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A “GOVERNMENT-ENGINEERED DISASTER?”
by 82ndSgt, blogging at The Right Planet
(Oct. 12, 2011) — I contend that every major bubble, and subsequent economic collapse has its root within the federal government. Here follows a history of governmental failure, beginning with the very founding of the country. Will they never learn?
The first failure of note occurred between 1791-1793. That’s right, it didn’t take them long did it? A mere couple of years after forming the country, and the federal government has already created a boom and bust. This one was called Scrippomania, and its origins can be traced to the door step of the new treasury secretary, Alexander Hamilton. In 1790 Hamilton delivered a report to congress on the formation of a national bank.
The report called on congress to incorporate the Bank of the United States (BUS), capitalized at $10 million dollars. 25,000 shares (or scrips) at $400 a piece were to be issued. The U.S. government was to take a 20% stake, with the other 8 million going to investors. Sound like a recipe for disaster? It was. Congress passed the bill early in 1791, after much debate on its constitutionality, and much back room dealing. The IPO, or Initial Public Offering came on July 4th, 1791, beginning six weeks of heated financial speculation. Scrips purchased during the IPO quickly doubled, then tripled in price as newspapers printed daily stock quotations. An angry Thomas Jefferson, who was against the idea, wrote to a friend that,” stock and scrip are the sole domestic subjects of conversation, . . . Ships are lying idle at the wharfs, buildings are stopped, capital withdrawn from commerce, manufacturers, arts and agriculture to be employed in gambling.” Sure, you can blame the speculators that drove the boom and bust but dumping $8 million in scrip on the market had predictable results, and yet the legislation was not thought through to its logical conclusion. Some safety measures could and should have been put in place, and were not.
The banking crisis of 1819 came about partly because of the end of the war between France and Great Britain. The U.S. was doing very well supplying both sides with war material so when the war came to a close the resulting loss in trade was a definite blow to the economy. However, the effects were exacerbated by actions taken by the federal government.
The amount of agricultural products being shipped to Europe during this period assured that domestic policy was tailored toward ramping up output, but the way the federal government went about it had predictable consequences that the government again failed to foresee. In 1815 Americans purchased roughly 1 million acres of farm land from the federal government. By 1819 that number had more than tripled to 3.5 million as the federal government sought to ramp up production. Most Americans could not afford to purchase the land outright so the government allowed the purchases on credit. As the war came to a halt and demand for goods declined, so the U.S. economy ground to a stop.
The Bank of the United States, as well as state and private banks demanded immediate payment of loans, which most Americans could not do. This resulted in the Banking crisis of 1819, which led directly to the Panic of 1819 on Wall Street. The federal government stepped in with the Land Act of 1820, and the Relief Act of 1821, but the damage had already been done and many farmers lost everything. Once again we see a case of the government trying to solve a problem that they themselves had created by loaning to people who could not make the payments after the inflated market returned to its normal size. Sound familiar?
When then President Andrew Jackson refused to renew the charter for the Second Bank of the United States in 1832, he transferred government funds to state banks. At that point Nicholas Biddle, head of the National Bank called in commercial loans, and a panic and recession follow. Over 800 banks closed and the banking system collapsed. Unemployment reached 10% nationwide.
In 1836 President Jackson finally managed the demise of The Bank of the United States -something that he had been attempting to do since taking office. He again transferred government money to state banks and issued the Specie Circular which required land sales to be paid for in gold or silver. Predictably, land sales and prices plummet while specie is hoarded and speculators thrive. Here also, it would be easy to blame the speculators, but they are only a symptom of the problem. This kind of speculation only arises out of poor governmental policy.
The depression of 1837-1843 begins with English banks raising interest rates while reducing credit. These measures crush the cotton market, but once again the federal government steps in and makes matters worse, not better. On October 12, 1837 the issuance of $10,000,000 in treasury notes is authorized, thus flooding the market. On May 21, 1838 congress rescinds the Specie Circular. On December 6, 1842 President Tyler writes in a letter to congress that, “in view of the fact that in 1830 the whole bank note circulation within the U.S. amounted to but $61,323,898 according to Treasury statements and that an addition had been made thereto of the enormous sum of $88,000,000 in just seven years.” That’s money printing on an unimaginable scale!
The Panic of 1857 was notable for being the first Panic to be fueled by the fast communication of news. When a branch of the Ohio Life Insurance and Trust Company failed, the news that would have taken weeks to cross the country, only takes hours with the telegraph. The news induces the first wave of panic sell offs.
President James Buchanan tries to blame speculators and bankers in a letter to congress on December 8, 1857, but in the end he places the responsibility squarely where it belongs when he writes, “it is one of the highest and responsible duties of government to insure to the people a sound circulating medium, the amount of which ought to be adapted with the utmost wisdom and skill to the wants of internal trade and foreign exchanges.” Sadly, this has yet to happen in our history.
The Panic and Depression of 1869-1871 was caused by gold speculators, but as always, the government could be depended upon to throw fuel on the fire. The term Black Friday originated on September 24, 1869. On this day a syndicate of bankers manipulated the price of gold to 162½, causing a panic. The previous day it had sold at 143 1/8. Not a huge upswing by today’s standards. The Grant administration then blew the problem out of all proportion by dumping $4,000,000 in gold on the market. This had the obvious effect of knocking the bottom out of the market. The price went from 162 to 133 in just 15 minutes. Many investors were ruined, fortunes were lost, brokerage houses failed, and railway stocks shrank. Domestic business was paralyzed.
As Cleveland prepares to take office yet another crisis is in the offing. Only ten days before the inauguration the Philadelphia and Reading Railroad files for bankruptcy. Prices of grain timber steel and cotton begin to fall while the stock market fluctuates. Financiers, including J.P. Morgan warn of panic and pressure Cleveland to repeal the Sherman Silver Purchase Act of 1890, which they blame for the crisis. This act was in response to deflation that prevented farmers from paying off debts. The act was also supposed to help the mining industry by artificially increasing demand for silver. As with most government acts and actions, there was a very negative side effect The law required the Treasury to purchase the silver with a special issue of treasury notes that could be redeemed for either silver or gold. Naturally, people and investors turned in the treasury notes for gold, thus depleting the government’s gold reserves.
I could go through the Twenty-odd booms and busts of the twentieth century, but I think that I have established a clear timeline of government failure spanning the duration of the nineteenth century. Throughout our history we can see the government missing clear signs of trouble or not taking proper precautions when the signs are spotted. Also, the government consistently fails to predict the easily foreseeable. Hopefully this latest government engineered disaster has taught the powers that be a lesson, but I doubt it.