How the current crisis compares to the Panic of 1873

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

by rglovejoy • 18 years ago

44 9 18 years ago

peakok3• 18 years ago

Interesting, but there are 2 critical differences :

1/ there was no Federal Reserve in 1873. The 1873 depression was one of the crisis that motivated the creation of the Fed, we thought a centralized bank system would help to stabilize the system.

2/ We are under the Bretton Woods system since 1944. It's the 1929 Great Depression that motivated the agreements of Bretton Woods.

What makes this crisis unique of its kind is that the US autorities are going to unleash 700 friggin billions dollars in the engine. It is a first time in history that such ridiculous numbers are summoned. This challenges at least one assumption of this article :

The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves.

In 1873, money was tied to gold. Therefore if you had cash reserves, it meant you could exchange it against sound, physical gold. It was guaranteed. It's not true anymore.

RobertL• 18 years ago

Good points peakok. The Bretton Woods and Federal Reserve thing are huge.

In 1873 there was no option for the government to simply deflate the dollar by 50% which is essentially what congress is voting on this week.

The relevant press release being the one saying that FDIC insurance will now cover bank deposits up to a maximum of $250,000 instead of $100,000.

What that means is that in a year or two all wages and prices will be about twice what they are today except for real estate. Real estate values will just sort of hold steady.

trevelyan2• 18 years ago

This is not true. The bailout is a cash giveaway to people who should really be jailed, but it is also structured to avoid a massive drop in the value of the USD. The reason is simple: it is an attempt to exchange good debt (government debt) for bad debt (private debt).

If things were handled differently, the Fed would have to promote liquidity by increasing the money supply. They are scared to do this in part because rates are already low and they don't have much breathing room. Also out of fear that any increase in the US money supply will trigger a run on the dollar.

That would force the US to raise interest rates to attract the currency to cover its debt. The exchange of debt for debt is technically non-inflationary as it takes the same amount of paper assets out of private hands as it puts into them.

trevelyan2• 18 years ago

Bretton Woods was abandoned in 1973 when it became impossible for the US to maintain its gold peg. Not a criticism of your main point.

peakok3• 18 years ago

Actually you're right, for some reason I always assumed that it was the Bretton Woods agreements that removed the tie between gold and money. My mistake. Still, my point is the same as you say.

helveticaman• 18 years ago

>It is a first time in history that such ridiculous numbers are summoned.

Not true. In 1984, in Chile, there was a shitstorm that warranted a 14 billion dollar bailout. Chile's population was ~12M, so the bailout was just over a thousand dollars per capita. Now, the bailout in US is over two thousand dollars per capita (700B/300M), and between 1984 and today, the dollar has lost about half its purchasing power (or more, depending on who you ask). So, it's about the same size. Keep in mind Chileans were, and still are, much poorer than Americans are today. So yes, there have been bailouts this size.

On a side note, the Chilean bailout was a success. But then, the Chilean Ministerio de Hacienda (Fed, basically) was really big on Friedman and the Chicago School in general. Plus, historically, it has always kept its shit together. Don't know if this is the case with the Federal Reserve.

peakok3• 18 years ago

This is not comparable because the 14 billions DOLLARS were prolly backed by the FMI wich meant that the United States and Europe were behind the bailout. Even if only the U.S were behind, 14 billions was really not much as we can see today.

But today the United States ARE the heart of the system. It's all a matter of confidence now : will the world trust the U.S banking system enough, will the world trust the dollar enough, in the end : will the world trust the U.S autorities ? The trust must comes directly from the U.S now, because there is no international agency backing up your decisions.

ALL the stability in the system comes from this confidence. The U.S. dollar was the most trusted money in the world.

socmoth• 18 years ago

"Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time."

best part for me, and how people aren't really getting why you would bail out banks.

How the current crisis compares to the Panic of 1873

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