We don’t use the word “panic” these days to describe widespread economic calamity. We use “great” — as in Great Depression, Great Recession — or “crisis.” Panic has been relegated to history books that hardly anyone pays attention to.
That the term is considered anachronistic is partly because economic downturns look and play out differently than they did in the 19th century, which was littered with panics. The biggest difference is the role of the public sector as regulator, intervenor and safety-net provider, rather than bystander.
It’s also because the core financial causes and debates of those panics would seem to have little relevance today. The Panic of 1893 occurred against a backdrop of an issue — whether money should be backed by gold or silver — that would trigger befuddlement among most Americans today.
But it’s a mistake to overlook the significance and lessons of those downturns, 1893 in particular. Reminding us why is a recently published book, “The Panic of 1893: The Untold Story of Washington State’s First Depression” (Caxton Press), by longtime business writer (and one-time colleague of this columnist at the late Seattle P-I) Bruce Ramsey.
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The Panic of 1893 is relevant and timely in multiple ways, especially as we mark the 10th anniversary of news events that in accumulation launched the Great Recession. While the panic’s look, sound and feel might be unfamiliar to us, the factors that made it so painful are all too familiar and recent — too much debt, too much leverage, too much reliance on housing.
Housing — and the financing of same — played a role in both the Panic of 1893 and the Great Recession. Entire cities were platted and sold on the expectation of a population boom everyone was certain to come. Banks lent enthusiastically to finance that development. Governments borrowed with equal zeal.
When the economy went sour — the people didn’t show up, commodity prices tumbled, someone else got the port or the railroad terminus — borrowers were stuck with debt they couldn’t repay, which meant lenders were stuck with worthless assets as well as debts of their own.
That was especially true of banks, which had lent depositors’ money for schemes that went bust.
Banks failed in huge numbers during the Great Recession too, because of their exposure to the housing market. But in an era of no deposit insurance, the prospect of a bank closing without notice or likelihood of repaying its customers made the term “panic” much more than an abstract concept, and helped deepen the downturn.
Ramsey’s book has considerable local relevance. Tacoma figures prominently in the story of the Panic of 1893, and not in a good way. Tacoma had more bank failures than Seattle, and its debt load was higher in relative terms than Seattle’s.
The Panic of 1893, Ramsey writes, cemented Tacoma‘s second-city status relative to Seattle.
The gold rush, the Great Northern’s entry into Seattle, Tacoma’s abusive treatment of Asian immigrants at a time when trans-Pacific trade was emerging as an important economic contributor and a general perception of more favorable attitudes in Seattle all contributed to Seattle growing to the point that by 1900 its population was more than double that of Tacoma’s.
(One other enduring local legacy of the panic: construction of what was to have been a luxury hotel for the Northern Pacific came to a halt with that railroad’s financial troubles, making the structure available for conversion into the world’s coolest high school, Stadium.)
Ramsey’s book (a definite entrant for next summer’s recommended business books of the past year) concludes with newspapers of the time noting that the panic did serve the purpose of reminding people of the hazards of debt. The Oregonian writes in 1897 that those who lived through the panic and the hard times that followed would retain a “horror of debt.” Adds, Ramsey, “They will, of course, eventually unlearn it.”
Indeed they will. It took decades for the lessons of the Great Depression to wear off. The Great Recession taught people who had never learned those lessons in the first place some painful truths (incomes and housing prices don’t always go up, interest rates don’t always stay low, employment isn’t guaranteed).
Now the question is how well that learning stuck. The longer the current economic up-cycle persists, the greater the concern about the debt loads that consumers, businesses and government are building up and their ability to repay when the cycle turns and starts its descent.
Which it will eventually do. It always does. When that moment comes, whatever its cause or ignition point, how deep and long it will be will have everything to do with debt and housing.