Small Change and The Depression of 1837-1843 – Part Five

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Part five – Prices collapse and banks do not fail?

As Eugene Fama quietly reminds us in his scholarly papers and public appearances, the “bubbles” in financial history are only reliably predicted after the fact. Our certainties about market peaks depend on the perfect clarity of our hindsight.

That there was a price “bubble” that burst in the American political economy from 1835 to 1845 is beyond question. From the peak in 1836 to the trough in 1844, commodity prices fell by half. From their top in 1835 to the bottom in 1843, the prices of the common stocks of the innovative technology companies of the age – the long-line railroads – fell by three quarters. Thanks to the hard digging by academic scholars through the surviving paper records of the 1820s, 1830s and 1840s, we now have sufficiently detailed information to be able to analyze the financial history of the first great depression in American history.

The challenge is to reconcile the data sets for commodity and securities prices, interest rates and production volumes with the narratives of what happened. The people who lived through those events describe a crisis in the political economy that cannot be found in the data. The bubble that people saw grow and then burst was not one that occurred; yet to a very great extent, our understanding of the period remains attached to the stories people and the newspapers told each other and not the statistical facts of what happened.