Scott Nelson’s forthcoming book looks at strangely familiar financial landscapes. Junk bonds and unbacked, ineptly bundled mortgages trigger financial crises that prompt competing economic stimulus proposals in Washington, D.C. Proposed government regulations prove to be controversial. Debate on how to react paralyzes Congress.
It sounds like a recap of the 2008 meltdown, but these events happened more than a century ago; many happened more than once. Crash: An Uncommon History of America’s Financial Disasters takes a look at the seven American financial panics from 1792 to 1929 from the context of the 2008 crash, which Nelson says should be referred to as the Panic of 2008, even though “Great Recession” is a more popular term.
Nelson is the Legum Professor in the Lyon Gardiner Tyler Department of History at William & Mary. He expects Crash, being published by Knopf, to hit the stands in fall of 2012. In August, Nelson was working on manuscript revisions on the book, which stemmed from reaction to a 2008 article he wrote for the Chronicle of Higher Education, just as the U.S. economy was starting to crumble.
“Everyone was talking about 1929, but I said in this article that the depression following the Panic of 1873 was much more like our current crash than 1929,” Nelson said. “1873 was a mortgage meltdown, then bank failure, which then led to stock market collapse.”
His phone started to ring after his Chronicle story was reprinted in major newspapers. Bankers and managers of large investment funds were asking Nelson to recommend a good economic history of the nation’s panics, crashes and depressions: “They were saying ‘What should I read?’ ‘Someone told me that the Panic of 1837 was important.’ ‘How about 1819?’”
Filling a void
Nelson realized that there wasn’t a good history of American financial panics and decided to fill the void by addressing material largely neglected by historians and economists alike.
“Most economists don’t know enough history and most historians don’t know enough economics,” he explained. “The economists who do know some history don’t know anything outside of U.S. history.”
During his research, Nelson found that older economics textbooks usually had a chapter on the nation’s panics—up until the 1964 neoclassical revolution in economics. At that time, he said, Milton Friedman’s A Monetary History of the United States convinced large numbers of economists that “all you have to do is look at the money supply and that’s all you need to know.”
“All of this accumulated knowledge about the other financial panics has just disappeared,” Nelson said. “It used to be taught by economists, sometimes by historians. Nobody teaches it now. Nobody knows it now.”
For Crash, Nelson supplemented his survey notes by immersing himself in economics—“I learned the Neoclassical model, I learned the Austrian model,” he said. “I worked with—struggled with—a bunch of economic historians. We locked horns a lot.” He coined a term, “symbolic doubt,” to describe skepticism about the worth of paper securities: “When you look at this bond, or this dollar, or this asset, is it really worth what I think it is?”
He also dug deeper into the panics and came up with some fresh insights into the cause of the various panics, often challenging conventional explanation.
“I learned that the Panic of 1819 was not primarily caused by the Second Bank of the United States; it had to do more with the international context with France and the end of the War of 1812 and Britain’s resumption of the gold standard,” he said. “Monkey jackets are a kind of a central thing. These jackets were exported wholesale from Britain very cheaply in the 18-teens and roiled the financial markets.”
Likewise, Nelson says that while most scholars believe the Panic of 1873 start with the failure of Jay Cooke & Company in the U.S, Crash shows the trouble had an international origin, starting five months earlier in Vienna.
“I thought the Panic of 1837 was about Jackson’s bank war and about silver and gold exports in China,” Nelson said. “You dig a little deeper and you find that that’s a very stupid explanation, because it’s a very American-centered thing and has to do with cotton.”
Greater focus on effects than causes
Nelson is a social historian, and so Crash deals more with the effects of panics than their causes. For instance, he tells how the Panic of 1819 advanced the study of alcoholism. So many merchants and bankers tried to drown their troubles that Philadelphia’s charity wards filled up with once-respectable men exhibiting the full range of alcohol withdrawal symptoms.
“The panic provided these people with test subjects,” Nelson said. Physicians and other caretakers began taking and comparing notes and the term “delirium tremens” began to be widely used.
Crash also tells how the Panic of 1857 helped to bring about the Civil War. Nelson explains that in response to the panic, there were two competing economic recovery stimulus projects being discussed in Congress.
“The Republican stimulus package is free land in the West, railroads that go to the West, and the creation of the land grant university system,” he explained. “The Democratic party at this point was largely controlled by Southern Democrats. Their stimulus package is to annex Cuba so that there will be more slaves available and they can be shipped to New Orleans to work in Louisiana and Mississippi.”
Lack of accord on the Cuba question stymied Congress for much of 1857-58, Nelson explained. Then a number of Whigs and Northern Democrats defected to the Republicans, boosting the size and influence of what had been a small third party. The Republicans became powerful enough able to elect Lincoln without any Southern votes.
“There were a lot of other things going on, but the enormity of the Panic in the people’s eyes was much more important than slavery, much more important than the other things,” Nelson explained. “ It means that any failure to cope with it leads to a massive defection from the parties.”
Greater transparency = quicker recovery
Nelson demurs when asked to offer words of wisdom relevant to the Panic of 2008. “Historians hate to make predictions,” he says. However, he points out that greater transparency has helped to reduce symbolic doubt and restore public confidence.
“That did happen in 1857—probably the quickest recovery of all the panics,” he said. “What happened was major reform in the insurance companies—the hedge funds of the 19th century. Government regulations prompted drastic reforms in the way that insurance companies do business. The reforms created transparency. Once investors can actually see the document and compare one to another, it makes all the difference in confidence.”