From public opinion to monetary policy, recessions have shaped how our nation views investments, risk, and the role of government. Most people can remember the lasting effects of the late 90’s tech bubble and the Great Recession, but there have been many other economic downturns in U.S. history that pre-date modern memory. This 3-part series will explore the catalysts for some of the most influential recessions in U.S. history, steps taken to repair the economy in their wake, and how these events changed the nation. Click the following links for Part 2 – Mid-20th Century or Part 3 – The Modern Economy in this series.
Keep in mind that recessions don’t occur in a bubble. Each economic contraction is influenced by the politics and people of the time – sometimes in conjunction with unforeseen shocks to the system. This article explores the earliest recessions in our nation’s history, from the founding of the country up to the Great Depression. Be sure to follow ADM on LinkedIn, Twitter or Facebook so you don’t miss the remaining articles in this series!
The Panic of 1797
In the newly formed U.S., land speculation was a popular venture following the American Revolution. During this time, investors relied heavily on European investments to make a profit. When foreign investment dwindled, the first recession took place in the United States.
In the late 1790s, The French Revolution tied up most of the capital in France, Great Britain, and other European countries. Consequently, European investors had little money available to fund American land development. To combat the lack of funding, speculators began issuing their own notes to fund their investments. This commercial paper was often backed by claims to land in the Western U.S. Unfortunately, much of that land was of poor quality and titles were often unclear. These limitations decreased interest from the remaining foreign investors.
Compounding the problems of poorly secured commercial paper, the U.S. credit system was disrupted by banking issues in England in 1797. This put pressure on American banks and hastened the collapse of commercial paper issued by land speculators. Some of the biggest land speculators were forced to declare bankruptcy. Unpaid debts from the bankrupted speculation businesses resulted in hardships for investors and creditors, both foreign and domestic. Many businesses, especially in Eastern port cities, were shuttered due to investment losses and strain in international trade.
The Panic of 1797 forced Americans to evaluate their dependency on foreign investments and exposed the interconnectedness of American and European banking systems. It also paved the way for the American legal system’s handling of bankruptcy cases.
The Panics of 1819 & 1837
In the early 1800’s there were a few notable incidents that included runs on banks and rampant bank failures. In 1819, the banking system experienced turmoil that lasted until 1821. During this crisis, the Second Bank of the U.S. began reducing the credit it gave to state charted banks. The end result was many farmers losing everything. In addition, during the panic of 1837, 343 out of 845 U.S. banks closed entirely and another 62 banks partially failed.
These 2 events were the result of a flawed banking system in its infancy, with too much dependence on foreign activity. The 1819 event was considered a catalyst for Andrew Jackson closing the Second Bank of the United States in 1933. President Jackson’s policies during this era also earn partial credit for the following Panic of 1837.
The Panic of 1857
In August 1857, some 60 years after the first economic crisis, the New York branch of The Ohio Life Insurance and Trust Company failed due to embezzlement, and eventually, the entire organization collapsed. In response, depositors across the country began withdrawing funds from banks and selling stocks and bonds – fearing a collapse of the entire banking system. Attempting to prevent runs on their banks, many bankers restricted withdrawal activity. Despite the restrictions, panic ensued along the east coast and many banks collapsed when they were unable to meet withdrawal requests.
After the initial panic, an economic contraction took place which lasted 18 months and resulted in significant job loss, decreased capital investment, and a decrease in commerce. Over 5,000 businesses failed within a year and unemployment rose considerably. The effects of the ensuing recession were felt across Europe, South America, and Asia, and this event became known as the first worldwide economic crisis.
To make matters worse, the SS Central America sank in September of 1857 while carrying a large shipment of gold to the eastern U.S. from banks in San Francisco. During this time, bank notes were still backed by the gold standard, so the loss of the gold shook public confidence further.
In December, President James Buchanan announced his strategy for dealing with the crisis: reform not relief. This strategy meant that the federal government could not directly provide relief to citizens. Instead, Buchanan encouraged states to enforce minimum reserve requirements for banks and to revoke charters for banks that suspended specie payments. Buchanan believed that the Constitution did not allow for a national bank, and his policies were intended to work within the framework of state’s power over banking regulation.
The Buchanan administration instead proposed that the Treasury sell revenue bonds for the first time since the Mexican American War, and in 1857 a bill was passed which reduced tariffs to facilitate international commerce. The reduction in tariffs negatively impacted northern businesses and exaggerated the disagreements between the northern and southern states. This recession did not entirely ease until the Civil War.
The Panic of 1873 and The Long Depression (1873-79)
Banking firm Cooke & Company collapsed in September 1873 after overextending itself buying railroad bonds that proved difficult to market to investors. When news of the company’s failure spread, equity markets plunged. The panic led many depositors to remove their funds from banks that were already strained from the Great Chicago Fire and the Great Boston Fire. A chain reaction followed that caused many businesses to collapse. Over the next two years, 18,000 business failed, and by 1876, unemployment reached a high of 14%.
Railroads were hit particularly hard during this time, as a total of 89 were shuttered. Rampant speculation had inflated the values of railroad companies after the Civil War and many of the investors were European. When European stock markets crashed in 1873, railroad valuations also tumbled. Then, domestic bank failures and negative investor sentiment further cut into railroad capital. In the wake of the banking crisis and railroad failures, wage cuts and poor working conditions led to railroad strikes so violent that federal troops had to be deployed.
Congress sought to ease monetary policy in 1874 by adding money to the economy and issuing Greenback bonds but the bill was vetoed by President Grant. This effort sought to calm the staggering effects of the economic crisis. However in 1875, Congress moved in the opposite direction and passed the Resumption Act which forced the Treasury to retire Greenbacks and reinstate the gold standard.
This economic downturn was so profound and long-lasting that it was later called the Long Depression. It was also called the Great Depression until the 1929 depression overshadowed it and claimed the name. The Long Depression lasted until 1879.
The Silver Panic 1893
The Sherman Silver Purchase Act of 1890 forced the U.S. Treasury to purchase large amounts of silver per month at below market value prices. At the time, American currency was backed by both silver and gold. The widespread purchase of silver caused the reserves of gold in the U.S. treasury to dwindle. When gold reserves in the U.S. Treasury fell to about $100 million from their previous $190 million, fears arose that the U.S. would no longer be able to convert bank notes to gold.
Later in 1893, the Philadelphia and Reading Railroad failed, feeding fears of a market collapse. Between January and July 1893, over 3,400 businesses declared bankruptcy including several railroads. During this time, Unemployment rose above 17% while industrial production fell by over 15%.
The Sherman Silver Purchase Act was repealed in October 1893. Gold inflows from Europe eased the panic but the recession continued until the summer of 1894. The effects of the crisis lingered, and the economy did not return in full force until 1897.
The Panic of 1907
The Panic of 1907 ensued when two bank managers, Heinze and Morse, suffered huge losses while attempting to corner the market for copper. After their losses, depositors lost faith in the banks associated with these men and quickly moved their funds to other banks. The New York Clearing House stepped in and declared the banks solvent but removed the existing management. The Clearing House also offered loans to the banks to keep them afloat.
Trust companies that were associated with Heinze and Morse soon fell under public scrutiny as well. Knickerbocker Trust, a large trust company in New York, faced a slew of withdrawal requests from depositors. Trust companies differed from banks and were not a part of the Clearing House Association, and therefore did not have access to the bailout that the association had provided to the banks. When Knickerbocker suspended operations, a financial crisis ensued.
The New York Clearing House Committee formed a panel to facilitate the issuance of clearing-house loan certificates to increase liquidity in the financial markets. J.P. Morgan also stepped in and facilitated credit transactions between financial institutions and brokers. The New York Clearing House banks restricted the convertibility of deposits into cash. This led to a cash premium and a corresponding influx of gold from abroad – which helped to curb the effects of the panic.
The results of the financial crisis were felt throughout the economy. Industrial output fell by 17% in 1908, but while the results of the crisis were severe, they were also short-lived. Due in part to the actions of the Clearing House Committee and J.P. Morgan, the economy recovered in just over a year. This crisis and the strategy for mitigating it became the basis for the Federal Reserve Bank.
Commonalities in Early Recessions
The recessions in early U.S. history share some common features, both in terms of causes and effects. The catalyst for each of these recessions was related to the failure of a business(es) or a sector(s) of the economy. This is a trend that is still seen today. When an important business sector contracts dramatically, the entire market is affected due to the interconnectedness of businesses within an economy. In addition, panic over a failing sector of the economy can dramatically change investor behavior.
Both early and modern recessions are characterized by increased unemployment and decreased industrial output, but modern government has more tools available to combat the effects of these economic contractions. Learn how these tools were developed and utilized in Parts 2 and 3 of this series. Part 2 will explore recessions in America from the Great Depression through the 1970’s, and Part 3 will cover modern times.
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