Feb 18, 2014

Lessons from the 19th century crises

In the 19th century, an unexpected failure of just one or a few firms was usually enough to ignite a panic. That was because in the era without a lender of last resort, company reputation was more important than actual financial soundness. In such a setting, a collapse of one or two prominent financial institutions typically resulted in widespread distrust of other financial companies and in an immediate withdrawal of deposits from banks and investments from the stock market.

Panic of 1819
State and private banks oversupplied mortgages to Western farmers seeking to acquire land from the federal government. When land speculation ended, farmers could no longer pay back to the banks. The bankruptcy of banks ignited the panic.