`Panics' vs. `corrections'
ACCORDING to President Reagan, what happened on the stock market on Oct. 19 was a ``correction.'' It was enough to cause those concerned to take thought about the too long continued budget and trade deficits. But there is no evidence yet of serious damage to the American economy as a whole. True, there are some layoffs or threatened layoffs - at Eastern Airlines, General Motors, and NBC. Unemployment is expected to show some increase over the next few months. But retail merchants say they expect good sales for Christmas, and so far spending seems to be continuing more or less at recent levels - except for automobiles.
All of which prompted me to turn back through the pages of American history for a look at previous times of economic difficulty to see what caused them and how they were handled or, more usually, mishandled.
The first thing that stands out from the record is that there is one great big difference between the present condition and those that went before. In all the previous cases there were many bank failures. The result was a disastrous shortage of credit for the conduct of business, which caused people to ``panic.''
That word ``panic'' was used in all cases before World War I to describe what happened. There were ``panics'' (so named) in 1819, 1837, 1887, and 1893. But curiously, the historians do not use that word ``panic'' in connection with what happened in 1929 and after. It led to a ``recession'' or, sometimes, as in '29, a ``depression,'' but I do not find the word ``panic'' in connection with the longest-lasting and in many ways the most damaging economic ``recession'' in United States history.
According to ``The Oxford History of the American People,'' by Samuel Eliot Morison (subsequent quotations in this article are from the same source), the panic of 1819 was ``caused by too great optimism and overextension of credit. Many state banks collapsed and enormous amounts of Western real estate were foreclosed. ... hard times in the West lasted until 1824.''
The panic of 1837 had a similar background. First there was a boom in Western land, manufacturing, railroads, and banking. It was fueled by ``overextension of credit.'' In 1836, the grain crop was a failure and the price of cotton fell by half. English banks called in their loans to American banks. A wave of bank failures resulted.
The panic of 1887 was also similar. First there was a great land boom, mostly in Kansas. There had been ``excessive railroad construction, usually financed locally, and oversettlement of the arid western part of the state.'' The land had been bought on credit. ``...there was one mortgage, on the average, to every other adult in the state.''
The bust was triggered by a severe drought, which ruined the grain harvest. Within the next four years ``one half the people who had entered this new El Dorado trekked eastward again,'' some carrying bumper stickers reading, ``In God we trusted, in Kansas we busted.''
The panic of 1893 was minor and briefer. ``The Treasury's gold reserve was depleted by an excess of imports and by liquidation of American securities in London after a panic there.''
In all of those early panics before World War I, the problem was first too much easy credit, followed by a sudden shortage of credit. Banks were not backed by any Federal Reserve System. When a boom burst, banks failed by the hundreds and even thousands. But there was relatively little disastrous human suffering, since the bulk of the population lived on the farms. Even in 1893, there was still no large urban factory population.
The Great Depression, which dates from 1929, was the first one with a large urban mass of factory workers but no mechanism for sustaining the consuming power of those factory workers. It was the last one that saw many bank failures and a drastic shortage of business credit.
Today such things as social security and welfare sustain mass consuming power, and the Federal Reserve provides enough credit to keep the economy sufficiently liquid.
Those are two big reasons why this time we have had the worst ever drop in the value of securities and a loss of vast sums of paper wealth - but no ``panic.''