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June 2022 marks the 250th anniversary of the outbreak of the 1772-3 credit crisis. Although not widely known today, this was arguably the first “modern” global financial crisis in terms of the role that private-sector credit and financial products played in it, in the paths of financial contagion that propagated the initial shock, and in the way authorities intervened to stabilize markets. In this post, we describe these developments and note the parallels with modern financial crises.
The panic of 1907 was among the most severe we’ve covered in our series and also the most transformative, as it led to the creation of the Federal Reserve System. Also known as the “Knickerbocker Crisis,” the panic of 1907 shares features with the 2007-08 crisis, including “shadow banks” in the form high-flying, less-regulated trusts operating beyond the safety net of the time, and a pivotal “Lehman moment” when Knickerbocker Trust, the second-largest trust in the country, was allowed to fail after J.P. Morgan refused to save it.
In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief from rising real debt burdens through higher prices. The U.S. government made a tentative step in this direction with the Sherman Silver Purchase Act, an 1890 law requiring the Treasury to significantly increase its purchases of silver. Concern about the United States abandoning the gold standard, however, drove up the demand for gold, which drained the Treasury’s holdings and created strains on the financial system’s liquidity. News in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures.
It always seemed to come down to railroads in the 1800s. Railroads fueled much of the economic growth in the United States at that time, but they required that a great deal of upfront capital be devoted to risky projects. The panics of 1837 and 1857 can both be pinned on railroad investments that went awry, creating enough doubt about the banking system to cause pervasive bank runs. The fatal spark for the Panic of 1873 was also tied to railroad investments—a major bank financing a railroad venture announced that it would suspend withdrawals. As other banks started failing, consumers and businesses pulled back and America entered what is recorded as the country’s longest depression.
Wall Street in the late 1860s was a bare-knuckles affair plagued by robber barons, political patronage, and stock manipulation. In perhaps the most scandalous instance of manipulation ever, a cabal led by Jay Gould, a successful but ruthless railroad executive and speculator, and several highly placed political contacts, conspired to corner the gold market. Although ultimately foiled, they succeeded in bankrupting several venerable brokerage houses and crashing the stock market, causing America’s first Black Friday.
When the U.S. Civil War broke out in 1861, cotton was king. The southern United States produced and exported much of the world’s cotton, England was a major textile producer, and cotton textiles were exported from England around the world.
On the crisp morning of January 24, 1848, James Marshall, a carpenter in the employ of John Sutter, traveled up the American River to inspect a lumber mill that Sutter had ordered constructed close to timber sources.
Money was plentiful in the United Kingdom in 1842, and with low yields on government bonds and railway shares paying handsome dividends, the desire to speculate spread—as one observer put it, “the contagion passed to all, and from the clerk to the capitalist the fever reigned uncontrollable and uncontrolled” (Francis’s History of the Bank of England).
Thomas Klitgaard and James Narron Correction: This post was updated on May 8 to correct the book title and spelling of the author’s name in the fifth paragraph. We regret the error. President Andrew Jackson was a “hard money” man. He saw specie—that is, gold and silver—as real money, and considered paper money a suspicious […]
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
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