For the first time since the late 1920s, the nation was looking into the abyss of a possible financial depression as the financial crash of 2008 unfolded. And it was distressing that so many smart people seemed to have learned so little from the nation’s economic history.
Don’t, someone plaintively wondered not too long ago, they teach history in schools of economics any more? Apparently not, or what we’re now dealing with the aftermath of would not have happened—or at least not the level of severity we experienced.
The Great Depression is only called that because it was the last catastrophic financial meltdown some of those still living can remember. The two depressions previous to that were at least as “great,” and ones previous to those were arguably more severe yet.
The Panic of 1873, for instance, created six years of economic hardship for the nation and Kendall County. The financial collapse began in Austria, spread throughout Europe, and finally arrived in the U.S. with the September 1873 failure of Jay Cooke & Company in New York caused by a railroad overbuilding bubble and unscrupulous business practices. The railroad building craze had caused unsustainable construction growth in everything from seaside docks to steel mills. When Cooke was unable to cover his construction loans for the Northern Pacific Railroad, the whole system crashed. On Sept. 20 that year, the New York Stock Exchange closed for 10 days as everything from silver mines to shipping lines went broke. Eventually, a quarter of the nation’s railroads were bankrupted.
On Sept. 25, 1873, the Kendall County Record’s Oswego correspondent hopefully noted that “The collapse of Jay Cooke & Co. and financial panic otherwise has not in the least impaired the business of this town.”
But from then on, comments about “the money crisis” and “stringency of the money” were common.
In 1877, a huge railroad strike nearly paralyzed the nation. Wrote the Record’s Oswego correspondent: “The shock of the strike caused old State Rights men to forsake their life-long principles and clamor for federal intervention; in the brains of the newspaper men it created a mighty revolution,” he wrote, adding that “The Chicago Tribune for years has had the nightmare caused by communism. One day of last week Chicago experienced a heavy shock by the collapse of her State Savings Institution. The next day the Tribune came out advocating communism, wanting the government to take care of our money; give us post office saving banks; verily things and men are changeable.”
Exactly 20 years later, another railroad bubble, combined with poor weather for Midwestern farmers and financial chicanery in mining and banking, created a second severe depression.
The Panic of 1893 officially began Feb. 23, when the Philadelphia and Reading Railroad went broke. Then in May, amidst the hoopla of Chicago’s upcoming Columbian Exposition, the city’s Chemical National Bank, whose president was a former Kendall County farmer, went broke amid charges of criminal wrongdoing.
Noted Record Editor J.R. Marshall on May 10: “A few years ago Mr. Jacob O. Curry was a farmer in the town[ship] of Bristol; later he was engaged as a grain buyer and speculator at Hinckley…he went into business at Aurora as a capitalist and financier and was instrumental in starting a national bank in that city…a year or two ago he went to Chicago to become president of the Chemical National Bank with a capital stock of $1 million. Tuesday’s Chicago papers contained the news that the doors of Mr. Curry’s National bank had closed for want of funds. Brother Curry had better come back to the Fox River valley. People out here may not be so sharp, but they are a heap sight more comfortable.”
Actually, it turned out Curry’s reach extended well into the Fox River Valley after all, where the three major banks in Kendall County apparently held significant stakes in Chemical National. The result was that all three, first the Plano Bank on Aug. 7, and followed quickly a week later by the Oswego Bank and the Kendall County Bank at Yorkville, failed. Along with them went many local and regional businesses, from the Joliet Rolling Mills to local stores and businesses.
On Aug. 23 Record Editor Marshall, clearly flummoxed and chastened by what had happened, wrote: “The newspapers of the whole country assumed the task of staying the panic by encouraging words and prophecies of better things, but their efforts were without avail. The Record stated that our business institutions were safe and conducted by safe men, and we believed firmly the statement because we had confidence in the integrity and business ability of the men. This statement was too soon followed by the failure of Mr. Henning [in Plano], then of Mr. Hall [in Oswego], followed by that of Mr. Cornell [in Yorkville]. The conclusion we have come to is that the newspapers don’t know anything about the business of banks—neither does anyone else, not even the bank examiners—and we shall make no more prognostications along business lines.”
On Sept. 6, the Record’s Oswego correspondent wrote the panic affected the whole community: “Oswego is now undergoing its full share of miseries; men that but a few weeks ago were ‘cheek by jowl’ would now like to devour each other. Bank failures most always entail much misery, widows with their little savings, old people with the accumulations for their declining years, and laborers with what was laid up for a rainy day are usually caught in them. There is a class of men who hold that governments, especially ours which is claimed to be by and for the people, should be responsible for the losses incurred through the institutions it makes legitimate, and the better to carry out this principle the government should run the institutions…By such a system there could be no motive for what is called ‘illegitimate banking,’ as all the earnings of the bank would go to the government. In unavoidable stringency the bank could be readily relieved; nothing would occur to stir up the bad blood as now exhibited….This would be the most opportune time for the teaching of the theories of socialism in Oswego.”
It took one more depression, the Panic of 1907, before the financial industry and the government decided to join together to figure out a way to, if not stop, at least lessen the impact of recurring financial crashes on the nation.
When the meeting was held to outline a possible course of action, a former Oswego farm boy, Frank Vanderlip, then an official with the National City Bank of New York—now Citibank—was part of the group whose ideas eventually led to formation of the Federal Reserve system.
It worked to some extent, but there were still not enough controls on banks to prohibit them from dabbling in the stock market and other risky ventures and the result was what today we call the Great Depression. That financial panic began in 1929 when a gigantic stock market bubble collapsed, taking the nation’s and the world’s economy along with it.
In the aftermath of the Great Depression of the 1930s, it appeared the nation had learned its lesson. Regulations were put in place to prohibit risky speculation by banks as well as stricter regulation of the stock market. But with no further major panics in subsequent years, the financial industry was chaffing at the controls meant not only to rein it in, but to protect the world’s financial structure from collapsing. And so starting in the 1980s, they began agitating to have the most effective controls eliminated. Lax oversight on the part of government officials responsible for making sure financial firms obeyed what rules were still in effect were welcomed by the industry.
And so, we proceeded to enthusiastically replicate every mistake of the past plus a few new ones invented thanks to innovations like computerized trading and linking the entire world’s financial system into one giant network.
So, don’t they teach history in schools of economics any more? Yes, they do, but these days those cautionary tales seem to be looked upon merely as roadmaps to ways unscrupulous people can game the system at the expense of those who entrust their money to it. In addition, most people—and that especially includes business owners and politicians—remain profoundly and aggressively ignorant of how economics actually works. It’s not a situation that engenders much confidence that things will get much better going forward.