economics, one it wouldn't forget for 40 years. The devastation of the Great Depression was so huge that it broke the back of America's love affair with the Conservative's Austrian School of economic theory that had driven U.S. policy since our founding; Keynesian economic theory had replaced it, although in its original form, it was found to be flawed as well. However, Keynesian economics had the advantage of being flexible, so as time went by, it mutated somewhat to be able to fit reality; something Austrian economics simply cannot do.
Economists finally began to understand what fundamentally drove the business cycles and how to better mitigate its ups and downs so as to prevent the economy from ever again from suffering from manic-depression, as it had prior to 1940; Keynesian economics was America's lithium. As we shall see in the next several sections, the medication worked; America remained relatively stable for the next 58 years.
Then America returned to its roots and completely stopped taking its medicine 2001.
President Franklin Roosevelt Again
Recession of 1937
The Recession of 1937 is only considered minor when compared to the Great Depression, but is otherwise among the worst recessions of the 20th century. Why did it happen? Didn't we learn our lesson in 1929? Well, in reality we learned a different lesson which we are are trying to forget in 2010 - 2012.
There are three popular explanations of why this recession occurred, one from each school of thought.
- Fiscal, Keynsian, economists thought the recession was caused because President Roosevelt made the decision to balance the budget and reduce the debt, just what the loyal opposition has been recommending since the Democrats won in 2008. Roosevelt cut back drastically on all of the government programs he put in place with the New Deal in order to grow America out of the depression. Even though business activity had returned to 1929 levels, it apparently was quite dependent on these New Deal programs for as soon as Congress cut them, the economy contracted sharply.
- Monetary economists believe it was the Federal Reserves fault. It would seem they believed the economy may be taking off too fast and they raised interest rates and tightened the money supply therefore dampening business activity.
- Austrian school, conservative, economist believes the recession was caused by the huge expansion in the money supply because of the influx of gold when we got off the gold standard and the recovery itself. They also noted the economic depressing effect that occurred when Congress passed the anti-marijuana laws and banned hemp production.
I say the recession occurred because of all three reasons. In any case, to get America back out of this recession, President Roosevelt ramped up the New Deal stimulus programs once more and the economy began to recover again. Recovery was completed with the beginning of WW II hostilities.
Recession of 1945
FOLLOWING EVERY MAJOR CONFLICT, there is a recession; it only makes sense. A country's manufacturing industry has geared up to support the war effort, unemployment is almost non-existent, gross domestic product (GDP) is up because business is making money ... until the war ends. Then, all of the troops come home, the government orders dry up, the demand for domestic product isn't quite there yet, people are laid-off, and GDP falls, sometimes drastically. This happened after the War of 1812, the Civil War, WW I, and now after WW II.
A declining GDP, into negative territory is, by definition, a recession if two succeeding quarters show negative growth. For WW II, America experienced a GDP decline of over 12%, which is fairly significant, but, unlike other war related recessions before it, unemployment didn't rise precipitously, in fact, it hardly rose at all; only to 5.2%. Like the recessions after the War of 1812 and WW I, this recession was relatively short, only lasting 8 months; for different reasons, the recession following the Civil War last over two years. The short nature of war recessions, especially ones where the conflict was overseas, is that there is a lot of pent-up demand and money available to spend. So, the delay is mainly structural as manufacturing tries to retool itself from wartime production to peacetime production.
What one often sees as well, is that after the economy recovers, it is still relatively unstable as it tries to absorb all of the returning soldiers and work toward some sort of equilibrium between supply and demand. Often this leads to another recession and the period after WW II is no exception. Fortunately, the recession, when it did occur in 1949, was almost a non-event and is not significant enough to cover here.
President Dwight D. Eisenhower
THE 1958 and 1960 RECESSIONS
THE NEXT RECESSION OF NOTE was what amounted to a double-dip recession begun under President Eisenhower in 1958 and again in 1960 and ended at the start of President Kennedy's administration. (It is curious how many recessions and depressions began just about the time a new president takes office, isn't. 1960[R], 1980[D], 1990[R], 2001[D], 2009[R].)
The first recession, in 1958, was more externally driven than financially-based, but both recessions were, in the scope of history, on the small side. Even though the 1958 recession was in concert with a world-wide economic downturn which resulted in serious declines in exports and imports; the US Auto industry saw a 37% decline with 20% unemployment in Detroit, it was preceded by domestic economic policy decisions that helped set the stage. Starting in 1955, monetary policy restricted the amount of money in circulation, in order to combat inflation. The effect was two-fold, it reduced demand, as intended, but it also reduced the amount of revenue flowing into the U.S. Treasury resulting in taking a budget surplus in 1957, and turning it into a budget deficit in 1958. In 1958, monetary policy was reversed and the recession ended in April 1958.
During the 1958 recession, overall unemployment did rise, it peaked at 7.5%, but so did personal income, a rarity. Also rare for a recession is that prices kept increasing, sort of our first "stagflation".
To combat inflationary problems, the Fed increased interest rates again, thereby tightening the money supply, which resulted in another short recession in 1960. President Kennedy campaigned and won on the promise get the economy going again from years of stagnation. He drastically cut income tax rates for all Americans and increased government spending. For the only time in American history, a income tax cut actually ended up being a stimulus and led to economic expansion, the second longest ever. It worked, where others failed, because tax rates were still at almost WW II - Korean War highs; there was a lot of room to cut. Not so with Reagan's 1981 tax "cut", it actually ended up being an increase when you consider all citizens and not just the wealthy, and Bush's 2001 tax cut.
Unemployment had not fallen very much after the recovery from the 1958 recession, but it rose to 7.1%, and the decline in GDP was only half that of the previous recession.
COTINUED IN PART II FOUND IN THE RELATED LINKS BELOW
ALSO. BELOW is a link to a petition I recently posted on the White House web site We The People. I hope you go sign it, I need another 144 votes to get it put on the main We The People web page where everybody can see it. The petition asks the White House to accomplish a formal statistical study and report the results on what I just presented in this hub. While I feel my analysis is very compelling, it is nevertheless not what is called in mathematics, "rigourous". A formal study willt ive it that rigor.
ACTIVE-STATE LIBERAL: A liberal who does not hold to the social Darwinist theory and believes there is a role for government to play to ensure all have an equal opportunity to succeed, should they so choose.
AUSTRIAN SCHOOL OF ECONOMICS: A sub-set of Classical economic that rejects econometrics. It was founded in the late 1800s, when it split from the Classical school, by Austrian’s Carl Menger, Frederich von Wiesner, and others. The Austrian school’s basic tenets include a fundamental believe the economy is driven by individual people. It is their subjective actions based on knowledge, experience, and expectations that set demand and price, and ultimately everything else that follows from that.
CLASSICAL SCHOOL OF ECONOMICS: This theory grew out of Adam Smith’s 1790 seminal work The Wealth of Nations. Smith’s famous metaphor of the “Invisible Hand” describes the self-regulating ability of free markets to reach natural equilibrium without outside intervention. Unlike Keynesian and Austrian economics, which are demand-based, Classical economics maintains and tries to prove that “supply creates its own demand” (Say’s Law). Nevertheless, like the Austrians who broke off in the late 1800s, Classical economists maintain all economic activity can be described in terms of activity at the level of the individual, i.e. microeconomics.
CONSERVATISM: In academia, conservatism means something different than what lay people conceive of it today; most people who call themselves Conservative today are actually Minimal-state Liberals. An actual Conservative, in the philosophical meaning of the word, believes in a certain set of values which Edmund Burke (1729 – 1797) first identified in his writings. Based on these, Russell Kirk (1918 – 1994), one of the foremost promoters of modern conservatism developed the Ten Conservative Principles, based on Burke’s original thoughts, in his book The Politics of Prudence. They are:
- “The conservative believes that there exists an enduring moral order - all social questions, at heart, [are] questions of private morality.
- The conservative adheres to custom, convention, and continuity - Conservatives are champions of custom, convention, and continuity because they prefer the devil they know to the devil they don’t know
- Conservatives believe in what may be called the principle of prescription - that is, of things established by immemorial usage, so that the mind of man runneth not to the contrary. It is perilous to weigh every passing issue on the basis of private judgment and private rationality. The individual is foolish, but the species is wise
- Conservatives are guided by their principle of prudence - acts only after sufficient reflection, having weighed the consequences. Sudden and slashing reforms are as perilous as sudden and slashing surgery.
- Conservatives pay attention to the principle of variety - preservation of a healthy diversity in any civilization, there must survive orders and classes, differences in material condition, and many sorts of inequality. The only true forms of equality are equality at the Last Judgment and equality before a just court of law; all other attempts at levelling must lead, at best, to social stagnation.
- Conservatives are chastened by their principle of imperfectability - All that we reasonably can expect is a tolerably ordered, just, and free society, in which some evils, maladjustments, and suffering will continue to lurk.
- Conservatives are persuaded that freedom and property are closely linked.
- Conservatives uphold voluntary community, quite as they oppose involuntary collectivism - In a genuine community, the decisions most directly affecting the lives of citizens are made locally and voluntarily. Some of these functions are carried out by local political bodies, others by private associations: so long as they are kept local, and are marked by the general agreement of those affected, they constitute healthy community.
- The conservative perceives the need for prudent restraints upon power and upon human passions - A just government maintains a healthy tension between the claims of authority and the claims of liberty.
- The thinking conservative understands that permanence and change must be recognized and reconciled in a vigorous society - When a society is progressing in some respects, usually it is declining in other respects.”
DEPRESSIONS: Severe recessions but also have no particular definition. So, again, it is left up to the NBER
FISCAL POLICY: The use of government revenue collection and expenditure to influence the economy. The two main instruments of fiscal policy, accomplished at the Congressional level, are changes in the level and composition of taxation and government spending in various sectors. These changes are intended to affect the following macroeconomic:
- Aggregate demand and the level of economic activity;
- The distribution of income;
- The pattern of resource allocation within the government sector and relative to the private sector.
GOVERNMENTAL MONETARY POLICY: Includes actions taken by the US Federal Reserve to increase or decrease the money supply (the amount of money in circulation) by manipulating interest rates. The Federal Reserve System is an Independent federal agency which incorporates both public and private aspects. The controlling organization is a Board of Governors, appointed by the President. They oversee 12 regional Federal Reserve Banks and a host of private banks that belong to the system who respond to Federal regulations. The mandate of the Fed is to 1) maximize employment, 2) keep prices stable, and 3) keep long-term interest rates moderate.
KEYNESIAN ECONOMICS: Developed in 1936 by John Maynard Keynes to answer the question as to why classical economics could not account for the violent boom-bust cycle experienced by the American (and world) economy for the last 130 years. While Classical economics continues with the original supply-driven approach to economic behavior, Keynes believed economic activity was driven instead by demand and that by using monetary and fiscal policies, the extremes of economic cycles can be mitigated in order to prevent recessions or reduce their size and thereby reduce the economic and social pain that result from them.
LIBERALISM: This philosophy is summed up in John Locke’s statement “ "All mankind...being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions". From this, the ideas of old and new liberalism emerge. In concert with this, Locke believed that to secure these “natural rights required the formation of a "sovereign" authority with universal jurisdiction. From this came the idea of a “social contract” between the governed and the government they consented to protect their rights. There are four principles regarding liberalism:
- Individualism – The “rule of man” is replaced by the “rule of law” where the protection of individual rights, in most instances, is more important than the rights of groups.
- Egalitarianism – Is legal and political equality, as well as, equal opportunity without artificial barriers, e.g., while all are able to start at the same place, not all finish together
- Universalism – The moral principles that define liberalism apply to all human beings
- Meliorism – The capacity of human beings to become better just as their social and political institutions can become better.
MACROECONOMICS: This theory is an adjunct to microeconomic by considering economics at the aggregate level. While microeconomics is worried about how much supply there is for product A, macroeconomics is concerned with the aggregate supply of all products in an economy. By doing so, larger questions regarding overall fluctuation in interest rates, inflation, and employment can be understood and acted upon.
MICROECONOMICS: Theory of “supply and demand”. Microeconomics considers what happens at the individual buyer and seller level; what motivates people and companies to buy a service or a product and what encourages investment into the production of a product or service.
MINIMAL-STATE LIBERAL: A liberal who does hold to the social Darwinist theory and believes there is no role for government to play beyond providing for the common defense from outside harm. All people start out having the same chance to succeed in life and the government does not have an obligation to keep the playing field level.
NEGATIVE FEEDBACK: A process in many fields of social, economic, and physical sciences where a system’s output influences the input of that process in such a way as to decelerate future output in the next iteration.
POSITIVE FEEDBACK: A process in many fields of social, economic, and physical sciences where a system’s output influences the input of that process in such a way as to accelerate future output in the next iteration. Examples will be offered in Part III.
PRIVATE MONETARY POLICIES: Actions by banks to set their own interest rates and print their own money as the market forces direct or as they simply see fit.
PROGRESSIVISM: Can apply to both conservatism and liberalism, but is generally considered the social and political activities that move a society from barbarism to civility. For example, the efforts to end slavery in America is considered progressive in nature as was giving suffrage to women with the 19th Amendment and the 1964 Civil Rights Act and 1965 Voting Rights Act.
RECESSIONS: Significant declines in economic activity but there is no clear-cut definition. One common rule-of-thumb is two consecutive quarters of negative economic growth, but the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales[i]
SPECULATION: Trading in an asset that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. The risk of loss is more than offset by the possibility of a huge gain. Speculation is not gambling, whose outcome is based solely on chance, instead, the speculator is taking a calculated high risk.
 Joseph A. Schumpeter, History of economic analysis, Oxford University Press 1996
 Russell Kirk (1993), “The Politics of Prudence “. Chapter 2. Wilmington, DE: ISI Books
 John Locke, “Second Treatise of Civil Government”, (1690), Chap 2, Sec 6, in http://www.constitution.org/jl/2ndtr02.htm
 Ronald Chau, “Liberalism: A Political Philosophy”, Mannkal Economic Education Foundation Library), November 26, 2009, 3-4
 Found in http://www.investopedia.com/terms/s/speculation.asp, referenced 3/30/2014
Now What Do You Think?
Which economic philosophy do you believe is mostly responsible for America's Economic Based Recessions and Depressions
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