Introduction
When the United States emerged from the Civil War, the divisions within its economy showed the reason why the South lost the conflict. Because of the industrialization that had taken place in the North in the first half of the nineteenth century, that side was able to develop materiel more quickly – and to get it to the men on the battlefields where they needed it with more rapidity. The South, on the other hand, was still mostly an agrarian society. While this agrarian dream would fire the imaginations of poets from Dixie well into the twentieth century, it also meant that the economy in the South would grow more slowly than its Northern counterpart. The outcome of this difference was a significant gap in opportunity. Even today, the differences between North and South, from an economic perspective, reflect that gap which was present long before the Confederate seizure of Ft. Sumter, South Carolina, and which remained at the signing of the surrender at Appomattox.
There have been many crucial events in the history of the American economy since the end of the Civil War. While the most well-known may well be the Great Depression that began in 1929 and ran, at least in terms of real unemployment, until the mobilization that began after the Japanese attack on Pearl Harbor in 1941, there have been other ups and downs in the nation's economy that have had significant effects on the prosperity of the American people, beginning with the Depression of 1873 and ending with the financial upheavals of 2008. The interactions between speculation and regulation have, in a large part, been the primary influences on the ability of Americans to realize their aspirations.
In the United States, the railroad firm of Jay Cooke and Co. went into bankruptcy in 1873, which was the symbolic beginning of a depression that would last for six years. Sometimes called the Long Depression, the panic initially began when Germany decided to come off the silver standard after the Franco-Prussian War. This caused a fall in silver worldwide, and the first financial failures began to appear in Vienna; however, they swiftly began to spread throughout Europe and North America. In the United States, the first response to the changes in the silver market was the Coinage Act of 1873, which moved the country from a mixed gold and silver standard to a de facto gold standard. The largest effect of this change was that the government no longer would set a statutory price for purchases of silver. Silver prices plummeted, which devastated mining interests in the West. However, the change also shrank the available money supply, spiking interest rates. The American monetary policy was now seen as unstable, which led investors to look more dubiously at long-term bonds issued by the government. The railroad industry, which had been in a boom, found itself unable to expand; particularly, Jay Cooke & Co. was unable to sell millions of dollars in bonds for the Northern Pacific Railway, and rumors began to swirl that the company's credit had no value. As a result, the entire firm declared bankruptcy on September 18, 1873 (Barreyre, 2011). This started a domino effect of bank failures, leading to the temporary closure of the New York Stock Exchange. 115 railroads had failed by September of 1874; in total, 18,000 businesses closed by the end of 1875, at which time unemployment was at 14 percent. The depression did not lift until the beginning of the first major wave of immigration that began in 1879 (Barreyre, 2011).
The Panic of 1893
It did not take long for shaky speculation and overbuilding in the railroad industry to rattle the American economy once again. The end of the Long Depression had been followed by a period of considerable economic growth in the 1880's, driven mostly by speculation in the railroads. Lines were built to excess and ultimately amassed expenses that revenues could not cover. A proliferation of new mines created a glut of silver that the market could not absorb, and so the price of silver fell once again. Cotton and wheat farmers had the problem of low prices. The Sherman Silver Purchase Act of 1890 had required the government to buy silver, driving up the price, but one of President Cleveland's first priorities in the 1892 election had been to have this law repealed, and so there was shakiness in the silver market upon his inauguration (Hoffman, 1970). The first pillar to fall was the Philadelphia and Reading Railroad, which declared bankruptcy in February, 1893. The Northern Pacific, Union Pacific, and Atchison, Topeka & Santa Fe Railroads all failed; all together, 500 banks and more than 15,000 companies would collapse, leading to unemployment as high as 19 percent. The disappearance of savings in failed banks led many in the middle class to abandon their mortgages; it was these vacant new homes that led to the idea of the empty haunted house in the American imagination (Hoffman, 1970). The depression persisted until the Klondike gold rush and the election of Republican President William McKinley in 1897.
The Panic of 1907
The growth that had begun with the finding of gold in the Klondike foundered in 1907, when what was known as the Knickerbocker Crisis was first marked by the fall of the New York Stock Exchange by approximately 50 percent from its peak in 1906. When banks in New York City began to restrict market liquidity, because of their own losses from their attempt to buy up all of the stock of the United Copper Company, the result was runs on banks in the city, leading to runs on affiliated trusts and banks. Late in 1907, the Knickerbocker Trust Company, which had been the third largest trust in the city, collapsed. Regional banks pulled their reserves from banks in New York City, and people across the nation responded likewise, pulling their own money from their local banks. At the time, there was no central bank in the United States to keep the market liquid, and so financier J.P. Morgan convinced other bankers in New York City to join him in pledging considerable amounts of their own money to suppot the banking system (Gorton, 2009). In 1908, Senator Nelson Aldrich started and led a commission to delve into the causes of the crisis and to suggest a set of solutions, one of which was the establishment of the Federal Reserve System (Herrick, 1908).
The Recession of 1973
Beginning with the mobilization of industry to provide the American military with the equipment it would need to assist the Allies in defeating the menace of the Axis powers, the American economy would grow steadily from the first arrivals of factory orders until the early 1970's. The military establishment became a major part of the American economy, and the resulting boom led to major changes in the American way of life. When the economy began to stagnate in 1973, the problems took on a different form; in previous panics, the currency had deflated with high unemployment. This time, though, the currency experienced inflation at the same time when unemployment was going up.
Two simultaneous events happened to bring about this particular recession. During World War II, 730 representatives from all 44 of the Allied countries had met in Bretton Woods, New Hampshire, for the UN Monetary and Financial Conference. The result of this meeting was the Bretton Woods system for monetary management; such institutions as the International Monetary Fund (IMF) were established as a result (Hull, 1948). Each country was allowed to maintain an exchange rate by linking its own currency to the American dollar, and the IMF was permitted to address short-term payment imbalances. However, when the United States left the gold standard in 1971, this ended the Bretton Woods system, sending many currencies into a free float as far as value (Hudson, 2003). When the Arab members of OPEC declared an oil embargo in 1973, to punish the United States for assisting Israel when Syria and Egypt had attacked, oil prices spiked and a recession ensued. New competition in the steel industry led to a crisis in that industry, leading to a restructuring in the United States in Europe. When the stock market crashed in 1973 and 1974, the recession was obvious. The recession saw unemployment peak at 9 percent, and it would not end until the spring of 1975.
The Recession of the early 1980’s
The upturn of the American economy that began in 1975 failed to eliminate one of the problems – high inflation. This persisted into the early 1980’s, when the Federal Reserve decided to use a contractionary monetary policy to rein in inflation. Unemployment had dropped from that high of 9 percent back down to 5.6 percent in May, 1979, but it started rising again as 1979 turned to 1980. Ronald Reagan was able to capitalize on what he called the “misery index” (adding the unemployment rate to the rate of inflation) in defeating incumbent Jimmy Carter in the 1980 Presidential election. However, unemployment remained high through the end of 1982. Rockford, Illinois, reached a peak unemployment of 25 percent (Ptashkin, 2010); overall, the national rate peaked at 10.8 percent at the end of 1982. The contractionary monetary policy involved slowing the rate at which the money supply would grow and increasing interest rates. The prime interest rate peaked at 21.5 percent in the summer of 1982. Coupled with a wave of bank deregulation, this led to an epidemic of lending to borrowers who did not have any business taking out the mortgages they had. By the end of 1982, the Federal Deposit Insurance Corporation (FDIC) had to spend $870 million to buy bad loans just to help banks stay open. It was only the increase in deficit spending and the lowering of interest rates that led to a slow economic recovery, which happened just in time to cement President Reagan’s re-election in 1984 (King, 1988).
The Recession of 2009
This particular recession is still plaguing much of the world, given limited prospects for global growth in 2013 and 2014. However, as with many of the other economic panics that have happened since the Civil War, the specter of unregulated speculation led to financial calamity. An unsustainable housing bubble in the United States developed through the availability of loans that were not sustainable because of the limited resources of the borrowers. Once this bubble began to burst, and banks began to wobble under the weight of all of the bad loans, financial institutions around the world felt the aftershocks. Of particular importance in this crisis were the automated valuation and underwriting systems that the lending giants Freddie Mac and Fannie Mae created in the United States, leading to a considerable relaxation of standards for lending throughout the mortgage industry (Fried, 2012). Estimates of the holdings of these substandard real estate loans, as of June 2008, were in excess of $2 trillion for each of those agencies. Unemployment remains a problem, as does the available of liquid cash for business development. Also, most of the Western governments have engaged in considerable deficit spending to boost growth – with limited results so far. The outlook is challenging, at best, for the American government going forward.
Of particular concern is the fate of the middle class in the United States. In 1971, the middle class was 61 percent of the population; in 2011, it was 51 percent; between 1970 and 2010, the upper class’ share of the national income rose from 29 percent to 46 percent. The middle class share dropped from 62 percent to 45 percent (Tankersley, 2012). This means that there is less of the total income for more people. This makes it harder for the lower and middle classes to amass wealth and attain social mobility. People under 35 are 68 percent less wealthy than the same group was in 1984; those who are over 55 are 10% richer (Tankersley, 2012). A great deal of this consolidation has happened since the Great Recession began; in 2007, the richest 20 percent of households had 85 percent of all wealth; in 2009, that number rose to 87.2 percent. The top one percent controlled 34.6 percent of all wealth in 2007; by 2009, that number had risen to 35.6 percent. For the bottom 80 percent, their share of the wealth fell from 15 percent to 12.8 percent in that same time period (Tankersley, 2012).
Conclusion
Whether it was the collapse of railroads in the Old West or the epidemic of foreclosures that happened just a couple of years ago, the same problems seem to bring on recession and depression for the American economy. When there is growth, the business interests appear to want to amass as much wealth as possible. Working in as much freedom from regulations as possible, these interests build up a considerable amount of opportunity, whether it’s in the form of railroad lines, new home mortgages, or other investable items. However, when it is obvious that matters have become too liquid, the bubble bursts, and those who have not already cashed out are headed for disaster. Then, regulations are drawn up and put in place – but those same interests start pecking away at those regulations, claiming that the current atmosphere of growth means that there is little risk. Then a new bubble grows, waiting for the inevitable explosion. It would seem that the financial interests could find a happy medium between the absence of regulation – and protection – and restrictions on growth. Hopefully that is the lesson that the American public will take from this latest recession, once it finally comes to an end.
Works Cited
Primary Sources
Herrick, M. (1908). The Panic of 1907 and some of its lessons. Annals of the American Academy of Political and Social Science 31(2): 8-25.
Hull, C. (1948). The memoirs of Cordell Hull: Vol. 1. New York: Macmillan.
Secondary Sources
Barreyre, N. (2011). The politics of economic crises: The Panic of 1873, the end of Reconstruction, and the realignment of American politics. Journal of the Gilded Age and Progressive Era 10(4): 403-423.
Fried, J. (2012). Who really drove the economy into the ditch. New York: Algora Publishing.
Gorton, G. (2009). Clearinghouses and the origin of central banking in the United States. The Journal of Economic History 45(2): 277-283.
Hoffman, C. (1970). The depression of the nineties: An economic history. Westport, CT: Greenwood Publishing.
Hudson, M. (2003). Super imperialism: The origins and fundamentals of U.S. world dominance, 2nd edition. London: Pluto Press.
King, S. (1988). Reagan’s mythical popularity. Psychology Today September 1988.
Ptashkin, S. (2010). Rockford unemployment: Better off now or in the 1980s? WREX 17 March 2010. http://www.wrex.com/Global/story.asp?S=12158573
Tankersley, J. (2012). How baby boomers destroyed the economy. Business Insider 7 October 2012. http://www.businessinsider.com/how-baby-boomers-destroyed-the-economy-2012-10
