Lessons for Europe From America's First Great Depression: Echoesby
The European Union is in trouble. Some governments are teetering on default, and even German creditworthiness is questioned. Interbank lending in the euro area is increasingly strained. The entire project of European economic integration, wrought through six decades of delicate negotiation, seems at risk of collapse.
In the U.S., meanwhile, European leaders are being criticized for failing to face up to their troubles. The New York Times condemns them for "gross mismanagement of the euro-zone debt crisis." "European elites," says the Boston Globe, "have for too long deceived themselves into believing they can have their cake and eat it too." Europe would be better off today, says the Washington Post's David Ignatius, if its leaders "had handled their problems as cleanly as the United States did three years ago."
But Americans with a sense of history should be wary of the temptation to lecture. One hundred and seventy years ago, the U.S. was a new and fragile federation, struggling with a similar crisis. And the performance of American politicians then was little better than that of their European counterparts today. European creditors bemoaned the country's unwillingness to face up to hard economic realities. Eventually it did -- but only after a decade of wrenching political struggle that offers lessons for Europe today.
In the 1830s, European investors poured vast amounts of money into the expansion of U.S. cotton plantations, frontier banks, canals and railroads. This fueled a speculative boom, which the U.S. government encouraged through reckless monetary and banking policies. Many state governments served as intermediaries for foreign lenders, borrowing in Europe and investing directly in banks and public works.
In 1837, a slowdown in the British economy, combined with an increase in U.S. cotton production, caused a steep decline in the price of cotton, and also in the price of land. The boom suddenly ended. Banks collapsed, government revenues evaporated and the states' grandiose improvement projects were instantly transformed into white elephants.
State governments began to default on their obligations to foreign lenders. The first were Michigan and Indiana, which defaulted in July 1841, followed by Maryland, Illinois, Pennsylvania and Louisiana. Three southern states -- Arkansas, Mississippi and Florida -- simply repudiated their debts.
Europe was outraged. The British poet laureate, William Wordsworth, whose family had sunk its retirement savings into Pennsylvania bonds, wrote a poem condemning "degenerate" Americans. The British writer Sydney Smith, another disgruntled investor, said that Americans were "guilty of a fraud as enormous as ever disgraced the worst king of Europe." In London, Americans were assailed at dinner parties and turned away at the doors of fashionable clubs.
London's Barings Bank, which had a long history of engagement in American finance, gave up trying to sell bonds from any U.S. state -- including those that hadn't defaulted. Even the federal government, which had an impeccable credit record, couldn't sell its bonds in Europe.
"Let us get rid of that blasted country," the London banker Anthony de Rothschild wrote. "It is the most blasted & the most stinking country in the world."
The Panic of 1837 had plunged the U.S. into one of the worst depressions in its history. Development in the West largely ceased. So did westward migration, the safety valve that had helped maintain peace in major U.S. cities. Riots between unemployed Americans and newly arrived immigrants broke out in cities in the Northeast. "The times are out of joint," wrote former New York Mayor Philip Hone. "Riot and violence stalk unchecked through the streets."
Economic troubles produced political turbulence. Voter turnout surged to the highest levels in U.S. history, as voters cast out incumbents in a succession of elections. The decline in federal revenue reopened bitter disputes between the North, South and West, as understandings on tariffs and aid to state governments came undone. Old party alliances frayed. Foreign policy came under strain as well, partly because the country's main rival for territory and markets, the United Kingdom, was also its major creditor.
Europeans wondered whether the U.S. would survive the crisis. In 1842, the Times of London questioned whether "the democracy of America will endure." A British diplomat in Washington reported that the country had become "a mass of ungovernable & unmanageable anarchy." An agent of British bondholders negotiating with the Illinois government complained that state legislators were stooping to "every species of intrigue, falsehood, and baseness."
Some Americans were equally pessimistic about the country's prospects. "When or where this will stop, God knows," wrote a Mississippi editor. "Never has the future been shrouded in a deeper and more portentous gloom." The diarist Sidney George Fisher wrote from Philadelphia that the American union was becoming "one of interest merely, a paper bond, to be torne asunder whenever interest demands it."
Eventually, though, the country worked through its troubles. And in the process Americans reappraised their ideas about liberty and popular sovereignty. Many states reformed their constitutions by introducing restrictions on state borrowing. These were "shackles upon the power of the legislature," a Kentucky politician conceded. Still, they would protect the public against "the sudden and dangerous impulses of passion." State governments also overcame popular resistance to establish new mechanisms for collecting taxes so that bondholders could be repaid.
At the same time, major cities of the Northeast established professional police forces to maintain domestic order. The hope that "manly self-discipline" would be enough to keep the peace in times of economic trouble was abandoned. A new police force, said Boston councilman Peleg Whitman Chandler, would help the city to "resist the shocks of anarchy."
Luck also played a part as the country gradually pulled itself back together. When revolution broke out across Europe in the late 1840s, British capitalists were prepared to take a second look at investment opportunities in the U.S. The repeal of British tariffs on grain helped to restart development in the American West. And the discovery of gold in California -- only weeks before the territory was ceded to the U.S. by Mexico in 1848 -- provided an unexpected stimulus.
The changes the country made to its constitutional and political order in those years laid the foundation for further economic expansion. But it wasn't easy. Millions of Americans had to adjust their understanding of the role of government, and they had to do it while coping with intense economic pain. Such a change couldn't happen overnight.
There are parallels to Europe's predicament today. Like the U.S. in 1840, the European Union is a relatively young and diverse federation, still in the early stages of building a common understanding about how its institutions should work. It is wrestling against settled ideas about popular sovereignty as well as the relentless forces of the market. Its adaptation will be slow and difficult. And European leaders must do what America's did 170 years ago: Ignore the taunts from overseas, and bear down on the difficult task of holding their union together.
(Alasdair Roberts is the Jerome L. Rappaport Professor of Law and Public Policy at Suffolk University Law School in Boston. His book "America's First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837" will be published by Cornell University Press in April. The opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author of this story:
To contact the editor responsible for this story:
Timothy Lavin at email@example.com