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A History of Market Panics
Happy Sunday, everyone! Today’s newsletter takes a look back at the history of U.S. market panics from 1792 through 1907.
Part I: The Panic of 1792
Part II: The Panic of 1819
Part III: The Panic of 1825
Part IV: The Panic of 1837
Part V: The Panic of 1857
Part VI: The Panic of 1866
Part VII: The Panic of 1873
Summary:
One of the main drivers of railway panics in the 19th century stemmed from the nature of their financing. Constructing railway lines was a very costly endeavor, and provided no revenue in the short-term. It is expensive to build a railway, and the railway can’t make money until the railway is built. Not great. From the perspective of an equity investor, railways were not a particularly attractive business model until construction had ceased and revenue started flowing.
For this reason, many railroad companies in the 19th century relied upon loans and bonds for financing their operations. In a survey of 408 railways in 1872, The Commercial & Financial Chronicle found that only 159 of 408 (39%) railroads had issued equity. Within the 159 that had issued equity, only 6% of railways had equity that actively traded on the NYSE.
Railway financing became problematic when railroads became unable to repay their debts or defaulted on their bonds, which was all too common due to the large up-front construction costs and no revenue.
Part VIII: The Panic of 1882
Part IX: The Panic of 1907
Missed last week’s article? Catch up here!