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Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses — of History

Author(s):Eichengreen, Barry
Reviewer(s):Rockoff, Hugh

Published by EH.Net (February 2016)

Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses — of History. New York: Oxford University Press, 2015. vi + 512 pp. $30 (hardcover), ISBN: 978-0-19-939200-1.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.
Barry Eichengreen knows as much or more about the financial history of the Great Depression as any living economic historian, and it shows in this splendid new book which compares the Great Recession with the Great Depression. The U.S. story, on which I will focus here, is the centerpiece, but as might be expected from Eichengreen, what happened in the rest of the world is also explored in detail. Eichengreen’s thesis is straightforward. In 2008 the United States, and with it the rest of the world, was headed for another Great Depression. Thanks to strong doses of monetary and fiscal stimulus, and lender-of-last-resort operations, especially in the United States, a second Great Depression was averted. Ideas were important: Much of the success can be attributed to John Maynard Keynes, Milton Friedman, and Anna Schwartz, and the lessons they drew from the Great Depression. But there was a downside to success. Because of the severity of the crisis in the 1930s the financial system underwent a massive reform that put it in a tough but effective straightjacket. The Great Recession was milder; politicians and lobbyists who opposed strict regulation regrouped, and the reforms were moderate at best. The Great Depression and the Great Recession were separated by eighty years, a long period of financial stability produced, according to Eichengreen, by New Deal financial reforms. But, he concludes, because the damage done by deregulation was only partly undone, “we are likely to see another such crisis in less than eighty years (p. 387).”

The analysis in the book is rigorous. Nevertheless, Eichengreen has written a book that can be read by policy makers, journalists, and the famous, and hopefully numerous, intelligent layperson. There are no charts, tables, or equations. Indeed, it would make a good textbook for an undergraduate course on the financial crisis. Eichengreen writes clearly. And he has sprinkled the text with biographical snippets that both inform and entertain. We meet William Jennings Bryan in the 1920s when he is using his oratorical skills to sell real estate in Florida; and we meet Charles Dawes, prominent banker, Vice President, Nobel Peace Prize winner (for his work on German Reparations), and composer of the melody for “It’s All in the Game.”

To make his case that the two crises were similar except for actions taken by governments, Eichengreen recounts both crises and identifies one parallel after another. The 1920s had Charles Ponzi; we had Bernie Madoff. In the 1920s the head of the Bank of England, Montagu Norman, was given, perhaps unconsciously, to “constructive ambiguity” (p. 23); we had Alan Greenspan. The 1920s witnessed the Florida land boom; we had subprime mortgages. Charles Dawes’s bank got needed assistance from the Reconstruction Finance Corporation, but the Guardian Group in Detroit was allowed to fail; we had Bear Stearns and Lehman Brothers. And this is just a taste. Eichengreen adds many, many more. Indeed, the parallels come so thick and fast that one is reminded of the phrase Albert Einstein used to describe two distant particles that were thought to be entangled: “spooky action at a distance.”

The book is divided into four parts. Part I, “The Best of Times,” consists of six chapters that cover the 1920s and the first decade of our century.  Here we learn (without attempting to be exhaustive) about real estate booms in the twenties, the attempt after World War I to reconstruct the gold standard, the repeated attempts to solve the German reparations problem, the Smoot-Hawley tariff, and the U.S. Stock market bubble. Then Eichengreen turns to our era and describes financial deregulation, the subprime mortgage boom, the expansion of the shadow banking sector, and the spread of this type of banking to Europe. Eichengreen doesn’t present new, controversial interpretations of events. Rather he presents conclusions based on careful readings of the available literature including the latest work by economic historians. What is new is the web of parallels he draws between the two crises. Others, of course, have noted the similarities, not the least Ben Bernanke as he wrestled with the crisis; but no one has created such a large catalog of parallels.

In Part II, “The Worst of Times,” nine chapters in all, we learn first about the stock market crash in 1929, the banking crises of 1930-33, and the spread of the Great Depression to Europe. Then he turns to the Great Recession: Bear Stearns, Lehman Brothers, AIG and all that, and the spread of the crisis to Europe.

In the seven chapters of Part III, “Toward Better Times,” we learn about Roosevelt’s attempts to revive the economy: the National Industrial Recovery Act, the Reconstruction Finance Corporation, Federal Reserve Policy in the 1930s, and Roosevelt’s conflicted ideas about budget deficits. European responses to the crisis are also discussed at length, and Japan’s Korekiyo Takahashi is celebrated as the finance minister who got it right. Takahashi, aided it must be said by costly Japanese military adventures, authorized a heavy dose of money-financed deficit spending and the result was the best economic performance among the industrial nations. Eichengreen then turns to our crisis: zero interest rates, quantitative easing, bailouts, and the fiscal stimulus. The argument is usually that what the government did helped, but more should have been done.

In Part IV, “Avoiding the Next Time,” Eichengreen focusses particularly on Dodd-Frank and the Euro. His main efforts are directed at explaining why so little was done to prevent another crisis. A number of potential reforms get favorable mentions: consolidation of regulatory agencies, higher capital requirements for financial institutions, and regulations that limit risk taking. But Eichengreen doesn’t rank possible reforms or explain in detail how they would work. Here I wanted Eichengreen to go on a bit, and tell us more about his ideas on what should have and presumably still can be done to prevent another crisis. His approach to Glass-Steagall is an example of his above the fray stance toward regulation. Eichengreen mentions Glass-Steagall, and the separation of commercial from investment banking many times — one chapter is titled “Shattered Glass.” He rejects the argument made mostly forcefully by Andrew Ross Sorkin (2012) — although it is one that must have occurred to many observers — that ending the separation of commercial and investment banking didn’t have much to do with causing the crisis. After all, Merrill Lynch, Bear Stearns, and Lehman brothers were not branches of commercial banks when they went off the rails. And AIG was an insurance company. Eichengreen tells us that ending Glass Steagall was “indicative of a trend” (p. 424), which it surely was, but he seems to feel that it was more than that. Here I would have liked to learn more about Eichengreen’s ideas about how ending Glass-Steagall undermined the system. Did it create moral hazard, because firms knew they could merge with a bank if they got in trouble? Or was it some other mechanism? And more urgently, I would have liked to have read more about Eichengreen’s views on how high a priority restoring Glass-Steagall should be, and where the lines should be drawn.

Comment and Conclusion

Eichengreen’s book is a synthesis. It pulls together an enormous body of studies by economic historians, policy makers, and journalists. Specialists in financial history will be familiar with many parts of the story. But I doubt there are any who will not learn a great deal from reading Eichengreen’s account. While I was persuaded by most of Eichengreen’s arguments I did have a recurring concern about how far we can go as social scientists, as opposed to policy advocates, in making assertions about what would have happened if alternative policies had been followed on the basis of two observations. It is one thing to claim that without aggressive monetary and fiscal actions and bailouts we might have ended up in another Great Depression.  And for me, as I suspect for most of us, that possibility justifies much of what was done. Even, say, a one-third chance of another Great Depression makes pulling out the stops worthwhile. But that claim is very different from the claim that we would have ended up in a Great Depression if less had been done. The truth is that we can’t be sure what path the economy would have followed if less had been done, or where we would be today.

Consider the following table which shows unemployment after four financial panics. When you compare 2008 only with 1930, it seems clear that we did a lot a better after the panic of 2008, and the things we did in 2008 “worked” at least up to a point: We avoided a Great Depression. On the other hand, we did, arguably, worse after 2008 than after the panic of 1907 when help for the economy was provided mainly through the circumscribed lender-of last-resort actions undertaken by J.P. Morgan.  And we did almost exactly the same as after the crisis of 1893, when only some limited stimulus came well after the crisis in the form of gold inflows and spending on the Spanish-American War. In fact, the 2008 and 1893 unemployment rates are so similar that it looks like another case of “spooky action at a distance.”

2008 1930 1907 1893
-1 4.6 2.9 2.5 4.3
0 5.8 8.9 3.1 6.8
1 9.3 15.7 7.5 9.3
2 9.6 22.9 5.7 8.5
3 8.9 20.9 5.9 9.3
4 8.1 16.2 7.0 8.5
5 7.4 14.4 5.9 7.8
6 6.2 10.0 5.7 5.9
7 5.3 9.2 8.5 5.0

Source: Historical Statistics of the United States, Millennial Edition: Volume 2, Work and Welfare, series Ba475 for 1893, 1907, and 1930 (pp. 2-82 and 2-83), and the standard Bureau of Labor Statistics series for 2008.

My point is not that 1893 is necessarily a better analog than 1930. One could argue the point, but I don’t think we know. Constructing a counterfactual macroeconomic history of a financial crisis and recession is essentially an exercise in forecasting, and we economists are just not very good at macroeconomic forecasting. We are in the position, I believe, of physicians in days gone by: we have some drugs that experience tells us sometimes relieve pain and suffering. But how they work and why they work in some cases and not in others, and what the long-run side effects are – we have some ideas we can discuss, or more likely debate, but the bottom line is that we don’t know.

(If we were entangled with the Depression of 1890s, we would want to know what happened in 1901 the year that corresponds to 2016. Among other things, 1901 began with a slide on the stock market of about 9%. Sound familiar?! Despite a spring rally the market finished the year off by about the same percentage. By the way, this is just an observation; I am not giving investment advice.)

Many excellent books and articles have been written about the financial crisis of 2008 and there will undoubtedly be many more. Gary Gorton’s papers and books and Ben Bernanke’s memoir immediately spring to mind, but the list of good books and articles is already a long one. There is nothing like a financial crisis to concentrate the minds of economists. However, if financial history is not your thing, and you want to read just one book about the financial crisis, you couldn’t do better than Hall of Mirrors.


Andrew Ross Sorkin, “Reinstating an Old Rule Is Not a Cure for Crisis” New York Times, May 21, 2012.

Hugh Rockoff is Distinguished Professor of Economics at Rutgers University and a Research Associate with the National Bureau of Economic Research.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

The Depression of 1893

David O. Whitten, Auburn University

The Depression of 1893 was one of the worst in American history with the unemployment rate exceeding ten percent for half a decade. This article describes economic developments in the decades leading up to the depression; the performance of the economy during the 1890s; domestic and international causes of the depression; and political and social responses to the depression.

The Depression of 1893 can be seen as a watershed event in American history. It was accompanied by violent strikes, the climax of the Populist and free silver political crusades, the creation of a new political balance, the continuing transformation of the country’s economy, major changes in national policy, and far-reaching social and intellectual developments. Business contraction shaped the decade that ushered out the nineteenth century.

Unemployment Estimates

One way to measure the severity of the depression is to examine the unemployment rate. Table 1 provides estimates of unemployment, which are derived from data on output — annual unemployment was not directly measured until 1929, so there is no consensus on the precise magnitude of the unemployment rate of the 1890s. Despite the differences in the two series, however, it is obvious that the Depression of 1893 was an important event. The unemployment rate exceeded ten percent for five or six consecutive years. The only other time this occurred in the history of the US economy was during the Great Depression of the 1930s.

Timing and Depth of the Depression

The National Bureau of Economic Research estimates that the economic contraction began in January 1893 and continued until June 1894. The economy then grew until December 1895, but it was then hit by a second recession that lasted until June 1897. Estimates of annual real gross national product (which adjust for this period’s deflation) are fairly crude, but they generally suggest that real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak, but GDP fell about 2.5% from 1895 to 1896. During this period population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899. Immigration, which had averaged over 500,000 people per year in the 1880s and which would surpass one million people per year in the first decade of the 1900s, averaged only 270,000 from 1894 to 1898.

Table 1
Estimates of Unemployment during the 1890s

Year Lebergott Romer
1890 4.0% 4.0%
1891 5.4 4.8
1892 3.0 3.7
1893 11.7 8.1
1894 18.4 12.3
1895 13.7 11.1
1896 14.5 12.0
1897 14.5 12.4
1898 12.4 11.6
1899 6.5 8,7
1900 5.0 5.0

Source: Romer, 1984

The depression struck an economy that was more like the economy of 1993 than that of 1793. By 1890, the US economy generated one of the highest levels of output per person in the world — below that in Britain, but higher than the rest of Europe. Agriculture no longer dominated the economy, producing only about 19 percent of GNP, well below the 30 percent produced in manufacturing and mining. Agriculture’s share of the labor force, which had been about 74% in 1800, and 60% in 1860, had fallen to roughly 40% in 1890. As Table 2 shows, only the South remained a predominantly agricultural region. Throughout the country few families were self-sufficient, most relied on selling their output or labor in the market — unlike those living in the country one hundred years earlier.

Table 2
Agriculture’s Share of the Labor Force by Region, 1890

Northeast 15%
Middle Atlantic 17%
Midwest 43%
South Atlantic 63%
South Central 67%
West 29%

Economic Trends Preceding the 1890s

Between 1870 and 1890 the number of farms in the United States rose by nearly 80 percent, to 4.5 million, and increased by another 25 percent by the end of the century. Farm property value grew by 75 percent, to $16.5 billion, and by 1900 had increased by another 25 percent. The advancing checkerboard of tilled fields in the nation’s heartland represented a vast indebtedness. Nationwide about 29% of farmers were encumbered by mortgages. One contemporary observer estimated 2.3 million farm mortgages nationwide in 1890 worth over $2.2 billion. But farmers in the plains were much more likely to be in debt. Kansas croplands were mortgaged to 45 percent of their true value, those in South Dakota to 46 percent, in Minnesota to 44, in Montana 41, and in Colorado 34 percent. Debt covered a comparable proportion of all farmlands in those states. Under favorable conditions the millions of dollars of annual charges on farm mortgages could be borne, but a declining economy brought foreclosures and tax sales.

Railroads opened new areas to agriculture, linking these to rapidly changing national and international markets. Mechanization, the development of improved crops, and the introduction of new techniques increased productivity and fueled a rapid expansion of farming operations. The output of staples skyrocketed. Yields of wheat, corn, and cotton doubled between 1870 and 1890 though the nation’s population rose by only two-thirds. Grain and fiber flooded the domestic market. Moreover, competition in world markets was fierce: Egypt and India emerged as rival sources of cotton; other areas poured out a growing stream of cereals. Farmers in the United States read the disappointing results in falling prices. Over 1870-73, corn and wheat averaged $0.463 and $1.174 per bushel and cotton $0.152 per pound; twenty years later they brought but $0.412 and $0.707 a bushel and $0.078 a pound. In 1889 corn fell to ten cents in Kansas, about half the estimated cost of production. Some farmers in need of cash to meet debts tried to increase income by increasing output of crops whose overproduction had already demoralized prices and cut farm receipts.

Railroad construction was an important spur to economic growth. Expansion peaked between 1879 and 1883, when eight thousand miles a year, on average, were built including the Southern Pacific, Northern Pacific and Santa Fe. An even higher peak was reached in the late 1880s, and the roads provided important markets for lumber, coal, iron, steel, and rolling stock.

The post-Civil War generation saw an enormous growth of manufacturing. Industrial output rose by some 296 percent, reaching in 1890 a value of almost $9.4 billion. In that year the nation’s 350,000 industrial firms employed nearly 4,750,000 workers. Iron and steel paced the progress of manufacturing. Farm and forest continued to provide raw materials for such established enterprises as cotton textiles, food, and lumber production. Heralding the machine age, however, was the growing importance of extractives — raw materials for a lengthening list of consumer goods and for producing and fueling locomotives, railroad cars, industrial machinery and equipment, farm implements, and electrical equipment for commerce and industry. The swift expansion and diversification of manufacturing allowed a growing independence from European imports and was reflected in the prominence of new goods among US exports. Already the value of American manufactures was more than half the value of European manufactures and twice that of Britain.

Onset and Causes of the Depression

The depression, which was signaled by a financial panic in 1893, has been blamed on the deflation dating back to the Civil War, the gold standard and monetary policy, underconsumption (the economy was producing goods and services at a higher rate than society was consuming and the resulting inventory accumulation led firms to reduce employment and cut back production), a general economic unsoundness (a reference less to tangible economic difficulties and more to a feeling that the economy was not running properly), and government extravagance .

Economic indicators signaling an 1893 business recession in the United States were largely obscured. The economy had improved during the previous year. Business failures had declined, and the average liabilities of failed firms had fallen by 40 percent. The country’s position in international commerce was improved. During the late nineteenth century, the United States had a negative net balance of payments. Passenger and cargo fares paid to foreign ships that carried most American overseas commerce, insurance charges, tourists’ expenditures abroad, and returns to foreign investors ordinarily more than offset the effect of a positive merchandise balance. In 1892, however, improved agricultural exports had reduced the previous year’s net negative balance from $89 million to $20 million. Moreover, output of non-agricultural consumer goods had risen by more than 5 percent, and business firms were believed to have an ample backlog of unfilled orders as 1893 opened. The number checks cleared between banks in the nation at large and outside New York, factory employment, wholesale prices, and railroad freight ton mileage advanced through the early months of the new year.

Yet several monthly series of indicators showed that business was falling off. Building construction had peaked in April 1892, later moving irregularly downward, probably in reaction to over building. The decline continued until the turn of the century, when construction volume finally turned up again. Weakness in building was transmitted to the rest of the economy, dampening general activity through restricted investment opportunities and curtailed demand for construction materials. Meanwhile, a similar uneven downward drift in business activity after spring 1892 was evident from a composite index of cotton takings (cotton turned into yarn, cloth, etc.) and raw silk consumption, rubber imports, tin and tin plate imports, pig iron manufactures, bituminous and anthracite coal production, crude oil output, railroad freight ton mileage, and foreign trade volume. Pig iron production had crested in February, followed by stock prices and business incorporations six months later.

The economy exhibited other weaknesses as the March 1893 date for Grover Cleveland’s inauguration to the presidency drew near. One of the most serious was in agriculture. Storm, drought, and overproduction during the preceding half-dozen years had reversed the remarkable agricultural prosperity and expansion of the early 1880s in the wheat, corn, and cotton belts. Wheat prices tumbled twenty cents per bushel in 1892. Corn held steady, but at a low figure and on a fall of one-eighth in output. Twice as great a decline in production dealt a severe blow to the hopes of cotton growers: the season’s short crop canceled gains anticipated from a recovery of one cent in prices to 8.3 cents per pound, close to the average level of recent years. Midwestern and Southern farming regions seethed with discontent as growers watched staple prices fall by as much as two-thirds after 1870 and all farm prices by two-fifths; meanwhile, the general wholesale index fell by one-fourth. The situation was grave for many. Farmers’ terms of trade had worsened, and dollar debts willingly incurred in good times to permit agricultural expansion were becoming unbearable burdens. Debt payments and low prices restricted agrarian purchasing power and demand for goods and services. Significantly, both output and consumption of farm equipment began to fall as early as 1891, marking a decline in agricultural investment. Moreover, foreclosure of farm mortgages reduced the ability of mortgage companies, banks, and other lenders to convert their earning assets into cash because the willingness of investors to buy mortgage paper was reduced by the declining expectation that they would yield a positive return.

Slowing investment in railroads was an additional deflationary influence. Railroad expansion had long been a potent engine of economic growth, ranging from 15 to 20 percent of total national investment in the 1870s and 1880s. Construction was a rough index of railroad investment. The amount of new track laid yearly peaked at 12,984 miles in 1887, after which it fell off steeply. Capital outlays rose through 1891 to provide needed additions to plant and equipment, but the rate of growth could not be sustained. Unsatisfactory earnings and a low return for investors indicated the system was over built and overcapitalized, and reports of mismanagement were common. In 1892, only 44 percent of rail shares outstanding returned dividends, although twice that proportion of bonds paid interest. In the meantime, the completion of trunk lines dried up local capital sources. Political antagonism toward railroads, spurred by the roads’ immense size and power and by real and imagined discrimination against small shippers, made the industry less attractive to investors. Declining growth reduced investment opportunity even as rail securities became less appealing. Capital outlays fell in 1892 despite easy credit during much of the year. The markets for ancillary industries, like iron and steel, felt the impact of falling railroad investment as well; at times in the 1880s rails had accounted for 90 percent of the country’s rolled steel output. In an industry whose expansion had long played a vital role in creating new markets for suppliers, lagging capital expenditures loomed large in the onset of depression.

European Influences

European depression was a further source of weakness as 1893 began. Recession struck France in 1889, and business slackened in Germany and England the following year. Contemporaries dated the English downturn from a financial panic in November. Monetary stringency was a base cause of economic hard times. Because specie — gold and silver — was regarded as the only real money, and paper money was available in multiples of the specie supply, when people viewed the future with doubt they stockpiled specie and rejected paper. The availability of specie was limited, so the longer hard times prevailed the more difficult it was for anyone to secure hard money. In addition to monetary stringency, the collapse of extensive speculations in Australian, South African, and Argentine properties; and a sharp break in securities prices marked the advent of severe contraction. The great banking house of Baring and Brothers, caught with excessive holdings of Argentine securities in a falling market, shocked the financial world by suspending business on November 20, 1890. Within a year of the crisis, commercial stagnation had settled over most of Europe. The contraction was severe and long-lived. In England many indices fell to 80 percent of capacity; wholesale prices overall declined nearly 6 percent in two years and had declined 15 percent by 1894. An index of the prices of principal industrial products declined by almost as much. In Germany, contraction lasted three times as long as the average for the period 1879-1902. Not until mid-1895 did Europe begin to revive. Full prosperity returned a year or more later.

Panic in the United Kingdom and falling trade in Europe brought serious repercussions in the United States. The immediate result was near panic in New York City, the nation’s financial center, as British investors sold their American stocks to obtain funds. Uneasiness spread through the country, fostered by falling stock prices, monetary stringency, and an increase in business failures. Liabilities of failed firms during the last quarter of 1890 were $90 million — twice those in the preceding quarter. Only the normal year’s end grain exports, destined largely for England, averted a gold outflow.

Circumstances moderated during the early months of 1891, although gold flowed to Europe, and business failures remained high. Credit eased, if slowly: in response to pleas for relief, the federal treasury began the premature redemption of government bonds to put additional money into circulation, and the end of the harvest trade reduced demand for credit. Commerce quickened in the spring. Perhaps anticipation of brisk trade during the harvest season stimulated the revival of investment and business; in any event, the harvest of 1891 buoyed the economy. A bumper American wheat crop coincided with poor yields in Europe increase exports and the inflow of specie: US exports in fiscal 1892 were $150 million greater than in the preceding year, a full 1 percent of gross national product. The improved market for American crops was primarily responsible for a brief cycle of prosperity in the United States that Europe did not share. Business thrived until signs of recession began to appear in late 1892 and early 1893.

The business revival of 1891-92 only delayed an inevitable reckoning. While domestic factors led in precipitating a major downturn in the United States, the European contraction operated as a powerful depressant. Commercial stagnation in Europe decisively affected the flow of foreign investment funds to the United States. Although foreign investment in this country and American investment abroad rose overall during the 1890s, changing business conditions forced American funds going abroad and foreign funds flowing into the United States to reverse as Americans sold off foreign holdings and foreigners sold off their holdings of American assets. Initially, contraction abroad forced European investors to sell substantial holdings of American securities, then the rate of new foreign investment fell off. The repatriation of American securities prompted gold exports, deflating the money stock and depressing prices. A reduced inflow of foreign capital slowed expansion and may have exacerbated the declining growth of the railroads; undoubtedly, it dampened aggregate demand.

As foreign investors sold their holdings of American stocks for hard money, specie left the United States. Funds secured through foreign investment in domestic enterprise were important in helping the country meet its usual balance of payments deficit. Fewer funds invested during the 1890s was one of the factors that, with a continued negative balance of payments, forced the United States to export gold almost continuously from 1892 to 1896. The impact of depression abroad on the flow of capital to this country can be inferred from the history of new capital issues in Britain, the source of perhaps 75 percent of overseas investment in the United States. British issues varied as shown in Table 3.

Table 3
British New Capital Issues, 1890-1898 (millions of pounds, sterling)

1890 142.6
1891 104.6
1892 81.1
1893 49.1
1894 91.8
1895 104.7
1896 152.8
1897 157.3
1898 150.2

Source: Hoffmann, p. 193

Simultaneously, the share of new British investment sent abroad fell from one-fourth in 1891 to one-fifth two years later. Over that same period, British net capital flows abroad declined by about 60 percent; not until 1896 and 1897 did they resume earlier levels.

Thus, the recession that began in 1893 had deep roots. The slowdown in railroad expansion, decline in building construction, and foreign depression had reduced investment opportunities, and, following the brief upturn effected by the bumper wheat crop of 1891, agricultural prices fell as did exports and commerce in general. By the end of 1893, business failures numbering 15,242 averaging $22,751 in liabilities, had been reported. Plagued by successive contractions of credit, many essentially sound firms failed which would have survived under ordinary circumstances. Liabilities totaled a staggering $357 million. This was the crisis of 1893.

Response to the Depression

The financial crises of 1893 accelerated the recession that was evident early in the year into a major contraction that spread throughout the economy. Investment, commerce, prices, employment, and wages remained depressed for several years. Changing circumstances and expectations, and a persistent federal deficit, subjected the treasury gold reserve to intense pressure and generated sharp counterflows of gold. The treasury was driven four times between 1894 and 1896 to resort to bond issues totaling $260 million to obtain specie to augment the reserve. Meanwhile, restricted investment, income, and profits spelled low consumption, widespread suffering, and occasionally explosive labor and political struggles. An extensive but incomplete revival occurred in 1895. The Democratic nomination of William Jennings Bryan for the presidency on a free silver platform the following year amid an upsurge of silverite support contributed to a second downturn peculiar to the United States. Europe, just beginning to emerge from depression, was unaffected. Only in mid-1897 did recovery begin in this country; full prosperity returned gradually over the ensuing year and more.

The economy that emerged from the depression differed profoundly from that of 1893. Consolidation and the influence of investment bankers were more advanced. The nation’s international trade position was more advantageous: huge merchandise exports assured a positive net balance of payments despite large tourist expenditures abroad, foreign investments in the United States, and a continued reliance on foreign shipping to carry most of America’s overseas commerce. Moreover, new industries were rapidly moving to ascendancy, and manufactures were coming to replace farm produce as the staple products and exports of the country. The era revealed the outlines of an emerging industrial-urban economic order that portended great changes for the United States.

Hard times intensified social sensitivity to a wide range of problems accompanying industrialization, by making them more severe. Those whom depression struck hardest as well as much of the general public and major Protestant churches, shored up their civic consciousness about currency and banking reform, regulation of business in the public interest, and labor relations. Although nineteenth century liberalism and the tradition of administrative nihilism that it favored remained viable, public opinion began to slowly swing toward governmental activism and interventionism associated with modern, industrial societies, erecting in the process the intellectual foundation for the reform impulse that was to be called Progressivism in twentieth century America. Most important of all, these opposed tendencies in thought set the boundaries within which Americans for the next century debated the most vital questions of their shared experience. The depression was a reminder of business slumps, commonweal above avarice, and principle above principal.

Government responses to depression during the 1890s exhibited elements of complexity, confusion, and contradiction. Yet they also showed a pattern that confirmed the transitional character of the era and clarified the role of the business crisis in the emergence of modern America. Hard times, intimately related to developments issuing in an industrial economy characterized by increasingly vast business units and concentrations of financial and productive power, were a major influence on society, thought, politics, and thus, unavoidably, government. Awareness of, and proposals of means for adapting to, deep-rooted changes attending industrialization, urbanization, and other dimensions of the current transformation of the United States long antedated the economic contraction of the nineties.

Selected Bibliography

*I would like to thank Douglas Steeples, retired dean of the College of Liberal Arts and professor of history, emeritus, Mercer University. Much of this article has been taken from Democracy in Desperation: The Depression of 1893 by Douglas Steeples and David O. Whitten, which was declared an Exceptional Academic Title by Choice. Democracy in Desperation includes the most recent and extensive bibliography for the depression of 1893.

Clanton, Gene. Populism: The Humane Preference in America, 1890-1900. Boston: Twayne, 1991.

Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Goodwyn, Lawrence. Democratic Promise: The Populist Movement in America. New York: Oxford University Press, 1976.

Grant, H. Roger. Self Help in the 1890s Depression. Ames: Iowa State University Press, 1983.

Higgs, Robert. The Transformation of the American Economy, 1865-1914. New York: Wiley, 1971.

Himmelberg, Robert F. The Rise of Big Business and the Beginnings of Antitrust and Railroad Regulation, 1870-1900. New York: Garland, 1994.

Hoffmann, Charles. The Depression of the Nineties: An Economic History. Westport, CT: Greenwood Publishing, 1970.

Jones, Stanley L. The Presidential Election of 1896. Madison: University of Wisconsin Press, 1964.

Kindleberger, Charles Poor. Manias, Panics, and Crashes: A History of Financial Crises. Revised Edition. New York: Basic Books, 1989.

Kolko, Gabriel. Railroads and Regulation, 1877-1916. Princeton: Princeton University Press, 1965.

Lamoreaux, Naomi R. The Great Merger Movement in American Business, 1895-1904. New York: Cambridge University Press, 1985.

Rees, Albert. Real Wages in Manufacturing, 1890-1914. Princeton, NJ: Princeton University Press, 1961.

Ritter, Gretchen. Goldbugs and Greenbacks: The Antimonopoly Tradition and the Politics of Finance in America. New York: Cambridge University Press, 1997.

Romer, Christina. “Spurious Volatility in Historical Unemployment Data.” Journal of Political Economy 94, no. 1. (1986): 1-37.

Schwantes, Carlos A. Coxey’s Army: An American Odyssey. Lincoln: University of Nebraska Press, 1985.

Steeples, Douglas, and David Whitten. Democracy in Desperation: The Depression of 1893. Westport, CT: Greenwood Press, 1998.

Timberlake, Richard. “Panic of 1893.” In Business Cycles and Depressions: An Encyclopedia, edited by David Glasner. New York: Garland, 1997.

White, Gerald Taylor. Years of Transition: The United States and the Problems of Recovery after 1893. University, AL: University of Alabama Press, 1982.

Citation: Whitten, David. “Depression of 1893”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL

Banking Panics in the US: 1873-1933

Elmus Wicker, Indiana University

Prior to the passage of deposit insurance legislation in 1933 banking panics were a recurrent feature of U.S. banking history. Three phases of that panic experience can be identified depending upon the type of regulatory framework in place: the pre-Civil War era, the National Banking era, and the era of the Federal Reserve System. Federal regulation was absent in the antebellum period with panics in 1819, 1837, 1857 and incipient panics in 1860 and 1861. During the National Banking era, banking panics occurred in 1873, 1893, and 1907 with incipient panics in 1884 and 1890. After the Federal Reserve Act was passed in 1913, there were four full-scale banking panics, one in 1930, two in 1931, one in 1933 and a localized panic in Chicago in 1932. This article will examine post-Civil War banking panics only.

Panics as Financial Shocks

Banking panics belong to a general class of financial shocks, which include panics in the stock market, the foreign exchange market and the acceleration of commercial bankruptcies. Banking panics are only one type of financial shock and certainly not the most frequent.

A banking panic may be defined as a class of financial shocks whose origin can be found in any sudden and unanticipated revision of expectations of deposit loss where there is an attempt, usually unsuccessful, to convert checking deposits into currency. In the past banking panics were regarded as examples of irrational or inscrutable behavior. That has changed. More recently they have been treated as a rational depositor response to an asymmetric information deficit. This revival of interest in banking panic theory has renewed scholarly interest in what happened in specific panic episodes.

Banking panics may be local, regional or national in geographical incidence. However, that does not preclude the economic effects from being extended beyond local or regional boundaries. With the single exception of the 1893 panic, pre-1914 banking panics were restricted mainly to the New York money market with relatively few bank suspensions in the rest of the country. Yet there were nonnegligible national effects in some instances on the money stock. Effects of panics on expenditures and overall economic activity have been more difficult to measure.

Specific banking panics differed as to their origins, duration, the number and incidence of bank runs and bank failures, the response of the New York Clearing House (NYCH) in the earlier period and the Federal Reserve in the latter, and their real effects, if any. Each had its own signature, as it were, differentiating it from the others. With due respect to the differences one can attempt to construct a general profile of the panics’ main characteristics both during the national banking era and the Federal Reserve System.

Characteristics of Panics of the National Banking Era

During the National Banking era (1863-1913) episodes of banking panics were accompanied by money market stringency, a stock market collapse, loan and deposit contractions, runs on banks, bank failures, the issue of Clearing House certificates, and in the case of the three major banking panics the partial suspension of cash payment. The general public had little or no direct experience of bank runs and bank suspensions, for their numbers were small with one exception and were highly concentrated. The partial suspension of cash payment was more widely diffused and brought home to the many the realization of a banking panic. The proximate effects of partial suspension of cash payment included: 1) difficulties encountered by business firms in meeting payrolls, 2) dislocation of the domestic exchanges, 3) an increase in hoarding, and 4) the emergence of a currency premium. This disruption of the payments mechanism led to an increase in real transactions costs, temporary factory closings, layoffs, and the creation of currency substitutes. The domestic exchanges were disrupted because bankers were reluctant to make remittances. Failure to remit on time encouraged firms to demand cash payment, thereby reducing real transactions.

Characteristics of Panics of the Great Depression

The banking panics of the Great Depression differed from the pre-1914 panics in the following ways:
1. Unlike pre-1914 panics, there were multiple banking crises during the contraction phase of a single cycle from 1929-1933, at least two of which were region specific.
2. The “eye” of the crisis was no longer in the New York money market.
3. At least two of the insidious effects of the pre-1914 crises had been eliminated, spikes in the call money rates and serious stock market upheavals. The 1929 stock market collapse was not accompanied by a banking panic due to the quick action of the Federal Reserve Bank of New York.
4. Unlike pre-1914 banking panics, there was greater elasticity of the currency supply in response to the increased demands of the public. Federal Reserve notes expanded substantially in each of the four banking panics.
5. Except for 1933, banks did not suspend cash payment.

The significant fact about the Great Depression banking panics is the occurrence of multiple panics; there was a continuous deterioration of depositor confidence as revealed by the monthly data on currency in circulation seasonally adjusted. In neither 1930 nor 1931 did the ending of the banking crisis result in a return flow of currency. Deceleration of bank suspensions was not followed by dishoarding as in previous panics. During 1930 and 1931 banking panics, hoarding accelerated during the panic, leveled off at a higher plateau, and then resumed an upward thrust at the onset of the next shock to depositor confidence.

The Federal Reserve eliminated crises in the central money market by increasing the availability of reserves.

Bank Suspensions

One of the principal characteristics of banking panics is the increased number of bank runs and bank suspensions. The evidence does not permit an estimate of the number of all bank runs. Table 1 provides estimates of bank suspensions in each of the five banking disturbances of the national banking era and three of the four banking panics of the Great Depression. Estimates for 1933 are not included because of widespread bank holidays in the last week of February and March.

Table 1
Number of Bank Failures: National Banking Era and Great Depression

National Banking Era Great Depression
Panic Dates Number of Failures Panic Dates Number of Failures
September 1873 101 November-December 1930 806
May 1884 42 April-August 1931 573
November 1890 18 September-October 1931 827
May-August 1893 503 June-July 1932 283
October-December 1907 73 February-March 1933 bank holiday

Source: Wicker (2000), p. 143.

We cannot but be surprised at the smallness of the number of bank suspensions before 1914, the exception being 1893. The banking disturbances of 1884 and 1890 hardly qualify as banking panics, and I have excluded them. I prefer to label them incipient panics because they were forestalled by effective action of the NYCH.

Suspensions of the Great Depression

During the banking panics of 1930 and 1931 there was no uniform response across the twelve Federal Reserve Districts, whether measured by the bank suspension evidence or the loss of depositor confidence as reflected in Federal Reserve notes in circulation. These three (one in 1930 and two in 1931) banking panics were region specific inasmuch as at least one-half of the Districts had either fewer than 10 percent of the bank closings (1930) or there was little or no change in hoarding (April-August 1931).

Two out of every five closings during the 1930 panic were located in the St. Louis Federal Reserve District. Four Districts accounted for 80 percent of total bank suspensions, and slightly over one-half of the deposits of failed banks. Between April and August 1931, one-third of the bank suspensions were in the Chicago District. There was a mini panic in Chicago in June and a full-scale panic in Toledo in August. The Cleveland Federal Reserve District had two-thirds of the deposits of suspended banks. However, in six Districts there was little or no change in currency hoarding.

During the September-October crisis in 1931 three Districts, Chicago, Cleveland and Philadelphia accounted for two-thirds of the deposits of suspended banks and one-half of the increase in hoarding. Moreover, there was a high concentration of suspensions in three cities: Pittsburgh, Philadelphia, and Chicago.

Suspensions in the National Banking Era

The highest concentration of bank failures in 1873 was in three states: New York, Pennsylvania and Virginia with over 70 percent of all suspensions. There were serious city-wide bank runs in Augusta and Savannah, Georgia, Louisville, Charleston, South Carolina, Nashville and Knoxville, Tennessee and Petersburg and Richmond, Virginia. Unprecedented runs on banks occurred in June and July 1893. The distinctive characteristic of the July suspensions were city-wide panics in Kansas City, Kansas and Kansas City, Missouri, Denver, Louisville, Milwaukee, and Portland, Oregon. The closures in Kansas City, Denver, and Louisville accounted for one in four suspensions in the western states but nearly 70 percent of the liabilities of closed banks. The key to understanding what happened in July is what happened in these six cities.

The most surprising conclusion to emerge from the narrative of what happened in these six cities during July is the proportion of banks that suspended and resumed operations within three months. These banks appear to have been solvent at the time of closure. It is indeed striking that over 90 percent of the banks in Kansas City, Portland, Oregon and sixty-five percent in Louisville and Denver were solvent a the time of the bank runs!

The banking panic of 1907 was the most severe of the panics of the national banking era if measured solely by deposits of failed banks. Bank runs were long and persistent for some trust companies, but the overall number of suspensions remained small. Severity of Bank Suspensions

Table 2 attempts to measure the relative severity of bank suspensions during the two periods by showing the ratio of total bank suspensions to the total number of banks in existence at the beginning of each panic, 1873 and 1933 excepted.

Table 2
Total Bank Suspensions as a Percent of Total Number of Banks in Each of the Banking Crises, 1873- 1931

National Banking Era Great Depression
Panic Date Percentage Panic Date Percentage
1873 see note 1930 3.4%
1884 0.6% April-August 1931 2.95%
1890 0.15% September-October 1931 4.27%
1893 4.2%
1907 0.26%

Note: The number of state and national bank suspensions as a percentage of the total number state and national banks was 1.648% in 1873. I have not uncovered estimates of the total number of unincorporated banks for 1873. Source: Wicker (2000), p. 6.

There are no estimates of the total number of banks in 1873 and the estimates for 1933 are inflated by bank closings resulting from banking holidays. It is quite clear that bank suspensions in the national banking era were less severe, except for the banking panic of 1893. In 1884, 1890 and 1907, less than one percent of banks were suspended, whereas in the most severe panics the suspension rates were between 2.95% and 4.27%.

The NYCH and Panics during the National Banking Era

Structural weaknesses of the National Banking Act have been widely perceived as the fundamental cause of the panics of the national banking era. An inelastic currency supply, the pyramiding of reserves and fixed reserve requirements have borne a large share of the blame to the almost complete neglect of the behavior of the New York Clearing House. The NYCH had the power, the knowledge (at least initially) and the instruments to forestall banking panics. Both the size and distribution of the banking reserve among the NYCH banks was conducive to the recognition of the specific role played by the New York banks in the maintenance of banking stability. The ultimate banking reserve of the country was lodged in six or seven of the largest New York banks. The size of that reserve was greater than that held by any of Europe’s central banks. Learning how to use that reserve was the chief task of the NYCH during the national banking era. The Clearing House had two principal instruments for managing the reserve: the issue of clearing house certificates and reserve pooling. The NYCH had the authority whenever it deemed it necessary to equalize or pool the reserves of the NYCH banks by transferring funds of surplus banks to deficit banks. The significance of reserve pooling was clearly understood by a special committee headed by George S. Coe, President of the Exchange National Bank. The Committee issued a report in November 1873 that effectively made the case that banking panics could be averted if the NYCH exercised bold leadership and was fully prepared to use its power to achieve its objective, which, it did effectively in 1860 and 1861 and again in 1873 with less success. Thereafter that knowledge seems to have faded from the collective memory of the Clearing House.

Causes of Depression-era Panics

Structural weaknesses may have been less important in generating the banking panics of the national banking era than the behavior of the NYCH, but they did play a prominent role in generating the panics of the Great Depression. The creation of the Federal Reserve was supposed to have been a panacea for the prevention of banking panics, yet the worst banking panics in our banking history occurred thereafter. How was that possible? Did the fault lie in the legislation creating the Fed or was Fed leadership culpable? Friedman and Schwartz (1963) attempted to unlock this riddle in terms of personalities, but there is a compelling alternative, which they rejected, that deserves reconsideration. Structural weaknesses in the original Federal Reserve Act can explain equally well, if not better, why the Fed failed to prevent the panics of the Great Depression. There were at least three important structural flaws in the 1913 Federal Reserve Act: l) membership was not compulsory for all banks; it was mandatory for national banks and optional for state banks and trust companies thereby restricting access to the discount window; 2) paper eligible for discount by member banks was too narrowly defined; and 3) power was decentralized among the twelve Federal Reserve Banks and the Federal Reserve Board making consistent and effective policy action difficult. These combined structural weaknesses hindered policymakers’ efforts to respond quickly at the onset of banking panics. When four out of five bank suspensions during the three panics of 1930 and 1931 were nonmember banks, it is time to reconsider the membership question as a cause of the Great Depression panics.

Random Withdrawal Theory vs. Asymmetric Information Theory

Calomiris and Gorton (1991) have identified for purely expository purposes two rival theories of banking panics around which research has “coalesced.” One theory descends directly from the seminal work of Diamond and Dybvig (1983) and has been labeled the random withdrawal hypothesis. The other has a varied origin associated with, among others, Gorton (1987) and Jacklin and Bhattacharya (1988) and is referred to as the asymmetric information approach. The random withdrawal hypothesis attributes bank suspensions to bank illiquidity induced by a contagion of fear. The asymmetric information approach assigns a key role to bank insolvency induced by asset shocks due to weak management, fraud and malfeasance, or persistent adverse economic conditions in a particular sector. This classification does not preclude that both may be at work simultaneously

The historical evidence is ambiguous about the validity of the two hypotheses. Asset shocks were clearly dominant in some panics, for example 1873 and 1884. Contagion played a far more important role during 1893 and 1933. Saunders and Wilson (1993) found significant contagion effects for a sample of national bank failures for the period 1930-32. Generalization is simply not possible. Each panic must be considered on its own merits.

The banking panic of 1930 has had special significance among the panics of the Great Depression because of the causal role assigned to it by Friedman and Schwartz. They maintained that an autonomous disturbance in the currency-deposit ratio provoked a rash of bank suspensions that decreased the money stock, which, in turn, converted a mild recession into a major depression. To have exerted a causal role, panic-induced bank suspensions must have been exogenous, that is, independent of price changes, interest rates and income. Boughton and Wicker (1979 and 1984) demonstrated that interest rates and income were important determinants of the money stock. The finding that the currency-deposit ratio was interest sensitive was consistent with Temin’s (1976) view that causation went from income and interest rates to money, not vice versa. The evidence on the causal role of money remains controversial; the historical evidence has still to be reconciled with the econometric evidence.

Disappearance of Panics after 1933

The long era of banking disturbances finally ended in 1933 due partly to the introduction of deposit insurance, improved performance of the Federal Reserve, and a better understanding of the sources of systemic banking unrest. Knowledge alone, we have learned, is not a sufficient guarantee to forestall banking panics. Leadership and policymaker competence are important as well.


Boughton, James and Elmus Wicker. “The Behavior of the Currency-Deposit Ratio during the Great Depression.” Journal of Money, Credit, and Banking 11 (1979): 405-18.

Boughton, James and Elmus Wicker. “A Reply to Trescott.” Journal of Money, Credit, and Banking 16 (1984): 336-7.

Calomiris, Charles W. and Gary Gorton. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by R. Glenn Hubbard, 109-173. Chicago: University of Chicago Press, 1991.

Diamond, Douglas and Philip Dybvig. “Bank Runs, Liquidity, and Deposit Insurance.” Journal of Political Economy 91, no. 3 (1983): 401-19.

Friedman, Milton and Anna Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Gorton, Gary. “Bank Suspensions and Convertibility.” Journal of Political Economy 15 (1987): 177-93??

Jacklin, Charles J. and Sudipto Bhattacharya. “Distinguishing Panics and Information-based Bank Runs: Welfare and Policy Implications.” Journal of Political Economy 96, no. 3 (1988): 568-592.

Saunders, Anthony and Berry Wilson. “Contagious Bank Runs: Evidence from the 1929-1933 Period.” Journal of Financial Intermediation_ 5, no 4 (1996): 409-23

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton, 1976.

Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996.

Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000.

Citation: Wicker, Elmus. “Banking Panics in the US: 1873-1933”. EH.Net Encyclopedia, edited by Robert Whaples. September 4, 2001. URL

Panic! Markets, Crises, and Crowds in American Fiction

Author(s):Zimmerman, David
Reviewer(s):Dalrymple, Scott

Published by EH.NET (October 2006)

David Zimmerman, Panic! Markets, Crises, and Crowds in American Fiction. Chapel Hill, NC: University of North Carolina Press, 2006. xi + 294 pp. $22.50 (paperback), ISBN: 0-8078-5687-8.

Review for EH.NET by Scott Dalrymple, Department of Business Administration, Hartwick College.

My grandmother, who came of age during the Great Depression, eventually became a bank teller. By the 1970s, she was head teller at her bank, a position that made her justifiably proud. She liked the banking world, and understood it quite well.

And yet, while she maintained a savings account at the bank where she worked, she always kept a sizeable portion of her cash in a coffee can hidden away in the closet. I once asked her about this, asked her why she would forego the potential interest from her money. “You can never be too careful,” she warned me, quite seriously. “The bank might not be there tomorrow.”

In our post-FDIC world, it’s easy to forget that generations of Americans shared this very real fear of the banking industry, and understandably so. Panics like those that occurred in 1873, 1893, and 1907 were so devastating because they caused ordinary Americans to lose trust in the banking system — trust that is essential for a capitalist economy whose engine is the lending of money to others.

In Panic!, David Zimmerman, a professor at the University of Wisconsin, Madison, has chosen a fascinating lens through which to view the phenomenon of bank panics: contemporary novels written in response to the panics. As Zimmerman points out, bank panics left people searching for answers about what had just happened, and why. And as they always do, authors of fiction stepped forward in an attempt to make sense of it all.

Zimmerman concentrates his study on novels published during the period from 1898 to 1913 — a choice that makes perfect sense, since this was the heyday of the American economic novel. Hundreds of novels on economic themes appeared during this fifteen year period, a point first made by V.L. Parrington’s Main Currents in American Thought in 1930, and later expanded in Walter Fuller Taylor’s exhaustive 1942 analysis, The Economic Novel in America.

As Zimmerman points out, novelists who tried to explain panics tended to come from two camps: those who viewed panics as evidence that capitalism as a system simply did not work; and those pro-business authors who sought to explain the mechanics of the system and “give the United States a business paternity” (p. 22). Zimmerman organizes his study into five chapters. The first chapter examines Frederic Isham’s Black Friday (1904); the second, Frank Norris’s The Pit (1903); the third, actual stock manipulator and sometime-novelist Thomas Lawson; the fourth, Upton Sinclair’s The Moneychangers (1908); and the fifth, Theodore Dreiser’s The Financier (1912).

All of these chapters are well written, insightful, and engaging. The chapter on Lawson, though, is especially interesting. As Zimmerman reminds us, Lawson was a feared stock manipulator who had a large hand in the 1899 Amalgamated Copper stock swindle. He later gained notoriety with his 1904 expos? Frenzied Finance — in which he revealed scandalous details about how the stock market actually worked, indicting numerous Wall Street figures including himself. Lawson became something of a sensation, lauded by those who appreciated his apparent turnaround … and vilified by those who thought his muckraking just another attempt at market manipulation.

Lawson is even more intriguing because in 1906, he wrote a novel, Friday, the Thirteenth. The lead character, who seems quite obviously based on Lawson himself, actually justifies the creation of market panics, which he believes will somehow cleanse the system of its problems — sort of like a bank robber claiming to have taken the money in order to help improve bank security. Zimmerman spends a few pages discussing Lawson’s novel, providing an ostensible reason for this chapter to be in the book. In truth, though, this chapter is a stretch for Panic!; it just doesn’t seem to fit. Having said that, it’s a fascinating chapter, and quite worthy of expansion into its own book.

Most of Panic! is more traditional historical/literary criticism, and quite well done at that. Zimmerman’s discussion of Frank Norris, especially, shows no small amount of insight into Norris’s psychology. Zimmerman uncovers an obscure 1897 Norris article titled “Inside the Organ” (in which Norris waxes rhapsodic about a huge pipe organ) and proceeds to show how Norris used similar language and imagery to describe financial markets in The Pit. This insight reveals much about how Norris — author of the much less business-friendly novel The Octopus — could not help but be awed by Wall Street, despite its warts. This is a very interesting piece of literary detective work on Zimmerman’s part, and it helps bolster this fine essay on Norris, who, had he lived beyond his thirties, might have become our greatest American novelist.

Zimmerman’s overall knowledge of the economic fiction of the time is impressive. He discusses not only the more obvious authors of such work — Norris, Dreiser, and Sinclair — but also some of the once-popular names since forgotten by literary history, including writers like Samuel Merwin, Henry Kitchell Webster, Will Payne, and Edwin Lef?vre.

Panic! is a well-written, well-researched study and a worthy addition to the literature of economic and literary history.

Scott Dalrymple is Assistant Professor of Business Administration at Hartwick College in Oneonta, NY. His essay on economic novelist Will Payne was awarded the James Soltow Award by the Economic and Business Historical Society in 2005.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Banking Panics of the Gilded Age

Author(s):Wicker, Elmus
Reviewer(s):Steindl, Frank

Published by EH.NET (March 2001)


Elmus Wicker, Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000. xvii + 160 pp. $49.95 (cloth), ISBN: 0-521-77023-8.

Reviewed for EH.NET by Frank Steindl, Department of Economics, Oklahoma State University.

Elmus Wicker’s fascinating new book on banking panics is an imaginative investigation into the 1873, 1884, 1890, 1893, and 1907 episodes. The concern follows naturally from his fundamental Banking Panics of the Great Depression (1996) and so it is not surprising that he compares banking upheavals between the two periods.

His point of reference and departure is Oliver Mitchell Wenworth Sprague’s 1910 classic History of Crises under the National Banking System. The allusion to the Gilded Age derives from the title and tenor of Mark Twain and Charles Warner’s tome of the first of the banking panics, a period of gross materialism and blatant political corruption during the 1870s. Neither materialism, as in the 1980s “decade of greed,” nor political corruption is of consequence in the narrative. Only materialism as understandable self-interest is an important player, and that principally is in the case of the New York Clearing House, the NYCH. This comes through with the subtlety of a sledgehammer in the penultimate chapter, in which Wicker asks, “Were Panics of the National Banking Era Preventable?” leaving little doubt that the answer is in the affirmative. But more on this later. First, let us tour the book, and a fascinating tour it is.

Wicker seeks to do three things. First and most prominently, he retreads the path pioneered by Sprague whose History “served its purpose so well as the principal source of our knowledge of what happened during this era that no work of comparable scale has replaced it” (p. xiv) — this being one of his several encomiums about Sprague. Secondly, there nonetheless are gaps, and these Wicker seeks to fill by going beyond Sprague in garnering evidence on the number of bank failures and the location of runs on banks, particularly outside New York. His evidence is based in large part on the financial publication, Bradstreet’s. Lastly, he concentrates on the NYCH and its vacillating and finally inept role.

Of course, there are other forays, one of which is an attempt to “test” whether the panics can best be understood in the Diamond and Dybvig (random withdrawal) hypothesis or the asymmetric information framework. He accepts neither one — the “evidence is mixed at best” (p. 145) — but does not offer an alternative suggestion, and rightfully so. Another is his attempt to detect whether the financial panics had any real effects. The Balke-Gordon and Romer GNP data are the basic materials.

The first chapter presents Wicker’s estimates of bank suspensions in each of the panics. The suspensions are by type of bank and whether in New York City or in the Interior. Included in the category of banks are private banks, which really are brokerage houses parading under the name bank. The principal assets in which they deal are speculative securities, but their liabilities are called deposits. Depositors knew full well that the redemption value of their deposits depended on the bank’s success in its speculative activities, that is, their deposits were far from fixed price. With apologies to Gertrude Stein, it is not true that a bank is a bank is a bank. Not surprisingly, failures of these private banks dominate the suspension data. The NYCH, Wicker’s bete noire, is brought into play in a useful table in which the dates of its issue of Clearing House loan certificates and suspensions (as well as resumptions) of cash payments are noted. One of the most important findings is that the number of suspensions was quite small.

The following four chapters discuss the specifics of the five banking panics, with those of 1884 and 1890 lumped together. The reason is that in retrospect neither seems like much of a problem, much less a panic. The 1873 panic, attributed to the failure of Jay Cooke’s merchant bank, saw reserve pooling by the NYCH, the only time it occurred in the five banking episodes. That reserve pooling was forsaken thereafter is one of Wicker’s central criticisms of the NYCH. Also, there was a suspension of cash payments. Of further interest, and this is original, the bank suspensions were concentrated outside New York City. Further, private banks — brokerage houses in effect — accounted for almost sixty percent of the suspensions. Unfortunately, Wicker was not able to get data on the size of the suspended deposits, much less their size relative to total deposits. As to Sprague, he “simply overlooked what was happening in the interior” (p. 22). The real effects were virtually nil, as neither the Balke-Gordon nor Romer (Christina, not Christine, as Wicker repeatedly mentions) real GNP series reported a sizeable drop.

The real effects on the 1884 and 1890 panics were even less. That output grew was not in question for either panic. Whether its growth increased or decreased is what was in dispute. Whether there really was a banking panic is less clear. Wicker basically concludes that there was a financial panic but not a banking one. In fact, he titles the chapter, The Incipient Banking Panics.

1893 is another story. This is the outlier in Wicker’s essay; the story of 1893 bears a closer relation to the panics of the Great Depression than do the others. The origin is not in New York but in the interior. Of the 503 suspensions, only three were in New York City. Because the troubles were far removed from New York, the money market banks, the members of the NYCH, were essentially unresponsive. In fact, the NYCH is virtually absent from the chapter. Of the banking panic narratives, the one in this chapter is by far the most detailed and fascinating. Here there are tales of ethnic community banks and runs. There also is specific attention to the particulars in several cities, among which are Kansas City, Louisville, and Portland, Oregon. Sprague recognized that the panic was in the interior, but was unable to get satisfactory data. Wicker fills this lacuna.

The real GNP data upon which Wicker relies exclusively argue against a depression in that year. This stands in contrast to the evidence in the Kuznets-Kendrick data, which Friedman and Schwartz used. They show an almost four percent annual rate of decline for 1893-94.

The last panic, the Trust Company Panic of 1907, is generally held to be the final straw, the one that set off the reaction that became the Federal Reserve System. The NYCH is nowhere to be seen, principally because the main difficulties were with the trust companies, no one of whom was a member. In its stead is J. P. Morgan who attempted, unsuccessfully as it turned out, to stem the tide. He failed because he “made the serious error of allowing Knickerbocker Trust to fail” (p. 84), largely on the advice of Benjamin Strong. The evidence on the real effects is mixed. Romer had continued expansion in 1907 whereas Balke-Gordon had a two percent decline. The following year, each had a sharp depression, 5.5 percent for the latter and 4.2 percent for the former.

The key to preventing panics was reserve pooling by the NYCH. As to the adequacy of reserves, Wicker’s calculations indicate that they were sufficient: “insufficient reserves were not the problem; it was the unequal distribution of those” (p. 146). Here he uses surplus reserves, which in fact are simply excess reserves as calculated from the fixed reserve requirements of the National Banking Act. Whether those excess reserves truly were surplus is of course the question. After all, the voluminous excess reserves of the middle 1930s,which were regarded almost without exception as surplus, seem not to have been surplus after all.

One of the important figures in the narrative is George S. Coe, whose 1873 report on the panic was in Sprague’s eyes “the ablest document which has ever appeared in the course of our banking history” (p. 127), an assessment seconded by Wicker. The key idea in the report was that bold leadership by the Clearinghouse, as in the “vigorous leadership [of] Coe” (p. 16) was required, if panics were to be averted. This is the central theme to which Wicker subscribes in his judgment that the NYCH failed to meet the task of averting panics because it was reduced to partisan infighting and rent seeking activities rather than “bold leadership.” The objection to pooling was not surprisingly an “equity” concern: well-managed, conservative banks should not subsidize “profligate” banks. The only red herring comes as Wicker considers the “puzzle” of the National Banking Act’s fixed reserve requirements as a measure insuring liquidity in banks (pp. 126-27). As commentators even back then realized, Morgan for instance, it simply is not a puzzle: reserve requirements do not provide liquidity.

The punch line on the question of whether the panics could have been averted thus comes down to the failure to exercise bold and effective leadership. In essence, there was no great man who alone would have pulled things through. Had the leadership of the NYCH not “bungled,” had “voluntary collective action” been executed effectively, the government via the institution of the Federal Reserve would not have “intervened to fill the vacuum” (p. 147).

I find this conclusion a distinct letdown after reading a truly first-rate study of the panics in the fifty years between the National Banking Act and the Federal Reserve System. This is a cop-out. What Wicker evidently is saying is that people should stop being human. If we rely on such counsel, if enhancing the national welfare depends on such, we are in for a rough time. Self-interest is too well ingrained to ask people to abandon it.

Frank G. Steindl is Regents Professor of Economics and Ardmore Professor of Business Administration, Oklahoma State University, Stillwater, OK. He is the author of Monetary Interpretations of the Great Depression (University of Michigan Press, 1996). His current research is on the economics of the recovery in the 1930s.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Business Cycles and Depressions: An Encyclopedia

Author(s):Glasner, David
Reviewer(s):Whaples, Robert


Published by EH.NET (September 1997)

David Glasner, editor, Business Cycles and Depressions: An Encyclopedia. New York: Garland Publishing, 1997. xv + 779 pp. Index. $95.00 (cloth), ISBN: 0-8240-0944-4.

Reviewed for EH.NET by Robert Whaples, Department of Economics, Wake Forest University.

“The motion of the economy, unlike that of heavenly bodies, conforms to no immutable mathematical laws and follows no repetitive patterns (p. 66)”

David Glasner (economist at the Bureau of Economics, U.S. Federal Trade Commission) has assembled a stellar cast who have written an exceptionally useful reference book. Business Cycles and Depressions: An Encyclopedia includes 327 original articles on every major aspect of business cycles, fluctuations, financial crises, recessions, and depressions. The articles, which range from macroeconomic theory to econometrics to the historical record, are generally up-to-date, clear and to the point. Most entries will be accessible to students, but are informative enough to benefit almost any professional, as well. Each includes a bibliography. A seven-page appendix presents international data detailing business cycle turning points and durations. Perhaps the highlight of the volume is a ten-page entry, “Business Cycles” by Victor Zarnowitz, which surveys the entire field of business cycle research and is quoted above.

EH.NET subscribers will find this work especially helpful. The encyclopedia includes biographies of dozens of economists. (These entries focus almost entirely on the individual’s contributions to the understanding of business cycles. The biography of W.W. Rostow, for example, only briefly mentions his work in the Kennedy and Johnson administrations and says little about his writings on economic growth.)

The subjects of these biographies include Moses Abramovitz, Maurice Allais, Luigi Amoroso, James Angell, Walter Bagehot, Otto Bauer, Eduard Bernstein, Eugen Bohm-Bawerk, Arthur Burns, Richard Cantillon, Carl Cassel, John Commons, Charles Coquelin, James Duesenberry, Otto Eckstein, Friedrich Engels, Irving Fisher, Milton Friedman, Ragnar Frisch, John Fullarton, Richard Goodwin, Tygve Haavelmo, Gottfried Haberler, Alvin Hansen, Roy Harrod, Friedrich Hayek, John Hicks, Rudolf Hilferding, John Hobson, David Hume, William Stanley Jevons, Nicholas Kaldor, Michal Kalecki, Karl Kautsky, John Maynard Keynes, Charles Kindleberger, Lawrence Klein, Nikolai Kondratieff, Tjalling Koopmans, Simon Kuznets, Oskar Lange, Frederick Lavington, Abba Lerner, W. Arthur Lewis, Erik Lindahl, Eric Lundberg, Rosa Luxembourg, Thomas Malthus, Alfred Marshall, Karl Marx, Lloyd Metzler, John Stuart Mill, Frederick Mills, Hyman Minsky, Ilse Mintz, Ludwig von Mises, Wesley Mitchell, Franco Modigliani, Gunnar Myrdal, Bertil Ohlin, Arthur Okun, Vilfredo Pareto, Henry Parnell, Warren Persons, A. W. Phillips, Arthur Pigou, David Ricardo, Lionel Robbins, Dennis Robertson, Joan Robinson, W.W. Rostow, Paul Samuelson, Jean Baptiste Say, Joseph Schumpeter, Anna Schwartz, Eugen Slutsky, Adam Smith, Arthur Smithies, Piero Sraffa, Paul Sweezy, Henry Thornton, Jan Tinbergen, James Tobin, Thomas Tooke, Robert Torrens, Mikhail Tugan-Baranovsky, Thorstein Veblen, Clark Warburton, J.G.K. Wicksell, Wladimir Woytinki and Victor Zarnowitz

Among the entries that will be of most interest to economic historians are: Agriculture and Business Cycles by Randal Rucker and Daniel Sumner Bank Charter Act of 1844 by David Glasner Bank of England by David Glasner, C.A.E. Goodhart and Gary Santoni Bank of France by Pierre-Cyrille Hautcoeur Bank of the United States by Eugene White Banking Panics by Gary Gorton Baring Crisis (1890) by Richard Grossman Business Cycles in Russia, 1700-1914 by Thomas Owen Central Banking by Anna Schwartz Clearinghouses by Gary Gorton Crisis of 1763 and 1772-1773 by Eric Schubert Crisis of the 1780s by Fred Moseley Crisis of 1819 by Neil Skaggs Crisis of 1847 by David Glasner Crisis of 1857 by Hugh Rockoff Crisis of 1873 by David Glasner Crisis of 1907 by C.A.E. Goodhart Crisis of 1914 by Forest Capie and Geoffrey Wood Depression of 1873-1879 by Fred Moseley Depression of 1882-1885 by Alan Sorkin Depression of 1920-21 by Anthony Patrick O?Brien Depression of 1937-1938 by W. Gene Smiley Federal Deposit Insurance by James Barth and John Feid Federal Reserve System: 1914-1941 by David Wheelock Federal Reserve System, 1941-1993 by Thomas Havrilesky Free Banking by Philippe Nataf Glass-Steagall Act by Eugene White Gold Standard by Michael Bordo Gold Standard: Causes and Consequences by Earl Thompson Great Depression in Britain (1929-1932) by Forrest Capie and Geoffrey Wood Great Depression in France (1929-1938) by Pierre-Cyrille Hautcoeur Great Depression in the U.S. (1929-1938) by Elmus Wicker Great Depression of 1873-1896 by Forrest Capie and Geoffrey Wood Industrial Revolution (c. 1750-1850) by Clark Nardinelli Kondratieff Cycles by Robert Zevin Leading Indicators: Historical Record by Geoffrey Moore Long-Wave Theories by Massimo Di Matteo Mississippi Bubble by Larry Neal Napoleonic Wars by Larry Neal Panic of 1825 by Michael Haupert Panic of 1837 by Richard Timberlake Panic of 1893 by Richard Timberlake Phillips Curve by Richard Lipsey Political Business Cycles by K. Alec Chrystal Recessions after World War II by Alan Sorkin Recessions (Supply-Side) in the 1970s by John Tatom Reichsbank by Harold James Seasonal Fluctuations and Financial Crises by Jeffrey Miron Smoot-Hawley Tariff by David Glasner South Sea Bubble by Larry Neal Stock-Market Crash of 1929 by Eugene White Tulipmania by Peter Garber

The encyclopedia is a valuable teaching tool. It is a must for any college library.

Robert Whaples Department of Economics Wake Forest University

Robert Whaples is Associate Director of EH.NET and author (with Jac Heckelman) of “Political Business Cycles before the Great Depression,” Economics Letters, 51, May 1996.


Subject(s):Business History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

American Unemployment: Past, Present, and Future

Author(s):Stricker, Frank
Reviewer(s):Ohanian, Lee

Published by EH.Net (January 2021)

Frank Stricker, American Unemployment: Past, Present, and Future. Urbana, IL: University of Illinois Press, 2020. x + 267 pp. $20 (paperback), ISBN: 978-0-252-08502-4.

Reviewed for EH.Net by Lee Ohanian, Department of Economics, UCLA.


There is perhaps no more challenging issue to write about in macroeconomics than unemployment. Measurement issues, theoretical issues, even conceptual issues make unemployment like quicksilver. We want to get our hands on it, but it invariably slips through our fingers.

Consider how many different interpretations/definitions exist in the literature. Old school Keynesians created “NAIRU” — the non-accelerating inflation rate of unemployment — which is based on the Phillips Curve. Neoclassical economists, including Milton Friedman, Edmund Phelps, and Armen Alchian created the “Natural Rate of Unemployment,” which was front and center in Robert Lucas’s misperceptions model that gave birth to the rational expectations business cycle literature.

Search theorists take a different approach, decomposing unemployment into “frictional unemployment,” which is the time it takes an individual to find a job that is a good match for their skills, and “structural unemployment,” which refers to those who remain unemployed long after search and matching frictions can reasonably be operative.

Conceptual struggles are not just academic. The Federal Reserve uses six different concepts of unemployment (known as U1-U6), ranging from the plain vanilla definition, to measures that incorporate long-term unemployment, temporary jobs, and the discouraged worker effect.

Some economists eschew unemployment and instead study alternative labor market indicators such as employment and/or market hours worked as a share of the working age population. The benefit of focusing on how much work is being done is that measurement is conceptually simple. It doesn’t require knowing an individual’s subjective attachment to the labor force or how much time they are devoting to searching if unemployed.

Understanding unemployment is a tall order. Despite this challenge, Frank Stricker — professor emeritus of history at California State University, Dominguez Hills — studies the history of American unemployment from roughly the postbellum period through the 2007-08 financial crisis and its aftermath in American Unemployment: Past, Present, and Future.

As a non-economist, Stricker brings a different eye towards the problem of unemployment. He is a passionate advocate for “full employment” and creating high paying jobs. He focuses the book on whether the shifting American model of a free enterprise economy can create achieve these goals. His answer is a clear “no,” and the latter chapters of the book present an explanation for his views, and present an argument for how government can be the solution to the problems he sees as ailing America’s labor market.

Stricker’s passion for struggling individuals throughout America’s history dominates his writing, and this is an important, positive feature of the book. The primary theme is that the U.S. labor market doesn’t function efficiently, thus leaving a lot of human resources underutilized much of the time. His perception is that the U.S. economy rarely achieves full employment, that compensation is limited by the chronic presence of the unemployed, that it has been a mistake to try to fight inflation using unemployment, and that government jobs policies would lead to significantly better economic outcomes.

While I disagree with Stricker’s characterization of the chronic lack of efficiency of the U.S. labor market, I agree with his perspective about the Phillips Curve and the failed logic of using unemployment to fight inflation. I also agree that there are labor market policy reforms available that could be beneficial in principle, including jobs policies. I discuss these issues below.

The book’s major limitation is the lack of a formal economic model to guide thinking about the U.S. labor market and to interpret labor market data. The term “full employment,” which is the centerpiece of the book, means different things to different people and fundamentally requires a model-based definition. Stricker refers to an unemployment rate of 4 percent as a benchmark, but that number is largely a relic from a time when our understanding of the labor market was much more limited.

The book begins with a discussion of the labor market between 1873 to 1920, a period of significant economic growth, including the technological revolutions of electrification and the internal combustion engine. Stricker discusses the period as one of chronic capitalist crises occurring in the 1870s, as well as the panics of 1893, 1907, and weak economic activity around 1914 and the focus of the chapter is the inability of the American economy to maintain full employment. Stanley Lebergott’s unemployment estimates, which are available from 1900 onwards, shed some light on this issue (though only beginning in 1900). The mean rate of unemployment between 1900 and 1920 was about 4.5 percent.

My view is that an average unemployment rate of 4.5 percent is remarkably low. Keep in mind that this period is one in which the American economy was poor and technologically backwards, which means that information costs were very high and mobility costs were very high, both of which increased unemployment. Moreover, new technologies were changing the nature and scope of work, sharply reducing the demand for agricultural workers and for workers employed in formerly labor-intensive technologies. And rural labor markets were not very competitive at that time. The biggest employer in a small town likely had significant monopsony power, which reduces hiring. I see the 1900-1920 U.S. labor market as a glass 4/5th full, rather than a glass that is 1/5th empty, which seems to be what Professor Stricker sees.

Stricker then moves to the 1920s and 1930s, the latter of which encompasses the Great Depression. This is a period in which government policies played an enormous role in impacting the economy. Stricker rightfully focuses on the role of government in this chapter, though he paints with broad strokes, setting this up as either a “laissez-faire” economy or one with government interventions.

But some 1930s government labor market interventions were destructive, including the National Industrial Recovery Act and the Wagner Act, the latter which de fatco permitted the use and threatened use of the sit-down strike. By impeding the normal forces of competition, the NIRA and the Wagner Act created substantial unemployment by raising real wages in manufacturing and other goods-producing sectors far above market-clearing levels. These are the types of policies that should concern labor activists because they create market inefficiencies by preventing mutually advantageous trades between the suppliers and demanders of labor services.

On the other hand, his positive description of government infrastructure projects in the 1930s (think Hoover Dam) is powerfully told, and the economics of these programs is clearly on his side. There is no better time to build infrastructure than when there is low demand for the factors of production that build that infrastructure. Sadly, our ability to do this today is probably much less efficient than it was 85 years ago. Understanding deeply why this is the case would be a wonderful contribution to American economic history.

The book transitions to three different periods that are demarcated by the observed patterns of unemployment and inflation. There is 1940-1974, which he refers to as “Full Employment: Experiments and Battles”; 1975-2000, which he refers to as “Low Unemployment + Low Inflation: Can’t Be Done, Is Done”; and then 2000-2018, which he refers to as “Low Pay, Great Recession.”

The guiding theme of these three chapters is the chronic conflict between labor and capital, and the evolution of economic policies that are both influenced by and shape these battles. The interpretation is that jobs have been limited for much of this period, and these limitations have depressed worker compensation.

The most compelling point discussed in these chapters is the failed policy of using the Phillips Curve to try and manage inflation by tolerating high unemployment. The Phillips Curve has been an extremely costly policy detour that remains in some policy quarters, despite that it empirically has failed for nearly forty years. Stricker correctly argues that this policy has harmed the economy and is one that should have been abandoned long ago.

An important postwar labor development is that labor conflict and frequent strikes, particularly in Rust Belt industries, sowed the seeds for future weak job growth and compensation growth by reducing investment and the adoption of the latest technologies in these industries. The remarkable increase in steel and auto imports reflects foreign producers who became much better at producing these products because of technological superiority and peaceful relations with their workers. Rust Belt industry management deserves some of this blame for the Rust Belt’s decline, but so do the United Auto Workers and the United Steel Workers, both of whom have admitted that they should have been more cooperative and less combative. What is not recognized in American Unemployment is that the labor movement of the 1950s-1970s damaged future workers.

An important misperception in American Unemployment that is particularly relevant for the recent economy is that wage levels and wage growth are a good proxy for compensation. This was accurate for the 1960s and before, when fringe benefits were a very small fraction of compensation. But today, fringe benefits are nearly 30 percent of compensation.

Competitive models of the labor market predict that real compensation will move closely with worker productivity, but this comparison requires better measurement than using just wages. Worker productivity has increased by about 180 percent since 1965, while compensation has increased by about 125 percent. This is a compensation shortfall of about 30 percent over the 55-year period, which amounts to about a 0.4 annualized percentage point difference. Not perfect, but certainly in the right direction as predicted by the theory. In contrast, measuring compensation using just wages, and deflating by the CPI rather than by the GDP deflator (which is used to construct productivity) shows only a 15 percent increase since 1965. No wonder that Stricker sees workers getting the short end of the stick based on this flawed measure.

The final chapter offers Stricker’s policy ideas. I support in principle his idea of government-provided jobs program, particularly as an alternative to long-term unemployment benefits. A positive externality of this policy is that this expands the ability of otherwise idled workers to contribute to their communities and to enhance their skills. Other policy ideas from Stricker, such as a $20 minimum wage, may not be nearly as productive as he believes, particularly in relatively poor labor markets. Currently, the median Mississippi worker earns less than $15 per hour. The downside of high minimum wages is that they price the least experienced workers, including immigrants, out of the labor market, and essentially force them into public assistance.

What is missing from the policy recommendations section is a detailed assessment of broader forces that will shape the U.S. labor market, including how continued globalization, automation, changing gender roles, and a deficient American K-12 education system will impact future jobs. Almost certainly, the most important policy reform is to improve our schools so that more of our students are adequately trained in STEM disciplines and in written and oral communication, all of which are skills that will be increasingly in demand.

In contrast to Stricker’s views, standard measures of labor market performance show that the American labor market is remarkably efficient. Before the pandemic, nearly six million jobs turned over each month, reflecting large changes in supply and demand across sectors and industries. This works out to be a turnover rate of about 40 percent of jobs annually. In terms of the speed of matching workers, two-thirds of the unemployed found a new match within 14 weeks of unemployment prior to the pandemic. And the percentage of employed prime-age workers (25-54 years old) was 80.5 percent, just below the peak of about 81 percent in the late 1990s. This is not a labor market that is broken.

The problem with our labor market is not that it doesn’t effectively match workers with businesses at compensation levels that are reasonable. Rather, any economy’s ability to create lots of high-paying jobs, which is Stricker’s understandable goal, requires lots of workers with high human capital. For Stricker, unemployed workers are a valuable human resource sitting idle, losing their ability to provide for themselves and their families, and losing the dignity that goes with having a decent job. While most of us agree with Stricker on this point, there is a deeper reason why these workers have been idled that goes far beyond politics and the potential deficiencies of a capitalist economy. It has to do with skills and why more American workers haven’t accumulated more skills to enhance their employability. This is perhaps the most important lesson that the history of labor economics provides, and shows why any discussion of unemployment and the labor market must dig more deeply than Stricker’s engaging and provocative book.


Lee E. Ohanian is Professor of Economics at UCLA and is a Senior Fellow at the Hoover Institution, Stanford University. He is the author of “New Deal Policies and the Persistence of the Great Depression.”

Copyright (c) 2021 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (January 2021). All EH.Net reviews are archived at

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance

Author(s):Kobrak, Christopher
Martin, Joe
Reviewer(s):Rockoff, Hugh

Published by EH.Net (February 2019)

Christopher Kobrak and Joe Martin, From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance. Toronto: University of Toronto Press, 2018. xii + 401 pp. $35 (paperback), ISBN: 978-1-4426-1625-7.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.

Why did the Canadian financial system escape the devastation that the American system experienced in the Great Depression (although Canada did not escape the decline in economic activity) and in 2008? Indeed, why has the financial system of Canada been so much more stable throughout its history than the American system? It’s a question that many economic historians have thought about. Calomiris and Haber (2014) is a recent attempt to come to grips with this and other comparisons which highlight the instability of the American financial system. And I have done some work on this with Michael Bordo and Angela Redish (1994, 2015).

From Wall Street to Bay Street sheds light on these questions. The book, I should note, is written for the layperson and not for the typical reader of EH.Net. One imagines (hopes?) that the intended audience might include a journalist, a politician, or a business executive looking for an explanation of a puzzling fact that might in turn affect what they write or do. Although Kobrak and Martin include some comparative charts at the end of the book, the text itself includes no charts, tables, or equations. As an explanation for lay readers, it works well. But, as I will explain below, I think it is also a book that professional economic historians will profit from reading.

Joe Martin is the Director of Canadian Business History at the Rotman School of Management of the University of Toronto. Christopher Kobrak (an undergraduate philosophy major at Rutgers, a clear marker of excellence, and a Columbia Ph.D.) was at the Rotman School at his untimely death in 2017. They chose to tell the whole story of American and Canadian finance — insurance, investment banks, and so on, as well as commercial banking — chronologically. There are introductory and concluding chapters, and five chapters in which they take their story from the colonial period to today.

Although the American systems were and very likely are still more crisis-prone than the Canadian system, there have been some bad moments in Canada that they duly note. There was a “near panic” in Western Canada in 1907 that the government addressed by allowing banks to issue notes in excess of those permitted under existing reserve requirements (p. 146). The Home Bank failed in 1923 and the government provided compensation for 35 percent of small deposits. And an emergency loan was made to the Dominion Bank. The Office of the Inspector of Banks was then created in the wake of the Home Bank failure. During the 1930s the Sun Life Insurance Company received special treatment from regulators probably because it was considered “too big to fail” (p. 184). The less-developed countries debt crisis of the early 1980s hit the Canadian financial system hard. And there were other difficulties including failures of trust companies and banks. The Office of Superintendent of Financial Institutions was created in the wake of these difficulties. But all of this pales in comparison with the American record of financial crises – 1819, 1837, 1857, 1873, 1893, 1907, 1930, and 2008, just to name some of the big ones.

What explains the relative stability of the Canadian system? Kobrak and Martin rely on two explanatory factors. One, that will be familiar to most American and Canadian financial historians, is Canada’s system of nationwide branch banking; a stark contrast with the United States which for much of its history had a fragmented banking system in which banks were always prevented from branching across state lines and in some cases were prevented from establishing any branches at all by unit banking laws. Most financial historians, I believe, agree that the absence of branching made American banks far more vulnerable to economic shocks than their Canadian cousins. The problem of state-centric regulation, however, was not confined, Kobrak and Martin show, to banking, but also troubled the American Insurance industry. This comparison illustrates one of the strengths of From Wall Street to Bay Street: its broad sectoral coverage creates opportunities for comparisons that test their conclusions about the origins of the difference in stability between the systems.

The other explanation that Kobrak and Martin rely on is culture. There is a tradeoff, they argue, between innovation and stability. “American finance,” in their estimation, “has been associated with an abundance of the former and not enough of the latter, with Canada assuming the opposite approach” (p. 14). In their concluding chapter they say that “Americans have always exhibited a tolerance for recklessness in commercial innovation, which appears curious to much of the rest of the world, including Canadians.” A reference to Tocqueville, who said much the same, helps to establish the venerable lineage of their observation about different attitudes toward stability (p. 262). Their reliance on cultural differences inevitably raises the question of whether it is “Kosher to Talk about Culture” to quote the title of one of Peter Temin’s (1997) well-known papers. A reliance on cultural explanations is always problematic. It is far easier to suggest cultural explanations for economic phenomena than to test them rigorously. For that reason, many economic historians shy away from them. Kobrak and Martin, however, are not afraid. I was skeptical at first, but I found myself coming away persuaded that part of the difference in institutional arrangements (including regulatory structures) and records of stability in the two financial systems ultimately derives from different attitudes toward innovation and stability.

Some parts of the book will be familiar to professional economic historians, such as summaries of work by economic historians on slavery and the Great Depression, and can be skipped by someone already familiar with these literatures. But professional economic historians are likely to encounter ideas that are worth pondering. The repeated emphasis on cultural differences is one example. Their conviction that to understand financial systems one has to look at the systems in their entirety and not focus solely on banking is another.

My bottom line is that this is a fine book. It delivers the explanation that they promised to the lay reader, but professional economic historians, such as those of us that read the posts on EH.Net, will also find that the book is worth their time.


Bordo, Michael D., Angela Redish, and Hugh Rockoff. “The U.S. Banking System from a Northern Exposure: Stability versus Efficiency.” Journal of Economic History 54, no. 2 (1994): 325-41.

Bordo, Michael D., Angela Redish, and Hugh Rockoff. “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or …)?” Economic History Review 68, no.1, (2015): 218-43.

Calomiris, Charles and Stephen Haber. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton: Princeton University Press, 2014.

Temin, Peter. “Is It Kosher to Talk about Culture?” Journal of Economic History 57, no. 2 (1997): 267-87.


Hugh Rockoff is a distinguished professor of economics at Rutgers University and a Research Associate of the National Bureau of Economic Research. His current research focuses on the origins of America’s national income accounts and in joint work with Michael Leeds at Temple University on the coming of Jim Crow to American horse racing.

Copyright (c) 2019 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (February 2019). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The United States Public Debt, 1861 to 1975

Franklin Noll, Ph.D.


On January 1, 1790, the United States’ public debt stood at $52,788,722.03 (Bayley 31). It consisted of the debt of the Continental Congress and $191,608.81 borrowed by Secretary of the Treasury Alexander Hamilton in the spring of 1789 from New York banks to meet the new government’s first payroll (Bayley 108). Since then the public debt has passed by a number of historical milestones: the assumption of Revolutionary War debt in August 1790, the redemption of the debt in 1835, the financing innovations rising from Civil War in 1861, the introduction of war loan drives in 1917, the rise of deficit spending after 1932, the lasting expansion of the debt from World War II, and the passage of the Budget Control Act in 1975. (The late 1990s may mark another point of significance in the history of the public debt, but it is still too soon to tell.) This short study examines the public debt between the Civil War and the Budget Control Act, the period in which the foundations of our present public debt of over $7 trillion were laid. (See Figure 1.) We start our investigation by asking, “What exactly is the public debt?”

Source: Nominal figures from “Principal of the Public Debt, Fiscal Years 1790-1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix. (Washington, DC: Government Printing Office, 1975), 62-63 and Robert Sahr, Oregon State University. URL: Real figures adjust for inflation. These figures and conversion factors provided by Robert Sahr.


Throughout its history, the Treasury has recognized various categories of government debt. The oldest category and the largest in size is the public debt. The public debt, simply put, is all debt for which the government of the United States is wholly liable. In turn, the general public is ultimately responsible for such debt through taxation. Some authors use the terms federal debt and national debt interchangeably with public debt. From the view of the United States Treasury, this is incorrect.

Federal debt, as defined by the Treasury, is the public debt plus debt issued by government-sponsored agencies for their own use. The term first appears in 1973 when it is officially defined as including “the obligations issued by Federal Government agencies which are part of the unified budget totals and in which there is an element of Federal ownership, along with the marketable and nonmarketable obligations of the Department of the Treasury” (Annual Report of the Secretary of the Treasury, 1973: 13). Put more succinctly, federal debt is made up of the public debt plus contingent debt. The government is partially or, more precisely, contingently liable for the debt of government-sponsored enterprises for which it has pledged its guarantee. On the contingency that a government-sponsored enterprise such as the Government National Mortgage Association ever defaults on its debt, the United States government becomes liable for the debt.

National debt, though a popular term and used by Alexander Hamilton, has never been technically defined by the Treasury. The term suggests that one is referring to all debt for which the government could be liable–wholly or in part. During the period 1861 to 1975, the debt for which the government could be partially or contingently liable has included that of government-sponsored enterprises, railroads, insular possessions (Puerto Rico and the Philippines), and the District of Columbia. Taken together, these categories of debt could be considered the true national debt which, to my knowledge, has never been calculated.


But it is the public debt–only that debt for which the government is wholly liable–which has been totaled and mathematically examined in a myriad of ways by scholars and pundits. Yet, very few have broken down the public debt into its component parts of marketable and nonmarketable debt instruments: those securities, such as bills, bonds, and notes that make up the basis of the debt. In a simplified form, the structure of the public debt is as follows:

  • Interest-bearing debt
    • Marketable debt
      • Treasuries
    • Nonmarketable debt
      • Depositary Series
    • Foreign Government Series
    • Government Account Series
    • Investment Series
    • REA Series
    • SLG Series
    • US Savings Securities
  • Matured debt
  • Debt bearing no interest

Though the elements of the debt varied over time, this basic structure remained constant from 1861 to 1975 and into the present. As we investigate further the elements making up the structure of the public debt, we will focus on information from 1975, the last year of our study. By doing so, we can see the debt at its largest and most complex for the period 1861 to 1975 and in a structure most like that currently held by the public debt. It was also in 1975 that the Bureau of the Public Debt’s accounting and reporting of the public debt took on its present form.

Some Financial Terms

Bearer Security
A bearer security is one in which ownership is determined solely by possession or the bearer of the security.
The term callable refers to whether and under what conditions the government has the right to redeem a debt issue prior to its maturity date. The date at which a security can be called by the government for redemption is known as its call date.
A coupon is a detachable part of a security that bears the interest payment date and the amount due. The bearer of the security detaches the appropriate coupon and presents it to the Treasury for payment. Coupon is synonymous with interest in financial parlance: the coupon rate refers to the interest rate.
Coupon Security
A coupon security is any security that has attached coupons, and usually refers to a bearer security.
The term discount refers to the sale of a debt instrument at a price below its face or par value.
A security is liquid if it can be easily bought and sold in the secondary market or easily converted to cash.
The maturity of a security is the date at which it becomes payable in full.
A negotiable security is one that can be freely sold or transferred to another holder.
Par is the nominal dollar amount assigned to a security by the government. It is the security’s face value.
The term premium refers to the sale of a debt instrument at a price above its face or par value.
Registered Security
A registered security is one in which the owner of the security is recorded by the Bureau of the Public Debt. Usually both the principal and interest are registered, making them non-negotiable or non-transferable.

Interest-Bearing Debt, Matured Debt, and Debt Bearing No Interest

This major division in the structure of the public debt is fairly self-explanatory. Interest-bearing debt contains all securities that carry an obligation on the part of the government to pay interest to the security’s owner on a regular basis. These debt instruments have not reached maturity. Almost all of the public debt falls into the interest-bearing debt category. (See Figure 2.) Securities that are past maturity (and therefore no longer paying interest), but have not yet been redeemed by their holders are located within the category of matured debt. This is an extremely small part of the total public debt. In the category of debt bearing no interest are securities that are non-negotiable and non-interest-bearing such as Special Notes of the United States issued to the International Monetary Fund. Securities in this category are often issued for one-time or extraordinary purposes. Also in the category are obsolete forms of currency such as fractional currency, legal tender notes, and silver certificates. In total, old currency made up only .114% of the public debt in 1975. The Federal Reserve Notes which have been issued since 1914 and which we deal with on a daily basis are obligations of the Federal Reserve and thus not part of the public debt.

Source: “Principal of the Public Debt, Fiscal Years 1790-1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 62-63.

During the period under study, the value of outstanding matured debt generally grew with the overall size of the debt, except for a spike in the amount of unredeemed securities in the mid and late 1950s. (See Figure 3.) This was caused by the maturation of United States Savings Bonds bought during World War II. Many of these war bonds lay forgotten in people’s safe-deposit boxes for years. Wartime purchases of Defense Savings Stamps and War Savings Stamps account for much of the sudden increase in debt bearing no interest from 1943 to 1947. (See Figure 4.) The year 1947 saw the United States issuing non-interest paying notes to fund the establishment of the International Monetary Fund and the International Bank for Reconstruction and Development (part of the World Bank). As interest-bearing debt makes up over 99% of the public debt, it is basically equivalent to it. (See Figure 5.) And, the history of the overall public debt will be examined later.

Source: “Principal of the Public Debt, Fiscal Years 1790-1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 62-63.

Marketable Debt and Nonmarketable Debt

Interest-bearing debt is divided between marketable debt and nonmarketable debt. Marketable debt consists of securities that can be easily bought and sold in the secondary market. The Treasury has used the term since World War II to describe issues that are available to the general public in registered or bearer form without any condition of sale. Nonmarketable debt refers to securities that cannot be bought and sold in the secondary market though there are rare exceptions. Generally, nonmarketable government securities may only be bought from or sold to the Treasury. They are issued in registered form only and/or can be bought only by government agencies, specific business enterprises, or individuals under strict conditions.

The growth of the marketable debt largely mirrors that of total interest-bearing debt; and until 1918, there was no such thing as nonmarketable debt. (See Figure 6.) Nonmarketable debt arose in fiscal year 1918, when securities were sold to the Federal Reserve in an emergency move to raise money as the United States entered World War I. This was the first sale of “special issue” securities as nonmarketable debt securities were classified prior to World War II. Special or nonmarketable issues continued through the interwar period and grew with the establishment of government programs. Such securities were sometimes issued by the Treasury in the name of a government fund or program and were then bought by the Treasury. In effect, the Treasury extended a loan to the government entity. More often the Treasury would sell a special security to the government fund or program for cash, creating a loan to the Treasury and an investment vehicle for the government entity. And, as the number of government programs grew and the size of government funds (like those associated with Social Security) expanded, so did the number and value of nonmarketable securities–greatly contributing to the rapid growth of nonmarketable debt. By 1975, these intragovernment securities combined with United States Savings Bonds helped make nonmarketable debt 40% of the total public debt. (See Figure 7.)

Source: The following were used to calculate outstanding marketable debt: Data for 1861 to 1880 derived from Rafael A. Bayley, The National Loans of the United States from July 4, 1776, to June 30, 1880, second edition, facs rpt (New York: Burt Franklin, 1970 [1881]), 180-84 and Annual Report of the Secretary of the Treasury on the State of the Finances, (Washington, DC: Government Printing Office, 1861), 44. Post-1880 numbers derived from “Analysis of the Principal of the Interest-Bearing Public Debt of the United States from July 1, 1856 to July 1, 1912,” idem (1912), 102-03; “Comparative Statement of the Public Debt Outstanding June 30, 1933 to 1939,” idem (1939), 452-53; “Composition of the Public Debt at the End of the Fiscal Years 1916 to 1938,” idem, 454-55; “Public Debt by Security Classes, June 30, 1939-49,” idem (1949), 400-01; “Public Debt Outstanding by Security Classes, June 30, 1945-55,” idem (1955); “Public Debt Outstanding by Classification,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 67-71. The marketable debt figures were then subtracted from total outstanding interest bearing debt to obtain nonmarketable figures.

Source: “Public Debt Outstanding by Classification,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 67-71.

Marketable Debt Securities: Treasuries

The general public is most familiar with those marketable debt instruments falling within the category of Treasury securities, more popularly known as simply Treasuries. These securities can be bought by anyone and have active secondary markets. The most commonly issued Treasuries between 1861 and 1975 are the following, listed in order of length of time to maturity, shortest to longest:

Treasury certificate of indebtedness
A couponed, short-term, interest-bearing security. It can have a maturity of as little as one day or as long as five years. Maturity is usually between 3 and 12 months. These securities were largely replaced by Treasury bills.
Treasury bill
A short-term security issued on a discount basis rather than at par. The price is determined by competitive bidding at auction. They have a maturity of a year or less and are usually sold on a weekly basis with maturities of 13 weeks and 26 weeks. They were first issued in December 1929.
Treasury note
A couponed, interest-bearing security that generally matures in 2 to 5 years. In 1968, the Treasury began to issue 7-year notes, and in 1976, the maximum maturity of Treasury notes was raised to 10 years.
Treasury bond
A couponed interest-bearing security that normally matures after 10 or more years.

The story of these securities between 1861 and 1975 is one of a general movement by the Treasury to issue ever more securities in the shorter maturities–certificates of indebtedness, bills, and notes. Until World War I, the security of preference was the bond with a call date before maturity. (See Figure 8.) Such an instrument provided the minimum attainable interest rate for the Treasury and was in demand as a long-term investment vehicle by investors. The pre-maturity call date allowed the Treasury the flexibility to redeem the bonds during a period of surplus revenue. Between 1861 and 1917, certificates of indebtedness were issued on occasion to manage cash flow through the Treasury and notes were issued only during the financial crisis years of the Civil War.

Source: Franklin Noll, A Guide to Government Obligations, 1861-1976, unpublished ms., 2004.

In terms of both numbers and values, the change to shorter maturity Treasury securities began with World War I. Unprepared for the financial demands of World War I, the Treasury was perennially short of cash and issued a great number of certificates of indebtedness and short-term notes. A market developed for these securities, and they were issued throughout the interwar period to meet cash demands and refund the remaining World War I debt. While the number of bonds issued rose in the World War I and World War II years, by 1975 bond issues had become rare; and by the late 1960s, the value of bonds issued was in steep decline. (See Figure 9.) In part, this was the effect of interest rates moving beyond statutory limits set on the interest rate the Treasury could pay on long-term securities. The primary reason for the decline of the bond, however, was post-World War II economic growth and inflation that drove up interest rates and established expectations of rising inflation. In such conditions, shorter term securities were more in favor with investors who sought to ride the rising tide of interest rates and keep their financial assets as liquid as possible. Correspondingly, the number and value of notes and bills rose throughout the postwar years. Certificates of indebtedness declined as they were replaced by bills. Treasury bills won out because they were easier and therefore less expensive for the Treasury to issue than certificates of indebtedness. Bills required no predetermination of interest rates or servicing of coupon payments.

Source: Data for 1861 to 1880 derived from Rafael A. Bayley, The National Loans of the United States from July 4, 1776, to June 30, 1880, second edition, facs rpt (New York: Burt Franklin, 1970 [1881]), 180-84 and Annual Report of the Secretary of the Treasury on the State of the Finances, (Washington, DC: Government Printing Office, 1861), 44. Post-1880 numbers derived from “Analysis of the Principal of the Interest-Bearing Public Debt of the United States from July 1, 1856 to July 1, 1912,” idem (1912), 102-03; “Comparative Statement of the Public Debt Outstanding June 30, 1933 to 1939,” idem (1939), 452-53; “Composition of the Public Debt at the End of the Fiscal Years 1916 to 1938,” idem, 454-55; “Public Debt by Security Classes, June 30, 1939-49,” idem (1949), 400-01; “Public Debt Outstanding by Security Classes, June 30, 1945-55,” idem (1955); “Public Debt Outstanding by Classification,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 67-71.

Nonmarketable Debt Securities

Securities sold as nonmarketable debt come in the forms above–certificate of indebtedness, bill, note, and bond. Most, but not all, nonmarketable securities fall into these series or categories:

Depositary Series
Made up of depositary bonds held by depositary banks. These are banks that provide banking facilities for the Treasury. Depositary bonds act as collateral for the Treasury funds deposited at the bank. The interest on these collateral securities provides the banks with income for the services rendered.
Foreign Government Series
The group of Treasury securities sold to foreign governments or used in foreign exchange stabilization operations.
Government Account Series
Refers to all types of securities issued to or by government accounts and trust funds.
Investment Series
Contains Treasury Bond, Investment Series securities sold to institutional investors.
REA Series
Rural electrification Administration Series securities are sold to recipients of Rural Electrification Administration loans who have unplanned excess loan money. Holding on to excess funds in the form of bonds give the borrower the capacity to cash in the bonds and retrieve the unused loan funds without the need for negotiating a new loan.
SLG Series
State and Local Government Series securities were first issued in 1972 to help state and municipal governments meet federal arbitrage restrictions.
US Savings Securities
United States Savings Securities refers to a group of securities consisting of savings stamps and bonds (most notably United States Savings Bonds) aimed at small, non-institutional investors.

A number of nonmarketable securities fall outside these series. The special issue securities sold to the Federal Reserve in 1917 (the first securities recognized as nonmarketable) and mentioned above do not fit into any of these categories, neither do securities providing tax advantages like Mortgage Guaranty Insurance Company Tax and Loss Bonds or Special Notes of the United States issued on behalf of the International Monetary Fund. Treasury reports are, in fact, frustratingly full of anomalies and contradictions. One major anomaly is Postal Savings Bonds. First issued in 1911, Postal Savings Bonds were United States Savings Securities that were bought by depositors in the now defunct Postal Savings System. These bonds, unlike United States Savings Bonds, were fully marketable and could be bought and sold on the open market. As a savings security, it is included in the nonmarketable United States Savings Security series even though it is marketable. (It is to include these anomalous securities that we begin the graphs below in 1910.)

The United States Savings Security Series and the Government Account Series were the most significant in the growth of the nonmarketable debt component of the public debt. (See Figure 10.) The real rise in savings securities began with the introduction of the nonmarketable United States Savings Bonds in 1935. The bond drives of World War II established these savings bonds in the American psyche and small investor portfolios. Securities issued for the benefit of government funds or programs began in 1925 and, as in the case of savings securities, really took off with the stimulus of World War II. The growth of government and government programs continued to stimulate the growth of the Government Account Series, making it the largest part of nonmarketable debt by 1975. (See Figure 13.)

Source: Various tables and exhibits, Annual Report of the Secretary of the Treasury on the State of the Finances, (Washington, DC: Government Printing Office, 1910-1932); “Comparative Statement of the Public Debt Outstanding June 30, 1933 to 1939,” idem (1939), 452-53; “Composition of the Public Debt at the End of the Fiscal Years 1916 to 1938,” idem, 454-55; “Public Debt by Security Classes, June 30, 1939-49,” idem (1949), 400-01; “Public Debt Outstanding by Security Classes, June 30, 1945-55,” idem (1955); “Public Debt Outstanding by Classification,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 67-71.

The Depositary, REA, and SLG series were of minor importance throughout the period with depositary bonds declining because their fixed interest rate of 2% became increasing uncompetitive with the rise in inflation. (See Figure 11.) As the Investment Series was tied to a single security, it declined with the gradual redemptions of Treasury Bond, Investment Series securities. (See Figure 12.) The Foreign Government Series grew with escalating efforts to stabilize the value of dollar in foreign exchange markets. (See Figure 12.)

Source: “Description of Public Debt Issues Outstanding, June 30, 1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix (Washington, DC: Government Printing Office, 1975), 88-112.

History of the Public Debt

While we have examined the development of the various components of the public debt, we have yet to consider the public debt as a whole. Quite a few writers in the recent past have commented on the ever-growing size of the public debt. Many were concerned that the public debt figures were becoming astronomical in size and that there was no end in sight to continued growth as perennial budget deficits forced the government to keep borrowing money. Such fears are not entirely new to our country. In the Civil War, World War I, and World War II, people were astounded at the unprecedented heights reached by the public debt during wartime. What changed during World War II (and maybe a bit before) was the assumption that the public debt would decrease once the present crisis was over. The pattern in America’s past was that after each war every effort would be made to pay off the accumulated debt as quickly as possible. Thus we find after the Civil War, World War I, and World War II declines in the total public debt. (See Figures 14 and 15.) Until the United States’ entry into World War I, the public debt never exceeded $3 billion (See Figure 14); and probably the debt would have returned near to this level after World War I if the Great Depression and World War II had not intervened. Yet, the last contraction of the public debt between 1861 and 1975 occurred in 1957. (See Figures 15 and 18.) Since then the debt grew at an ever-increasing rate. Why?

The period 1861 to 1975 roughly divides into two eras and two corresponding philosophies on the public debt. From 1861 to 1932, government officials basically followed traditional precepts of public debt management, pursuing balanced budgets and paying down any debt as quickly as possible (Withers, 35-42). We will label these officials traditionalists. To oversimplify, for traditionalists the economy was not to be meddled with by the government as no good would come from it. The ups and downs of business cycles were natural phenomena that had to be endured and when possible provided for through the accumulation of budget surpluses. These views of national finance and the public debt held sway before the Great Depression and lingered on into the 1950s (Conklin, 234). But it was during the Great Depression and the first term of President Franklin Roosevelt, that we see an acceptance of what was then called “new economics” and would later be called Keynesianism. Basically, “new” economists believed that the business cycle could be counteracted through government intervention into the economy (Withers, 32). During economic downturns, the government could dampen the down cycle by stimulating the economy through lower taxes, increased government spending, and an expanded money supply. As the economy recovered, these stimulants would be reversed to dampen the up cycle of the economy. These beliefs gained ever greater currency over time and we will designate the period 1932 to 1975, the New Era.

The Traditional Era, 1861-1932

(This discussion focuses on figures 14 and 16. Also See Figures 18, 19, and 20.) In 1861, the public debt stood at roughly $65 million. At the end of the Civil War the debt was some 42 times greater at $2,756 million and the country was off the gold standard. The Civil War was paid for by a new personal income tax, massive bond issues, and the printing of currency, popularly known as Greenbacks. Once the war was over, there was a drive to return to the status quo antebellum with a return to the gold standard, a pay down of the public debt, and the retirement of Greenbacks. The period 1866 to 1893, saw 28 continuous years of budget surpluses with revenues pouring in from tariffs and land sales in the west. During that time, successive Secretaries of the Treasury redeemed public debt securities to the greatest extent possible, often buying securities at a premium in the open market. The debt declined continuously until 1893 to a low of $961 million with a brief exception in the late 1870s as the country dealt with the recessionary after effects of the Panic of 1873 and the controversy regarding resumption of the gold standard in 1879. The Panic of 1893 and a decline in tariff revenues brought a period of budget deficits and slightly raised the public debt from its 1893 low to a steady average of around $1,150 million in the years leading up to World War I. The first war drives occurred during World War I. With the aid of the recently established Federal Reserve, the Treasury held four Liberty Loan drives and one Victory Loan drive. The Treasury also introduced low cost savings certificates and stamps to attract the smallest investor. For 25 cents, one could aid the war effort by buying a Thrift Stamp. As at the end of previous wars, once World War I ended there was a concerted drive to pay down the debt. By 1931, the debt was reduced to $16,801 million from a wartime high of $25,485 million. The first budget deficit since the end of the war also appeared in 1931, marking the deepening of the Great Depression and a move away from the fiscal orthodoxy of the past.

Source: “Principal of the Public Debt, Fiscal Years 1790-1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix. (Washington, DC: Government Printing Office, 1975), 62-63.

Source: Robert Sahr, Oregon State University. URL: fac/sahr/sahrhome.htm.

The New Era, 1932-1975

(This discussion focuses on figures 15 and 17. Also See Figures 18, 19, and 20.) It was Roosevelt who first experimented with deficit spending to pull the economy out of depression and to stimulate jobs through the creation of public works programs and other elements of his New Deal. Though taxes were raised on the wealthy, the depressed state of the economy meant government revenues were far too low to finance the New Deal. As a result, Roosevelt in his first year created a budget deficit almost six times greater than that of Hoover’s last year in office. Between 1931 and 1941, the public debt tripled in size, standing at $48,961 million upon the United States’ entry into World War II. To help fund the debt and get hoarded money back into circulation, the Treasury introduced the United States Savings Bond. Nonmarketable with a guaranteed redemption value at any point in the life of the security and a denomination as low as $25, the savings bond was aimed at small investors fearful of continued bank collapses. With the advent of war, these bonds became War Savings Bonds and were the focus of the eight war drives of World War II, which also included Treasury bonds and certificates of indebtedness. The public debt reached a height of $269,422 million because of the war.

The experience of the New Deal combined with the low unemployment and victory of wartime, seemed to confirm Keynesian theories and reduce the fear of budget deficits. In 1946, Congress passed the Full Employment Act, committing the government to the pursuit of low unemployment through government intervention in the economy, which could include deficit spending. Though Truman and Eisenhower promoted some government intervention in the economy, they were still economic traditionalists at heart and sought to pay down the public debt as much as possible. And, despite massive foreign aid, a sharp recession in the late 1950s, and large-scale foreign military deployments, including the Korean War, these two presidents were able to present budget surpluses more than 50% of the time and limit the growth of the public debt to an average of $1,000 million per year. From 1960 to 1975, there would only be one year of budget surplus and the public debt would grow at an average rate of $17,040 million per year. It was in 1960 and the arrival of the Kennedy administration that the “new economics” or Keynesianism came into full flower within the government. In the 1960s and 1970s, tax cuts and increased domestic spending were pursued not only to improve society but also to move the economy toward full employment. However, these economic stimulants were not just applied on down cycles of the economy but also on up cycles, resulting in ever-growing deficits. Added to this domestic spending were the continued outlays on military deployments overseas, including Vietnam, and borrowings in foreign markets to prop up the value of the dollar. During boom years, government revenues did increase but never enough to outpace spending. The exception was 1969 when a high rate of inflation boosted nominal revenues which were offset by the increased nominal cost of servicing the debt. By 1975, the United States was suffering from the high inflation and high unemployment of stagflation, and the budgetary deficits seemed to take on a life of their own. Each downturn in the economy brought smaller revenues aggravated by tax cuts while spending soared because of increased welfare and unemployment benefits and other government spending aimed at spurring job creation. The net result was an ever-increasing charge on the public debt and the huge numbers that have concerned so many in the past (and present).

Source: Nominal figures from “Principal of the Public Debt, Fiscal Years 1790-1975,” Annual Report of the Secretary of the Treasury on the State of the Finances, Statistical Appendix. (Washington, DC: Government Printing Office, 1975), 62-63; real figures adjust for inflation and are provided by Robert Sahr, Oregon State University. URL:

Source: Derived from figures provided by Robert Sahr, Oregon State University. URL: fac/sahr/sahrhome.htm.

Source: Robert Sahr, Oregon State University. URL: fac/sahr/sahrhome.htm.

We end this study in 1975 and the passage of the Budget Control Act. Formally entitled the Congressional Budget and Impoundment Control Act of 1974, it was passed on July 12, 1974 (the start of fiscal year 1975). Some of the most notable provisions of the act were the establishment of House and Senate Budget Committees, creation of the Congressional Budget Office, and removal of impoundment authority from the President. Impoundment was the President’s ability to refrain from spending funds authorized in the budget. For example, if a government program ended up not spending all the money allotted it, the President (or more specifically the Treasury under the President’s authority) did not have to pay out the unneeded money. Or, if the President did not want to fund a project passed by Congress in the budget, he could in effect veto it by instructing the Treasury not to release the money. In sum, the Budget Control Act shifted the balance of budgetary power to the Congress from the executive branch. The effect was to weaken restraints on Congressional spending and contribute to the increased deficits and sharp, upward growth in the public debt in the next couple decades. (See Figures 1, 19, and 20.)

But the Budget Control Act was a watershed for the public debt not only in its rate of growth but also in the way it was recorded and reported. The act changed the fiscal year (the twelve-month period used to determine income and expenses for accounting purposes) from July 1 to June 30 of each year to October 1 to September 30. The Budget Control Act also initiated the reporting system currently used by the Bureau of the Public Debt to report on the public debt. Fiscal year 1975 saw the first publication of the Monthly Statement of the Public Debt of the United States. For the first time, it reported the public debt in the structure we examined above, a structure still used by the Treasury today.


The public debt from 1861 to 1975 was the product of many factors. First, it was the result of accountancy on the part of the United States Treasury. Only certain obligations of the United States fall into the definition of the public debt. Second, the debt was the effect of Treasury debt management decisions as to what debt instruments or securities were to be used to finance the debt. Third, the public debt was fundamentally a product of budget deficits. Massive government spending in itself did not create deficits and add to the debt. It was only when revenues were not sufficient to offset the spending that deficits and government borrowing were necessary. At times, as during wartime or severe recessions, deficits were largely unavoidable. The change that occurred between 1861 and 1975 was the attitude among the government and the public toward budget deficits. Until the Great Depression, deficits were seen as injurious to the public good, and the public debt was viewed with unease as something the country could really do without. After the Great Depression, deficits were still not welcomed but were now viewed as a necessary tool needed to aid in economic recovery and the creation of jobs. Post-World War II rising expectations of continuous economic growth and high employment at home and the extension of United States’ power abroad spurred the use of deficit spending. And, the belief among some influential Keynesians that more tinkering with the economy was all that was needed to fix a stagflating economy created an almost self-perpetuating growth of the public debt. In the end, the history of the public debt is not so much about accountancy or Treasury securities as about national ambitions, politics, and economic theories.

Annotated Bibliography

Though much has been written about the public debt, very little of it is of any real use in economic analysis or learning the history of the public debt. Most books deal with an ever-pending public debt crisis and give policy recommendations on how to solve the problem. However, there are a few recommendations:

Annual Report of the Secretary of the Treasury on the State of the Finances. Washington, DC: Government Printing Office, -1980.

This is the basic source for all information on the public debt until 1980.

Bayley, Rafael A. The National Loans of the United States from July 4, 1776, to June 30, 1880. Second edition. Facsimile reprint. New York: Burt Franklin, 1970 [1881].

This is the standard work on early United States financing written by a Treasury bureaucrat.

Bureau of the Public Debt. “The Public Debt Online.” URL: http://www.publicdebt.treas. gov/opd/opd.htm.

Provides limited data on the public debt, but provides all past issues of the Monthly Statement of the Public Debt.

Conklin, George T., Jr. “Treasury Financial Policy from the Institutional Point of View.” Journal of Finance 8, no. 2 (May 1953): 226-34.

This is a contemporary’s disapproving view of the growing acceptance of the “new economics” that appeared in the 1930s.

Gordon, John Steele. Hamilton’s Blessing: the Extraordinary Life and Times of Our National Debt. New York: Penguin, 1998.

This is a very readable, brief overview of the history of the public debt.

Love, Robert A. Federal Financing: A Study of the Methods Employed by the Treasury in Its Borrowing Operations. Reprint of 1931 edition. New York: AMS Press, 1968.

This is the most complete and thorough account of the structure of the public debt. Unfortunately, it only goes up to 1925.

Noll, Franklin. A Guide to Government Obligations, 1861-1976. Unpublished ms. 2004.

This is a descriptive inventory and chronological listing of the roughly 12,000 securities issued by the Treasury between 1861 and 1976.

Office of Management and Budget. “Historical Tables.” Budget of the United States Government, Fiscal Year 2005. URL: pdf/hist.pdf.

Provides data on the public debt, budgets, and federal spending, but reports focus on the latter twentieth century.

Sahr, Robert. “National Government Budget.” URL: fac/sahr/sahr.htm.

This is a valuable web site containing a useful collection of detailed graphs on government spending and the public debt.

Withers, William. The Public Debt. New York: John Day Company, 1945.

Like Conklin, this is a contemporary’s view of the change in perspectives on the public debt occurring in the 1930s. Withers tends to favor the “new economics.”

Citation: Noll, Franklin. “The United States Public Debt, 1861 to 1975”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

Bankruptcy Law in the United States

Bradley Hansen, Mary Washington College

Since 1996 over a million people a year have filed for bankruptcy in the United States. Most seek a discharge of debts in exchange for having their assets liquidated for the benefit of their creditors. The rest seek the assistance of bankruptcy courts in working out arrangements with their creditors. The law has not always been so kind to insolvent debtors. Throughout most of the nineteenth century there was no bankruptcy law in the United States, and most debtors found it impossible to receive a discharge from their debts. Early in the century debtors could have expected even harsher treatment, such as imprisonment for debt.

Table 1. Chronology of Bankruptcy Law in The United States, 1789-1978

Date Event
1789 The Constitution empowers Congress to enact uniform laws on the subject of bankruptcy.
1800 First bankruptcy law is enacted. The law allows only for involuntary bankruptcy of traders.
1803 First bankruptcy law is repealed amid complaints of excessive expenses and corruption.
1841 Second bankruptcy law is enacted in the wake of the Panics of 1837 and 1839. The law allows both voluntary and involuntary bankruptcy.
1843 1841 Bankruptcy Act is repealed, amid complaints about expenses and corruption.
1867 Prompted by demands arising from financial failures during the Panic of 1857 and the Civil War, Congress enacts the third bankruptcy law.
1874 The 1867 Bankruptcy Act is amended to allow for compositions.
1878 The 1867 Bankruptcy Law is repealed.
1881 The National Convention of Boards of Trade is formed to lobby for bankruptcy legislation.
1889 The National Convention of Representatives of Commercial Bodies is formed to lobby for bankruptcy legislation. The president of the Convention, Jay L. Torrey, drafts a bankruptcy bill.
1898 Congress passes a bankruptcy bill based on the Torrey bill.
1933-34 The 1898 Bankruptcy Act is amended to include railroad reorganization, corporate reorganization, and individual debtor arrangements.
1938 The Chandler Act amends the 1898 Bankruptcy Act, creating a menu of options for both business and non-business debtors.
1978 The 1898 Bankruptcy Act is replaced by The Bankruptcy Reform Act.

To say that there was no bankruptcy law in the United States for most of the nineteenth century is not to say that there were no laws governing insolvency or the collection of debts. Americans have always relied on credit and have always had laws governing the collection of debts. Debtor-creditor laws and their enforcement are important because they influence the supply and demand for credit. Laws that do not encourage the repayment of debts increase risk for creditors and reduce the supply of credit. On the other hand, laws that are too strict also have costs. Strict laws such as imprisonment for debt can discourage entrepreneurs from experimenting. Many of America’s most famous entrepreneurs, such as Henry Ford, failed at least once before making their fortunes.

Over the last two hundred years the United States has shifted from a legal regime that was primarily directed at the strict enforcement of debt contracts to one that provides numerous means to alter the terms of debt contracts. As the economy developed groups of people became convinced that strict enforcement of credit contracts was unfair, inefficient, contrary to the public interest, or simply not in their own self interest. Periodic financial crises in the nineteenth century generated demands for bankruptcy laws to discharge debts. They also led to the introduction of voluntary bankruptcy and the extension of the right to file for bankruptcy to all individuals. The expansion of interstate commerce in the late nineteenth century led to demands for a uniform and efficient bankruptcy law throughout the United States. The rise of railroads gave rise to a demand for corporate reorganization. The expansion of consumer credit in the twentieth century and the rise in consumer bankruptcy cases led to the introduction of arrangements into bankruptcy law, and continue to fuel demands for revision of bankruptcy law today.

Origins of American Bankruptcy Law

Like much of American law, the origins of both state laws for the collection of debt and federal bankruptcy law can be found in England. State laws are, in general, derived from common law procedures for the collection of debt. Under the common law a variety of procedures evolved to aid a creditor in collecting a debt. Generally, the creditor can obtain a judgment from a court for the amount that he is owed and then have a legal official seize some of the debtor’s property or wages to satisfy this judgement. In the past a defaulting debtor could also be placed in prison to coerce repayment. Bankruptcy law does not replace other collection laws but does supercede them. Creditors still use procedures such as garnishing a debtor’s wages, but if the debtor or another creditor files for bankruptcy such collection efforts are stopped.

Under the U.S. Constitution, adopted 1789, bankruptcy law became a federal law in the United States. There are two clauses of the Constitution that influenced the evolution of bankruptcy law. First, in Article One, Section Eight Congress was empowered to enact uniform laws on the subject of bankruptcy. Second, the Contract Clause prohibited states from passing laws that impair the obligation of contracts. Courts have generally interpreted these clauses so as to give wide latitude to the federal government to alter the obligations of debt contracts while restricting state governments. States, however, are not completely barred from altering the terms of contracts. In its 1827 decision on Ogden vs. Saunders the Supreme Court declared that states could pass laws that granted a discharge for debts that were incurred after the law was passed; however, a state discharge can not be binding on creditors who are citizens of other states.

The evolution of bankruptcy law in the United States can be divided into two periods. In the first period, which encompasses most of the nineteenth century, Congress enacted three laws in the wake of financial crises. In each case the law was repealed within a few years amid complaints of high costs and corruption. The second period begins in 1881 when associations of merchants and manufacturers banded together to form a national association to lobby for a federal bankruptcy law. In contrast to previous demands for bankruptcy law, which were prompted largely by crises, late nineteenth century demands for bankruptcy law were for a permanent law suited to the needs of a commercial nation. In 1898 the Act to Establish a Uniform System of Bankruptcy was enacted and the United States has had a bankruptcy law ever since.

The Temporary Bankruptcy Acts of 1800, 1841 and 1867

Congress first exercised its power to enact uniform laws on bankruptcy in 1800. The debates in the Annals of Congress are brief but suggest that the demand for the law arose from individuals who were in financial distress. The law was modeled after the English bankruptcy law of the time. The law applied only to traders. Creditors could file a bankruptcy petition against a debtor, the debtor’s assets would be divided on a pro rata basis among his creditors, and the debtor would receive a discharge. Although debtors could not file a voluntary bankruptcy petition, it was generally believed that many debtors asked a friendly creditor to petition them into the bankruptcy court so that they could obtain a discharge. The law was intended to remain in effect for five years. Complaints that the law was expensive to administer, that it was difficult and costly to travel to federal courts, and that the law provided opportunities for fraud led to its repeal after only two years. Similar complaints were to follow the passage of subsequent bankruptcy laws.

Bankruptcy law largely disappeared from national politics until the Panic of 1839. A few petitions and memorials were sent to Congress in the wake of the Panic of 1819, but no law was passed. The Panic of 1839 and the recession that followed it brought forward a flood of petitions and memorials for bankruptcy legislation. Memorials typically declared that many business people had been brought to ruin by economic conditions that were beyond their control not through any fault of their own. In the wake of the Panic, Whigs made the attack on Democratic economic policies and the passage of bankruptcy relief central parts of their platform. After gaining control of Congress and the Presidency, the Whigs pushed through the 1841 Bankruptcy Act. The law went into effect February 2, 1842.

Like its predecessor, the Bankruptcy Act of 1841 was short-lived. The law was repealed March 3, 1843. The rapid about-face on bankruptcy was the result of the collapse of a bargain between Northern and Southern Whigs. Democrats overwhelmingly opposed the passage of the Act and supported its repeal. Southern Whigs also generally opposed a federal bankruptcy law. Northern Whigs appear to have obtained the Southern Whigs votes for passage by agreeing to distribute the proceeds from the sales of federal lands to the states. A majority of Southern Whigs voted for passage but then reversed their votes the next year. Despite its short life, over 41,000 petitions for bankruptcy, most of them voluntary, were filed under the 1841 law.

The primary innovations of the Bankruptcy Act of 1841 were the introduction of voluntary bankruptcy and the widening of the scope of occupations that could use the law. With the introduction of voluntary bankruptcy, debtors no longer had to resort to the assistance of a friendly creditor. Unlike the previous law in which only traders could become bankrupts, under the 1841 Act traders, bankers, brokers, factors, underwriters, and marine insurers could be made involuntary bankrupts and any person could apply for voluntary bankruptcy.

After repeal of the Bankruptcy Act of 1841, the subject of bankruptcy again disappeared from congressional consideration until the Panic of 1857, when appeals for a bankruptcy law resurfaced. The financial distress caused to Northern merchants by the Civil War further fueled demands for bankruptcy legislation. Though demands for a bankruptcy law persisted throughout the War, considerable opposition also existed to passing a law before the War was over. In the first Congress after the end of the War, the Bankruptcy Act of 1867 was enacted. The 1867 Act was amended several times and lasted longer than its predecessors. An 1874 amendment added compositions to bankruptcy law for the first time. Under the composition provision a debtor could offer a plan to distribute his assets among his creditors to settle the case. Again, complaints of excessive fees and expenses led to the repeal of the Bankruptcy Act in 1878. Table 2 shows the number of petitions filed under the 1867 law between 1867 and 1872.

Table 2. Bankruptcy Petitions, 1867-1872

Year Petitions
1867 7,345
1868 29,539
1869 5,921
1870 4,301
1871 5,438
1872 6,074

Source: Expenses of Proceedings in Bankruptcy In United States Courts. Senate Executive Document 19 (43-1) 1580.

During the first three quarters of the nineteenth century the demand for bankruptcy legislation rose with financial panics and fell as they passed. Many people came to believe that the forces that brought people to insolvency were often beyond their control and that to give them a fresh start was not only fair but in the best interest of society. Burdened with debts they had no hope of paying they had no incentive to be productive, creditors would take anything they earned. Freed from these debts they could once again become productive members of society. The spread of the belief that debtors should not be subjected to the harshest elements of debt collection law can also be seen in numerous state laws enacted during the nineteenth century. Homestead and exemption laws declared property that creditors could not take. Stay and moratoria laws were passed during recessions to stall collection efforts. Over the course of the nineteenth century, states also abolished imprisonment for debt.

Demand For A Permanent Bankruptcy Law

The repeal of the 1867 Bankruptcy Act was followed almost immediately by a well-organized movement to obtain a new Bankruptcy law. A national campaign by merchants and manufacturers to obtain bankruptcy legislation began in 1881 when The New York Board of Trade and Transportation organized a National Convention of Boards of Trade.The participants at the Convention endorsed a bankruptcy bill prepared by John Lowell, a judge from Massachusetts. They continued to lobby for the bill throughout the 1880s.

After failing to obtain passage of the Lowell bill, associations of merchants and manufacturers met again in 1889. Under the name of The National Convention of Representatives of Commercial Bodies they held meetings in St. Louis and in Minneapolis. The president of the Convention, a lawyer and businessman named Jay Torrey, drafted a bill that the Convention lobbied for throughout the 1890s. The bill allowed both voluntary and involuntary petitions, though wage earners and farmers could not be made involuntary bankrupts. The bill was primarily directed at liquidation but did include a provision for composition. A composition had to be approved by a majority of creditors in both number and value. In a compromise with states’ rights advocates, the bill declared that exemptions would be determined by the states.

The merchants and manufacturers, who organized the conventions, provided credit to their customers whenever they delivered goods in advance of payment. They were troubled by three features of state debtor-creditor laws. First, the details of collection laws varied from state to state, forcing them to learn the laws in all the states in which they wished to sell goods. Second, many state laws discriminated against foreign creditors, that is, creditors who were not citizens of the state. Third, many of the state laws provided for a first-come, first-served distribution of assets rather than a pro rata division. With the first-come, first-served rule, the first creditor to go to court could claim all the assets necessary to pay his debts leaving the last to receive nothing. The first-come, first-served rule of collection tended to create incentives for creditors to race to be the first to file a claim. The effect of this rule was described by Jay Torrey: “If a creditor suspects his debtor is in financial trouble, he usually commences an attachment suit, and as a result the debtor is thrown into liquidation irrespective of whether he is solvent or insolvent. This course is ordinarily imperative because if he does not pursue that course some other creditor will.” Thus the law could actually precipitate business failures. As interstate commerce expanded in the late nineteenth century more merchants and manufacturers experienced these three problems

Merchants and manufacturers also found it easier to form a national organization in the late nineteenth century because of the growth of trade associations, boards of trade, chambers of commerce and other commercial organizations. By forming a national organization composed of businessmen’s associations from all over the country, merchants and manufacturers were able to act in unison in drafting a bankruptcy bill and lobbying for a bankruptcy bill. The bill they drafted not only provided uniformity and a pro rata distribution, but was designed to prevent the excessive fees and expenses that had been a major complaint against previous bankruptcy laws.

As early as 1884, the Republican Party supported the bankruptcy bills put forward by the merchants and manufacturers. A majority in both the Republican and Democratic parties supported bankruptcy legislation during the late nineteenth century. It took nearly twenty years to enact bankruptcy legislation because they supported different versions of bankruptcy law. The Democratic Party supported bills that were purely voluntary (creditors could not initiate proceedings) and temporary (the law would only remain in effect for a few years). The requirement that the law be temporary was crucial to Democrats because a vote for a permanent bankruptcy law would have been a vote for the expansion of federal power and against states’ rights, a central component of Democratic policy. Throughout the 1880s and 1890s, votes on bankruptcy split strictly along party lines. The majority of Republicans preferred the status quo to the Democrats bills and the majority of Democrats preferred the status quo to the Republican bills. Because control of Congress was split between the two parties for most of the last quarter of the nineteenth century neither side could force through their version of bankruptcy law. This period of divided government ended with the 55th Congress, in which the Bankruptcy Act of 1898 was passed.

Railroad Receivership and the Origins of Corporate Reorganization

The 1898 Bankruptcy Act was designed to aid creditors in liquidation of an insolvent debtor’s assets, but one of the important features of current bankruptcy law is the provision for reorganization of insolvent corporations. To find the origins of corporate reorganization one has to look outside the early evolution of bankruptcy law and look instead at the evolution of receiverships for insolvent railroads. A receiver is an individual appointed by a court to take control of some property, but courts in the nineteenth century developed this tool as a means to reorganize troubled railroads. The first reorganization through receivership occurred in 1846, when a Georgia court appointed a receiver over the insolvent Munroe Railway Co. and successfully reorganized it as the Macon and Western Railway. In the last two decades of the nineteenth century the number of receiverships increased dramatically; see Table 3. In theory, courts were supposed to appoint an indifferent party as receiver, and the receiver was merely to conserve the railroad while the best means to liquidate it was ascertained. In fact, judges routinely appointed the president, vice-president or other officers of the insolvent railway and assigned them the task of getting the railroad back on its feet. The object of the receivership was typically a sale of the railroad as a whole. But the sale was at least partly a fiction. The sole bidder was usually a committee of the bondholders using their bonds as payment. Thus the receivership involved a financial reorganization of the firm in which the bond and stock holders of the railroad traded in their old securities for new ones. The task of the reorganizers was to find a plan acceptable to the bondholders. For example, in the Wabash receivership of 1886, first mortgage bondholders ultimately agreed to exchange their 7 percent bonds for new ones of 5 percent. The sale resulted in the creation of a new railroad with the assets of the old. Often the transformation was simply a matter of changing “Railway” to “Railroad” in the name of the corporation. Throughout the late nineteenth and early twentieth centuries judges denied other corporations the right to reorganize through receivership. They emphasized that railroads were special because of their importance to the public.

Unlike the credit supplied by merchants and manufacturers, much of the debt of railroads was secured. For example, bondholders might have a mortgage that said they could claim a specific line of track if the railroad failed to make its bond payments. If a railroad became insolvent different groups of bondholders might claim different parts of the railroad. Such piecemeal liquidation of a business presented two problems in the case of railroads. First, many people believed that piecemeal liquidation would destroy much of the value of the assets. In his 1859 Treatise on the Law of Railways, Isaac Redfield explained that, “The railway, like a complicated machine, consists of a great number of parts, the combined action of which is necessary to produce revenue.” Second, railroads were regarded as quasi-public corporations. They were given subsidies and special privileges. Their charters often stated that their corporate status had been granted in exchange for service to the public. Courts were reluctant to treat railroads like other enterprises when they became insolvent and instead used receivership proceedings to make sure that the railroad continued to operate while its finances were reorganized.

Table 3. Railroad Receiverships, 1870-1897

Percentage of
Receiverships Mileage in Mileage put in
Year Established Receivership Receivership
1870 3 531 1
1871 4 644 1.07
1872 4 535 0.81
1873 10 1,357 1.93
1874 33 4,414 6.1
1875 43 7,340 9.91
1876 25 4,714 6.14
1877 33 3,090 3.91
1878 27 2,371 2.9
1879 12 1,102 1.27
1880 13 940 1.01
1881 5 110 0.11
1882 13 912 0.79
1883 12 2,041 1.68
1884 40 8,731 6.96
1885 44 7,523 5.86
1886 12 1,602 1.17
1887 10 1,114 0.74
1888 22 3,205 2.05
1889 24 3,784 2.35
1890 20 2,460 1.48
1891 29 2,017 1.18
1892 40 4,313 2.46
1893 132 27,570 15.51
1894 50 4,139 2.31
1895 32 3,227 1.78
1896 39 3,715 2.03
1897 21 1,536 0.83

Source: Swain, H. H. “Economic Aspects of Railroad Receivership.” Economic Studies 3, (1898): 53-161.

Depression Era Bankruptcy Reforms

Reorganization and bankruptcy were brought together by the amendments to the 1898 Bankruptcy Act during the Great Depression. By the late 1920s, a number of problems had become apparent with both the bankruptcy law and receivership. Table 4 shows the number of bankruptcy petitions filed each year since the law was enacted. The use of consumer credit expanded rapidly in the 1920s and so did wage earner bankruptcy cases. As Table 5 shows, voluntary bankruptcy by wage earners became an increasingly large proportion of bankruptcy petitions. Unlike mercantile bankruptcy cases, in many wage earner cases there were no assets. Expecting no return, many creditors paid little attention to bankruptcy cases and corruption spread in the bankruptcy courts. An investigation into bankruptcy in the southern district of New York recorded numerous abuses and led to the disbarment of of more than a dozen lawyers. In the wake of the investigation President Hoover appointed Thomas Thacher to investigate bankruptcy procedure in the United States. The Thacher Report recommended that an administrative staff be created to oversee bankruptcies. The bankruptcy administrators would be empowered to investigate bankrupts and reject requests for discharge. The report also suggested that many debtors could pay their debts if given an opportunity to work out an arrangement with their creditors. It suggested that procedures for the adjustment or extension of debts be added to the law. Corporate lawyers also identified three problems with the corporate receiverships. First, it was necessary to obtain an ancillary receivership in each federal district in which the corporation had assets. Second, some creditors might try to withhold their approval of a reorganization plan in exchange for a better deal for themselves. Third, judges were unwilling to apply reorganization through receivership to corporations other than railroads. Consequently, the Thacher report suggested that procedures for corporate reorganization also be incorporated into bankruptcy law.

Table 4. Bankruptcy Petitions Filed, 1899-1997

Petitions per Percentage
Year Voluntary Involuntary Total 10,000 Population Involuntary
1899 20,994 1,452 22,446 3.00 6.47
1900 20,128 1,810 21,938 2.88 8.25
1901 17,015 1,992 19,007 2.45 10.48
1902 16,374 2,108 18,482 2.33 11.41
1903 14,308 2,567 16,875 2.09 15.21
1904 13,784 3,298 17,082 2.08 19.31
1905 13,852 3,094 16,946 2.02 18.26
1906 10,526 2,446 12,972 1.52 18.86
1907 11,127 3,033 14,160 1.63 21.42
1908 13,109 4,709 17,818 2.01 26.43
1909 13,638 4,380 18,018 1.99 24.31
1910 14,059 3,994 18,053 1.95 22.12
1911 14,907 4,431 19,338 2.06 22.91
1912 15,313 4,432 19,745 2.07 22.45
1913 16,361 4,569 20,930 2.15 21.83
1914 17,924 5,035 22,959 2.32 21.93
1915 21,979 5,653 27,632 2.75 20.46
1916 23,027 4,341 27,368 2.68 15.86
1917 21,161 3,677 24,838 2.41 14.80
1918 17,261 3,124 20,385 1.98 15.32
1919 12,035 2,013 14,048 1.34 14.33
1920 11,333 2,225 13,558 1.27 16.41
1921 16,645 6,167 22,812 2.10 27.03
1922 28,879 9,286 38,165 3.47 24.33
1923 33,922 7,832 41,754 3.73 18.76
1924 36,977 6,542 43,519 3.81 15.03
1925 39,328 6,313 45,641 3.94 13.83
1926 40,962 5,412 46,374 3.95 11.67
1927 43,070 5,688 48,758 4.10 11.67
1928 47,136 5,928 53,064 4.40 11.17
1929 51,930 5,350 57,280 4.70 9.34
1930 57,299 5,546 62,845 5.11 8.82
1931 58,780 6,555 65,335 5.27 10.03
1932 62,475 7,574 70,049 5.61 10.81
1933 56,049 6,207 62,256 4.96 9.97
1934 58,888 4.66
1935 69,153 5.43
1936 60,624 4.73
1937 55,842 1,643 57,485 4.46 2.86
1938 55,137 2,169 57,306 4.41 3.78
1939 48,865 2,132 50,997 3.90 4.18
1940 43,902 1,752 45,654 3.46 3.84
1941 47,581 1,491 49,072 3.69 3.04
1942 44,366 1,295 45,661 3.41 2.84
1943 30,913 649 31,562 2.35 2.06
1944 17,629 277 17,906 1.35 1.55
1945 11,101 264 11,365 0.86 2.38
1946 8,293 268 8,561 0.61 3.13
1947 9,657 697 10,354 0.72 6.73
1948 13,546 1,029 14,575 1.00 7.06
1949 18,882 1,240 20,122 1.35 6.16
1950 25,263 1,369 26,632 1.76 5.14
1951 26,594 1,099 27,693 1.81 3.97
1952 25,890 1,059 26,949 1.73 3.93
1953 29,815 1,064 30,879 1.95 3.45
1954 41,335 1,398 42,733 2.65 3.27
1955 47,650 1,249 48,899 2.98 2.55
1956 50,655 1,240 51,895 3.10 2.39
1957 60,335 1,189 61,524 3.61 1.93
1958 76,048 1,413 77,461 4.47 1.82
1959 85,502 1,288 86,790 4.90 1.48
1960 94,414 1,296 95,710 5.43 1.35
1961 124,386 1,444 125,830 6.99 1.15
1962 122,499 1,382 123,881 6.77 1.12
1963 128,405 1,409 129,814 6.99 1.09
1964 141,828 1,339 143,167 7.60 0.94
1965 149,820 1,317 151,137 7.91 0.87
1966 161,840 1,165 163,005 8.42 0.72
1967 173,884 1,241 175,125 8.95 0.71
1968 164,592 1,001 165,593 8.39 0.60
1969 154,054 946 155,000 7.77 0.61
1970 161,366 1,085 162,451 8.07 0.67
1971 167,149 1,215 168,364 8.26 0.72
1972 152,840 1,094 153,934 7.33 0.71
1973 144,929 985 145,914 6.89 0.68
1974 156,958 1,009 157,967 7.39 0.64
1975 208,064 1,266 209,330 9.69 0.60
1976 207,926 1,141 209,067 9.59 0.55
1977 180,062 1,132 181,194 8.23 0.62
1978 167,776 995 168,771 7.58 0.59
1979 182,344 915 183,259 8.14 0.50
1980 359,768 1,184 360,952 15.85 0.33
1981 358,997 1,332 360,329 15.67 0.37
1982 366,331 1,535 367,866 15.84 0.42
1983 373,064 1,670 374,734 15.99 0.45
1984 342,848 1,447 344,295 14.57 0.42
1985 362,939 1,597 364,536 15.29 0.44
1986 476,214 1,642 477,856 19.86 0.34
1987 559,658 1,620 561,278 23.12 0.29
1988 593,158 1,409 594,567 24.27 0.24
1989 641,528 1,465 642,993 25.71 0.23
1990 723,886 1,598 725,484 29.03 0.22
1991 878,626 1,773 880,399 34.85 0.20
1992 971,047 1,443 972,490 38.08 0.15
1993 917,350 1,384 918,734 35.60 0.15
1994 844,087 1,170 845,257 32.43 0.14
1995 856,991 1,113 858,104 32.62 0.13
1996 1,040,915 1,195 1,042,110 39.26 0.11
1997 1,315,782 1,217 1,316,999 49.16 0.09

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

Table 5. Wage Earner Bankruptcy and No Asset Cases, 1899-1933

Percentage of Cases
Year Wage Earners With No Assets
1899 5,288 51.12
1900 7,516 40.52
1901 7,068 48.99
1902 6,859 47.25
1903 4,852 41.36
1904 5,291 40.55
1905 5,426 40.75
1906 2,748 42.29
1907 3,257 42.11
1908 3,492 40.29
1909 3,528 38.46
1910 4,366 36.49
1911 4,139 48.14
1912 4,161 50.70
1913 4,863 49.63
1914 5,773 49.96
1915 6,632 49.88
1916 6,418 53.29
1917 7,787 57.12
1918 8,230 57.05
1919 6,743 64.53
1920 5,601 67.41
1921 5,897 65.66
1922 7,550 52.70
1923 10,173 61.10
1924 13,126 62.17
1925 14,444 61.23
1926 16,770 64.02
1927 18,494 64.86
1928 21,510 63.19
1929 25,478 67.34
1930 28,979 68.44
1931 29,698 69.15
1932 29,742 66.25
1933 27,385 62.76

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

In 1933, Congress enacted amendments that allowed farmers and wage earners to seek arrangements. Arrangements offered more flexibility than compositions. Debtors could offer to pay all or part of their debts over a longer period of time. Congress also added section 77, which provided for railroad reorganization. Section 77 solved two of the problems that had plagued corporate reorganization. Bankruptcy courts had jurisdiction of the assets throughout the country so that ancillary receiverships were not needed. The amendment also alleviated the holdout problem by making 2/3 votes of a class of creditors binding on all the members of the class. In 1934, Congress extended reorganization to non-railroad corporations as well. The Thacher Report’s recommendations for a bankruptcy administrator were not enacted, largely because of opposition from bankruptcy lawyers. The 1898 Bankruptcy Act had created a well-organized group with a vested interest in the evolution of the law–bankruptcy lawyers.

Although the 1933-34 reforms were ones that bankruptcy lawyers and judges had wanted, many of them believed that the law could be further improved. In 1932, The Commercial Law League, the American Bar Association, the National Association of Credit Management and the National Association of Referees in Bankruptcy joined together to form the National Bankruptcy Conference. The culmination of their efforts was the Chandler Act of 1938. The Chandler Act created a menu of options for both individual and corporate debtors. Debtors could choose traditional liquidation. They could seek an arrangement with their creditors through Chapter 10 of the Act. They could attempt to obtain an extension through Chapter 12. A corporation could seek an arrangement through Chapter 11 or reorganization through Chapter 10. Chapter 11 only allowed corporations to alter their unsecured debt, whereas Chapter 10 allowed reorganization of both secured and unsecured debt. However, corporations tended to prefer Chapter 11 because Chapter 10 required Securities and Exchange Commission review for all publicly traded firms with more than $250,000 in liabilities.

By 1938 modern American bankruptcy law had obtained its central features. The law dealt with all types of individuals and businesses. It allowed both voluntary and involuntary petitions. It enabled debtors to choose liquidation and a discharge, or to choose some type of readjustment of their debts. By 1939, the vast majority of bankruptcy cases were, as they are now, voluntary consumer bankruptcy cases. After 1939 involuntary bankruptcy cases never again rose above 2,000. (See Table 4). The decline of involuntary bankruptcy cases appears to have been associated with the decline in business failures. According to Dun and Bradstreet, the number of failures per 10,000 listed concerns averaged 100 per year from 1870 to 1933. From 1934-1988 the failure rate averaged 50 per 10,000 concerns. The failure rate did not rise above 70 per 10,000 listed concerns again until the 1980s. Also, the number of failures, which had averaged over 20,000 a year in the 1920s did not reach 20,000 a year again until the 1980s. The mercantile failures which had so troubled late nineteenth century merchants and manufacturers were much less of a problem after the Great Depression.

Table 6. Business Failures, 1870-1997

Failures per
Year Failures 10,000 Firms
1870 3,546 83
1871 2,915 64
1872 4,069 81
1873 5,183 105
1874 5,830 104
1875 7,740 128
1876 9,092 142
1877 8,872 139
1878 10,478 158
1879 6,658 95
1880 4,735 63
1881 5,582 71
1882 6,738 82
1883 9,184 106
1884 10,968 121
1885 10,637 116
1886 9,834 101
1887 9,634 97
1888 10,679 103
1889 10,882 103
1890 10,907 99
1891 12,273 107
1892 10,344 89
1893 15,242 130
1894 13,885 123
1895 13,197 112
1896 15,088 133
1897 13,351 125
1898 12,186 111
1899 9,337 82
1900 10,774 92
1901 11,002 90
1902 11,615 93
1903 12,069 94
1904 12,199 92
1905 11,520 85
1906 10,682 77
1907 11,725 83
1908 15,690 108
1909 12,924 87
1910 12,652 84
1911 13,441 88
1912 15,452 100
1913 16,037 98
1914 18,280 118
1915 22,156 133
1916 16,993 100
1917 13,855 80
1918 9,982 59
1919 6,451 37
1920 8,881 48
1921 19,652 102
1922 23,676 120
1923 18,718 93
1924 20,615 100
1925 21,214 100
1926 21,773 101
1927 23,146 106
1928 23,842 109
1929 22,909 104
1930 26,355 122
1931 28,285 133
1932 31,822 154
1933 19,859 100
1934 12,091 61
1935 12,244 62
1936 9,607 48
1937 9,490 46
1938 12,836 61
1939 14,768 70
1940 13,619 63
1941 11,848 55
1942 9,405 45
1943 3,221 16
1944 1,222 7
1945 809 4
1946 1,129 5
1947 3,474 14
1948 5,250 20
1949 9,246 34
1950 9,162 34
1951 8,058 31
1952 7,611 29
1953 8,862 33
1954 11,086 42
1955 10,969 42
1956 12,686 48
1957 13,739 52
1958 14,964 56
1959 14,053 52
1960 15,445 57
1961 17,075 64
1962 15,782 61
1963 14,374 56
1964 13,501 53
1965 13,514 53
1966 13,061 52
1967 12,364 49
1968 9,636 39
1969 9,154 37
1970 10,748 44
1971 10,326 42
1972 9,566 38
1973 9,345 36
1974 9,915 38
1975 11,432 43
1976 9,628 35
1977 7,919 28
1978 6,619 24
1979 7,564 28
1980 11,742 42
1981 16,794 61
1982 24,908 88
1983 31,334 110
1984 52,078 107
1985 57,078 115
1986 61,616 120
1987 61,111 102
1988 57,098 98
1989 50,631 65
1990 60,747 74
1991 88,140 107
1992 97,069 110
1993 86,133 96
1994 71,558 86
1995 71,128 82
1996 71,931 86
1997 84,342 89

Source: United States. Historical Statistics of the United States: Bicentennial Edition. 1975; and United States. Statistical Abstract of the United States. Washington D.C.: GPO. Various years.

The Bankruptcy Reform Act of 1978

In contrast to the decline in business failures, personal bankruptcy climbed steadily. Prompted by a rise in personal bankruptcy in the 1960s, Congress initiated an investigation of bankruptcy law that culminated in the Bankruptcy Reform Act of 1978, which replaced the much amended 1898 Bankruptcy Act. The Bankruptcy Reform Act, also known as the Bankruptcy Code or just “the Code”, maintains the menu of options for debtors embodied in the Chandler Act. It provides Chapter 7 liquidation for businesses and individuals, Chapter 11 reorganization, Chapter 13 adjustment of debts for individuals with regular income, and Chapter 12 readjustment for farmers. In 1991, seventy-one percent of all cases were Chapter 7 and twenty-seven percent were Chapter 13. Many of the changes introduced by the Code made bankruptcy, especially Chapter 13, more attractive to debtors. The number of bankruptcy petitions did climb rapidly after the law was enacted. Lobbying by creditor groups and a Supreme Court decision that ruled certain administrative parts of the Act unconstitutional led to the Bankruptcy Amendments and Federal Judgeship Act of 1984. The 1984 amendments attempted to roll back some of the pro-debtor provisions of the Code. Because bankruptcy filings continued their rapid ascent after the 1984, recent studies have tended to look toward changes in other factors, such as consumer finance, to explain the explosion in bankruptcy cases.

Bankruptcy law continues to evolve. To understand the evolution of bankruptcy law is to understand why groups of people came to believe that existing debt collection law was inadequate and to see how those people were able to use courts and legislatures to change the law. In the early nineteenth century demands were largely driven by victims of financial crises. In the late nineteenth century, merchants and manufacturers demanded a law that would facilitate interstate commerce. Unlike its predecessors, the 1898 Bankruptcy Act was not repealed after a few years and over time it gave rise to a group with a vested interest in bankruptcy law, bankruptcy lawyers. Bankruptcy lawyers have played a prominent role in drafting and lobbying for bankruptcy reform since the 1930s. Credit card companies and customers may be expected to play a significant role in changing bankruptcy law in the future.


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Citation: Hansen, Bradley. “Bankruptcy Law in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL