The History of Financial Panics

By Martin A. Armstrong

Throughout time, the economy of mankind has swung back and forth between some fantastic periods of prosperity and deep dark depressions. It is our failure to understand this mechanism that often drives the politics of the world also between two extremes of totalitarian regimes and communism to periods of enlightenment and democracy. What is most misunderstood is that the economic swings between two extremes are the source of progress itself. For example, the devastation of OPEC, which forced crude oil prices sharply high during the 1970s, sparked a steep recession and a 40% decline in the stock market while it unleashed a new wave of innovation to find alternative energy sources. Despite the Industrial Revolution, 40% of the civil work force was still employed in agriculture in 1929. As horrible as the Great Depression was with unemployment rising to 25%, this economic disaster forced labour off the farm and into the manufacturing-base where it began to acquire different skills. By 1980, agricultural employment fell to merely 3% of the total civil work force as innovation brought higher productivity and machines to the farmland in America. It was the Panic of 1907 that lead to the creation of the Federal Reserve and a central banking system in the wake a massive bank failures due to cash drains that headed west to settle insurance claims. Senate investigations lead to a better understanding of regional disparities within any economy and thus a 12 branch Federal Reserves system was established to smooth the regional cash flows problems that resulted in temporary shortages of cash causing bank failures.

Each and every Panic in history has created some innovation within the economy as well as the political world. Those who believe that we must eliminate all economy downturns fail to understand that such downturns are the very engine of progress. Trying to create utopia runs the risk of reducing innovation and progress within society as a whole. Human nature is simply content to keep things as they are as long as life is good. Only when the economy declines do we find society demanding change, which in turn sparks innovation and progress.

It is vital that we understand this natural mechanism that drives the economy of mankind. We must avoid at all costs attempts to create perpetual utopia for it is as unattainable as the quest to end the aging process. Financial panics are an important component of the economy driving what is more commonly referred to as the business cycle. We must realize that recessions and depressions are NOT some disease that can be eradicated by another new law. Like viruses that mutate to defeat man’s latest antibiotics, the economy is always evolving in its own strange way. Labour unions try to prevent evolution most often by opposing innovation that would result in what they see as a loss of jobs. However, what labour fails to understand is that it cannot stand in the way of progress and innovation. The shipping unions of New York City tried to ban container shipping because it took fewer workers to unload the cargo. The end result: ports emerged in New Jersey and elsewhere and NY ports are no more. Labour must understand that it cannot oppose innovation but only embrace it or risk total elimination. Labour must strive to keep up with changing technology so that its skills suddenly do not become obsolete over the span of a few decades. The ultimate survival of the individual within the economy depends upon his willingness to increase his personal knowledge and skills. Like an old car, labour’s value depreciates within the economy whenever it remains stagnant. Jobs that are mainly physical labour are the most vulnerable to progress and the first to suffer.

There have been numerous panics since the dawn of organized economic activity. Even though we pride ourselves as being the most intelligent species on this planet, the scope of our knowledge as a society leaves a lot to be desired. Merely reviewing the financial panics in history lends credence to the old adage that history repeats. But this same adage can also be restated as “man never learns from his past mistakes.”

In the heat of panic, society seeks the cause. We try to reduce everything to a single one-line explanation so we can quickly pass a new law to eradicate this experience from posterity. But as time moves onward, the next boom always comes to an end followed by yet another financial panic. Although the degree of such panics differs from time to time, as is the case with all boom periods, the root causes are merely a minor variation of a standard set of circumstances. The particular focus might also shift from real estate on one panic to stocks or commodities on the next. It will even shift on a global basis depending upon where capital has concentrated, such as the case in Japan in 1989, the US in 1987 or gold in 1980.

To understand the nature of panics requires a global and broad perspective. It is a common threat which runs through each panic and its cause is simply due to an over-concentration of capital into one sector or one nation that leads to an over-valuation. The study offered here takes that view and in the conclusion we hope that you see the common threat which ties all such panics together as a natural occurrence which mankind must come to respect as a law of economics.

Ancient Panics
17th & 18th Centuries
19th Century
20th Century