Thursday, September 9, 2010

Great Depressions

America’s Biggest Banking Bubbles


The Panic of 1873

The Panic of 1873 was not America’s first depression,

but it was among the most severe and it involved the

failure of the Banking system as did all of the Depressions

in American history.

A major economic reversal began in Europe and

reached the United States in the fall of 1873.

The signal event on this side of the Atlantic was

the failure of Jay Cooke and Company,

the country’s preeminent investment banking

concern. The firm was the principal backer of the

Northern Pacific Railroad and had handled most of

the government’s wartime loans.


Cooke’s fall touched off a series of events that

encompassed the entire nation. The New York

Stock Exchange was closed for 10 days. Credit

dried up, foreclosures were common and banks

failed. Factories closed their doors, costing thousands

of workers’ jobs. The volume of destitute people soon

overwhelmed the abilities of charities to function.

Most of the major railroads failed.


The public tended to blame President Grant and

Congress for mishandling the economy. The causes

were much broader, however. The postwar period

was one of frenetic, unregulated growth with the

government playing no role in curbing abuses.

More than any other single event, the extreme

overbuilding of the nation’s railroad system laid

the groundwork of the Panic and the depression

that followed. Recovery was not realized until 1878.

In addition to the ruined fortunes of many Americans,

there developed from the Panic of 1873 bitter

antagonism between workers and the leaders of

banking and manufacturing. This tension would

erupt into the labor unrest that marked the following decades.

The Crash of 1929

The Stock Market bubble of 1929 was created by

Banks making risky loans to stock market Brokers

to finance the purchasing of stocks on a 10% margin.

When prices began to fall margin accounts were

called forcing selling. Selling caused more drops

forcing more selling.


On “Black Tuesday,” October 29, 1929, the market

lost $14 billion, making the loss for that week an

astounding $30 billion. that would be

$377,587,032,770.41 today.

The banks most heavily involved in financing

stock purchasing started to fail. Of the more

than 25,000 banks in business in 1929, fewer

than 15,000 survived to 1933.

Crisis of 2007

The financial crisis of 2007 to the present

led to the “Great Recession”. It was triggered

by a liquidity shortfall in the American banking

system. Unlike the Great Depression of the 1930s

when 10,000 banks failed only about 100 failed

this time. That was a lot different from the

normal failure rate. None of the big boys failed

because the Government wouldn’t let them.

It was felt that a world collapse would result


On the other hand, a collapse did occur on Main Street.

When the Technology Bubble burst in 1999/2000 and

the Stock market bottomed in Oct. 2002, the Bush

administration went with low interest rates and

promotion of the Housing market as the way out of

that recession. The result was a loss of Standards

beginning with Mortgage Brokers , up through the

bankers all the way to the Bond securities market.

The Housing Bubble grew until it started to burst in 2006

and the financial collapse followed. The Bankers were

saved and made big bucks. Main Street ended in a

depression and 10% official unemployment.


The biggest danger for the future is that the

Financial Industry is taking an ever increasing

share of the Gross Domestic Product in our economy.

It is partly because it takes an ever increasing

amount of capital to finance production of

goods & services and the money necessary to

support our credit economy. It is also true that

big money people find it is the easy way to shift

money from the working class to the accumulators

of wealth. That makes us more vulnerable to

financial bubbles and disaster to the middle class.

Our next big Governmental challenge is to take

money control away from Private Finance Institutions

and place it in the hands of the people. It is time

the Government owned the Federal Reserve System

and not the Big Banks. Greed should not be the our

path to a better future.–2010

Copyright © William Hodge 2010

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