There's no denying the economic situation looks bad. Venerable institutions such as Bear Stearns have gone the way of most '90s dotcoms, vanishing practically overnight. Stocks are competing in a horrific limbo contest to see how low, low, low they can go. Here in Hawaii, hotel occupancy is down, malls are less crowded, and tourist spots like the Arizona Memorial are seeing fewer visitors.

Bad situations lead to people making bad decisions. For example, selling all your equities at this point is rather like buying a smoke alarm after your house burns down. I know of one fellow who was considering withdrawing all his cash from the bank, fearing the FDIC might not be able to safeguard his savings. Does he have a point? Sure, there's no absolute guarantee the FDIC can protect his money. Of course, if the FDIC and entire banking system collapsed, cash would be worthless and our biggest worries would be roving bands of brigands since civilization would no longer exist and we'd all be in some sort of Cormac McCarthy-The Road post-apocalypse scenario.

We're a bit of a ways from all that. In fact, we've gone through this type of thing before. The accompanying cartoon was published on October 11th, 135 years ago in Harper's Weekly, and relates to President Ulysses Grant's response to the Panic of 1873. Interesting parallels can be drawn between what's going on now and what happened during that Reconstruction Era crash.

Recently, Ken Carriere of Canada's Globe & Mail wrote, "Current conditions are commonly compared to the crash of 1929, but a more accurate line can be drawn to the Panic of 1873." He explained briefly what the situation was, and it sounds vaguely familiar. "In Europe," he wrote, "mortgages became easy to obtain even with little or no money down, causing a building boom that drove up housing prices, requiring larger mortgages, and so on. In the United States, railroads raised capital through complex financial instruments no one understood, but as long as those bonds could be sold for a profit, a delusional confidence in them thrived. Stock markets shot up as exuberance grew in the certainty the good times would never end." Good times do end though, both then and now. What brought the Wheel of Fortune to a halt nearly a century-and-a-half ago? According to Carriere, "Cheap grain from America undercut Europe's farmers, which meant they couldn't pay off their creditors. Mortgage-laden banks failed... taking their depositors down with them. The relatively healthier London banks... stopped lending, at least for low interest rates. This credit crunch spread back to the United States, killing thousands of businesses suddenly unable to finance their operations."

Scott Reynolds Nelson, a professor of history at the College of William and Mary, also sees similarities between the Panic of 1873 and the Panic of 2008. Writing in The Chronicle of Higher Education, he noted:

The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

All pretty frightening stuff, and justifiably so. The 1873 Panic had devastating results. The New York Stock Exchange was forced to close for 10 days. Between 1873 and 1875, 18,000 U.S. businesses failed. Unemployment soared to 14 percent. Wages were cut, real estate values plunged, and corporate profits evaporated.

So should we start preparing for those armed bands of brigands? Not just yet. While there are similarities between 1873 and now in terms of how we got into this mess, there are differences in the way the government is responding. For example, President Grant's economic policies favored a contracting money supply, while the current Fed policy of low interest rates swings the other way. There were other questionable responses to the Panic, including the Coinage Act of 1873 which further led to a drastically reduced money supply, devastating anyone with serious debts. So far, no one in Congress has proposed seriously altering our national currency system as they did during Grant's time.

So are there any comforting lessons to be had from comparing our crisis to that of 135 years ago? Sort of. The Panic of 1873, though similar, was far worse, and the governmental response did more harm than good. Current U.S. economic policy seems to be much better reasoned, and the fundamentals of the U.S. economy are more solid. Hopefully that in itself is cause for some optimism... though how much is open to debate.

-GIR-

Brandon Bosworth is a freelance writer living in Hawaii and is GRIH's Publications Consultant.