Sunday, February 20, 2011

1900s: Bank Panic

The history of the United States economy is filled with boom and bust cycles--often with more regularity, extremes, and currency impacts than the generally steady climate the past two or three generations have experienced. The banking panic of 1907 was similar to many other downturns in its effect on both the economy and the political landscape. The exponential growth of the economy in the decades and years leading up to 1907 had created a particularly volatile situation as the financial infrastructure that was mostly established pre-industrial society was not able to keep up. The lack of a central bank, or alternate centralized monetary controls or regulations, combined with a widely distributed and decentralized banking system across rural areas created a web of interdependencies among financial institutions--large and small--that were neither transparent nor understood by almost anyone. The system was not able to absorb the shocks of the San Francisco earthquake followed by the even the collapse of small corporations whose finances were overleveraged to banks who were also overleveraged. Even if these events had not set off the panic in 1907, the system would have collapsed due to some other events.

1907 was similar to its counterpart one hundred years later in that both were essentially credit crunches do to overly risky, opaque investments by the large banks. However, the similarities end there. With a lack of a central bank or similar institution, there were limited abilities in 1907 for a coordinated reaction to the events as they were unfolding. The establishment of the Federal Reserve and other regulations were a direct result of that experience and of course were instrumental in controlling the magnitude of our most recent recession. (The Fed's effectiveness is admittadly a debatable point.)

At the same time, while a complex tangle of financial investments and relationships led to the panic, it was visible enough that J.P. Morgan and colleagues were able to manage the situation and control certain events from spiraling out of control via spot loans and bailouts of certain brokerages, clearing houses, and even the city of New York's payroll, that were seen as strategic cogs in the financial machine that would lead to out-of-control chaos if they went down. The argument is that Morgan et al's actions over several days in 1907 kept the panic at a recession-level downturn versus a disastrous depression that could have absolutely crippled the U.S. economy and currency.

The Panic of 1907 was one of the first books I identified for this reading list. Taken alone it is a good story, albeit a little academic, on the events leading up to a bank panic and the special circumstances and maybe even heroic efforts of a few powerful men in attempt to quell the storm. The author may be a little enamored with Morgan and I believe there are histories with alternative emphases on events or business cycle theories, but the basic simple lessons of how a panic can be generated are a good perspective to consider current events. As part of this reading project the book is even better in context after reading about the years of expansion and growth in industry, population, and local infrastructure. Transitioning to the next decade I am going to look at the upcoming political history, including the changing political priorities of Taft from Roosevelt coming out of this economic climate.

The book is an average read, 3/5 stars although it probably reads a little smoother than it should for the subject matter. On a side note, this was my first ebook, read on the Kindle app on an iPad, which was a surprisingly enjoyable experience. (Although it showed I still had 50% to read when it ended because of all of the appendices that I hadn't noticed.)

(Read February 2011)