From the January 2010 issue of Research Magazine • Subscribe!

The Tumultuous 19th Century

Contemplating the causes, consequences and implications of severe, long-ago crises.

On September 12, 1857, Commander William Lewis Herndon, in full uniform and with head bowed, stood by the wheel of the SS Central America as women and children evacuated the hurricane-battered vessel. Herndon, a Navy officer on leave with a distinguished record in war and exploration, would go down with the ship, along with over 400 passengers and crew. So would some precious cargo: over three tons of gold.

This gleaming payload, worth some $2 million (in 1857 dollars), had been collected in the California Gold Rush and was en route to Eastern banks. Its disappearance into the choppy waters off North Carolina meant those banks would be unable to make payments to customers. And that news, coming on top of the August shutting of doors at the New York office of the Ohio Life Insurance and Trust Co., a major firm wracked by embezzlement and bad investments, triggered the Panic of 1857.

During that panic, stock prices dropped by half or more, most banks suspended payments of specie, bankruptcies were widespread and rioting in New York City resulted in the militia being activated. As severe as the crisis was, however, it was just one of a number of intense financial panics that occurred throughout the 19th century. Besides 1857, there were salient episodes of financial turmoil in 1819, 1837, 1873 and 1893.

These panics, with their far-reaching financial and economic effects, cast a particularly long shadow in light of the financial crisis that spilled over in 2008. For one thing, they suggest that, as bad as conditions have been in the recent past, they could be even worse. Notwithstanding the limits of 19th-century economic data, it is clear the U.S. economy took many years to recover from some of that century's financial convulsions.

The long-ago panics also carry implications for current policy debates. With the Federal Reserve coming under growing scrutiny, and a movement spearheaded by Rep. Ron Paul (R-Texas) aiming to abolish the central bank altogether, such controversy carries echoes of the early 19th century's pitched political battles over the Fed's early precursors, the First and Second Banks of the United States.

Following the termination of those early institutions, the United States had no central bank for most of the 19th century. The course of that century, with its recurrent and severe financial crises, raises considerable doubts about End the Fed, the slogan of Paul's movement and title of his bestselling book, and whether doing so would really produce greater financial stability and economic prosperity.

Central Bank Clashes

The First Bank of the United States, created in 1791 as proposed by Treasury Secretary Alexander Hamilton, ended in 1811 when President James Madison declined to renew its 20-year charter. Madison's Democratic-Republicans (later known just as Democrats) had long worried that central banking gave too much power to the federal government.

However, without a central bank, the federal government took a hit to its credit standing and had trouble financing the War of 1812. Madison reluctantly agreed to a bill that created the Second Bank of the United States, which began in 1816 bearing, like its predecessor, an initial 20-year charter.

The economy boomed for several years. Agriculture thrived with exports flowing to Napoleonic Wars-ravaged Europe, while the federal government opened large tracts of frontier land. But the good times soon turned to excessive speculation, as banks issued lots of currency and loans while land prices soared. By 1819, the Second Bank was trying to rein in the bubble by calling in loans. Before long, the nation was in a deep recession.

It would not be until 1823 that the economy was on the mend again. Meanwhile, the Second Bank generated much ill will, although it is debatable whether its policies were truly blameworthy, as opposed to other factors such as dubious private-sector lending and speculation along with government policies unrelated to the central bank, such as the imposition of high tariffs.

Andrew Jackson, elected president in 1828, despised the Second Bank, along with its president, Nicholas Biddle, as part of a "monied aristocracy." While running for reelection in 1832, Jackson vetoed a bill to give the bank a new charter, defeating a push by the bank's congressional allies. Jackson then withdrew federal deposits from the moribund institution, which languished until its charter finally expired in 1836.

The central bank's demise, however, removed a brake on the ability of state-chartered banks to issue paper money (as previously a bank issuing too much or irregular currency might find its paper not accepted by the federal bank). That fueled land speculation, which Jackson tried to curb by issuing his Specie Circular, an executive order stating the federal government would accept only gold or silver as payment for land. It was left to Jackson's successor, Martin Van Buren, to implement this order.

The speculative bubble, followed by the hard-money crackdown, brought on the Panic of 1837. Waves of bank failures and bankruptcies began in the West and rolled across the nation. The crisis erupted early in Van Buren's term and he never recovered politically, his Democratic ticket losing to the Whigs in 1840. The economy did not recover until 1843. The stock market's crumbling during this episode inspired the New York Stock Exchange to institute a new requirement: that companies provide public disclosure of financial information as a condition for offering stock.

Panicky Procession

Throughout the century, major panics occurred at roughly two-decade intervals. The Panic of 1857 not only wiped out a great deal of wealth but also exacerbated the sectional tensions that soon led to the Civil War. The South was less hard-hit than the North and not particularly sympathetic to the latter. Jefferson Davis, Mississippi senator and future Confederate States of America president, accused New York of bringing about financial ruin "by extravagance, by her speculation in railroad stocks and western land."

The Civil War's aftermath saw boom times, particularly in railroad construction. In 1869, investor confidence took a hit on Black Friday, when Jay Gould and Jim Fisk sought to corner the gold market. But a larger crisis started on Sept. 18, 1873 with the collapse of Philadelphia financial firm Jay Cooke & Co. That firm, known as the first wirehouse for its early adoption of the telegraph, had become overextended in railroad securities.

News of the failure caused a "monstrous yell" on the NYSE floor, according to one observer. On the street, a policeman arrested a newsboy shouting a headline about the failure, something the cop could not believe was true. The market slid rapidly, Western Union dropping $10 a share in 10 minutes. Runs on banks started and brokerage firms began suspending trading. On Sept. 20, the stock exchange shut down, its settlement system clogged with bounced bank checks; it would remain closed for 10 days.

Even before Jay Cooke went under, markets had been rattled by various developments, including the Great Chicago Fire of 1871 and the Coinage Act of 1873; the latter demonetized silver, spurring a contraction of the money supply. Now, the turmoil spread across the country. One firm that failed was the Carolina Life Insurance Co. Its president -- none other than Jefferson Davis -- lost his life savings.

The Panic of 1873 began what became known as the Long Depression, which lasted until 1879. As measured by the National Bureau of Economic Research, this was the longest straight contraction in American history -- 65 months, compared to 43 months from 1929 to 1933 during the Great Depression. The long downturn did lasting damage to labor relations, especially after the Great Railroad Strike of 1877 was put down by state and local militia.

The Panic of 1893

By the early 1890s, a new bubble was taking shape around railroad overbuilding with questionable financing. On Feb. 20, 1893, the Philadelphia and Reading Railroad went bust, inspiring a flurry of bank runs that put pressure on gold reserves. Things got more panicky when the National Cordage Co., a big-time rope manufacturer, was unable to meet a $50,000 margin call. Stocks plunged while money call rates rose to 74 percent.

Soon, numerous companies were going bankrupt, including railroads such as the Union Pacific and the Northern Pacific. Many banks failed, while others suspended specie payments. With currency in short supply, companies took to using scrip to pay their employees. Agricultural prices plummeted. Abandoned homes became more common, and the empty Victorian "haunted house" emerged as a pop culture staple.

By 1896, the economy was on the mend, and the market began recovering in earnest after William Jennings Bryan lost the presidential election. That same year, the Dow Jones Industrial Average was created, beginning on May 26 at the level of 40.94. The tumult of the 19th century was over. But the Panic of 1907 lay around the corner.

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A Legal Wrangle

The Panic of 1819 brought about a landmark legal battle. When the Second Bank of the United States, then the nation's central bank, began calling in loans to restrain a speculative bubble in land prices, the State of Maryland responded by trying to tax the Second Bank so as to get some cash to make new loans. James McCulloch, head of the central bank's Baltimore branch, refused to pay, questioning Maryland's authority for such a levy.

The resulting case went to the Supreme Court and is known as McCulloch v. Maryland. The Court's opinion, written by Chief Justice John Marshall, determined that a central bank is constitutional, since its functions are implied by the Constitution's wording even though there is no explicit mention of a bank in the document.

The case also established that states may not impede valid exercises of constitutional authority by the federal government, such as Maryland tried to do by putting a tax on the Second Bank of the United States.

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