I’ve been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872/73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.
The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.
The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.
Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.
- The crisis of 1873: Perspectives from multiple asset classes (SSRN)
- The real Great Depression (Chronicle of Higher Education)