A History of Financial Panics in the U.S.

In each case, the documents stored away for safekeeping — whether a promissory note or a bill of exchange, bank draft, or railway bond — were viewed as assets by financial intermediaries: merchant banks, banks of deposit, brokers, moneylenders, and insurance companies.Other financial intermediaries involved may be unfamiliar — the Federal Land Office, New York wholesalers, midwestern railways, and Albany insurance companies, among others — but in each case these financial intermediaries convinced themselves that the financial instrument they had created was sophisticated enough to protect them from consumer default. And in each case the complex chain of institutions linking borrowers and lenders made it impossible for lenders to distinguish good loans from bad.

In those crashes in America’s past, perhaps a repo man in a Dodge Dart with a million gallons of gas could have visited every debtor, edged his way in, and decided who was good for it. But lenders have neither the time nor the capacity to act with the diligence of a repo man. Instead, lenders (let’s agree to call all of them banks) try to unload the debts, hide from their own creditors, go into bankruptcy, and call on state and federal institutions for relief. But banks, as we will see, have routinely overestimated the collateral — the underlying asset — for the loans they hold. When those debts go unpaid or appear unpayable, banks quickly withdraw lending; the teller’s window slams shut. As banks suspend lending, a crisis on Wall Street becomes a crisis on Main Street. Money is tight. Loans are impossible: crash.

Besides exploring what caused these panics, I’ll consider here what changes these panics caused. Unlike Karl Marx, I do not believe that all human actions are dictated by economic catastrophes, but it turns out that panics have changed a lot of things in American history. Marx predicted that workers and farmers would organize in crises. In fact, they usually formed unions during economic booms. Unions like the Brotherhood of Locomotive Engineers, the Knights of Labor, and the American Federation of Labor, for example, all organized during financial upswings.

When busts came, the rules of politics changed as strong political figures emerged who courted farmers, artisans, sailors, and soldiers burned by financial disaster. Many Americans switched parties, since the people in power usually took the blame. Thus in 1793 a political faction appealed to artisans and farmers hurt by that panic; they organized a new party. Labeled “Democrats” by their opponents, they had obtained almost complete hegemony by 1800. In the aftermath of the financial downturn of 1819, the Democratic Party splintered, with the Jacksonian wing ultimately absorbing those with concrete grievances about the economy. After the panic in 1837 wrecked Jackson’s party and boosted the newly formed Whigs, the seesawing continued: The 1857 panic caused northern and especially midwestern voters to abandon the Democratic Party for the Republicans, while the crash of 1873 led voters back to the Democrats. After 1893, the wind shifted again as many voters blamed Democrats for hard times. At the same time, both parties saw reform wings within their ranks build a movement called Progressivism. Finally, in 1929, many traditional Republican voters abandoned their party, while a divided Democratic Party found a common theme in reform. The story of American financial panics is the story of politics.