Are We Panicking Yet?

Investor Amnesia Course Sale!

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Imperial Finance: A History of Empires

The Panic Series

Happy Sunday, everyone! Today’s post is going to be a recap what we’ve covered thus far in the Panic Series because yesterday I was out celebrating my lovely girlfriend Maris’ 25th birthday on a boat with an open bar. Suffice it to say that it would not have been a productive day for writing about financial history.

But, to make up for my lack of new content this morning, I’ve included a sale on Investor Amnesia courses at the top of this page. We are closing in on 800 enrolled Investor Amnesia “students”. Blown away.

So, catch up on any Panic Series posts you may have missed, and I’ll be back with you next week with another look at the history of panics and crises!

1792: Insider Trading & America’s First Panic

The Panic of 1792 is a fascinating episode in America’s financial history for many reasons. Not only did this period witness the first attempted ‘corner’ in America, the creation of a quasi central bank, and an insider trading scandal involving former Treasury department officials… it also occurred at the very founding of America. This meant that unlike today, where economists can leverage prior experiences and lessons to guide their decision-making process, Alexander Hamilton and his team were navigating crises on the fly.

1819: America’s First Depression

The asset class at the heart of the Panic of 1819 was not equities, but real estate. The impetus for America’s first speculative real estate boom had a few culprits, some of which are familiar from the Panic of 1792. You may remember that in 1812, America waged another war with Great Britain (it was in this war that the White House was torched by British soldiers). Well, as with the Revolutionary War, America had borrowed heavily to finance the costs of this conflict, and found herself heavily indebted when the conflict drew to a close. Making matters worse, the large debts Jefferson had issued to execute his famed 1803 Louisiana Purchase from France were coming due to 1818.

In short, the American government needed a substantial revenue stream – and fast – to meet all of its payments associated with the War of 1812 & Louisiana Purchase.

1825: Real Bonds, Fake Countries & Speculative Mania

Gregor MacGregor had the most Scottish name imaginable, and was also deemed the ‘King of Con-Men’ by The Economist. MacGregor earned this title by finding an uninhabited piece of land off the coast of Honduras, creating a fictitious country called Poyais, and selling over a billion dollars worth of ‘Poyais bonds’ in London. He did this by misleading investors into thinking the uninhabited jungle he had found in Honduras was actually a legitimate country boasting beautiful architecture, an opera house, parliamentary building, cathedral, and more.

1837: Bank Wars & Western Expansion

Although there was support in Congress for re-chartering the national bank, President Jackson would not budge, calling the SBUS a “corrupting monster”. When presented with the bill for re-chartering the bank, Jackson exercised his veto powers, ensuring the bank’s death when its charter expired 4 years later in 1836. However, Jackson was not finished. In addition to vetoing the re-charter, Jackson took a drastic decision in 1833 to withdraw al federal deposits from the SBUS and place them in the hands of state banks. Despite having 3 years left to run in its charter, the SBUS was effectively finished in 1833.

Jackson’s decision to withdraw funds from the SBUS had significant consequences,

1857: The First Railway Panic

In 1849 there was an explosion in economic growth and westward expansion after gold was discovered at Sutter’s Mill, triggering the California Gold Rush. The scale of this expansion is underscored by the fact that over the next decade California’s population grew from 93,000 to 380,000.

A seemingly endless number of railway lines and companies were launched in this period to meet the transportation demand stemming from westward expansion. According to historian Robert C. Kennedy, more than 20,000 miles of railroad track were laid during the 1850s.

1866: Credit Collapse & Lenders of Last Resort

It was this note posted on Overend & Gurney’s door announcing the suspension of payments that triggered the Panic of 1866. In terms of monetary policy, this Panic was pivotal in the evolution of central banking. When Overend & Gurney collapsed, depositors at other banks rushed to withdraw their funds out of fear that their funds were also in danger. In response, the banks went “to the Bank of England discount office in search of funds.”

For the first time, the Bank of England acted as a Lender of Last Resort by injecting liquidity into the system, lending out £4 Million to commercial banks in just two days. The Bank of England’s actions quelled the panic and reduced its impact on the “real” economy.

1873: Insider Trading & America’s First Panic

The Panic of 1873 in American picks up largely where we left off in the Panic of 1857, with railroads at the center of yet another financial crisis. Railroads had already experienced rapid growth before 1861, but the US Civil War (1861-1865) took things to another level. From 1866 to 1873 some 35,000 miles of railway track were laid across America. In terms of their importance to the domestic economy, railroads had also become the largest non-agricultural employer.