Nov. 25 (Bloomberg) -- The financial meltdown of 2008 has been attributed to a pre-crash economy whose incentives and rewards resembled a freewheeling casino rather than a rational marketplace.
Sometimes knowingly, sometimes unwittingly, and almost always shortsightedly, banks, government entities and consumers joined forces to create an environment in which untrammeled speculation, unwarranted credit, and pyramids of foolishly assumed debt yielded the appearance of boundless prosperity while masking the inevitability of epic disaster.
The U.S. has been here before. The middle of the 1830s was one of those times, when land speculation and easy credit blurred the lines between legitimate and illegitimate pursuits of wealth.
No part of the U.S. was more steeped in this culture of speculation than the Deep South, because the forced removal of Native Americans had opened vast swaths of valuable cotton land there for development. Cotton cultivated by slaves was the raw material driving the early Industrial Revolution. The crop’s market prices kept rising seemingly regardless of supply, and it became America’s most significant export and arguably the most important commodity in the world.
Where it grew, people and money followed, and as banks and investors flooded what was then America’s southwest with millions of dollars, credit was available for almost anyone. In short order, places such as Alabama and Mississippi became the most exciting economic environments in the nation, the spots where dreams of easy money came true.
Yet even those who thrilled at the sense that they sat on the dynamic edge of U.S. capitalism had doubts about the substance and moral quality of what was happening. Rumors of financial malfeasance and corruption swirled around southwestern banks, and swindlers and fast-talking lawyers exploited the unwary. The pursuit of self-interest shaded into rapacious greed, and using borrowed money to leverage oneself to the top looked less like productive labor than it did like gambling.
In a typical lament, the political economist Thomas Dew bewailed the “reckless profligate gambling spirit” that had “spread through the country.”
In the summer of 1835, ambivalence about the righteousness of avarice and anxiety about the sturdiness of the economy exploded into violence. In the boomtown of Vicksburg, Mississippi, a confrontation at a Fourth of July barbecue ended with a mob attempting to purge the city of professional gamblers and ultimately to the public lynching of five men, four of whom were dragged to a public scaffold by ropes around their necks and hanged, their pleas for a jury trial ignored. The fifth man, badly injured by the mob, was executed before he even regained consciousness. Covered in blood, he was driven to the gallows in a wagon, carried up the stairs, noosed, and simply tossed off the platform.
Over the course of the ensuing weeks and months, men suspected of being professional gamblers were threatened with violence, beaten and chased from almost every sizeable town and city in the state of Mississippi and all along the Mississippi and Ohio Rivers. In New Orleans and Mobile, Alabama, in Little Rock, Arkansas, and St. Louis, Missouri, in Memphis and Nashville, Tennessee, in Lexington and Louisville, in Cincinnati and Wheeling, West Virginia, residents warned gamblers out, assaulted them, destroyed their equipment, arrested and jailed them, and convened public meetings where antigambling societies formed.
By the fall, the panic had even spread to the Eastern Seaboard, as authorities from New York to Norfolk, Virginia, raided gambling houses, attacked supposed gamblers and worried that mobs were gathering, intent on enforcing their own methods of justice.
Explaining what had happened in Vicksburg, the editor of the local newspaper argued that professional gamblers were drunken and criminal wretches who defrauded the young and foolish and then moved on once they had fleeced everyone they could. Destroying them was the only way to preserve decency and to give respectable people space to make an honest living.
Even as editors of other newspapers condemned the violence that had begun in Vicksburg, many agreed with such an assessment of gamblers, commonly referring to them as “vampires,” “blood-suckers,” and “vultures.”
But gamblers prospered only where they had customers, and the hostility toward them and their profession in the 1830s reflected less the sense that there was a clear moral line between legitimate and illegitimate kinds of economic striving than it betrayed an awareness of how blurry that line was.
At a moment when the potential rewards of a speculative economy drove many Americans to distraction, those who made their way in the world solely by figuring the odds and betting that the future would turn in their favor brought home the nation’s profligacy in an especially discomfiting way.
Ultimately, getting rid of every professional gambler in the U.S. still wouldn’t have staved off the collapse. Between the summer of 1836 and the spring of 1837, the doubts of foreign investors and creditors about the underlying strength of the U.S. economy dovetailed with falling cotton prices.
In May 1837 the suspension of specie payments by two leading banks in Natchez, Mississippi, touched off a cascade of suspensions by almost every bank in the country within a matter of weeks. The ensuing depression would last six years, bankrupting countless thousands and offering the lesson, still unlearned, that in a casino, the house always wins.
(Joshua Rothman is a professor of history, director of the Summersell Center for the Study of the South at the University of Alabama, and author of “Flush Times and Fever Dreams: A Story of Capitalism and Slavery in the Age of Jackson.” The opinions expressed are his own.)
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