As I write this, the U.S. stock market is bouncing around from its low of the year, having lost 40 or 50 percent of its value, depending on which minute you look at it. That problem wouldn’t be so remarkable if it were not occurring at a point in our history when more than half of the American population is connected to the stock and bond markets through savings plans or direct investments and when financial institutions are being held together by governmental baling wire and carmakers are teetering on bankruptcy and homes are declining in value and the current generation of retiring Americans has proved to be among the most profligate borrowers and worst savers in history. Like the USSR in the 1980s, we appear to be taking an unexpected turn toward a different sort of government and economy.
Despite this congeries of problems, what is happening now is hardly unique. In the history of the United States, there has been no single period above fifteen years that has been free of severe recession, panic, depression or major war, all of which have been connected to some larger array of persistent problems and many of which seemed unsolvable at the time. People often comment without much sense of the past: for example, for months we’ve been hearing that today’s downturn is much worse than previous ones due to the fact that the world’s economies are for the “first time so connected.”
In 1797, the Western nations were already connected enough that a severe deflation in England, caused in part by England’s war with France, crossed the [End Page 5] Atlantic, triggering a similar deflation in the newly independent United States. Philadelphia merchant Robert Morris had been the minister of finance for the United States during the Revolutionary War. He had both lent money from his own fortune and scared up millions of dollars from Europe for Washington’s army. After the war, this financial genius invested $333,000 of borrowed money to purchase for himself a vast chunk of western New York State. He was unable to pay it back due to the English-influenced deflationary spiral, which flattened the value of U.S. real estate. Morris was arrested and condemned to the Prune Street prison in Philadelphia, where he would have died if Congress hadn’t passed the bankruptcy bill three years into his sentence, partly to get him out of jail.
So remember—the guy who paid for the American Revolution went broke in real estate speculation, inspiring the bill that will keep you out of jail when you go broke. Be happy.
That was just the beginning of America’s economic ups and downs. Our first depression occurred in 1807, a seven-year doozy partly caused by the Embargo Act. President Thomas Jefferson pushed the passage of this act to punish the British for harassing our shipping and impressing our sailors for England’s war against France. Unfortunately, the United States then suffered much more, with our exports decreasing by 75 percent. We entered into a second war against Britain and remained an economic basket case for two years beyond the time that its soldiers burned the Capitol and White House.
The strain on banks and decline of gold and silver reserves came back to haunt our young country only five years later, causing the Panic of 1819–1824. Banks were forced to trade in paper obligations of declining value, leading to bank runs and failures, a drop in prices, again including real estate, bankruptcies and widespread unemployment. That one lasted five years.
Following that was a series of panics, each of which happened about thirteen years after the conclusion of the previous one, beginning in 1837, 1857 and 1873. All of them were set off by a combination of similar events: the failure of banks or major insurance companies, lack of confidence in currencies, speculative bubbles in certain areas of the economy, such as railroads, and recessions in Europe. The so-called Long Depression—called the Great Depression until a greater one occurred—overlapped the last of those three panics, lasting from 1873 through 1896. It...