Off-the-Wall History of Financial Crashes
by Robert Wenzel: Ron
Paul One Step Ahead of Dean Baker
Roubini is continuing his mad streak of tweets attacking those who
see dangers in central banking, in general, and the Federal Reserve
in particular. His tweets
distort the history of banking and crashes from the 1700's to modern
day. He begins:
bucolic world before the Fed: Panic/Crisis of 1772, '92, '96-97,
1819, '25, '37, '47, '57, '68, '73, '84, '90, 1901,'07, '10-11
Financial crises be4 the Fed was created: Panic/Crisis of 1772,
'92, '96-97, 1819, '25, '37, '47, '57, '68, '73, '84, '90, 1901,'07,
I'm not going
to conduct a financial history of the last three centuries in this
post, but lets take a look at the first two dates Roubini lists
1772 and 1792.
In the first
case,1772, there was a bank that attempted to inflate in Scotland,
but it was a private bank and it didn't get very far. As Murray
Rothbard suggested when private banks inflate damage is extremely
limited. Ron Paul explained
what happened in the period surrounding the 1772 bank collapse in
the Ayr Bank in Scotland was founded on the inflationist schemes
which the Scotsman John Law had tried unsuccessfully to get the
Bank of Scotland to adopt in 1705.
In a mere
three years, the Ayr Bank managed to create a tremendous amount
of unbacked paper, and when it finally collapsed in 1772 losses
amounted to two-thirds of a million pounds, a staggering amount
for those days.
the intriguing thing is that the Ayr Bank's collapse had limited
repercussions. It took with it only eight small private banks
in Edinburgh. This is largely because of a well-developed clearinghouse
mechanism that the large Scottish banks employed. They accepted
each others' notes and returned those notes to the issuing bank.
Suspicious of the Ayr Bank's issue, other banks made a practice
of quickly returning Ayr's notes to it. When the collapse came,
they were not affected. Nevertheless, to insure public confidence
(and get their own notes into wider circulation) the two largest
banks, the Royal Bank and the Bank of Scotland, announced that
they would accept the bankrupt bank's notes. This was not as mad
as it may appear. The collapse had few rippling effects because
of Scotland's extraordinary practice of unlimited liability on
the part of the bank's shareholders. So Ayr's loss was borne completely
by the 241 shareholders, who paid all creditors in full.
A helluva a
lot different than the recent crisis where taxpayers instead of
Goldman Sachs shareholders JPMorgan shareholders paid the losses.
But this 1772 crisis is the model, resolved by private parties and
limited in damage, that Roubini is suggesting is more damaging than
the model used to deal with current crises that get every one to
pay for the recklessness of a few.
1792 crisis was a direct result of the First Bank of the United
States. The bank was founded by Congress in 1791 at the insistence
of Alexander Hamilton. In other words it was a central bank. As
Ron Paul reports:
bank immediately fulfilled its inflationary potential by issuing
millions of dollars in paper money and demand deposits pyramiding
on top of $2 million in specie.
up Ron Paul's account and explains how the halt in the central
bank money printing resulted in the crash, the way all such manipulations
had an enormous impact on the economy within two months of opening
its doors for business by flooding the market with its discounts
(loans) and banknotes and then sharply reversing course and calling
in many of the loans. Although the added liquidity initially helped
push a rising securities market higher, the subsequent drain caused
the very first U.S. securities market crash by forcing speculators
to sell their stocks. The largest speculator caught in the financial
crisis was William Duer. When he went insolvent in March 1792,
the markets were temporarily paralyzed. This so-called "Panic
of 1792" was short lived as again Secretary Hamilton (as
in the previous year during the script bubble) injected funds
by buying securities directly and on behalf of the sinking fund.
Yet incidents like the Panic of 1792 and the script bubble would
be remembered for many years by opponents of the Bank who were
still in steadfast opposition to the Hamilton inspired institution.
Thus, we see
that Roubini's throwing out dates of financial crashes completely
distorts the picture. The first date Roubini cites was a small crisis
that hurt mostly the shareholders of the bank involved. The second
crisis had nothing to do with the private sector, it was the result
of a central bank.
is only getting warmed up, he then claims that current crises, during
the watch of the Federal Reserve, were not caused by the Fed:
caused by voodoo laissez faire de-reg. Fed not easing after crash,
no fiscal stimulus & letting disorderly bank collapses.
Great Depression and Robert Murphy's The
Politically Correct Guide to the Great Depression and the New Deal
for the Fed's key role in the Great Depression. The short explanation
is that the crisis was mostly caused by Fed printing in the 1920s
and contraction that started in 1929, coupled with heavy regulation
in the 1930s that extended the crisis, not laissez faire policies.
the rest of the article
Economic Policy Journal
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