Thursday, April 17, 2008

The Panic of ‘73

This cartoon appeared in Harper's Weekly, Oct. 18, 1873 (from the Library of Congress):

The caption reads:
“Cartoon showing Pres. Grant helping female personification of America out of the wreckage of Wall Street, saying ‘I am glad to see that you are not seriously hurt. The houses in this 'Street' have been shaky and on false bases for a long time’.”
This is another entry in the “The More Things Change” file ... The Panic of 1873 was a “severe nationwide economic depression” caused (in part) by the unintended consequences of short-sighted federal monetary policy. Congress moved the U.S. from a silver- and gold- backed currency to a gold-only backed currency. The move triggered a national sell-off in silver positions and led to the demise of at least one well established banking house (Jay Cooke and Company).

The parallel is not exact, of course, but the recent downturn in the housing and credit markets has arguably been exacerbated by the easy money policy of the Fed: by keeping interest rates low, the Fed increased the supply and thereby drove down the price of credit, leading lenders to lend more and borrowers to borrow more (since both lending and borrowing had become comparatively cheap).

And then there’s the byline of this November 3, 1907 New York Times article explaining the Panic of ’73:
“It was Then the Era of Paper Money, So That the Great Credits Which Were Created Had No Currency Basis.”
‘Nuff said.


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