The Bank Crisis Blame Game, Then and Now
Whether Barack Obama or John McCain finds himself taking the oath of office on January 20, he won't be the first man to be handed a financial crisis along with the keys to the White House. FDR faced a depression and a banking crisis in 1933. Another president, even farther in the past, faced a situation closer to today's mess: forgotten Martin Van Buren.
When Martin Van Buren placed his hand on the Bible on March 4, 1837, a string of business failures simultaneously began to topple the American financial system. Early in his presidency, he and his party lost the support of the American people. They blamed Van Buren for the worst depression in the first century of U. S. history. He became the first scapegoat president.
In 1837, as now, the sacrifice of a scapegoat may have served as a national catharsis, but it didn't solve the underlying problems. Blaming George Bush and November's victor for our mess won't solve our own. The causes of any panic are complex. Who we choose to blame determines the solutions we find. Getting it wrong can be painful.
Alan Greenspan has called our current crisis "a once-in-a-century event." He's right. Unlike the Crash of 1929, so often referred to today, the panics of 1837 and 2008 share an element of surprise. No one believed in business cycles in 1837. Today, our faith in economic predictability has been undermined. The shock of potential economic Armageddon unites these events.
Today's panic is much like the one in 1837. Van Buren's predecessor, Andrew Jackson, had deregulated the American banking system. Offering easy credit without central regulation, hundreds of new banks invited a wider and deeper segment of the population to gamble financially. Thousands of varieties of bank notes, many very highly leveraged, circulated throughout the nation. The economy boomed, but rumors of instability spread among financiers and in the press.
Van Buren, like Obama and McCain, was forced to focus on the economy in his campaign. Doubt crept into investors' minds. As credit lines dwindled and interest rates soared, overly leveraged firms found themselves unable to secure the loans they needed to meet their payments. Sound familiar?
On Van Buren's Inauguration Day, one of the biggest merchants in New Orleans failed. When the news arrived in New York nine days later, Wall Street institutions tumbled. People panicked.
Then, as now, New York financiers begged Washington to restore confidence. In his inaugural address, Van Buren had sworn to follow in the footsteps of his "illustrious predecessor" who expressed his hatred for banks and their paper money by minimizing government involvement in the financial system. So Van Buren refused to bail out Wall Street.
When this news arrived in New York, men and women risked injury by demanding gold for their bank notes. New York banks shut their doors, and banks nationwide followed. Six weeks after the inauguration, paper money lost its value. The economy was in free fall.
The past century has provided Americans with more instruments for dealing with crises. But similar factors contributed to both of these panics. Foreign investors, greedy speculators, complex financial instruments and soaring commodity prices shared the blame as a shocked nation responded to incomprehensible failures.
In 1837, as soon as the dollar lost its value, Americans focused on politically slaughtering the President. Van Buren's opponents circulated hard times tokens, a pseudo-currency, portraying him as blindly following his "illustrious predecessor," symbolized by an ass -- an early incarnation of the Democratic logo. Americans interpreted the crimes of "Martin Van Ruin" in political terms. Successfully pinning the crisis on Van Buren, his Whig opposition won large Congressional gains.
Because Americans convicted Van Buren, they acquitted many guilty parties. The public never attacked the press that profited by spreading panic. Individuals avoided questioning their own spending habits. Legislators let irresponsible banks and financiers off the regulatory hook. In describing the booms and busts that followed as a business cycle, economists minimized individual responsibility. Even Jackson escaped blame to such a degree that in 2008, as panicked Americans liquidate money market and savings accounts, ATMs issue them bills depicting this enemy of paper money.
We choose whom to blame for financial crises, and this choice matters. We may want to blame President Bush for our panic, as Nancy Pelosi did in her speech before the first bailout plan. Next year it may be tempting to blame the new resident of 1600 Pennsylvania Avenue for the mess he inherits, but this short-term catharsis will not help us find long-term cures to our difficulties. By recognizing the range of our economic choices instead of blaming everyone, we can save the scapegoats and make useful sacrifices.
This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.
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Raul A Garcia - 11/6/2008
Thankfully, we don't have slavery any more, although we are asked to sacrifice here in a "free" economy and in a failed system like Cuba's they are asked the same. Van Buren and the Amistad case is an interesting read. There are some fundamental fractures (to borrow Mr. Fitzgerald's term)that have not undergone sufficient scrutiny. I am tired of the market being our morality. We had better not get another dose of the "Emperor's New Clothes".
Thomas Fitzgerald - 11/3/2008
I've read this article and I first do not want anyone to somehow infer the Andrew Jackson and George W. Bush share any similarities. That is just not fair to Andrew Jackson.
Secondly, the Panic of 1837 was not due to Andrew Jackson deregulating the banking industry. It was caused by fractional reserve banking. Any system in which banks can lend out more than they have is subject to fail if there is a loss of confidence in the system. I agree there are some similarities between 1837 and 2008, but put blame where blame is due and do not take the easy way out and blame Jackson who was fighting the good fight for sound money.