A Short History of American Panics, Recessions, Depressions: Why Conservative Economics Can't Work (5-13-2012) [32*29]

[For those of you returning for the next installment, you will either be happy or sad to know that I have completed this effort. Now all that is left is the editing]

THIS BOOK IS A STORY of two competing economic theories, the Conservative Austrian School and the Progressive Keynesian theory, which have been the two models followed in America's 200+ year history. Proponents of the Austrian School were Presidents Thomas Jefferson, Grover Cleveland, Ronald Reagan, and W. Bush. We can also include the current list of Republican 2012 presidential hopefuls.

Those who I believe might have supported the Keynesian model, had it been around then, are Alexander Hamilton, President Adams, President Theodore Roosevelt, the originator of the Federal Reserve, and President Franklin Roosevelt. Those who did support it was Presidents Truman, Eisenhower, Kennedy, Johnson, Nixon, Carter, Clinton, and Obama. As you will see, which theory prevails has an enormous impact on your lives.

What I hope to present in the following sections is a record of significant depressions and recessions in American history along with an assessment of the fundamental causes, who was in power leading up to the depression/recession, what got us out of it, and who was in power when that happened. I think this will be educational as we enter the debate of the upcoming 2012 Presidential election.

(THERE IS A POLL AT THE BOTTOM - PLEASE VOTE)

Below is the list of panics, recessions, and depressions that will be covered in this book. It by no means is a complete list of all of the downturns America has seen, just those that met certain criteria of severity and/or length. The National Bureau of Economic Research[S1] (NBER) has determined that America has suffered at least 47 economic downturns since 1790. Of those, five were classified as depressions; the last of which was the Great Depression beginning in 1929. For my purposes, I am only considering economic downturns that not only meet the normal criteria for a recession, but also lasted longer than one year or had significant contractions. This is why the recessions in 1990 or early 2001 are not included.

Some might wonder why the year 2001 isn't included, after all, wasn't there a huge stock market crash and a steep rise in unemployment? Well, yes and no. Even with the crash, the economic contraction only lasted eight months, the third shortest in history. Two other recessions were shorter and four more were tied at eight. Unemployment topped out at 6.2%, not much above normal unemployment, and decline in GDP was only -.3%, hardly a decline at all. If fact, some say that without the 9/11 terrorist attacks, there might not have been a recession at all.

Under review are:

• The Great Recession of 2007
• The Recession of 1980
• The Recession of 1973
• The Recession of 1958 - 1961
• The Recession of 1945
• The Great Depression of 1929 - 1942 including the Recession of 1937
• The Recession of 1918 - 1921
• The Recession of 1913
• The Panic of 1910
• The Panic of 1907
• The Panic of 1896
• The Panic of 1893
• The Long Depression of 1873 - 1885: Includes the Panic of 1873 and Recession of 1882
• The Panic of 1857
• The Panic of 1837 followed by the Depression of 1839
• The Recession of 1825 - 1826
• The Recessions of 1822 - 1823
• The Depression of 1815 - 1821
• The Depression of 1807
• The Recession of 1802
• The Panic of 1797

THE table below contains my opinion of the causes and the fiscal philosophy responible, if there was one, for each of the recessions I anayze.  I identity the philosophies as either Conservative or Progressive as political lables, e.g. Democratic and Republican changed over time.  For reference though, Conservative is identified primarily with the majority of Republicans currently elected to federal offices today, while Progressive applies to most Democrats. (Most conservative Democrats were voted out of office in November 2010, amd replaced with conservative Republicans.)

THE reason I am offering this is I believe understanding that there are two basic schools of thought on how the economy works is incredibly necessary if you are to understand the fight between the Conservatives and the Progressives, and, especially the Liberals. Why? Because one school descibes the Conservative economic philosophy and the other school describes the Progressive economic philosophy. The essential difference between the two philosophies is that one believes that:

• Believes the market is a self-correcting mechanism; leave it alone and it will take care of itself (the Austrian School)
• Believes the market is not self-correcting all of the time and will need government intervention from time-to-time (Keynesian School)

The Conservatives, from the late 1700s to today, have followed some variation of the Austrian School while the Progressives, when they finally got the chance in the mid-1800s, tried to implement policies that later would be tied to the Keynesian School, which wasn't formally developed until 1936. The current incarnation of the Austrian School is Supply-side Economics, once derisively called "trickle-down" theory; which is much better than the "horse and sparrow" theory (I'll explain later). The Progressives are much less inventive, the latest version is called ... the New Keynesian economics.

There are two ways that the economy can be effected by government or private action independent of the market. One is called "fiscal" policy, which is a government-only prerogative, and "monetary" policy, which could be either a government or private banking action in the influencing of interest rates and money supply. OK, the next information is the last of the "technical" stuff, the rest is descriptive and logic.

Fiscal policy is action taken by the government to influence the direction of the economy by either increasing or decreasing spending and/or taxes. Government monetary policy are actions taken, in America's case, by the Federal Reserve to increase or decrease the money supply, the amount of money in circulation, by manipulating interest rates. Private monetary "policy" are the actions by a government sanctioned but normally unregulated bank or simply all unregulated, regular banks to set their own interest rates as they see fit or, as theory would have it, market forces direct.

Now, what I hope is the simpler part, ironically, the theory. At least that is the way I am going to try to present it knowing of course that saying this is just "scratching the surface" is a gross overstatement.

First, let's take the Conservative's stance. This was the principal economic philosophy followed in America since its inception until 1841, when the Whig party finally won the Presidency and Congress. The Democrats regained control in 1853 only to lose it again to the re-minted Republican (formerly northern Whigs) Party nominee, Abraham Lincoln in 1861. From that point on, inroads were made by Progressive economic ideas until the Great Depression in 1929.

In reaction to the Great Depression, under FDR, the Progressives finally had their chance. From then until about 1970, what became known as the Keynesian school dominated economic policy in America. From 1970, the Conservatives, starting with Nixon, then Carter, even though a Democrat, began to chip away at what the Progressives had built until 1981 when it became more of a landslide with the invention of "Supply-side" economics. Even President Clinton was not Progressive, economically. The last underpinnings of the Progressive era were removed in 2000 and 2001 with the deruglation of the last major industry, the financial markets.

In practice, the difference between the two schools can be summed up with this quote from Democrat William Jennings Bryant (1860 - 1925) in his Cross of Gold speech:

"There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests up on them."

The first sentence represents "Supply-side" economics while the remainder is Keynesian. The reference to "Democratic" however is problematic in that during this period, party identity to a particular social or financial ideology was in a great state of transition with both Parties having significant elements of each philosophy represented within their ranks. This persists today in the Democratic party with the Blue-dog Democrats representing the fiscal Conservative ideas. The Republicans, on the other hand, have all but exterminated any non-fiscal Conservatives from theirs.

AS I POINTED OUT in the last section, there are two schools of economic thought, each championed by each opposing political side, the Conservative anti-Federalist (Austrian School) and the moderate/progressive Federalists (Keynesian School-although at the time, formal Keynesian economics was a couple of centuries in the future.) Nevertheless, the fundamental difference between the two was whether the Federal government would be part of the economic process or not; anti-Federalists thought that it shouldn’t, and Federalists thought it should.

Who were these competitors and what did they really believe in that has stayed with us through the centuries? To start, the two terms came into being over during the fight to ratify the U.S. Constitution. The anti-Federalists were those who opposed the ratification of the Constitution; instead they believed a slightly beefed up Articles of Confederation which establish the Continental Congress. Anti-Federalists were first and foremost State’s Rightists, having a firm conviction of the supremacy and independence of the various states (colonies) with respect to any federal government; in short, they believed in a united States of America, the one conceived in the Declaration of Independence.

On the other side of the fence sat the Federalists, those who created and signed the U.S. Constitution during the Constitutional Convention. They absolutely believed in a United States of America, as defined in the new Constitution. They thought that the federal government, albeit one with limitations, should be supreme to the various states and that the states, while still being autonomous, where nevertheless bound, by Law, through the Constitution, to federal government and was subordinate to the federal government in matters that affected the United States as a whole. The fight between these two opposing viewpoints was fierce and sometimes violent, just like it remains in the 21^st Century.

More specifically, the anti-Federalists, who in today’s terms would be the Conservatives, stood for the following ideals:

• Political
• - States Rightists
• - Weak central government
• - Strict Constitutionalists
• - Political base was primarily in the South and agrarian
• Foreign Policy – pro-French
• Economic
• - Opposed the wealthy interests
• - Wanted low tariffs to promote agricultural trade
• - Wanted a laissez-faire governmental approach to business
• - Believed in what today is called the Austrian school of economic philosophy
• - Did not believe in a central bank.

The only real difference from anti-Federalist in the 1700s and the Conservatives of 2012 is that Conservatives are no longer pro-French and they certainly do not shun the moneyed class.

Federalists, what we would call Progressives or Liberals today, thought that the best set of ideals would be:

• Political
• - Strong central government with limitations on total power
• - Wanted the Federal Court to be the ultimate “law of the land”
• - Believed in a court who primarily used “purpose and consequence” as guiding principles
• - Political base was primarily in the North and industrialists
• Foreign Policy
• - Supported England in war with the French
• - Opposed the anti-American French revolutionaries
• Economic
• - Support high tariffs to protect American manufacturing
• - Supported a national bank to manage money supply
• - Pro-business
• - Believed in an economic philosophy that ultimately was codified in Keynesian economics

Famous anti-Federalists (later known as anti-administration, after they lost the ratification battle, and later still, Democratic-Republicans) were:

• Thomas Jefferson
• George Mason
• Patrick Henry
• John Hancock
• Richard Henry Lee
• Samuel Adams

The Federalists, which became the pro-administration faction, which, in turn, became the Federalist Party; were represented by such personages as:

• George Washington
• John Adams
• Benjamin Franklin
• Alexander Hamilton
• James Madison (although with Conservative tendencies)
• John Jay

In some respects, the fight over the ratification of the U.S. Constitution has never ended, even to today. The Conservatives, whether they were known as anti-Federalists; anti-administration; Democratic-Republicans; Democrats; and finally, today, Republicans, have been fighting hard to make the federal government over into its own image; one that tends to parallel a united States paradigm. Conversely, the Progressives, whether they were known as Federalists; Whigs; Republicans; and finally Democrats fight just as hard to keep the idea of a United States alive with a strong, but nonetheless limited, central government.

- The Political Situation

IN THE YEARS the years leading up to the Panic of 1797, momentous events occurred, not the least of which was the birth of the United States of America as we know it today. Prior to that time, America was simply the united States of America that preceded it. England had lost its war with the revolutionaries in America and was now heavily engaged in a war with France. America had gone through its tumultuous ratification process and George Washington was nearing the end of his second term in office. Because Washington would not allow the creation of political parties, those in Congress broke into two polar opposite factions, the pro-administration faction comprised of the Federalists who supported the new Constitution and the anti-administration faction made up of those who had opposed the ratification. Soon after John Adams was sworn in as POTUS #2, in March 1797, the two factions organized themselves into the Federalist Party, led by John Adams and Alexander Hamilton, and the Democratic-Republican Party, led by Thomas Jefferson. Even though all these great occurrences had become reality, it had little impact on the start of or course of the ensuing panic.

- Déjà Vu

This is a hvery interesting recession because it should sound familiar to you, so let us start with a summary of the Panic of 1797 from Wikipedia regarding America’s first economic disaster:

"Just as a land speculation bubble was bursting, deflation from the Bank of England (which was facing insolvency because of the cost of Great Britain's involvement in the French Revolutionary Wars) crossed to North America and disrupted commercial and real estate markets in the United States and the Caribbean, and caused a major financial panic. Prosperity continued in the south, but economic activity was stagnant in the north for three years. The young United States engaged in the Quasi-War with France. (site: Thorp, Willard Long (1926). Business Annals. NBER. pp. 113–23. ISBN 0-87014-007-8. http://www.nber.org/books/thor26-1.)"

Does this have a familiar ring to it? Something akin to the Great Recession of 2008? Hmmmmm

- The Panic

The Panic of 1797 lasted around three years from 1796 to 1799. There aren't very many economic measures to relate to as nothing was established back then, there were no real standards. That said, several of the resources I looked at classified this panic as a Depression.

At that time in history, in both Europe and the infant United States, monetary policy was not controlled by the governments but by an oligarchy of private financiers both in England and America. While there was fiat currency being used at the time, it was back by species - gold and silver. The dominant commercial bank at the time was the Bank of England which was heavily involved with the rampant land speculation that was going on as America began its great expansion. Even though Bank of England was England's Central Bank, it was privately owned and had been authorized to set interest rates and print money. Many today say this is how the Federal Reserve works but that is not true. The Federal Reserve is a government institution, not a private institution.

During 2006 - 2007 ... er, sorry, ... 1796 - 1797 there was a series of downturns in the credit market that led to broader commercial downturns on sides of the Atlantic. In 1796, the land speculation bubble burst as well. To make matters worse, England and France were at war and the English were afraid of an invasion by France. Consequently, there was a run on the Bank of England. The Parliament, in order preserve their remaining gold reserves and prevent insolvency, ordered the Bank of England to suspended payment for fiat currency in species thus making the fiat currency basically worthless.

At this point in history, the US Government had relatively little control over monetary policy; there was no Federal Reserve. There was the First Bank of the United States, a private bank set-up to serve as the US Treasury's bank but it didn't have quite the same functions as the Bank of England and didn't play much in the Panic of 1797.

So, who is to blame for this recession? It doesn't appear to be Congress or the President at this point. They were simply too new on the scene to have set up the machinery that might have managed the situation. Basically you had the kind of unregulated, free-market free-for-all that is the apple of today's Conservatives eye. The wealthy bankers set the interest rates and credit policies and printed the money (except in America) and the wealthy industrialists in the North began the decades long process of consolidation and monopolization without restraint. The well-off middle class and wealthy speculated to their hearts content until the recession, partly from their own making, bit them in their you-know-where. And like the Tech bubble of 2000 and the Housing bubble of 2007, when they burst, as they always will, disaster always follows. There were zero fail-safes built into the system so when you have a shock like the run on the Bank of England, there isn''t much you can do but stand back and let the tsunami wash over you.

One, little known fall-out from this, America’s first depression, was the financial demise of Roger Morris, who, along with George Washington, may be considered the man most responsible for the colonies winning the Revolutionary War.During the Revolutionary War, Roger Morris was a very well connected and wealthy financier.It was to Roger Morris to whom George Washington turned after the several States turned their backs on the Continental Congress, and therefore, the Continental Army and refused to continue to fund the war effort.It was Roger Morris who, on more than one occasion, cobbled together enough financing for Washington to see the war to its successful conclusion.And, sadly, it is the same Roger Morris who went bankrupt during the Panic of 1797 and was ultimately sent to debtor’s prison.

But, it didn’t stop there.Many prominent Federalists had joined Morris in his various ventures and, when he failed, so did they with the consequence that the Federalist Party was significantly weakened which ended up being partly responsible for loss of political control to Thomas Jefferson’s Democratic Republicans.

What might have stopped it from happening? Sensible regulation of the credit, finantial, real estate markets for one. Another would be government organization set-up to intervene and provide oversight to separate the irresponsible power brokers who are in the game regardless of who gets hurt from the responsible power broker who wants to keep the host alive while still feeding off of it.

- WHILE PRESIDENT JOHN ADAMS began his presidency with a depression, Thomas Jefferson was presented with a recession. Much had changed in four short years. President[S1] Adams started the Quasi-War with France then sued for and won a peace with them. He signed the four Alien and Sedition Acts in an attempt to subdue Jefferson’s Democratic Republican Party. Adams also saw the fracture of the Federalists Party after its glue, George Washington, died. A major fight broke out between Adams and Alexander Hamilton. The peace with France, a very unpopular move which Adams is, nevertheless, most proud of; the Alien and Sedition Acts; and the fracture of the Federalists Party all led to Adams’ defeat to Thomas Jefferson, POTUS #3.

- THE RECESSION OF 1802 was a significant recession in that it lasted two years and was fairly deep. After recovering from the Panic of 1797, the economy in infant America boomed, in part from providing supplies and material for the war between England and France. Ultimately, in March 1802, the Treaty of Amiens was signed, which ended the war, temporarily at least.

Along with ending the war, it ended the need for war material and supplies, which caused a massive slow down in the nescient American economy. To add insult to injury, the U.S. government had been paying a substantial portion of its treasury in tribute and ransom to Algeria to stop the piracy along the Barbary Coast and buy back our captured sailors. The economy simply couldn't survive such a series of blows and consequently it crashed and didn't recover for two long years.

- BACKGROUND

ONLY FIVE YEARS HAVE PASSED since the last recession, Thomas Jefferson was still president, and America was set for its first formal Depression, although many historians think the Panic of 1797 was also a depression. Another first is that this depression was self-inflicted rather occurring because of events outside of our governments control.

It is self-inflicted because Jefferson, his Congress, and his Democratic-Republican Party were at fault. ck edit above to add content to this empty capsule. The cause and effect are pretty straight-forward and clear-cut. However, before getting into the details behind the Depression, a little background might help.

Thomas Jefferson was a Democratic-Republican as well as POTUS #3. He followed George Washington, of no political party, and John Adams, a Federalist, as president. During George Washington's eight years, there were no defined political parties in Congress; they simply grouped themselves as pro-administration (Federalists) and anti-administration (anti-Federalists).

During John Adam's four years, true political parties formed, this began the period of the First Party System which consisted of the Federalist Party (former pro-administration) and the Democratic-Republican Party (former anti-administration). Thomas Jefferson, a moderate anti-federalist with a social reformist bent*, along with James Madison, founded the Democratic-Republican party. Together, they beat John Adams in what was probably the most vicious Presidential election America has ever witnessed! In the process, the Democratic - Republican Party swept Congress in a way that would make Newt Gingrich proud. By the end of Thomas Jefferson's second term, the Democratic - Republican Party, whose platform, you see reflected in today's Conservative/Tea Party political doctrine, had overwhelming control over the government.

In the 10th U.S. Congress, the Democratic-Republicans had more than an 81% -19% advantage over the Federalists in each House! In the 11th U.S. Congress, they lost a little power because of the worsening economy, but still had a whopping 79% to 21% advantage in the Senate and a 67% to 33% advantage in the House! There wasn't a damn thing the Federalists could do to stop any initiative the opposition put forward. Consequently, what happened next was because of the Democratic-Republican Party’s economic philosophy.

* Because of these views, e.g. separation of church and State, equal rights, anti-slavery (thing's conservatives oppose or opposed until as recently as the 1960s), and other similar views, I dneo not think Jefferson would pass the famous litmus test that has been lately created to find "true" Conservatives.

- CAUSES:

England and France were at war with each other over the control of Europe. America was a plaything they thought they could use to each other's advantage when necessary. Jefferson did not want war and thought America had the power to assert itself economically to achieve its goals. This is because England and Europe now depended a great deal on American goods.

Consequently, Congress passed and Jefferson signed the ill-conceived Embargo Act of 1807, along with several other measures, that forbade U.S. ships from sailing to any foreign ports. This not only included British and French ports, but all other foreign ports as well! Further, this action was in conjunction with other Acts already passed, such as the non-Importation Act (from England).

In the next year, 1808, Congress found loopholes in the various laws and moved to close them with a vengeance. The Federalists, who opposed the embargo, were powerless to stop them. In fact, Jefferson's own Secretary of the Treasury, Albert Gallatin, was against the embargo saying:

"As to the hope that it may...induce England to treat us better," wrote Gallatin to Jefferson shortly after the bill had become law, "I think is entirely groundless...government prohibitions do always more mischief than had been calculated; and it is not without much hesitation that a statesman should hazard to regulate the concerns of individuals as if he could do it in a superior way than themselves" ("Gallatin to Jefferson, December 1807" Vol.1, p.368. Adams, Henry (1879). The Writings of Albert Gallatin. Philadelphia: Lippincott.)

- CONSEQUENCES:

DISASTER! America's first Depression. The one good benefit of the Embargo Act is that it helped initiate American industrialization; the rest was misery for Americans. By the Spring of 1808, commerce had ground pretty much to a halt; the depression started, and unemployment was rampant. Honest American businesses started going bankrupt, while dishonest ones made it through by flouting what were barely enforceable laws. England was hurting, no doubt, but they found new sources in South America, while America, because of the total embargo, had no place to turn.

A year later, President Jefferson finally understood his mistake which was his lack of understanding of the economics of commerce. In March 1809, he signed into law the Non-Intercourse Act which repealed the Embargo Act that limited its provisions to only England, France, and their possessions; which was still totally unenforceable.

Because it was unenforceable, Jefferson, a vocal and passionate proponent of "as little federal government as possible," found himself in a rather ironic position; one common with politicians who try to govern purely by principle, without using pragmatism to integrate those principles with reality. From 1807, until the end of his Presidency, Jefferson was forced to increasingly use the power of the Federal government to enforce his Embargo!

In May 1810, the Macon Bill #2 was passed, which replaced the Non-Intercourse Act. This was a carrot instead of a stick approach and it also signaled the beginning of the recovery from the Depression; three very long years later. The new Bill promised to reinstate the provisions of the Non-Intercourse Act against the belligerent countries who did not remove restrictions against American commerce.

France accepted, so America reinstated the Non-Intercourse provisions against Britain. France, however, reneged on their pledge. Even so, America did not retaliate. In June 1812, Britain finally agreed to remove their restrictions as well, but, before the word reached America, James Madison declared war on Britain, thus beginning the War of 1812.

Seven years later, in 1819, America experienced another depression, but with a twist. For the first time, this involved the financial collapse of the economy precisely like we recently experienced in 2007.

- POLITICAL HISTORY

PRESIDENTS JAMES MADISON AND JAMES MONROE were leading America when the next major economic downturn occurred; their Congresses were solidly conservative Democratic-Republican. If James Madison lived today, he would supersede John Kerry and Mitt Romney for the title of flip-flopper. When he was fighting for ratification of the Constitution and writing the Federalist Papers with John Jay and Alexander Hamilton, he believed in and supported a strong central government over States Rights, as you can observe in reading his essays.

By the time Madison became President, however, his position had changed and he no longer favored a strong national government; instead, he sided with Thomas Jefferson and opposed John Jay, John Adams, and Alexander Hamilton in his philosophy regarding the role of the Federal government vs. State governments. He also opposed Alexander Hamilton regarding the need for a National Bank and believed they were detrimental free enterprise. Consequently, Madison let the charter for the First National Bank of the United States, America’s first central bank.

Hamilton’s thought America needed such a bank to accomplish three goals:

• Establish financial order, clarity and precedence in and of the newly formed United States.
• Establish credit—both in country and overseas—for the new nation.
• To resolve the issue of the fiat currency, issued by the Continental Congress immediately prior to and during the United States Revolutionary War—the "Continental".

He was successful in overcoming objections from Jefferson and Madison during the second term of President George Washington. Madison’s principal objection the establishment of a central bank was unconstitutional for it was not one of the enumerated powers invested in Congress by the new Constitution. It was issues like these where James Madison parted ways from the Federalists and joined Thomas Jefferson to form the Democratic-Republican Party after George Washington left office.

Even though the central bank met the objectives Hamilton envisioned and proved of great value, Madison, with strong support from his Congress, let the charter expire in 1811. Within four years, America was in its next major Recession.

- THE ALMOST FIRST ECONOMIC RECESSION

THIS IS REALLY A THREE-FER: the depressions from 1815 to 1819, the Panic of 1819, and the Recession of 1822. The cause, without yet laying blame to any political person(s), party, or philosophy, is the lack of regulation over the Second Bank of the United States.

While the next recession is credited with being the first one due solely to economic reasons, this one comes close. As we shall see, this recession started with an external factor, the War of 1812. After that, it was all economic and economic philosophy and, as we will see, our old buddy greed; which is at the root of it all. When you finish this story, I suspect you are going to say, "deje vu all over again!"

It all started in 1816 when President Madison (Democrat, VA), POTUS #4, chartered the Second Bank of the United States, which was patterned after the First Bank which lost its charter in 1811. Although this was against the Conservative, Austrian School of economic philosophy, he felt he had no choice because of the financial chaos ensuing from the inflation caused by all the private state banks issuing their own bank notes resulting from the huge cost of the just-ended War of 1812.

The U.S. government had racked up considerable debt and had no way of paying it off (sound familiar?); inflation was making it all the harder, while the multitude of different bank currencies with no common valuation made trade hugely complex. The economy was unstable, bouncing around, therefore President Madison had to swallow the bitter pill.

Congress chartered the Second Bank of the United States and gave it special privileges as the sole recipient of federal funds, but no oversight authority. Those privileges gave this bank, a private bank, great leverage over all other state banks. As with TARP, this 20-year charter came with very few strings attached, such as regulations. The Federalists (Progressives) had all but disappeared as a party after the War of 1812, which they had bitterly opposed; America was, for all intents and purposes, a one-party country (Conservative) for the next 20 to 30 years.

This so called "national" bank was actually "national" in name only. It wasn't anything at all like the Federal Reserve Bank of today. It must be noted that the bank did what was intended, after a year or so. It brought inflation and the economy under control as well as established, once again, a single US currency that had a predictable and dependable value. In short, it allowed the US government to get a handle on its debt once again. But, and it is a very big But, - it allowed the bank to also do its own thing with very little, if any, governmental oversight; - laissez-faire at its very best.

Then came the speculators and more loans and, of course, loan fraud and more greed. On and on it spiraled up, this time without any regulators to notice. Nobody else noticed either until one day in 1819; then, somebody in the Second Band finally did become aware. Sound familiar? They saw how massively over extended the bank was, started calling in their loans and instituted a policy of contraction which, yep, you’re right, stopped the land sales dead in its tracks.

There went the land prices, just like what happened in 1929 and 2008, the Panic of 1819 was on! Two very long years later, in 1821, the depression was over, recovery began. Commodities prices surged upward in a big way, sort of like the 2000 stock prices, only to fall right back down again into a double-dip recession. This recession ended a year later in 1823, but only for a couple of years, then America was at it again.

The recession of 1825 - 1826 is notable because it was the first economic downturn caused solely for economic reasons and not other external causes such war. While England was most affected by this recession, America did not escape its clutches either. All totalled, seventy banks failed.

Again, the cause is simple and straight-forward - greed and lack of regulations. The basic facts are in the years leading up to 1825, there was increasing speculation in Latin America funded by many major banks in England and America. People even invested heavily in the country of Poyais, an invention (scam) by the Scottish soldier/adventurer Gregor MacGregor. The leader of this stampede was the Bank of England, a for-profit bank, which had been given the same responsibility and powers to regulate the English economy as the Second Bank of the United States, also a for-profit bank, did for America.

The Bank of Englands job was to police the other banks and protect the public. Instead, it allowed banks to facilitate the speculation by not doing due diligence on the loans they were backing, one of the main causes of the 2007 recession, so that when the Latin American bubble burst, the banks were holding on to a lot of worthless paper.

The stock market first crashed in England and was closely followed by those in America. The Bank of England raised lending rates to protect itself and its investors instead of lowering them to protect the public they had the responsibility to protect. Credit dries up, markets stop functioning, and once again America, along England, Latin and South America was facing economic collapse. Apparently, France knew better because they bailed out the Bank of England and kept it from being bank number seventy-one.

From the previous recession forward you are going to be seeing a common theme among those recessions whose causes are economic in nature, such as this one. The theme running through all these is that unregulated capitalism will succumb to greed every time. It is not capitalism that is the problem, capitalism is the greatest thing since sliced bread, the true problem is, however, unchecked human greed. I will have more to say later.

America finally catches a break, 11 years without a major economic disruption; the previous record was seven years. But, when a downturn started again, it was a doozy and is the second caused for economic reasons; this depression finally motivated the American citizens to put into power a President and Congress that believed in a more hands-on approach to government (Progressive Whigs) regulation of America's economic engines than the entirely hands-off philosophy of Conservatives (Democrats).

Leading Up To The Great Fall:

PRESIDENT Andrew Jackson continued the long-standing Conservative economic philosophy of staying out of the way of business, laissez-faire, as much as possible. Several policy decisions by President Jackson set the stage: 1) allowing the Second Bank of the United States' charter to expire, 2) massive sales of government land to raise money, 3) the Tariff of 1833, and the coup de grace, 4) his issuance of the Species Circular.

By allowing the Second Bank charter to expire, there was no brake on returning to the status the Second Bank was chartered to stop and then prevent, the formation of a multitudede of State and wildcat banks. Multiple bank paper currencies reappeared which made money much more available and there was no regulation of their activities.

The sales if public land and the Tariff of 1833 brought in massive amounts of cash to the US Treasury. This accomplished the goal of every Presidency, regardless of party, paying off the National Debt. It didn't stop there either; the United States accumulated a large surplus; so much so that Congress divided it between the States. The States reinvested that largess in major infrastructure projects which as paid for with State bank notes rather than species, e.g., gold and silver.

All the ingredients necessary for economic failure were now in the mixing bowl; the same basic ingredients that were at the bottom of the Great Recession of 2007 - easy money and little or no regulation and regulators of American financial institutions; the fuze was lit.

The Fall:

THE years leading up to the Panic of 1837 were good times for all because cheap land was available from the government which could be readily sold to willing buyers, in the form of companies employed to build the railroad construction, canal construction, and other infrastructure projects the States were paying for with all that surplus money the Federal government had returned to them; worthy projects all. You also had lots of people employed from all of these projects and the resulting economic stimulus they provided. Add to this a bevy of unregulated State and wildcat banks loaded with money, from all those employed citizens, who were willing to lend to those who wanted to buy this cheap land from the government and what have you got? The beginning of the end of the good times.

Why? Because the fuse was lit that exploded in rampant speculation; from an annual average of $1.3 million in land sales around 1829 to an unbelievable $47 million in 1836, a poison to sustained economic expansion. Where the 2003 - 2007 speculation, just as spectacular and debilitating, was primarily centered around the housing market, the 1830s speculation were land tracts that, hopefully, would be in the path of one of the railroad or canal projects. With no controls on those lending the money, there were no controls on the fast and continuous turnover in land ownership. Land prices skyrocketed, fortunes were made, and this time the good times will never stop ... sound familiar?

While the 1837 panic and subsequent depression were more or less predictable, much as it was for the 2007 recession, and would have probably occured on its own anyway, President Jackson's issuance of the Species Circular guaranteed it. Of course, this wasn't Jackson's intent, but, if he had understood how the market truly worked, he would have seen the obvious consequences his action.

What the Species Circular required was that all debts to the U.S. Government would be paid in species, meaning gold and/or silver, rather than what was becoming worthless paper money issued by the unregulated State and wildcat banks; worthless because of inflation that was brought on by the printing of so much of these various paper currencies; from $61 million in circulation in 1834 to a whopping $140 million just three years later. President Jackson was properly worried about this huge inflation of paper currency and sought to put a halt to it; hence the Species Circular.

President Jackson left office shortly after issuing this executive order and left the fall-out to incoming President and fellow Conservative, Martin Van Buren. If there had been plenty of gold and silver laying around in the bank coffers to back all of the paper currency in circulation, things would have continued until the speculation bubble burst of its own weight. In 1834, this might have been the case but in 1837, with over double the paper notes in circulation, they weren't even close and the inevitable happened, credit dried up. With no more credit, land sales all but vanished and consequently so did the upward pressure on land prices. Now that the support for the massively inflated land prices had vanished, there was only one direction prices could go ... DOWN.

Since you just lived through the 2007 financial collapse, you know the rest of the story; banks failed in droves, unemployment skyrocketed and the economy sunk into a deep depression. President Van Buren, following his Conservative economic philosophy, did virtually nothing to intervene save for signing the Tariff of 1842, five years later. Economists do say there was a brief recovery in 1938 - 39 but was cut short when banks in England and the Netherlands raised their interest rates. The American economy did not recover until 1843 after six years of unprecedented unemployment and business inactivity.

THE DYNAMICS leading up to the Panic of 1857, next in a series of financially based recessions, began during President Franklin Pierce's term (Conservative Democrat) and continued into the beginning of President James Buchanan's term (Conservative Democrat), which is when the recession officially began.

While neither President did anything in particular that can be pointed as to having directly facilitated the Panic, such as President Jackson's issuance of the Species Circular which was tied closely to the 1827 Depression, neither did anything to prevent it nor alleviate its devastating consequences either. This was, however in line with their Conservative political philosophy of laissez-faire so there should have been no surprise there.

In the intervening years before their Presidencies, the same economic policies that were in place during the Depression of 1815, the Panic of 1825, and the Panic of 1837 were still being followed in the years leading up to the Panic of 1857 and into the recovery that followed.

According to Wikipedia, "The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. " This occurred while President Pierce was totally consumed with other critical domestic issues that ultimately cost him being nominated for re-election. In any case, it is not likely Pierce would have done much to control what was going on since that would run counter to his Conservative economic philosophy of leaving the essentially unregulated business and financial markets unregulated

.- The Build-up:

So, what were the particulars that led up to the Panic of 1857? As it was true with the previous three financial recessions, and as we will see for most of the future financial recessions as well, the country was enjoying very prosperous times. Banks were lending, people and businesses were buying, and the railroad industry was booming due to the mass migration of Americans to the West. Once again land speculation was on the rise. Because the good times were so good, everybody started taking risks; banks relaxed their rules and banks, citizens, and businesses started taking on massive debt. This was true in both America and Europe. Then, starting in 1857, the bubble slowly and then quickly burst.

- And Then The Collapse:

It started with the European economy beginning to slow down thereby reducing demand for American products, especially products from the newly and rapidly expanding West. This, in of itself, was not surprising because, as economists had recently found out, business runs in cycles. What followed next would not be surprising either; there was an economic slowdown in America resulting from the lack of demand. Again this is nothing to panic over (pun intended).

The problem, and since there was a Panic of 1857 there had to a problem, the slowdown was magnified in the West. Consequently, business in the West started drying up causing concern in the East, especially eastern banks; the downward spiral had begun. As the mad rush to the West slowed down, railroad profits began to fall which caused the eastern banks to become cautious and made loans harder to get, and they eventually dried-up altogether. In fact, because the Conservative government had yet to reinstate a single currency, because they were opposed to a central bank, some eastern banks stopped accepting western currency! Now the downward spiral, a naturally occurring phenomenon, it became a death spiral.

The rest follows what has become, and still is, the playbook on recessions and depressions. Land prices in the West collapsed which, in combination with disappearing demand, businesses, including farms and railroads, began to fail. Eastern farmers who had bought land and then mortgaged it to western farmers, began to foreclose. Additionally, the Illinois Central; Erie; Pittsburgh, Fort Wayne and Chicago; and Reading Railroads shut down or went bankrupt, throwing countless people out of work reducing demand even further.

One of the business activities the President did facilitate was the building of the Intercontinental railroad; which had unintended consequences, fatal ones unfortunately. The West to East railroad interconnected the two economies and the failure in the West began to be visited upon the East and soon the eastern United States economy was on its way down.

There was another unintended consequence that played a large roll in setting the stage for the Panic; the March 1857.Supreme Court's Dread Scott v Sanford decision that ruled slaves were not American citizens; although the fact that the US Constitution allowed the States to count each slave as being worth 3/5ths a person when determining how many electoral votes a State received. The ramification of this is that it threw the western states open to be slave states. This was in-line with President Pierce's pushing for and signing the Nebraska-Kansas Act that invalidated the Missouri Compromise. This left political and financial turmoil in its wake, causing even more downward pressures on land values and prices in the West.

The tipping point, the Lehman Bros of 1857, was the collapse of the Ohio Life Insurance and Trust Company in August 1857. Like the Barkley Bank purchase of the bankrupt Lehman Bros, the immediate financial impact of Ohio Life's failure was mitigated by interconnected banks co-insuring each other against runs. But, like Lehman Bros, the word was out; the economic problems were now in the public domain. Where the response in 2008 was extreme volatility in the stock markets followed by the final collapse in December 2008, the response in 1857 was similar economic volatility and inevitable collapse of the economy. The Panic of 1857 was now in full swing!

- Delayed Recovery:

The similarities with the 2008, continue just a little bit longer before diverging from each other in a fundamental way. President's Buchanan and Obama have one thing in common, they inherited a collapsing economy upon their assumption of office. While the economy had just entered a free-fall just before President Obama was sworn-in January 2009, the Panic of 1857 didn't really reach its crescendo until about four or five months after President Buchanan was sworn-in March 1857.

This is where the similarities end. Obama, using a Progressive social and economic philosophy, immediately implemented a strategy to try to mitigate as much as possible the devastation that could have caused a full depression; the result was a major recession rather than a depression, which stopped the acceleration of job loss within two months of implementation and returned job growth within 21 months. Buchanan, on the other hand, following a Conservative social and economic philosophy, did nothing!

Actually, "did nothing" is not quite accurate; in December 1857, President Buchanan did develop and implement a strategy he called "Reform, not Relief" which basically stated: "the government sympathized but could do nothing to alleviate the suffering individuals"! (Klein, Philip Shriver (1962). President James Buchanan. Pennsylvania: The Pennsylvania State University Press) Consequently, the Panic continued to run its own course, wreaking havoc on the western and northern economies and citizens. As it turned out, the South was not hurt too much by this Panic because their economy was not as closely tied to the West, where an economic bubble burst, or the North, which, was the countries’ financial mecca and as such financed western expansion.

Almost two years later, in 1859, the economy began to stabilize but inflation was still high. Finally, President Buchanan took some measures to try to bring it under control. He took a rather unprecedented step of banning paper currencies above $20 in an attempt to drive the country toward a species-based system again.

In a panic full of unintended consequences, there was still one more that would its presence known. Because of the terrible impact of the panic on the North, the South believed they would be more amenable to southern demands. In the face of rising tensions between the North and South over slavery, the South slowed down their demands for succession thinking that would help keep slavery alive in America. (Huston, James L. (1987). The Panic of 1857 and the Coming of the Civil War. Baton Rouge: Louisiana State University Press.) Even so, America was at war with itself just two years later.

THIS depression began with the Panic of 1873 and ended with the Recession of 1882. Like the Panics before it, the cause was the now familiar boom-bust cycle, this time with a heavy dose of government involvement , both foreign and domestic. President Ulysses S. Grant, POTUS # 18, had the unfortunate luck to havjng to live through first the Boom period during his first term and the Bust period during his second term as President. The beginning of this "Long Depression", as the Europeans like to call it, began much earlier, however.

When the Civil War ended in 1865, the boom began. It was fueled by, dare I repeat myself, the now familiar government land grants followed by land speculation, railroad expansion followed by economic expansion, over building, too much cash flow in the economy, very easy credit, and the worst of all ... the belief that it would never end. And why not, it was one of the longest growth cycles America had experienced to-date, eight years before the rug was pulled out from under them. Further, it wasn't only in America that was feeling its oats, all of Europe was as well. Then, like Wiley Coyote always does, the world ran past the edge of the cliff and was hanging in mid-air.

The House of Cards Begins to Collapse

It didn’t start in America, but in Germany. Following the Franco-Prussian War in 1871, Chancellor Otto von Bismark extracted a large indemnity of gold from France. As a consequence, he stopped minting the German silver Thaler coins and abandoned the silver standard thereby letting the value of silver float freely on the European markets. This was unfortunate for America because our western mining interests were the main source of supply for the silver used in minting the German Thaler.

This action by the Chancellor had some rather unintended and very damaging consequences; the destruction of the European economy and the fuse that led to the Panic of 1873 in America. Two things happened when silver was no longer the standard backing German currency: 1) silver's value fell and 2) the money supply dwindled with the elimination of the silver Thaler.

With the fall in silver prices those investments which were based on silver lost value as well let alone the instability in the markets such a decision causes. Given what followed, these weren't insignificant effects. Nor was the result from the constriction of the money supply resulting from removing the Thaler from circulation. This had the effect of raising interest rates which in turn began to reduce lending.

In normal times, the economy could probably absorb these perturbations, but, these were not normal times. Like in America, the European economy was extremely overheated and extremely fragile. This double hit was enough to start the death spiral in Europe and make America's future more uncertain.

- Now It is America's Turn

The fuse was lit, but, there was time to put it out; instead, our government managed to only fan the flames. As it was previously described, America's economy was booming after the end of the Civil War. By design, there were no governmental regulatory constraints on the economy and consequently business followed the natural path sought by pure, marginally regulated capitalism. The natural result, as it had been in 1815, 1825, 1837, and 1857 was an overheated economy just waiting for the right contractionary episode(s) to occur causing it to collapse, rather than decline.

In 1873, those episodes were, first, the demonetization of silver in Germany in 1871 and secondly the coup de grace was the Coinage Act of 1873, by the Grant administration, which accomplished essentially the same thing to silver in America. As a consequence both Europe and America were now on a de facto gold standard, the only metal that was backing the paper currency in circulation. The problem, of course, is that there was lot of paper currency floating around and not so much gold, now that silver was no longer being used. The impending avalanche was simply waiting for the small canon to go off sending the first snow ball on its way down the way down the mountain side.

The end came quickly once the effects of the minting of the German Thaler stopped in 1871 - 1872. Demand for silver from the mines in the Western United States began to drop, together with the fall in silver prices. As time went on, this decline accelerated since there was nothing to replace it.

The instability in silver prices, which were set by law in America but were free to rise and fall, mainly fell, in Europe. This trend was beginning to cause many problems in American financial markets. New silver finds in the West increased supplies at a time when demand for silver was falling causing consternation in its relationship to its value with gold.

Finally, while increased employment from some mines opening because of the new silver fields, even more mines were closing due to the lack of demand. Thereby decreasing employment and decreasing demand for the support services of those who had lost their jobs ; keep in mind, there was no unemployment insurance back then so the effect on a person being out of work were more pronounced and immediate on the surrounding economy, not to mention the working-class guy and his family.

Because of all of the problems with silver, Congress began to move to demonetize silver in America and accomplished this with the Coinage Act of 1873. However, as Americans have always had a penchant to do, and still insist on doing, we do not learn from others mistakes and we forget the ones we have made in the past. In this case, we weren't watching what was happening in Europe, and we should have because they were struggling.

Why was Europe struggling? It was partly due to demonetizing the Thaler; it destabilized the economy. So, what did America go ahead and do in the face of what was starting to be a declining economy, the same damn thing! Go figure.

- The House of Cards Came Tumbling Down

On February 13, 1873, one can probably say America began its death spiral into depression. Silver prices were immediately depressed and now they could float freely based on market forces and not government rules; the Western mining interests labeled this Act the "The Crime of '73". The Coinage Act took all silver coins out of circulation thereby reducing the money supply which raised interest rates. If this were a normal economy, this wouldn't be too big of a deal but this wasn't a normal economy.

It was an enormously overheated economy with tons of paper currency floating around and not enough gold to back it up; uncertainty abounding regarding the silver market; credit was drying up because of rising interest rates; and the railroad boom was in its last stages.

In the previous years there were minor shock waves; the Black Friday Panic of 1869, the Chicago Fire in 1871, and the equine influenza of 1872. Then, on May 9, 1973, the Vienna stock market crashed signaling the beginning of "the Long Depression" in Europe that didn't end until 1896.

In late 1873, J. Cooke & Company, a major US bank, was heavily invested, as many other investment companies and banks were at the time, in railroad companies. Right when they were all trying to get more capitalization for further expansion, President Ulysses S. Grant instituted a monetary policy of money supply contraction.

J. Cooke had been working on a project for years to create a second transcontinental railroad called the Northern Pacific Railroad; ground had already been broken in 1870. In September 1873, J. Cooke, in face of Grant's monetary policy, tried to sell millions of dollars in bonds to finance the project ... and couldn't. Even though they were about to get a $300 million government loan, J. Cooke's credit became worthless and was forced into bankruptcy on September 18, 1873; and the final lynch pin holding the economic house of cards together, the Lehman Bros. of 1873, had been removed.

The failure of J. Cooke and Company was quickly followed by Livermore, Clewes, and Company, one of the largest marketers of government bonds, and then many more banks. Ultimately, the New York Stock Exchange had to be temporarily shut down. We aren't talking weeks and months like what was experienced in 2008, we are talking days. The New York Stock Exchange closed for ten days starting September 20, 1873!! It was that fast.

Obviously, the impact was felt quickly in New York, more slowly in Chicago, and slower still as you moved West. But the results were certain, lost jobs, increasing unemployment, and bankruptcies. When it was all over, out of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876, three years after the depression began (by comparison, in the Great Recession of 2008, unemployment peaked at 10.4% in 2009 and started falling in the same year). Construction work halted, wages were cut, real estate values fell and corporate profits vanished. (Rezneck - 1950)

- In Summary

By all standards, this was a terrible depression. It was deep, it was wide, and it was long; 12 years long. Just think how that would go over in today's political environment. While there is probably nothing that could have been done to prevent such a strong economic downturn, if intelligent minds had prevailed instead of political ones, it wouldn't have been as bad.

I say this even if you consider the lack of a central bank and any real government regulation for business and financial operations, which on their own can have a fundamental impact on the economy, or, given the degree to which the economy had become overheated.

What could have altered the course from the debacle that did occur is if the government in power abandoned their economic philosophy and opened their collective eyes to what was happening around them and then formulated activist policies to counteract what was happening. You don't institute policies that amplify the downward spiral which is what the Grant Administration and Congress did!

Passing the Coinage Act of 1873 was an egregious mistake given the clear evidence from Europe of what would result. Instituting further contractionary money supply policies when expansionary policies were needed was inexplicable. Following the current Democratic (Conservative) hands-off, no interference, with both the citizenry and business, policy when the economy goes south contributed greatly to the large number of business bankruptcies; the high, long-term unemployment rate; and the depth and length of the depression cycle while not surprising, was certainly unfortunate. I would hope no one would argue that if the government had actually tried to intervene and mitigate the effects of the depression, things would not have gotten worse.

I MUST apologize for repeating myself, but I guess I must. It is said the Panic of 1893 was the worst economic downturn until the Depression of 1929 and that once again, it was the result of financial mismanagement within the business, financial, and governmental sectors of the American economy.

After America had recovered from the longest depression it and the world had ever experienced in 1879, the economy boomed; it really boomed. Then it boomed some more until the once again booming railroad industry bubble burst, the banks which once made sound loans and then got caught up in the good times and greed (sound familiar) started making bad loans and overextending themselves into bankruptcy.

This might have not been enough to push the economy over the edge, although it was certainly a good start, but the government helped set the stage with its economic policies.

These economic shocks might not havebeen enough to push the economy over the edge on its own, although it was certainly a good start. The government helped set the stage with its economic policies that (had) weakened the economic structure just enough to allow this round of unconstrained business excesses to finish the job.

- GOVERMENTAL ACTIONS

Foremost among these was the Sherman Silver Purchase Act of 1890 which, among other things reestablished bimetallism, gold and silver, rather than using a single metal on which to peg the value of American currency. This has been a long standing debate between Republicans and Democrats and continued until the 1970s when President Nixon finally took the United States, much to the outrage of what in 1893 would have been the Democrats, but in 1972 and 2011 were and are Conservative Republicans; sort of makes your head spin, doesn't it. By the way, there is a strong movement among the Conservatives of 2011 to reestablish the gold standard.

The reason for the Sherman Act was to support farmers going broke due to a series of droughts by causing inflation from the purchase of vast quantities of silver by the U.S. government. Another reason for the Act was to have a major buyer for all the new silver being produced by all of the new silver mines being opened in the West being supported by, you guessed it, and ever expanding railroad.

The consequence of this maneuver did what everybody wanted, it inflated the dollar, making the farmers debt worth less and easier to pay off as well as providlng a ready market for silver. This would have normally depressed the price of silver, but now it was fixed to the dollar and gold. For reasons I won't get into, this caused a run on gold drastically depleting the amount available in banks to back the species dollar, which was back in vogue again. All of this was happening between 1890 and 1893.

- BUSINESS AND FINANCE

As I said, this Panic was caused by the over expansion of the railroad system into the West and other areas resulting, one more time, in land speculation as well as the inevitable financial overextension of financial institutions. Add to this the government’s mishandling of the economy, and all that was left was the predictable hic-cup which will ultimately lead to bank failures and bankruptcies that ultimately led to massive unemployment. This hic-cup in 1893 was the failure of the Philadelphia and Reading Railroad, February 23, 1893. Further compounding the problem was the Conservative non-interference economic theory which prevented the government from taking any action to mitigate the impact so, as a consequence:

· Bankruptcies rose to over 15,000

· Bank closures exceeded 640

· Unemployment hit a high between 12 and 19%, depending on who is counting, but both sources, Lebergott or Romer, agree that unemployment rose above 8% in 1893 and didn't fall below 8% until 1899.

- REPUBLICAN INFLUENCE

In the lead-up to the Panic of 1893, there was a succession of Republican Presidents who came into power after the Democrats were largely blamed for the Long Recession of 1873. Succeeding Democratic President Ulysses S. Grant (POTUS #18: 1869-1877), there were Republicans:

· Ruther B. Hayes (POTUS #19: 1877-1881)

· James Garfield (POTUS #20: 1881-1881)

· Chester A. Authur (POTUS #21: 1881-1885)

· Benjamin Harrison (POTUS #23: 1889 – 1893)

While it wasn’t until President Harrison’s term that the Republican’s pushed through the Sherman Silver Purchase Act which helped cause the Panic of 1893, the Republican’s who preceded him heralded in the first change in overall government philosophy since Thomas Jefferson beat John Adams in 1801.

It wasn’t so much a shift in economic philosophy as of yet, although there were certainly major differences between single and bimetallism, there was the need for a national bank, and tariffs since it was the role of government and how it operated. With President Hayes and the “progressive” Republicans came the first outright attempt to move government away from the “spoils” patronage bureaucratic system to a more “merit”-based system of professional bureaucrats who would become experts in various operations of government.

President Hayes, in 1877, also had to call on federal troops to protect federal property and aid States during the greatest railroad strikes the nation had yet seen. The strike was the result of pay cuts and other actions the railroads took trying to survive the Panic of 1873; and it was nationwide. When it was over, President Hayes made the comment,

"The strikes have been put down by force; but now for the real remedy. Can't something [be] done by education of strikers, by judicious control of capitalists, by wise general policy to end or diminish the evil? The railroad strikers, as a rule, are good men, sober, intelligent, and industrious."

Here we see the first indications that government might have an interest in taking a more activist role in both labor and the control of business. It was also in President Hayes’ term that there was a strong push to go back to bimetallism in order to help alleviate some of the terrible impacts of the ongoing 1873 depression by inflating the money supply.

This was something the Republicans were generally in favor of, but Hayes thought dangerous and unethical in this situation and vetoed a compromise bill, the Bland–Allison Act of 1878 that came out of Congress; only to be overridden by Congress, so, America was more or less back on bimetallism again.

Hayes did back the passing of the Specie Payment Resumption Act of 1875, which required the treasury to redeem any outstanding greenbacks in gold which had the reverse effect of deflating the economy. As it turned out, between these two measures, the economy finally improved enough so by 1879, expansion was about to begin.

In 1885, Bourbon Democrat Grover Cleveland (POTUS #22: 1885 – 1889), was elected president. He tried, unsuccessfully to 1) reduce the high tariffs favored by the Republicans which favored businesses and 2) go back to the gold standard. Both play into the upcoming Panic of 1893.

In the first case, the Republicans believed the tariffs helped business because of their protectionist attributes and were needed in any case to pay off the cost of the civil war. But, since the war was now paid off, the government was running high budget surpluses and the Democrats those surpluses should be returned back to the people (talk about role reversal).

In the second case, because America was on a bimetal standard and Europe wasn’t, but both were now on species currency, it was cheaper for Americans to pay their debts in silver, which was worth less than gold, in America. However, Europeans would only accept payments in gold; the result was an ever decreasing supply of gold in America to back its dollar. Both of these forces were at work in the background during that huge boom in the 1880s I described earlier. President Cleveland lost his bid for reelection largely due to his failed bids on these to issues.

Republican Benjamin Harrison (POTUS #23: 1889 – 1893) won in 1889 and, as has been previously mentioned, passed the Sherman Silver Purchase Act of 1890 and finally made bimetallism fully in effect in America; remember, the Bland–Allison Act of 1878 was only a compromise. This action by the Harrison administration was all that was needed to set the wheels in motion for the economy to leave the tracks three years later.

- THE COLLAPSE

The high tariffs were part of President Harrison’s downfall in the next election, they drove very high prices in America; he also suffered from an economy on the verge of collapse as well as a split in the Republican party with the Populist wing. Ex-President Grover Cleveland was about to become unique in American history and win his second term which was not consecutive with his first only to be faced with the worst depression in America’s history; it started with the collapse of the Philadelphia and Reading Railroad, on February 23, 1893.

This was quickly followed by the Northern Pacific Railroad and such great names as the Union Pacific and Atchison, Topeka & Santa Fe Railroads plus the multitude of banking institutions that financed them. The resulting unemployment drove many more banks into failure because so many homes and farm mortgages went into foreclosure which left the banks with no assets.

President Grover Cleveland did try to reverse the economic effects of bimetallism by repealing the Sherman Silver Purchase Act, this was in accordance with his conservative economic theory. What was also in agreement with his strong Bourbon Democrat beliefs is not to interfere with the natural course of economic events.

While they were in the midst of the Panic, Texas was in the middle of a terrible drought and Congress sought to alleviate some of the pain and misery of the combination of the two catastrophes by passing the Texas Seed Bill.^[95] This bill was passed after a drought had ruined crops in several Texas counties, Congress appropriated $10,000 to purchase seed grain for farmers there.^[95] Cleveland vetoed the expenditure and in his veto message, he espoused his theory of limited government which resonates with many Conservatives today:

“I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the government, the government should not support the people. The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.”^[96]

It is this philosophy that led to the worst depression in America's history until 1929.

- IN SUMMARY

This is one of the more complex economic collapses to-date which involves both governmental and business actions that led to the catastrophe, followed by further governmental inaction which deepened and lengthened the resulting disaster. So, to try to summarize the various moving parts let me offer the following:

· The Republican government created a fragile economy with the passage of the Sherman Silver Purchase Act of 1890 and the Bland-Allison Act of 1879. These were efforts by a "progressive" Republican effort a social engineering, to wit, protect the farmers and silver miners.

· Business and financial interests did what came naturally in a laissez-faire environment during boom times, they over did it and lived beyond their means; bubbles were created which finally burst leading to economic downturn.

· What the Republican economic policy decisions ultimately did was set the stage for a run on gold when the economy started its downward spiral which led to bank failures and ultimately a crash of major proportions.

· The depth and breadth of the depression were then exacerbated by the Democratic president's Conservative non-interference policy. The results were:

· - Bankruptcies rose to over 15,000

· - Bank closures exceeded 640

· - Unemployment hit a high between 12 and 19%, depending on who is counting, but both sources, Lebergott or Romer, agree that unemployment rose above 8% in 1893 and didn't fall below 8% until 1899; six very long years. By comparison, unemployment during the current 2008 recession has been above 8% for only two years, yet, the political rhetoric would want you to believe this has been the longest recovery in history.

MANY consider this depression just an extension of the Panic of 1893, which would make it a double-dip depression, in today's parlance. Like the previous several recessions and depressions, this major economic downturn was primarily a financial crises. Unlike the others, however, the Panic of 1896 was primarily involving bank failures that then drove business failures rather than the reverse.

The main culprit, however, is once again the lack of regulations or "free banking" as it was called. The specific cause was the collapse of silver reserves brought about by the by President Cleveland’s repeal of the Sherman Silver Purchase Act in his attempt to shore up the economy in 1893. The result of this collapse was a destabilization in the linked gold standard followed by deflation (remember the Sherman Act was intended to cause inflation) which brought down commodity prices and caused a stock market crash.

The first domino to fall was the National Bank of Illinois in Chicago. This was quickly followed by a run on many other banks which also failed. By the time the economic peak fell to its trough, economic activity had decreased by about 25% nationally. Recovery began in the Summer of 1897; a rather short period as stand-alone depressions go but remember, this is just an extension of what really began in 1893.

THE PANIC OF 1907, while almost identical to the Panic of 1896, is unique in one major respect because it is this recession is the reason the modern Federal Reserve System exists today and why Jekyll Island, GA has become famous (to conspiracy theorists) and why, almost single-handedly, one man was, at the same time, responsible for stopping this Panic from becoming a 1929-size disaster yet became reviled as a danger to the country after he saved it; only in America.

The Panic of 1896 resulted from instability in the economy, for a variety of reasons, which led to runs on banks and their subsequent failures. This financial instability then spread to the rest of the economy leading to bankruptcies in industry, unemployment, and overall economic slowdown; normally the process is reversed. The Panic of 1907 followed basically the same course, although the causative reasons are different and the consequences have ramifications that are still influencing what is happening today, in 2012.

THIS PANIC WAS the result of several things, 1) the wealthy playing games in the stock market trying to become wealthier, 2) lack of regulation of the stock market, 3) lack of regulation over banks and other financial institutions, and 4) no Federal Reserve, as we know it today.

It all started in October 1907, when F. Augustus Heinze, his brother Otto, and his partner Charles W. Morse, decided to corner the copper market in Heinze's United Copper Company. In addition to owning the United Copper Company, Heinze and Morse served on at least six national banks, ten state banks, five trust companies and four insurance firms; this will be important in a bit. The plan was intricate but, what is important to this story is that it failed. It failed big and it brought down the United Copper Company on October 16, 1907.

Before we go on, a little stage-setting first.

IN 1832, President Andrew Jackson, the first of the very Conservative (Jacksonian) Democratic presidents, let the charter for the Second Bank of the United States, a precursor to the Federal Reserve System, expires; the nation no longer had a central bank and wouldn't have another one for almost 100 years. The economic impact was to let the money supply fluctuate with the ebbs and flows of an unregulated economy. It was this lack of a central bank, and its ability to act as a "shock absorber" to help dampen the wild swings common to an unregulated economy, that allowed the devastation caused by the panics after 1832.

In New York City's case, remember New York was the financial hub of America, the economy fluctuated with the annual agricultural cycle. Interest rates were raised and lowered in opposition to the cycle to keep foreign money flowing in when the agricultural cycle had it flowing out. When times are good, this works well, but, when things starting getting out of whack, positive feedback's can start an avalanche; the April 1906, San Francisco earthquake was one such destabilizing event by causing large amounts of money to flow out of New York to help rebuild the devastated city to the West.

In January 1906, the Dow Jones Industrial Average hit its high at a whopping 103, but began a modest correction from that point on indicating an economy that was cooling off (which normally nobody notices at this point because the stock market is considered a "leading" indicator). In April, there was the San Francisco earthquake and later in 1906, the powerful Bank of England raised its own interest rates; slowing down money filtering into New York.

In July 1906, The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law. As a result, the value of railroad stocks fell and began dragging down the stock market in general; between September 1906 and March 1907, the market fell almost 8%, and in March 1907 alone, fell another 10% (sometimes called "the rich man's panic"). As the Summer progressed, such stocks as the Union Pacific Railroad and Standard Oil Company (due to anti-trust actions) took big hits; the market was down almost 25% in the first nine months of 1907; the financial economy was very unstable, not necessarily the industrial economy. Also during that time, the copper market collapsed and there were bank runs occurring outside the United States.

It wouldn't take much to set off a financial meltdown; the Heinze-Morris failed attempt to corner the copper market was all that was needed.

THE Knickerbocker Trust Company was New York City's third-largest trust and was controlled by Heinze; it, among many others, helped finance the Heinze-Morris play to corner the market. In mid-October 1907, when their scheme failed, it brought down Knickerbocker Trust with it; the first domino.

This failure spread fear throughout New York's financial district and other trusts and regional banks began drawing their reserves out of New York City. This, in turn, started runs on banks, beginning in New York, and then spreading across the nation; bank failures were scattered around everywhere. At this point, there wasn’t any fundamental weakness in the economy, just fear in the financial markets because of the greed of a couple of wealthy men; yet, the die had been cast for a massive depression, if something wasn't done.

What was to be done? There was no central bank to provide liquidity to the markets; conservative President Andrew Jackson pointedly did not renew the charter of the last one back in 1836. Even though a progressive Republican, Theodore Roosevelt, was in the White House, the government, as was the habit of the time, did not get involved. So, how do you stop an economic meltdown in the making? Can you spell TARP!

Well, not TARP exactly, but definitely a bank bailout, although not a government one. Who then? None other than the legendary J.P. Morgan. the very wealthy financier and banker. He immediately stepped in and led a rescue effort, convincing other solvent banks to prop up failings ones. In order to shore up public confidence, Morgan formed two committees. One to work with the clergy to preach calm from the pulpit and the other to work with the press to explain what he was doing. It worked. By November 1907, the first phase of the panic subsided; almost.

Next on the failure agenda, early in November of 1907, was one of the New York Stock Exchanges largest brokerage houses, Moore & Schley; it was heavily in debt and in danger of collapse. They had used Tennessee Coal, Iron and Railroad Company (TC&I) as collateral and its stock price was in danger of collapsing. With a major railroad company and a major brokerage house about to go bankrupt, the combination potentially would cause a crash of the market. At nearly the same time, because of nagging and continuing bank runs, Trust Company of America and the Lincoln Trust could fail to open.

J. P. Morgan came to the rescue once again, this time bringing U.S. Steel with him to acquire TC&I. By force of will, he convinced the most powerful financial brokers to form a cartel in order to provide the financing to keep the banking system from collapsing. An agreement was reached but one more thing needed to be done, stop President Roosevelt from turning his anti-trust crusade against U.S. Steel.

Morgan's envoys to the President even used some subterfuge even to get an audience with Roosevelt and once they did, it had to be the same as Bernanke and Paulson trying to convince President Bush to go against his deeply-held principles and approve TARP in order to stave off a certain depression. The envoys cajoled President Roosevelt to set aside his and allow U.S. Steele's acquisition to go forward to avoid a similar fate; Roosevelt relented and the depression was averted.

But wait, that is not the end of this story.

A DEPRESSION had been avoided, but a recession wasn't. The economy was already contracting prior to the Heinze-Morse stock play set-off the series of bank runs and near stock market crash: their move made it much, much worse. J.P. Morgan's version of a privately funded TARP bail out of the financial system prevented a disaster from happening; production fell by 11% and imports by 26% while unemployment rose from 3% to 8% and lasted until June 1908.

The similarities to our current 2008 recession are uncanny. While the causes were different, once it kicked off, the responses were nearly the same; multiple bank failures, industrial collapse leading to rapidly rising unemployment, and both were stopped from worsening by a massive and multiple infusions of money into the banking system, not by the government though, as it was in 2009, but by a cartel of private banks and wealthy businessmen led by John Pierpont Morgan. Who would have thought that the much maligned TARP by the party of the corporate America was actually the reapplication of the same solution used by corporate America 100 years earlier to stop the same type of financially caused recession from becoming a disastrous depression. Was 2009, history repeating itself?

WHEN F. Augustus Heinze's and Charles W. Morse, unsuccessfully attempted to manipulate the stock market in order to accumulate even more wealth, they never realized the sea change in the financial world they were going to visit on America. Since the end of the civil war in 1865, there were panics (recessions), of one degree of severity or another, in 1873, 1884, 1890, 1893, 1896, and 1907; several of which have been reported on above. Three events motivated the 60th U.S. Congress to begin seeking a solution to avoid future crises such as the one they had just experienced, they were: 1) the high frequency of panics prior the Panic of 1907, 2) the severity of the Panic of 1907, and 3) the ubiquitous power of J.P Morgan to control the American financial market.

The first two reasons are obvious; however, the last reason was unique. While the country and the politicians were extremely grateful for what J.P Morgan did to save the country from disaster, they were also stunned by the immense power and influence this single business and finance man had; he could literally manipulate the American financial market which he exhibited in saving it. This scared a lot of people. The public and the politicians feared a plutocracy of the wealthy had formed, independent of the government, the luster on J.P. Morgan began to fade. Congress convened the Pujo Committee, named after Representative Arsène Pujo, (D–La.7th), the chair of the House Committee on Banking and Currency, to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion).

Consequently, Congress passed the Aldrich–Vreeland Act in May 1908 to study the situation and come up with a solution. The Act established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. Senator Nelson Aldrich (R–RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems. What he found was that they had one thing which America didn't that made a difference; a national banking system where in times of low cash reserves, the government could extend the supply of money to offset the economic downturns.

With this information in hand, in November of 1910, at a secret meeting held off the coast of Georgia on Jekyll Island at the Jekyll Island Club, Senator Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department) met with a number of the nation's leading financiers who included: Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan). At this meeting on Jekyll Island, these men produced a design for a "National Reserve Bank", which is today's Federal Reserve System. (This is where the various conspiracy theories regarding the Fed originate.)

Congress fought and debated for the next three years, during which time there was one more Panic (1910) and a recession (1913); on December 23, 1913, the Federal Reserve System came into being. Its charter was to address banking panics, to furnish an elastic currency, to afford means of rediscounting commercial paper, and to establish a more effective supervision of banking in the United States.

Thus began the life of the Federal Reserve System.

THE PANIC OF 1910, while still a financially based downturn, wasn't very severe, only a 15% and 11% decline in business and trade/industrial activity, respectively, but it was long, 2-years long, and, there was deflation which classifies it as an economic depression. By comparison, the downturns on either side of this one were in the 20 - 30% range. The main causes of this panic were the disruptions in business and the upheaval in the stock market brought on by the enforcement of the Sherman Anti-Trust Act, especially with the breakup of the Standard Oil Company. Even unemployment wasn't badly affected and only rose to 6%.

At this point in time, there was still no central bank to act as a shock absorber to monetary upheavals; the creation of the Federal Reserve System was still three years away. There had now been a Progressive Republican government in power long enough to actually effect long-term policy.

The Panic of 1910 ended in January 1912. Just a year later, in January 1913, another long recession started. There is very little information I could find on this particular recession but a few things are known, 1) there was no Central bank just yet to act as a shock absorber to wild swings in money availability in the economy and support banks; the Act that created it wasn't signed into law until December 1913, 2) the Progressive government was still trying to bring overreaching corporations into line and establish protections for laborers, 3) the reverberations of the Panics of 1907 and 1910 were still bouncing around. All of this led to a fragile economy.

When productions and real income began to decline late in 1912, maybe because of government action, there was nothing in place to stop the downward cycle. The cycle continued downward for 23 months and didn't improve until the start of World War I which increased demand. Even though this financial recession was a little shorter than the previous financial recession that had just concluded, unemployment increased, about 7.5%, and a very sharp a 26% and 20% decline in business and trade/industrial activity, respectively.

AS A GENERAL RULE, following any war, there is recession of depression. The recession of 1918, was no exception. Its causes are simple to understand and were non-financial in nature.

This was a brief but very sharp recession which was caused by the end of war production generated during WW I as well as an influx of labor from returning troops. With the end of demand from the War Department, demand plummeted, unemployment rose because there was no work yet for the returning troops, and the cost of the war created a huge deficit. All of this is a recipe for the normal economic contraction leading to recession following cessation of major hostilities.

By the time the first part of the recession had run its seven month course, the combined effect of the recession and returning troops and driven unemployment up to 5%, not nearly as bad as past recessions or of what was to come, from 3%. Business activity, however, declined by a whopping 24.5% and industrial activity declined by 14%. The economy improved for a short time in about seven months, but unemployment didn't stop rising.

Ten months later, the economy contracted again, still suffering and adjusting to peacetime conditions. There were two new factors however, that turned what might have been a double-dip recession into a recession followed by a sharp Depression.

That was inflation and the newly created Federal Reserve's reaction to it. It is a characteristic of being on the gold standard, which we were at the time, and with no central bank, which, until 1913, there wasn't, for inflation and deflation to run rampant, this is the classic "Boom-Bust" cycle with its associated happiness and unbelievable misery. With the advent of the Federal Reserve, tools were made available to mitigate the effect of this cycle by controlling the money supply and business activity; its primary tool is the ability to set interest rates at which banks can borrow money.

With the good, there is always bad and, according WIkipedia's citation of Milton Friedman and Anna Schwartz, in A Monetary History of the United States, the Federal Reserve sort of over did it. In order to combat rapidly rising inflation, they raised interest rates drastically. They had, you see, no history to work from; they were creating history. In any case, they raised interest rates way too much and brought the economy, according to Friedman-Schwatz, to a halt and tied with all the other factors going on, a sharp, devastating depression ensued that set several records that still stand today.

With the rapid economic collapse, probably like 2008, nobody had any money to spend, so banks failed left and right, people lost their savings because deposits were not insured, businesses closed from lack of sales, etc. etc. Unemployment finally topped out at about 9% in 1921, business activity declined an astounding 38%, and industrial activity declined 33%; huge numbers indeed; the largest in the nations history to-date. Also setting a record was the largest recorded one-year deflation rate, between 13% and 18% at the retail level and about 39% at the wholesale lever; in total, the Great 1929 Depression was worse, but not in a single year.

When the Federal Reserve understood what had happened and why, they quickly reversed themselves and started lowering interest rates; the economy recovered and the Roaring 20s ensued ... until 1929.

It was also during this period where we see the first signs of government action to mitigate the effects of the depression on the populous at large. President Warren Harding convened a President's Conference on Unemployment at the instigation of then Commerce Secretary Herbert Hoover as a result of rising unemployment during the recession. An economic conference and a committee on unemployment was formed with branches in every state having substantial unemployment, along with sub-branches in local communities and mayors' emergency committees in 31 cities. The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.

Tariffs were still in vogue and still hotly debated between Republicans and Democrats. In 1921, President Warren G. Harding signed the Emergency Tariff of 1921 and the Fordney–McCumber Tariff which was supported by the Republican Party and conservatives and generally opposed by the Democratic Party and liberal progressives.

The Great Depression of 1929 was actually a double-dip depression with the second dip occurring in 1937; the causes of the second depression, however, are different but nevertheless dependent on the first depression and consequently deserves its own discussion in the subsequent section.

To begin this particular tale, please consider the following without considering we are talking about 1929. In the previous six years, the economy has been booming, everybody, the poor and the wealthy alike, but especially the wealthy, were participating in the good times. The stock market was having the best run in its history; nobody thought things could ever go bad again (why is it we never think things can go bad again?). While all of this was going on, interest rates were falling; margin rates (the cost to borrow money to invest) were almost non-existent; people of ALL income classes were taking on debt they could not pay back IF the good times stopped. Asset prices have become enormously overvalued and financiers are playing fancy with the stock market and other financial and real estate deals all the while making huge financial bets things will go wrong.

Behind the scenes though, things weren't looking so rosy. The stock market had peaked and turned down a little bit; so had industrial production; so had some commodity prices and nobody noticed, except the few very wealthy who were now making investments that would pay off if the market collapses.

Soon, these bets didn't go unnoticed by other investors, things start to get shaky; the stock market does collapse; banks start calling in loans; people can't pay and go bankrupt; banks fail; the economy begins collapsing. Prices of assets rapidly fall reducing profits and value of businesses values which bring great instability into the stock market and finally collapse there as well; businesses are now failing. Consequently, demand falls driving more unemployment, hundreds of thousands a month, and the vicious death-spiral is well on its way. Commodity prices are now plummeting as is industrial and business output, farms by the thousands stop producing and the Federal Reserve sits idly by doing nothing. The country falls into depression.

Does all of this sound vaguely familiar? It could be 2008, couldn't it?

INSTEAD, WHAT I JUST RELATED WAS THE BEGINNING OF THE 1929 DEPRESSION. Even though America never entered a deflationary period between during the Great Recession of 2008, we came very close to becoming a full-blown depression of probably greater proportions, if the government hadn't intervened as it had! That is what Secretary of Treasury Paulson and Federal Reserve Chairman Bernanke were, one day in October 2008, advising President Bush was going to happen; according to President Bush during an interview later, he blinked, he turned away from his Conservative economic principals (as Greenspan, Paulson, and Bernanke had already done) and agreed to propose and push for the Troubled Asset Relief Program (TARP).

The 1929 depression has been recognized as the Great Depression because of the enormity of the devastation it caused world-wide in all sectors of the economy. It isn't that there haven't been longer depressions or probably deeper ones or ones that effected the whole world, there have been. The 1929 depression lasted 4 years and 7 months and had a decline in GDP of 26.7%, as well as peak unemployment of 24.9%. Compare that to the Panic of 1873 which lasted 5 years and 5 months or the Panics/Depressions of 1836, 1839, 1873, 1882, 1893, 1907, and 1920, all of which had declines in business activity between 29% and 38%! Virtually all of these Panics and Depressions had global implications.

What made 1929 unique, I believe, is that America was simply different by then. It had a much bigger population-wise and it was definitely much more interconnected, internally and internationally. In the 30 years since the turn of the century, electrification of the country had occurred as had the spread automobiles; Henry Ford had introduced the assembly line, industrial engineering was developing thereby introducing skilled labor; people in America had become mobile, breaking the bonds that tied a laborer to their employer via the company store made famous by the lyrics in Tennessee Williams' song "Sixteen Tons";

Some of you might remember: " You load sixteen tons, what do you get; Another day older and deeper in debt; Saint Peter don't you call me 'cause I can't go; I owe my soul to the Company Store."

All of these factors hadn't coalesced until around 1930, and I think they magnified the effects of what had become a norman business-cycle depression over the last 115 years. The fundamental causes of the 1929 depression were not so very different from the nine financially-based, major panics/depressions that occurred since 1815; that is one almost 1929-style depression every 12.8 years for 115 years! This does not count the other non-financially-based depressions and numerous recessions that also occurred during those same 115 years. Americans definitely have a short memory. Throughout 95% of those 115 years, only one economic philosophy was being followed in America, the same one that was in force just prior to the Great 2008 Recession.

IN OCTOBER 1929, there was another Conservative President in the White House, Herbert Hoover, who faced the same problem. The Federal Reserve, fresh from making a terrible decision in 1921 by raising interest rates precipitously which caused a deeper recession than necessary. faced a similar predicament. In both cases, the President and the Federal Reserve chose to do nothing to intervene, which is the Austrian (Conservative) Economic School's solution to these situations; the market place needs to correct itself with no government intervention, that was the Conservative's answer in 1929 and that was their answer in 2008 - 2009.

The 1929 Depression started in August 1929, just before the peak of the stock market on September 4, 1929. It ended four years seven months later in March 1933, only to be followed by a sharp recession in 1937, that lasted for another 13 months. Often, these two events are looked at as just that, two separate events, given the time difference between the end of the last depression and the beginning of the next recession. In this case, however, the depression was so deep that the economy didn't come close to recovering before the next recession came along. Consequently, the 1937 recession is often looked at as a recession occurring within a depression.

As with most large market downturns, it is easy to look back and see the signs of impending doom; astute investors, and there aren't many of them, see them only a few months in real-time after they become obvious when viewed in hindsight. For the rest of us, the damage is done before we are aware enough to do anything about it. In any case, it works something like this:

1. As the economy improves, professional investors start buying more and selling less in a prudent manner, driving prices up
2. So long as the economy keeps improving, this activity feeds on itself with additional, but less experienced investors getting into the game
3. If the economy really heats up and starts to boom, money becomes easy to get, margin rates drop, (in the case of 1929, you could borrow $.90 for every $.10 you put up), everybody who can, begins investing, driving prices up well beyond what the future value of the underlying assets are worth
4. Economically, the boom has run its course, production is no longer increasing and may even be falling, but only the true professionals notice. The feeding frenzy is on in the investment arena and there is no government oversight or control; nobody wants to miss out on making their fortune; even the professionals are making investment bets, except they are betting the market will fall. Buyers still outnumber sellers at this point, but now you see a rise in "short sellers"; those who sell "borrowed" stock at high prices on the hopes they can buy it back at low prices so they can repay what they "borrowed"
5. More people start noticing the economy has slowed down, not a problem in normal times, but these aren't normal times, these are boom times in an unregulated market. More investors start selling; people are getting nervous; more short selling happens.
6. Economic numbers tumble and the selling panic is on, now there are many more sellers than buyers; with one hitch, all those short sellers must buy now to cover their bets, that gives the markets a temporary lift; but only temporary.
7. After one or two more minor attempts at recovery, it is straight to the bottom for the market and the economy, because contemporaneous with all of this happening in the financial markets, is the failure of the banking institutions and businesses whose value collapsed along with the economy thereby throwing millions of people out of work.

INDUSTRIAL PRODUCTION had already peaked in May 1929; by September 1929, there was little doubt to the very professional investors the boom had run its course and they started exiting the market. Normal investors, rarely read the tea leaves, just what everybody else is doing and finally decide they need to do the same before they lose out on all of that money being made; this happened in 1929, 2000, 2008, and many times before and in between; it is a familiar pattern.

One thing that happens when you get this "panic" buying is that the value of stocks, in general, become overvalued, meaning they are actually worth less than what they are priced at. Often, business and industrial output doesn't decline precipitously and markets have time to adjust, but 1929, as you can see by the chart at the right, industrial production cratered after July 1929. When industrial production dramatically declined in mid-1929, the most experienced professional investors started leaving the market or betting against it, but everybody else kept on buying. By September 1929, more people began to notice production had fallen off and now unemployment had been increasing and that these were out of sync with the rising stock market; they began selling as well and the market peaked.

Come mid-October 1929, the market was extremely volatile, very similar to Oct 2008, because as some people sold, others, not believing the good times were over, kept buying what they thought were bargains. Similar to the activities of J.P. Morgan in 1907, private bankers tried to save the day with market intervention because the Federal Reserve, who was put in place to mitigate such money supply problem and production problems remained on the sidelines doing nothing; this was probably a result of 1) the conservative economic philosophy of the Federal Reserve Boad and 2) getting burned by overreacting in 1920, turning a minor recession into a major one.

The conservative Congress, however, was trying to do one thing, pass a tariff, the Smoot–Hawley Tariff Act , in order to drive production back into the U.S.

(the problem was, of course, when the Act was passed in June 1930, it started a protectionist war which opponents, such as Henry Ford, J.P. Morgan, and Franklin Roosevelt, convinced conservative President Hoover that it would do and, as a consequence, gained his support as well, made the world-wide depression even worse. Even though Hoover initially switched sides, he nevertheless succumbed to his party's pressure and signed the bill. It cut U.S. exports and imports by half and helped drive unemployment rate, that had not reached 10% and was in decline, up into high double digits while negatively impacting American farm, industrial, and business production.)

The dam started bursting on Black Thursday, Oct 24, the market lost 11% on the opening bell and panic began to set in. The latter-day J.P. Morgan-types tried his 1907 ploy again and bought large blocks of "blue chip" stocks at above market prices; that worked ... for a day; the market closed up 6%. On Black Monday, Oct 28, investors decided it was still too risky to stay in the market and started selling again and the market fell another 13%; the panic was on. One Oct 29, Black Thursday, the market fell another 12% or 25% in two days!

THE GOLD STANDARD is one of the Conservative economic theorists mainstays; some are calling for the return to it even today; it is opposed by modern economists. In and of itself, having a currency pegged to gold or silver or some other material that has intrinsic value is not a bad thing ... in a stable economy. If that economy becomes unstable, however, it can be a terrible thing, providing positive feedback to a deteriorating situation thereby making it even worse. That is what being pegged to the gold standard did during the Great Depression of 1929.

You can see from the chart to the right when America left the gold standard, the economy began to recover. Now, untying the dollar from gold didn't make the economy improve, it just removed a major impediment that was preventing it from improving.

What the chart doesn't show you is 1) that the few countries who were on a silver standard, did not suffer very much, if at all from the world-wide depression, 2) those countries who left the gold standard sooner, recovered sooner, and 3) those countries that left the gold standard later, recovered later. That is pretty damning evidence that having a gold standard is clearly a double-edged sword that probably should be avoided. Had the world been on a gold standard in 2008, a full-blown depression would probably have been unavoidable.

THE RECOVERY FROM the Great Depression began in late 1933. that was when economic growth first began. The GDP did not return to pre-1929 levels until 1940 and unemployment didn't return to normal until WW II. The economy recovered until 1937 when too much belt-tightening by President Roosevelt in order to bring the deficit, which resulted from his efforts to dig America out from the crushing Depression, under control, drove the country back into a recession. As you can see from Chart 4 above, it wasn't until 1940 - 41, that GDP finally returned to normal.

Historians point to many causes for the recovery. Most economists agree on the following: 1) President Roosevelt's "New Deal" policies, 2) the positive effects President Roosevelt's words and actions on the mood of business and the country coupled with the lack of negativism from the opposition party, 3) leaving the gold standard, and 4) the rebuilding, restructuring, regulating, and overseeing the financial institutions; regulations and oversight that remained in place until the period of deregulation that lasted from 1981 - 2008, when the Great Recession of 2008 brought on a new round of rebuilding, restructure, and re-regulating.

FINALLY, AMERICA HAD LEARNED a huge lesson about economics, one it wouldn't forget for 40 years. The devastation of the Great Depression was so huge that it broke the back of America's love affair with the Conservative's Austrian School of economic theory that had driven U.S. policy since our founding; Keynesian economic theory had replaced it, although in its original form, it was found to be flawed as well. However, Keynesian economics had the advantage of being flexible, so as time went by, it mutated somewhat to be able to fit reality; something Austrian economics simply cannot do.

Economists finally began to understand what fundamentally drove the business cycles and how to better mitigate its ups and downs so as to prevent the economy from ever again from suffering from manic-depression, as it had prior to 1940; Keynesian economics was America's lithium. As we shall see in the next several sections, the medication worked; America remained relatively stable for the next 58 years.

Then America returned to its roots and completely stopped taking its medicine 2001.

The Recession of 1937 is only considered minor when compared to the Great Depression, but is otherwise among the worst recessions of the 20th century. Why did it happen? Didn't we learn our lesson in 1929? Well, in reality we learned a different lesson which we are are trying to forget in 2010 - 2012.

There are three popular explanations of why this recession occurred, one from each school of thought.

• Fiscal, Keynsian, economists thought the recession was caused because President Roosevelt made the decision to balance the budget and reduce the debt, just what the loyal opposition has been recommending since the Democrats won in 2008. Roosevelt cut back drastically on all of the government programs he put in place with the New Deal in order to grow America out of the depression. Even though business activity had returned to 1929 levels, it apparently was quite dependent on these New Deal programs for as soon as Congress cut them, the economy contracted sharply.
• Monetary economists believe it was the Federal Reserves fault. It would seem they believed the economy may be taking off too fast and they raised interest rates and tightened the money supply therefore dampening business activity.
• Austrian school, conservative, economist believes the recession was caused by the huge expansion in the money supply because of the influx of gold when we got off the gold standard and the recovery itself. They also noted the economic depressing effect that occurred when Congress passed the anti-marijuana laws and banned hemp production.

I say the recession occurred because of all three reasons. In any case, to get America back out of this recession, President Roosevelt ramped up the New Deal stimulus programs once more and the economy began to recover again. Recovery was completed with the beginning of WW II hostilities.

FOLLOWING EVERY MAJOR CONFLICT, there is a recession; it only makes sense. A country's manufacturing industry has geared up to support the war effort, unemployment is almost non-existent, gross domestic product (GDP) is up because business is making money ... until the war ends. Then, all of the troops come home, the government orders dry up, the demand for domestic product isn't quite there yet, people are laid-off, and GDP falls, sometimes drastically. This happened after the War of 1812, the Civil War, WW I, and now after WW II.

A declining GDP, into negative territory is, by definition, a recession if two succeeding quarters show negative growth. For WW II, America experienced a GDP decline of over 12%, which is fairly significant, but, unlike other war related recessions before it, unemployment didn't rise precipitously, in fact, it hardly rose at all; only to 5.2%. Like the recessions after the War of 1812 and WW I, this recession was relatively short, only lasting 8 months; for different reasons, the recession following the Civil War last over two years. The short nature of war recessions, especially ones where the conflict was overseas, is that there is a lot of pent-up demand and money available to spend. So, the delay is mainly structural as manufacturing tries to retool itself from wartime production to peacetime production.

What one often sees as well, is that after the economy recovers, it is still relatively unstable as it tries to absorb all of the returning soldiers and work toward some sort of equilibrium between supply and demand. Often this leads to another recession and the period after WW II is no exception. Fortunately, the recession, when it did occur in 1949, was almost a non-event and is not significant enough to cover here.

THE NEXT RECESSION OF NOTE was what amounted to a double-dip recession begun under President Eisenhower in 1958 and again in 1960 and ended at the start of President Kennedy's administration. (It is curious how many recessions and depressions began just about the time a new president takes office, isn't. 1960[R], 1980[D], 1990[R], 2001[D], 2009[R].)

The first recession, in 1958, was more externally driven than financially-based, but both recessions were, in the scope of history, on the small side. Even though the 1958 recession was in concert with a world-wide economic downturn which resulted in serious declines in exports and imports; the US Auto industry saw a 37% decline with 20% unemployment in Detroit, it was preceded by domestic economic policy decisions that helped set the stage. Starting in 1955, monetary policy restricted the amount of money in circulation, in order to combat inflation. The effect was two-fold, it reduced demand, as intended, but it also reduced the amount of revenue flowing into the U.S. Treasury resulting in taking a budget surplus in 1957, and turning it into a budget deficit in 1958. In 1958, monetary policy was reversed and the recession ended in April 1958.

During the 1958 recession, overall unemployment did rise, it peaked at 7.5%, but so did personal income, a rarity. Also rare for a recession is that prices kept increasing, sort of our first "stagflation".

To combat inflationary problems, the Fed increased interest rates again, thereby tightening the money supply, which resulted in another short recession in 1960. President Kennedy campaigned and won on the promise get the economy going again from years of stagnation. He drastically cut income tax rates for all Americans and increased government spending. For the only time in American history, a income tax cut actually ended up being a stimulus and led to economic expansion, the second longest ever. It worked, where others failed, because tax rates were still at almost WW II - Korean War highs; there was a lot of room to cut. Not so with Reagan's 1981 tax "cut", it actually ended up being an increase when you consider all citizens and not just the wealthy, and Bush's 2001 tax cut.

Unemployment had not fallen very much after the recovery from the 1958 recession, but it rose to 7.1%, and the decline in GDP was only half that of the previous recession.

EVERYTHING CONSIDERED, THIS RECESSION was the worst since 1937 and until 2008. At one year, four months, it was three months longer than one in 1937, but only two month shorter than 2008. However, unemployment hit 9%, far less than the 19% seen in 1937 and the 25% in 1933, but was the highest since then, until the 1981 and 2008 recessions, both of which surpassed a 10% unemployment rate. You can also get a feel of how different recessions were, after Keynesian economics was implemented, by comparing declines in GDP. In 1933, GDP fell 26.7% and in 1937, it fell 18.7% Compare this to 1958 and 1973, when GDP only fell 3.7% and 3.2%, respectively; these remained the low points until 2008, when GDP declined 5.1%.

What led to worst downturn since 1937? Many events; the Vietnam war and the 1973 OPEC-inspired oil crisis being the primary ones. One of the main factors leading to recovery was a page President Nixon took from President Frankllin Roosevelt, he unilaterally (something Roosevelt didn't do) took America off the gold standard once more. Unlike many recessions, the 1973 was a rather complex one, with many internal and external factors all coming to a head in 1973 which lead to a major stock market crash; heralding the beginning of the recession.

ONE FACTOR WHICH LED TO THE RECESSION was the cost of the Vietnam War. That cost, in and of itself, might have been bearable if were not for the compounding effect which was becoming to be felt from President Johnson's Great New Society program. Like President George W. Bush in the beginning of the twenty-first centruy, President Johnson refused to raise taxes to pay for the cost of the Great Society and Vietnam War; instead, he started to borrow money to pay for both and began running a larger and larger budget deficit (printing money) and increasing the national debt.

Everything else being equal, printing money leads to inflation in normal times and the late 1960s was no exception since the economy was still booming. Generally, inflation in one country leads to larger and larger trade deficts, which is what began happening in America. The effect of this is to weaken the dollar which, because of the restrictions of the 1944 Bretton Woods monetary system established to keep the international monetary system stable, increased the depletion of America's gold reserves. (The reasons for this are rather intricate and complicated by the advent of currency speculation among nations and huge banks.) The Bretton Woods agreement, among other things, had two requirements, 1) the dollar would be pegged to gold at $35/ounce and 2) the U.S. guaranteed that it would convert dollars into gold upon demand. This worked fine while the private market for gold remained near $35/ounce, but by the late 1960s it had increased to $40/ounce as was heading higher, the weaker the dollar got.

Various patches were tried to repair the collapsing system, such as letting the price of gold float, while still keeping the dollar pegged to gold; nothing really worked. The situation kept deterioring; inflation kept rising; and so did the unemployment rate; enter Richard Nixon - stage right.

RICHARD NIXON HAD A MESS on his hands when he took office in January 1969. The Vietnam War was not going well and the world economy he inherited was structurally coming apart at the seams given the tug-of-war going on between currency and gold speculators on the one hand, and the restrictions caused by trying to maintain the gold standard. Eleven months after taking office, Nixon had to endure a small, short recession; a precursor to what was to come.

To combat the rising the inflation, in 1971, Nixon implemented his famous wage and price freeze. At the same time, he unilaterally took America, and therefore the world, off the gold standard, thereby totally dismantling the Bretton Wood agreement; this was known as the Nixon Shock. As you can see in Chart 1, inflation had already peaked in 1969 and had already fallen significantly by the time these two actions occured, but they probably did help to continue the slide until mid-1972, but, it set the stage for problems later, espcially the fall-out from the wage-price freeze policy.

ON OCTOBER 6, 1973, SYRIA and EGYPT ATTACKED ISRAEL, and the Yom Kipper War was on. On October 12, 1973, President Nixon authorized Operation Nickel Grass, an overt strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt. On October 16, 1973, the Organization of Petroleum Exporting Countries (OPEC) declared a 70% increase in oil prices and on October 20, 1973, the Arab exporting countries began an oil embargo on the West. In November 1973, the 1973 recession began.

RECESSIONS AREN"T ALWAYS CAUSED by internal economic or financial conditions or policies, they are sometimes caused by external events, such as the Civil War, and the 1970s was a poster child and Presidents Nixon, Carter, and Reagan were standing in the way of a economic stampede. This is not to say that governmental monetary and fiscal policies didn't aggravate the situation on occasion (on other occasions, of course, they helped.)

The 1970s was beset by three major external events, the Vietnam War, the 1973 Oil Crisis, and the 1979 Oil Crisis, see Chart 2. It is said the "good times can't last" and that is certainly true here. After one of the longest periods of economic expansion in the 1960s, the economy was ready for a change and these outside events provided the catalyst.

The economic pressure brought on by the Vietnam War began raising deficits in the early 1970s which, along with a crisis developing around divergence of the private price of gold compared to "pegged" rate, created the first ripple, the 1970s recession with the accompanying rise in unemployment and interest rates. President Nixon's reaction to that in taking America off the gold standard, coupled with the fed tightening the money supply and Nixon's wage and price controls, helped bring things under control, or so it seemed for both inflation and unemployment started coming down. Unlike the 1960s, the 1970s was a volatile time relative to world politics and events which left confidence in the economy weak.

Then the huge shock of having oil prices increase 70% almost overnight was too much; the stock market crashed and the economy tanked as the gas lines grew; unemployment and inflation skyrocketed, even though the fed did all it could to stop it from happening; all they could do was mitigate it, the result was the infamous "stagflation", unusual for a recession.

Government countermeasures kept the recession for spiralling out of control until it had run its course. The recession ended in May 1975 but unemployment kept rising until it hit 9% before sliding back down until the next oil crisis drove it, and inflation, up to its all time high in the early 1980s since the Great Depression period.

The recession of 1973 was the worst overall recession since 1937 when you consider length, unemployment, inflation, and decline in business activity. This recession lasted one year, four months, a characteristic of the 'U'-shaped recession seen in Chart 3; as reported, unemployment hit a recent record of 9%; inflation rose to 12%, second highest ever except for the 15.1% reached in 1981; and business activity (GDP) fell 3.2%; only the latter metric was less than previous recessions in the last 30 years, but only by .5%.

When compared to the Great Depression or the 1937 recession, 1973 was a drop in the bucket, hardly a blip, but then that was the point of all the structural protections built into the Progressive version of economic policy, but more on that later.

The Carter-Reagan Recession of 1981 was a major recession primarily brought on by the confluence of three world-wide events. Now I call it, unfairly, the Reagan recession because he was in power when it was officially announced and my first attempt at entrepreneurship went down the tubes. (Of course, I could thank him as well because I ended up with a pretty interesting career as a civil servant.)

The kick-off event was the 1979 overthrow of the not so nice Shaw of Iran, Mohammad Reza Pahlavi, Mohammad Reza Pahlavi, by the order of magnitude worse religious tyranny the world has seen since the Catholic Inquisition in the 1400s. Oil production fell off considerably and this destabilized world oil prices considerably which then led to a quick, huge run up in oil prices to their highest levels to that point in history.

The next factor that led to the 1980 Recession was the run-up in the Federal Reserves Prime Interest rate which is their main monetary policy weapon used to battle inflation. As you can see from the Chart 1 above, as a general rule, as the price of a barrel of increased so did inflation. This results from the fact that the price of oil wasn't being driven up by market forces, in other words not by supply and demand, but by external events, speculation, and greed. Because so much production and transportation relies on oil and oil products, their prices were forced to increase for non-economic reasons. That, by definition, is inflation. You can also see that the Fed kept raising the prime (discount) rate in an effort to battle inflation.

Now look at the Chart 2 below. It shows the change in the Gross Domestic Product The GDP reflects the cumulative effect of the titanic struggle between the inflationary forces of ever increasing oil prices and the resulting run-up in inflation and the Fed's effort to curb inflation by turning down the fire underpinning economic activity. The Fed ultimately won ... as you can see from the upper chart, in a BIG way.

The period between 1977 and 1981 was called "stagflation". It is the worst of all possible worlds as it is when you have flat or falling economic growth coupled with high inflation. It is what some people call a death spiral, a situation that is very hard to break-out of. This is why Paul Volcker, the current Fed Chief, went to such drastic measures to break the spiral.

The third factor that led to the 1981 Recession was the Oil Embargoes of 1967-1968 and 1973-1974. You can easily see one Charts 1 and 2 that both brought on economic chaos followed by negative growth and two recessions. These were like the before shocks that strike just ahead of the Big One. This may also be one reason why the unemployment rates for the 1981 recession aren't remembered as vividly as they should be. This earlier recession led to higher unemployment rates (10.8%) that stayed above 10% much longer than the same rates did this time around. Our current unemployment problems have a long way to go before they break the longevity record of the 1981 recession as well. For example, unemployment hit its low point of 5.9% two years before the 1981 recession started and didn't get back to that level until 6 years after the recession was over. I don't remember anyone complaining about how terrible a job President Reagan was doing getting people back to work, do you? Under his Presidency he had unemployment rates above 8% from from the end of 1981 to the beginning of 1984! It didn't get below 7% until 1986! Do you think today's Right-wing Conservatives who are in power now said one word of complaint against Reagan back then? I think not. (Darn these soapboxes, they keep jumping in front of me.) Anyway, unemployment was at 4.2% only 6 months before the official start of the 2007 recession. We don't know if will ever get that low again since 5-6% is normal.

Notice how I have not brought up either President Carter or President Reagan as being associated with the cause of this recession? That is because I personally don't think they are. From the discussion above that the real culprits were the Arab oil moguls and Paul Volcker's necessary reaction to the calamity they caused, don't you see.

President Carter is out of the picture because the stage was set for the big fall when he took office in 1977. He had no control over the rapid increase in oil prices and the reaction by Paul Volcker. The 1981 recession was a done deal and just needed to happen.

I do think President Reagan's fiscal policies set the stage for future problems, mainly America's first runaway deficit, but not this recession. He was just the unlucky fellow who happened to be President when it landed in his lap.

The Great Recession of 2007 officially started, according to the NBER, in December 2007. It officially ended in June 2010, again according to the NBER. Official or not and whether the American economy is actually expanding again or not is a bit mute if the American People feel we are not; and right now they still don't!

[Let me digress a moment and hop on one of my favorite soapboxes. One reason the people don't is jobs. Unemployment is hovering a little under 10%. I want to talk about why it is staying at that number in the face of twelve months of private sector job growth! Count them Twelve Months!! President Obama's stimulus policies have added more than 1,000,000 private sector jobs since Jan 1, 2010! Granted, it is not the 6 million jobs that the Republicans and their policies caused to be lost in the first place but it isn't a bad start in trying to stop the boulder they started rolling downhill.

The reason the unemployment number hasn't come down is because of the stupid way we count unemployment. Get this! If a person stops looking for work, we stop counting them!! So, in an extreme and unrealistic example, if, for one week, everybody who had been looking for work the previous week, quit looking and simply gave up ... the unemployment rate would drop to zero; go figure, lol. Now, of course, this would never happen, but what is happening is that when people start going back to work, then those who had previously given up looking, start looking again and we start counting them again; ergo the unemployment numbers don't change. They won't change until the number of people who get hired exceed the number of people begin looking for work again. In addition, the number of new people joining the workforce keeps growing also adding upward pressure on the unemployment numbers. So long as major corporations want to sit on the billions of dollars of cash they have accumulated and not invest and hire, those altruistic son-of-a-guns, then unemployment has to remain high.

In the mean time, those who want to do damage to President Obama's domestic and economic policy get to make hay by loudly (but stupidly) proclaiming that Obama is failing because all they need to do is point to those terrible unemployment numbers and ipso facto, Obama just doesn't have a clue, don't you see, on how to bring those unemployment numbers down ... rubbish. In fact, of course, he is doing what needs to be done, it is the Republicans and Corporate America who are not.]

OK, back on message. The recession lasted one year and six months which makes it the twelfth longest recession or depression that has been estimated by the NBER. The downturn in the GDP was -4.1% which is minuscule when compared to the double digit downturns from 1867 to 1938 which ranged anywhere from 26% to 37%! (and we thought we had it tough!!) Likewise, unemployment while high at the peak of 10.2% which lasted only one or two months, doesn't begin to compare with the Depression of 1929, 24.6%, and the Recession of 1937, 26.7%. Even the Carter-Reagan recession of 1980 had higher and longer unemployment rate at 10.8% than does the current recession.

Who gets the blame for the Great Recession of 2007? President Bush, of course. Everyone knows that the president in power always gets the credit or the blame. Well, I don't work that way. I try to find the real cause. In this case, it really is President Bush and the Republican fiscal policy philosophy. Although, I have to admit, they had more than a little help from the Democrats, mainly Presidents Carter and Clinton. But, nevertheless, when you dig down deep, the real culprit in my opinion is the proven failure of the Republican fiscal philosophy regarding the relationship between business and government (my first foray into this arena was via my first hub "Thoughts on the "New World Order And 2012") and, as I pointed out in the section on the 1873 Depression, the American citizen's and, more importantly, our politician's unforgivable and plain stupid inability to learn from past mistakes.

The prima fascia cause of the 2007 recession was the collapse of the Sub-Prime market. For brevity and clarity I want to reproduce a section from Wikipedia's opening on this subject:

"The US sub-prime mortgage crisiswas one of the first indicators of the 2007-2010, characterized by a rise in sub-prime mortgage delinquencies and foreclosures, and the resulting decline of securities backing said mortgages.

Approximately 80% of U.S. mortgages issued to sub-prime borrowers were adjustable-rate mortgages. After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with mortgages, including sub-prime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities. In addition to causing increased delinquencies and foreclosures in sub-prime mortgages (along with all other types of mortgages including Alt-A and conforming), the 2007-2010 financial crisis caused a decline in the capacity and willingness of the private financial system to support lending, tightening credit around the world and slowing economic growth in the U.S. and Europe."

But what allowed this to happen? Why now and not some other time earlier during Clinton, Reagan, Carter, or Kennedy-Johnson administrations? As I have brought up in several other hubs, I lay the beginning of the end with the repeal of the Glass-Steagall act of 1933. This repeal was signed into law in 1999 by President Clinton as a compromise with the Right-wing Conservative Congress. Both had forgotten the lessons of history.

Part of the reason for the Great Depression of 1929 was a lack of regulations regarding the relationship between commercial lending banks and investment banks; they could be one in the same and as a result a lot of risk taking and speculation was done in the name of making a profit. It got out of hand (sound familiar?) and ergo, the Great Depression. Now this wasn't the sole cause but it was a major constituent. Consequently, over the painful howls of the Conservatives, both Democrat and Republican, the Glass-Steagall Act was passed in 1933 that separated commercial banks who could make mortgages, and where required to assume the risk of the mortgages they made, and the investment banks who could not participate in the mortgages. There was a firm wall between the two. The Conservative fiscal ideology does not like walls. Deregulation is the name of the game.

It lasted until that fateful day, when the Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act of 1999 (I hope you aren't bored yet - to INTPs like me, this is great stuff!). The GLB Act allowed the investment bank financial firms to own sub-prime adjustable rate mortgages while the commercial bank (who now may be one-in-the-same) no longer assumes any risk associated with the loan that they made and therefore doesn't care if they make a good loan or not!! What is worse is in the financial world you can bet with an investment if you think its value will increase or against the investment if you think its value will decrease. If you are right, you will make money either way. This is why we couldn't have this kind of situation occur until the Glass-Steagall Act had been repealed.

After the repeal of the Glass-Steagall Act and when George W. Bush became president, the Republicans set about dismantling the rest of the barriers that protected society from the excesses of business. The result was predictable, the Almost Depression of 2007.

HOPEFULLY, I WON'T HAVE TO ADD any more depressions and recessions to this book, and I haven't even included them all! In total, I covered 25 of the worst economic downturns in the 215 years since 1757. Missing are another 19 recessions, to wit: 1812, 1828, 1833, 1845, 1847*, 1853*, 1860, 1865, 1867, 1887, 1890, 1899, 1902*, 1923*, 1926, 1949, 1953, 1990, and 2001. That is one downturn every 4.9 years and one major depression every 8.6 years; America's economy has been anything but stable!!

Most of the recessions I did not cover were generally short and not too severe, except for those labeled with an '*'. In those cases, the loss of business activity were generally the same as those I classified as "major", but their impact was mitigated by their short duration.

As you might have noticed in the previous sections, the reasons for recessions and depressions arise from two major events; turbulence from primarily external sources and turbulence from primarily internal sources (principally financial). The charts are intended to provide you an idea of the relative make-up of each. Chart 1 depicts all economic downturns as listed by the National Bureau of Economic Research (NBER). The width of the triangles represent the length of the event and the height, the severity. Chart 2 removes all of those whose reasons were external leaving only those caused as a result of the governmental economic monetary and fiscal policies, or lack thereof, that provided the environment in which the economic activity took place. The severity measures are more directly related to those policies while the width measure indicates the amount of governmental involvement in recovery efforts and/or mitigation of the downturn once it began.

I let Chart 3 grow in size to make the details clearer. This is an important chart in that it relates political economic philosophy in play at the time and what was happening in the economy. For most of our history, America has been governed by a moderately Conservative to a very Conservative President and Congress. Because this political spectrum kept getting elected speaks strongly toward the natural inclination of America's electorate. The only times they were booted from power was after a particularly nasty depression.********** After a term or two, Conservatives were put back into power ... until 1933, that is. After that date, because of the Great Depression, America did not revert back to its Conservative roots, but, instead made a fundamental change toward moderation and even Progressivism. The Conservative Austrian school of economic theory was replaced with various forms of the adaptable Keynesian economic theory. This change held until 2001, when the Conservative movement that began in 1981 finally came to fruition with the reinstallation of a largely Austrian economic school again; at least to the extent of the remaining laws still on the books that hadn't been rescinded in the 20 years, would allow. Eight years later America experienced its worst recession since the 1937 recession and the ruling Conservatives were removed and replaced with Progressives who began the job of switching back to a more Keynesian economic school of thought.

AUSTRIAN SCHOOL OF ECONOMIC THEORY

U.S. Representative Ron Paul, a presidential contender in the 2012 Republican Presidential Primary race, is the loudest vocal proponent for returning to the Austrian School; he mentions it in several of his speeches. The remainder of the candidates, while not referring to it so directly, tick off its characteristics when talking about what their economic policies will be. So, what is the Austrian School exactly?

According to Wikipedia The Austrian School of economics is a school of economic thought which advocates methodological individualism and a deductive approach to economics called praxeology; whew! What is "methodological individualism"? Again, turning to Wikipedia, Methodological individualism is the theory that social phenomena can only be accurately explained by showing how they result from the intentionalstates that motivate the individual actors. And, what is "praxeology"? It is"Praxeology is the deductive study of human action based on the action-axiom"; sheesh, another strange phrase, "action-axiom".

With a definition of this final term, we can start walking our way backward to actually understanding the Austrian School of economics that Conservatives love so much. So, here we go: "Action axioms are of the form "IF a condition holds, THEN the following should be done." Decision theory and, hence, decision analysis are based on the maximum expected utility (MEU) action axiom" [Wikipedia]. What these rather imposing string of words are trying to say, is that people base the choices they make on logical, rather than emotional reasons and that their choices are biased toward those things they think will provide the most benefit. To put it more bluntly, people always make cold, calculating choices that benefit them the most.

This idea forms the foundation of the Austrian School, of the economic system Ron Paul and the other Republican presidential hopefuls believe is best for our country. It is the same economic theory followed by American governments for virtually all of the 1800s and the first two decades of the 1900s. What are the ramifications this idea?

The ramifications are that essentially only the actions of the "individual actors" within the economy make a difference on the economy. The theory of supply and demand was developed to explain what takes place in this environment as well as the whole theory of microeconomics.

Those who accept the Austrian School, along with buying into the precepts of that theory, also deny the applicability of other possible influences on the economy, more specifically macro influences, which is the interaction of major economic sectors like output, unemployment, and inflation. In other words, microeconomics is all you need to predict economic behavior and balancing the forces that are at work at that level is all that is needed to make the economy function properly. Macroeconomists disagree, of course.

KEYNESIAN ECONOMIC THEORY

Complementing microeconomics is macroeconomic. It should be patently obvious from Charts 1, 2, or 3, that the period prior to 1940 was very unstable. John Maynard Keynes and several others searched for reasons for this seeming inability of the prevailing economic theory to account for obvious discrepancies, such as goods being left unsold while workers are left unemployed or what lead to such a long, frequent stream of sometimes violent boom-bust cycles. As a consequence of his research, in 1937, Keynes published General Theory of Employment, Interest and Money.It was a seminal work that changed history.

What Keynes brought to the table was the idea that not only did individual decisions play a role in determining the activity within the economy, but so did unemployment, inflation, and interest rates and how they interacted with one another. Conservatives reject this latter idea, which is the basis of macroeconomics. One reason they reject it is because an outgrowth of Keynesian economics is that it requires the government to intervene in the economy by modifying fiscal and monetary policies in order to keep unemployment, inflation, and interest rates in balance. Keynes maintains these factors, and the relationship between them, have a significant impact on supply and demand, in addition to individual decisions.

THE COMPARISON

As I said, prior to 1940, and Keynesian economics, the country went through over 100 years of major boom-bust cycles with the economy spiraling out of control roughly once every 5 years. After 1940, the economy settled down significantly and continued without a major downturn until 2008, 8 years after Conservatives re-instated their version of economics. That, in and of itself, should be a clear indictment of the Austrian School and a confirmation of Keynesian economics.

Both systems clearly work when the economy is stable, supply and demand follow the dictates of individual decisions. Even small perturbations end up correcting themselves with price variations, i.e. 1) demand goes up, 2) supply goes up, but lags, 3) price goes up, 4) demand peaks once price gets too high, 5) supply continues up, 6) price goes up to cover increasing inventories, 7) demand goes down, 8) supply goes down, but leading, 9) price goes down and so on until equilibrium is found. There is no pressure on employment, inflation or interest rates in this scenario.

However, consider the case of an overheated economy, such as what happened in 1825, 1837, 1857, 1873, 1893, 1929, and 2008. I found that overheating results from almost the sequence of events and in the same financial environment in each case, including the Great Recession of 2008.

1) First, there is some economic event that is spurring the economy, in the 1800s that was often the expansion of the railroad.

2) Second, there was investment of some sort in real estate.

3) Third, the investment led to speculation

4) Speculation could flourish because banks were unregulated and credit flowed freely at extremely low interest rates with little or no collateral or showing ability to repay.

5) In the case of the the recessions/depressions in the 1800s, there was no Federal Reserve to control the money supply and the States, and therefore the state banks, were more or less free to do what they please. The result was a huge increase in money supply.

6) Fourth, the speculation drove prices beyond the value of the commodities being bought and sold, therefore driving up inflation.

7) Fifth, this series of events spiraled up, out of control until it was unsustainable when it finally crashed.

8) Sixth, loans were called, people and businesses couldn't pay and went bankrupt; this in turned forced banks to fail.

9) Seventh, people are fired in masses, unemployment skyrockets; and the death spiral continues on down.

Keynes theory says that in this situation, the Austrian School's theory fails, because individual decisions led to the overheated economy; they fed it and there was no counterweight to offset the effect. The more people speculated, the higher inflation and the money supply rose; there was nothing to stop it ... except its own weight. When the crash inevitably comes, it is like a large boulder rolling downhill, it keeps gaining momentum and speed; no amount of individual decisions are going to stop the bolder until it reaches the valley floor.

Kaynes also says that none of this needed to happen, or at least as bad as it did. By using fiscal and monetary tools, money supply, inflation, and the rate of growth can be somewhat controlled mitigating the overheating pressures of speculation. Likewise, when the economy contracts, those same tools can be used to stimulate the economy, thereby mitigating the effects of the downturn. Looking at the before and after views of the American economy seems to substantiate Keynes' theory.

ANALYSIS

Why has the Conservative's Austrian School of economics failed so badly in crisis situations?

It has been my long standing observation as a professional cost analyst that "one-size fits all" models rarely, if ever, work in all circumstances and at its core, the Conservative's model is "one-size fits all". To understand this, you need to go back and relook at what the basic foundational theory is behind the Austrian School - it "advocates methodological individualism and a deductive approach to economics."

To work, it requires that most individuals make rational decisions that maximize their personal needs or wants based on an analytical thought process, rather than an emotional one. That is it; sounds like we are all Mr. Spock of Star Trek fame, doesn't it. With this one fundamental notion, the whole theory and practice of microeconomics was built; which is all one needs, according to the Austrian School's way of thinking. What is more, it works! ... so long as the economy stays within normal bounds.

The reason this theory fails in abnormal times is because humans are not like Mr. Spock, we, as a group, don't always think rationally in large numbers at all times, and because we don't, the theory ultimately fails. The greed and "follow-the-herd" mentality individuals assume, en mass, in great times, overcomes the normal control mechanisms that is part of the Austrian School's theory and we end up with overheated economies and the "bubbles" we are all so familiar with now. Having one major financially-based recession or depression every 5 years, on average, attests loudly to this fact.

The by-products, as we have seen from the above series of vignettes, of an overheated economy generaly are 1) inflation, 2) a large increase in money supply, 3) easy credit resulting in very large debt with little collateral, and 4) often an inability to repay the loan at the time of the making. You see most, if not all of these traits in every single downturn that measures 4 or more in Chart 3. Please note, the only item from this list not experienced in the Great Recession of 2008 was inflation.

Even before Keynesian economics, it was understood that a way of affecting the money supply and the need for a "lender of last resort" was required; both ideas encompassed in Keynesian economics. In fact, because America was tied to the gold standard, its effect on money supply amplified any overheating and deepened the predictable downward spirals. To act as a counterweight, a Federal Reserve was chartered for the third time in 1913 and given the authority, over time, to combat each of the maladies listed above; in 1929 and 2002-2007, the Fed as basically asleep at the switch, mainly because believers in the Austrian School were manning the switch.

In 1929, the Fed either did nothing to dampen the Roaring 20's and let that period be known as the Blazing 20s, or something, and when the crash occured, if effected policies that made it worse. In 2002 - 2007, the Fed forgot the lessons of history and refused to use its regulatory powers to reign in the shadow and regular banking systems, including the Government Supported Enterprises, and prevent the kind of credit lending practices that led to the housing bubble and its bursting. In both cases, the Fed had the power to, if not prevent a downturn, to certainly mitigate the terrible personal tragedies resulting from "big" economic collapses.

After Keynesian economics, the Federal Reserve, and the federal government, had a formal theoritical framework to help guide their decision making. And it paid off! From 1940 to 2008, there were no major economic, or any other kind, based recessions and for those that did occur, it was, on average, once every 9 or 10 years, half the rate of the Austrian School. It was only when Keynes was abandoned and the country moved more toward an Austrian system did we have our first major recession in 61 years!

I think the phrase, "the proof is in the pudding" is applicable here. I hope I have made a clear and convincing case that 1) there are substantial differences between how Conservatives believe the economy should be run and how non-Conservatives do, 2) the Conservative economic system is inherently unstable because it only considers one part of the economic equation, microeconomic, and 3) the non-Conservative system is much, much more stable because it takes into account other variables that are included in macroeconomics. Further, I pray you received some sort of understanding of the horrible personal price citizens pay when the wrong system is chosen to be implemented.

I thank you for making your way through this long, and potentially boring saga of American economic woes and hope it has been worth your trouble.