Austerity and C Thomas compare today’s economy to the panic of 1837
“Mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges…which are employed altogether for their benefit.” Andrew JacksonGood morning! I’m Austerity Jones and I am joined today by C Thomas Printer as we take a look at the state of the economy.
There are lots of analysts looking to the past to try and find clues to what this economy is going to do. The stock is either approaching or is in a bear market depending on your index, and bonds just had a terrible quarter. People are saying that with inflation forcing real rates to negative levels, we must look to the 1970s. This was the lost decade for America financially as stocks did nothing while commodities and real estate appreciated along with the interest rate.
Other great financial minds like Lyn Alden are saying that this is reminiscent of the 1940s, which is also an interesting test case. We were coming out of WWII with a very large national debt, inflation was high and real interest rates were negative. This kept a lid on stocks as people still shunned stocks still remembering the crash of 1929. The DJIA finally surpassed its 1929 highs in 1952, a full 25 years later. This is also a strong possibility. But C Thomas, you have an even earlier theory?
C Thomas: The panic of 1837 was actually preceded by the Flour Riot of 1837 which took place in February 1837 when riots and looting took place in New York City when the Locofocos charged into merchant stores and rolled flour barrels out into the street in protest. This was precipitated by spiking food prices brought on by supply shock problems as the wheat crop was decimated by the Hessian fly. This made avoiding hunger the new country’s primary focus. Keep in mind that the United States was the emerging market of the day while Great Britain was the world’s superpower and they had the world’s reserve currency. So when we see food riots in Peru, gas riots in Kazakhstan, and Sri Lanka melting down into food and political rioting we see that things were similar. But the similarity continues beyond the struggles of the emerging markets.
In the runup to 1837, there was great prosperity in America, the emerging market of the day, as well as Europe especially England which had the world’s reserve currency. Austerity, tell the listeners what a reserve currency is…
Reserve Currency- a foreign currency that is held in significant quantities by central banks as part of their foreign reserves.
Cotton prices were high, silver was abundant, and land sales fueled the westward expansion in the United States and were being financed by British Banks. However, a series of events pushed the young United States into a depression that lasted almost 7 years. As we see today, when things “boom” quickly, there is the potential for an ensuing bust. Today we have real estate prices at all-time lows, bonds at all-time highs, and real estate at all-time highs. Well in 1836, I don’t know what Bitcoin was worth, but the real estate, wheat, and cotton prices were through the roof. Cotton was the big cash crop and was used to secure many loans, the price of cotton sunk and the fortunes of the export-heavy US went with it.
In addition, The Bank of England decided to raise interest rates, and that effect was felt worldwide. Emerging markets were forced to raise their interest rates as a protectionary response further exacerbating credit liquidity as loan activity disappeared. Great Britain was exporting their tight financial policies across the globe just as the Federal Reserve is attempting to do today. Just like the British then, the Federal Reserve today has the global reserve currency so when we see the Japanese Yen make a 20-year low we can see the dilemma that the US must have been in at the time.
Austerity: C Thomas, there wasn’t a Federal Reserve yet in the United States and the country was still on the gold standard so how did that play into the story? Those are key differences from today, correct?
C Thomas: Those are both correct so let me get to one at a time because both are important. The President in the period before 1837 was a man of the people and not the establishment or politicians Andrew Jackson. The country had a national bank, created by Alexander Hamilton, but that charter expired in 1811. The second national bank began a year later largely to finance the war of 1812 and continued until 1832 when Andrew Jackson vetoed the bill saying it was “unauthorized by the Constitution, subversive to the rights of the States, and dangerous to the liberties of the people.” Jackson believed that the big banks were contributing to wealth inequality and were harmful to the common working man. How similar does that sound to today’s environments where the billionaires pay no taxes and the banks get bailed out by the taxpayer? Over the next three years by increasing federal land sales in the west, reducing governmental waste, and controlling gov’t spending, Andrew Jackson paid off the entire national debt, the only time it has happened in the history of the country. This was still in the bubble part of 1835, but Jackson had only reduced the national debt. The speculative fever had extended to the state-chartered banks that had looser financial regulations. Their debts and the bubbles in westward lands and the new technology of the time, railroads, continued to grow. Some people today are referring to our new technologies of the time as Crypto, in fact, we just had the Luna/Terra implosion of $32 billion in 24 hours this last week.
The prick in the bubble came when Jackson declared “Specie Circular” which meant that all federal land sales must be paid for with gold coins aka no more credit. Jackson knew that the speculation would harm the common man, but he might not have foreseen how sharply the contraction of credit would be felt. The bubble hasn’t officially burst yet on our economy as a whole, but we are having the Federal Reserve begin its own contraction of credit. Starting in June, quantitative tightening will begin as the Fed begins to unwind its $9 trillion balance sheet which had its origins in the great financial crisis, GFC. In addition, they have started raising interest rates just as the Bank of England did in 1836. Inflation is spiking even faster globally than here in the US, and just this week there was an article on CNBC about how ¼ of the people in the UK were skipping meals as a solution to inflation and food scarcity. I want to point out that this article wasn’t from 1836 but Tuesday in 2022.
How did emerging markets fare in 1837 you ask? Cotton prices fell 25%, 40% of banks closed, real estate tanked, and the depression lasted between 5-7 years depending on the source. Jackson got the blame for restricting credit as well as the incoming president Martin Van Buren, he of the Van Buren boys, who also believed in a free and solvent national government.
I don’t know how things play out from here and if there is a decision that pricks the bubble. I merely see many similarities with the Panic of 1837. So when we see food riots in Peru, gas riots in Kazakhstan, and Sri Lanka melting down into civil unrest we see that things were similar. But the similarity continues beyond the struggles of the emerging markets, and I am of the opinion that due to America having the global reserve currency, like the UK back then, (although the US had no debt then and has a record amount today) I think we can weather the storm better than most emerging markets. I also think that today’s economists have studied the contraction of credit in 1836 and see it as a lever best pulled slowly. This might be why our current Fed leader is moving at a glacial pace. He might believe that any sudden moves could cause us to have panic of our own. I also find it ironic that the rampant speculation that Jackson was trying to warn and defend against stained his legacy anyway, and that likely fueled the opposition to never again balance the national debt. I guess we are 186 years and $30 trillion away so we will likely never know if this was causation or correlation, now will we?
“You are a den of vipers. I intend to rout you out and by the Eternal God I will rout you out. If the people only understood the rank injustice of our money and banking system, there would be a revolution before morning.” Andrew JacksonSincerely Yours,
C Thomas
Also born on this date: Bob Saget, Sugar Ray Leonard, Craig Ferguson, Cool Papa Bell, Titanic survivor and actress Dorothy Gibson, and the man with the velvet pipes himself, Jim Nantz.