These days, Americans—New Yorkers leading the way—are, for obvious reasons, feeling panicky about the nation’s finances. To ease their anxiety, they might want to examine the past. Fiscal emergencies have marked our economic history as a nation. We’ve triumphed over every one of them—a testament to the buoyancy of our dynamic free-market system.
The first major panic occurred in 1792, at the close of George Washington’s first administration. Wall Street was then the unacknowledged seat of government; indeed, Alexander Hamilton, the secretary of the treasury, lived at the corner of Wall and Water Streets. His former undersecretary, William Duer, was widely considered the ultimate insider, and when he began to purchase banking stocks, traders, and then the public, followed suit. Buying fever rose to record levels. One newspaper ran a memorable warning in rhyme, though few heeded it:
Touched by the wand of speculation,
A frenzy runs throughout the nation;
For soon or late, so truth advises,
Things must assume their proper sizes.
When they assumed their proper sizes, the creditors who had funded all the speculation moved in. Duer unloaded his shares in the Bank of the United States, hoping to get enough money to cover his own debts, but the market kept dipping, and eventually his creditors would wait no longer. As historian Ron Chernow observes, rather than bail out his former colleague, “Hamilton had the Treasury purchase large amounts of government securities in the marketplace. By doing so, he steadied the market and also bought back public debt at bargain prices.” Hamilton led the bank to prosperity. Duer died in debtors’ prison.
Four decades later, another panic broke out, this one far more severe. President Andrew Jackson, a believer in hard currency, ordered the U.S. Treasury to accept only gold and silver in sales of public lands, not paper money, which at the time was issued by banks. By the time Martin Van Buren replaced Jackson in 1837, gold and silver shortages plagued the nation. Depositors pulled their cash out of banks, throwing the economy into disarray. Unemployment rose, farms failed, and the New York militia was called in to keep order on Wall Street. By early autumn, 90 percent of eastern factories had closed. New York Tribune editor Horace (“Go west, young man”) Greeley estimated that one-fourth of all those in trade were out of business, “with dreary prospects for the coming winter.”
The dreariness spread to almost every town and hamlet in America. There was no point in appealing to foreign bankers. A federal representative received word from a Paris-based member of the Rothschild family: “You may tell your government that you have seen the man who is at the head of the finances of Europe, and that he has told you that they cannot borrow a dollar, not a dollar.” Yet seven years later, thanks to westward expansion and the Polk administration’s banking and tariff reforms, Wall Street bounced back, and with it the nation’s economy. In time, Europeans resumed purchases of American securities.
All was well until September 1857, when the Central America, an American merchant-marine vessel carrying 30,000 pounds of gold bullion, sank in a gale off the Carolinas. A short time before, the Ohio Life Insurance and Trust Company had collapsed, following charges of embezzlement by one of its officers. News of these disasters spread rapidly, thanks to Western Union’s newfangled telegraph system. Jittery investors, domestic and foreign, began to sell off their holdings. To add to this general malaise, the Crimean War ended, and the resultant peace treaty meant that Russians could return to their farms, breaking a three-year dependence on American agriculture. As money became scarce, land expansion ceased. Stocks fell. Railroad companies suffered; some went out of business. Facing the crisis head-on, the government declared a bank holiday and acted to reduce tariffs, thereby encouraging Russia, Britain, and other European nations to increase trade with the United States. By 1859, the worst was over.
Still, the effects of this latest alarm lasted until shots rang out at Fort Sumter. And those led to feverish speculations. During the Civil War, the U.S. Treasury finally began issuing paper money, backing it not with gold but with the “full faith” of the government—credit. After the war, however, it was widely assumed that the government would back the dollars with gold. Figuring that this would require the government to acquire large quantities of gold, two unscrupulous financiers, James Fisk and Jay Gould, set out to corner the gold market. The contrast in their appearances and personalities was vaudevillian. Gould reminded onlookers of a dark, bearded ferret; Fisk gave the impression of a blonde peacock. Gould was a family man; Fisk kept his wife in Boston while he cavorted with high-priced call girls in New York. And as Hofstra University history professor Robert Sobel notes in Panic on Wall Street, “Gould was able to concoct ingenious campaigns; Fisk had the knack of knowing how to carry them out.” It was an ideal partnership.
Several times during the spring of 1869, Gould contrived to run into a speculator named Abel Rathbone Corbin, who happened to be the president’s brother-in-law. Through Corbin, Gould obtained an audience with Ulysses S. Grant and advised him to back the paper money with gold. When Grant gave no guarantees about future money policy, the partners made another contact: Assistant Treasurer Daniel Butterfield. The malleable Butterfield agreed to tip off Gould and Fisk if the government decided against the gold standard after all.
By midsummer, gold was trading at about $135 an ounce, 30 percent higher than usual. Gould began to accumulate large amounts of the precious metal, sending prices skyward. The avaricious partners hoarded their stash, waiting for still-higher prices. But when gold reached $150 per ounce, Grant sensed that something was up. On September 24, “Black Friday,” he secretly instructed the Treasury secretary, George S. Boutwell, to stop the speculation. That day, the government dumped $4 million in gold on the market. Gold briefly peaked at $160—then plunged to $138. Gould and Fisk, fast on their feet, escaped real damage. Many others, including Corbin, were wiped out. E. C. Stedman, a poet as well as a broker, summed up the situation in verse:
One Hundred and Sixty! Can’t be true!
What will the bears-at-forty do?
How will the merchants pay their dues?
How will the country stand the news?
What’ll the banks—but listen! hold!
In screwing up the price of gold
To that dangerous, last, particular peg,
They had killed their Goose with the Golden Egg!
Grant’s second administration ran into trouble, too. At first, “prosperity was written over the face of things,” remembered historian James Ford Rhodes, who lived through the period. “Manufacturers were busy, workmen in demand. Streets and shops were crowded and everywhere new buildings going up. Prices of commodities were high, demand pretty good. Everybody seemed to be making money.”
But the Gilded Age was showing signs of tarnish. In 1872, equine influenza had ravaged ranches and farms in the West. The “Great Epizootic” affected foodstuffs, dry goods, metal, lumber, manufacturing—every industry that employed horse-driven transit. Then came the Coinage Act of 1873. Formerly, the U.S. backed its currency with silver as well as gold. Now it went on the gold standard. Silver prices immediately fell off, and western mining slackened, throwing thousands of miners out of work.
In September 1873, a bank with enormous influence on Wall Street went belly-up. Jay Cooke & Company had invested too heavily in the ill-conceived and badly financed Northern Pacific Railway.
Other financial houses, similarly invested in railroads and other overpriced companies, soon began to falter, including Fisk and Hatch, which billed itself as “one of the richest and soundest in New York.” The New York Stock Exchange closed for the first time in its history and remained shut for ten days. In January 1874, hordes of angry unemployed men rioted in Tompkins Square Park, in one of the largest demonstrations in New York City’s history. In the end, 89 of the nation’s 364 railroads went bankrupt. Some 18,000 businesses had failed by 1875. Cotton mills and ironworks closed. Unemployment was rampant. Laborers, many of them Civil War veterans, wandered the countryside. Two words became commonplace: “tramp” and “bum.”
But in 1877, good weather spread across the nation. Crops were bountiful as the decade ended, and exports increased. Looking back in 1911, the New York Times reported: “Stocks began their rise in the spring of 1878, and in 1879, men of means awoke suddenly to the fact that the railroads were of value as investments after all, and a marvelous buying of securities sprang up, which electrified the financial world and led to a boom in prices.”
By now, it was clear: every boom had its bust, and good times were never forever. Then again, neither were bad times. The stock exchange thrived once more, and lenders became as common as borrowers. The new era of prosperity went on until February 1893, when the Philadelphia and Reading Rail Road abruptly declared bankruptcy. Wall Street grew nervous again, and fretful investors cut back. The economy worsened. Bank runs began. European speculators, fearing the worst, demanded payments in gold, depleting Fort Knox. Three prominent railroads—the Northern Pacific, the Union Pacific, and the Atchison, Topeka and Santa Fe—all failed.
Once again, the specter of unemployment hovered over the land, and many middle-class families defaulted on their mortgages. Real-estate values dropped precipitously. Great Victorian-style houses, a sign of prosperity only a few years earlier, now stood dark and empty. Labor unrest made things worse, as workers struck in the silver-mining towns of the West and a Pullman strike further weakened the railroads and, in turn, businesses that depended on freight deliveries.
In 1894, Ohio quarrier and labor advocate Jacob Coxey organized a march on Washington, demanding federal intervention in this latest crisis. En route to the capital, “Coxey’s Army” picked up many adherents. It also put President Grover Cleveland on edge, and when the army arrived, the Democrat had it driven from the Capitol’s lawn. Coxey, who tried to read a prepared statement, wound up in jail for trespassing. A sympathizer read his declaration into the Congressional Record, but it was a pyrrhic victory: voters, fearful of social unrest, turned right. The pro-business Republican William McKinley won the 1896 election, and he had the good fortune to be in office when the Klondike Gold Rush began. He let Wall Street go its own way with little interference from Washington, and the economy rebounded again.
McKinley was assassinated in 1901, mourned by conservatives and reviled by radicals. Anarchist Emma Goldman called the fallen leader “president of the money kings and trust magnates,” favorably comparing his assassin, Leon Czolgosz, to Marcus Brutus, Julius Caesar’s murderer. McKinley’s replacement, Vice President Theodore Roosevelt, supposedly favored “sound” business practices. But he was also notorious for impulsive decisions. Along Wall Street, a fresh worry arose: What would happen if the unpredictable power of Washington collided with the indisputable might of the world’s greatest financier, J. P. Morgan?
The answer came in 1907. That was the year of the “Bankers’ Panic,” when the New York Stock Exchange lost almost half its value. In the first months of ’07, Americans were occupied with the trial of millionaire Harry Thaw, charged with the murder of Stanford White, America’s leading architect, who had, some years back, taken the virginity of the woman who would become Thaw’s wife, showgirl Evelyn Nesbit. Few newspaper readers paid attention to the financial page. There, things seemed prosperous enough—except for Jacob Schiff’s quiet warning about the marketplace. “If the currency conditions of this country are not changed,” he told his fellow bankers, “you’ll have such a panic as will make all previous panics look like child’s play.”
Schiff was more aware of global conditions than his colleagues were. Foreign governments desperately needed capital. The Russo-Japanese War had cost Russia some $840 million, and Japan almost $1 billion. Britain had spent nearly $800 million in the Boer War. Even the short Spanish-American War had run up a bill of $165 million for the U.S. Treasury, and the San Francisco earthquake had required more millions for aid and rebuilding. With money in short supply on Wall Street—indeed, all over the world—bankers began to float long-term bonds at what they thought attractive interest rates. But investors showed no enthusiasm for these instruments. On Wall Street, a malaise grew palpable, underlined by Theodore Roosevelt’s continued “trust-busting.” Teddy’s administration went after Standard Oil, for example, indicting the company on 529 counts of illegal acceptance of rebates and fining it $29 million. However justifiable the action, Wall Street viewed it as antibusiness and expected more harsh treatment from the 26th president.
Catastrophe lay in wait. The only thing missing was a push downhill. It occurred in September 1907, when a cabal of investors vainly attempted to corner the copper market. Their covert plan had received backing from the Knickerbocker Trust Company, New York’s third-largest trust; when the plan failed in October, the Knickerbocker did, too. Other trusts followed in its slipstream. Angst ran through the city and then the country, as investors from every social stratum withdrew their savings from every sort of bank. Once again, the troubled NYSE was on the verge of crumpling.
There was no point in looking to Teddy for help; economics wasn’t his strong suit, and, in any case, he would have been suspect. Enter J. P. Morgan. The mighty banker had been semiretired, luxuriating in his great mansion on Madison Avenue and 36th Street. Now this unlikely hero, a red-nosed, scowling 70-year-old in a black three-piece suit, stepped in to rescue the United States. Working the phones, he brought wealthy industrialists into the picture, pooling their funds to bail out the remaining trusts. Morgan personally underwrote municipal bonds to save New York City and induced European bankers to replenish the money supply with foreign gold. At one point, he summoned the presidents of the city’s major trusts to his library and persuaded them to contribute $25 million to keep the stock exchange up and running. The executives had little choice; Morgan had locked them in until he got an agreement.
Roosevelt followed all this with quiet admiration; after all, he wasn’t above a little bullying himself. In the end, both sides felt satisfied. Teddy quietly ended the antitrust phase of his presidency, dropping lawsuits against various large corporations and focusing on international affairs during his remaining years in office. He even invited Morgan to dine at the White House. Meanwhile, Morgan busied himself with Episcopal Church matters and the acquisition of new works for his glorious art collection.
Wall Street took a deep breath before climbing to new altitudes after the victory of the Great War. And that was only the beginning. During the Roaring Twenties, from 1920 to 1929, stocks more than quadrupled in value. Almost everyone bought on margin, convinced that the market knew only one direction: up. A light versifier encapsulated the situation in The Saturday Evening Post:
Oh, hush thee, my babe, granny’s bought some more shares,
Daddy’s gone out to play with the bulls and the bears,
Mother’s buying on tips and she simply can’t lose,
And baby shall have some expensive new shoes!
It was a fatal miscalculation, based on wishful thinking. With shares selling at 20 and 30 times earnings, the hour of reckoning was imminent. It struck in the fall of 1929, when Black Thursday, Black Monday, and Black Tuesday left tens of thousands of investors ruined, virtually overnight. Depression quickly spread across the land. President Herbert Hoover, an engineer by training, tried to reverse the downturn with various federal ways and means. All were ineffective, the worst being the notorious Smoot-Hawley Tariff Act of 1930, which raised U.S. levies on more than 20,000 imported goods. Foreign countries retaliated, sending American trade with the rest of the world into a nosedive. The Republican Party took the hit for the Depression, and in 1932, New York governor Franklin Delano Roosevelt won the presidency in a 46-state landslide.
The 32nd president assumed office just as the radio became the prime medium of entertainment and information. During a series of “fireside chats” broadcast throughout the country, Roosevelt’s sonorities and memorable phrases reached deep into the American psyche: “The only thing we have to fear is fear itself”; “I see one-third of a nation ill fed, ill clothed, ill housed”; “When you come to the end of your rope, tie a knot and hang on.” Americans who had watched the market lose some 89 percent of its value needed such assurances.
As everyone knows, FDR’s administration initiated a series of reforms called the New Deal. They were Keynesian in philosophy—vast public spending that saddled the next generation with debt. Slowly, steadily, recovery got under way. But what sparked it? The received wisdom used to be that massive spending saved the day. But the current consensus among professional economists is very different (see “Economics Does Not Lie,” Summer 2008). In her bestselling volume, The Forgotten Man: A New History of the Great Depression, financial journalist Amity Shlaes argues that FDR’s National Industrial Recovery Act, an important component of the New Deal, actually prolonged the Depression. By wrapping businesses in red tape, discouraging competition, and subjecting wages and prices to strict control, it forcibly reduced profits. Companies reacted by cutting jobs, throwing more people into the breadlines. At the same time, Roosevelt created new political constituencies—artists and intellectuals funded by the Works Progress Administration, farmers receiving subsidies, consumers promised cheap electric power. These groups, grateful to the New Deal, guaranteed his victory in four straight elections, despite the disappointing results of his policies. It wasn’t until 1940, when the nation’s factories began to retool for the imminent war in Europe and Asia, that the economy truly revived and the U.S. came close to full employment.
Lesser panics continued to strike—the John F. Kennedy recession, the double-digit inflation of the Jimmy Carter years, and the crash of 1987 during Ronald Reagan’s presidency, when the stock market suffered the largest one-day loss in its history. Wall Street, and the economy as a whole, rebounded every time. So before President Barack Obama completely “remakes” America, as he has promised, he might benefit from a long look in the rearview mirror. Our system has proven remarkably resilient.