Delanceyplace.com 9/3/09 - Panics and Crashes

In today's encore excerpt - the history of the United States has been filled with financial panics and market crashes: The Panic of 1819, the Panic of 1837, and the stock market crash that signaled the Great Depression, to name just a handful. In 1819, the end of the Napoleonic Wars brought an economic boom, and when the crash came, the Second Bank of the United States sharply curtailed its lending, greatly worsening the problem and bringing a 50-75% collapse in commodity and real estate prices. This monetary curtailment, also employed by the Federal Reserve in the early 1930s, stands in contrast to the more lenient and salutary policies pursued by the Federal Reserve during the 2008 market crisis:

"February 20, 1817, would prove the zenith of the 'Era of Good Feelings' as far as the Bank of the United States [BUS] and American enterprise were concerned. A year later, [John Jacob] Astor warned [Treasury Secretary Albert] Gallatin that redoubled speculation, goaded by the BUS, now threatened 'a general Blow up' among the state banks. A year after that, the American economy collapsed from top to bottom. ... American staple prices and land values dropped by anywhere from 50 to 75 percent; and backward the dominos fell, from ruined speculator to merchant farmer. ...

"Early in 1819, pushed by Astor and [Stephen] Girard, the bank's directors finally dismissed [BUS president William] Jones and replaced him with the South Carolinian Langdon Cheves. The new president ... tightened the screws, reducing the bank's liabilities by more than half, sharply cutting back the total value of bank notes in circulation, and more than tripling the bank's specie reserve.

"Without question, Cheves's decision to contract instinctually made sense, both in halting the runaway inflation and in doing right by his stockholders. ... Yet, for the national economy, his timing and the extent of his actions could not have been worse, ... turning what might have been a sharp recession into a prolonged and disastrous depression. Just as the bank intensified its deflationary pressure, commodity prices for American staples on the world market collapsed. Coupled with the bank's brutal deflation, the free fall of agricultural prices prevented state banks from either collecting from their debtors or meeting their obligations to the BUS--leading to a tidal wave of bank failures, business collapses, and personal bankruptcies. As the financial writer and bank critic William Gouge later observed, 'The Bank was saved and the people were ruined.' "

Sean Wilentz, The Rise of American Democracy, Norton, Copyright 2005 by Sean Wilentz, pp. 205-207