In 1873, the railroad industry was booming just as the housing industry boomed 10 years ago. And like housing, much of the railroad boom was due to excessive government subsidies, which made the boom much larger than it should have been. Investors, speculators, and bankers hurried to get in on the riches by investing millions in railroads, and soon railroad supply exceeded consumer demand. The railroad bubble was bound to bust.
The bust came when the nation’s biggest bank went under due to heavy over investment in railroads. This crash sparked a chain reaction among other leading U.S. banks in the new national banking system (forerunner to the Federal Reserve). This caused a stock market crash, massive business insolvency, unemployment, and poverty. In fact, this was called the “Great Depression” until a bigger one happened in the 1930s.
Like today, politicians scrambled to save their careers with a quick fix to the problem. They came up with the Inflation Bill, in which $18 million in paper money would be printed to stimulate the economy. This was the 19th century version of the “stimulus” championed by President Obama in 2009, which redistributed nearly $1 trillion of borrowed, printed, and taxpayer money. But in 1873, President Ulysses S. Grant knew what Obama hasn’t learned: borrowing, printing, and redistributing tax dollars cannot stimulate an economy. Grant vetoed the bill.
Grant was harshly criticized for his so-called “laissez faire” approach, but the veto kept the crisis from getting worse by allowing the free market to correct itself. While inflation may have helped in the short term and secured many politicians’ reelections, it would have been highly damaging in the long term by increasing the cost of living through higher prices. Compare this to Obama’s “stimulus,” in which prices are now rising and unemployment has actually gotten higher since its inception.
Grant angered opponents even further by approving a bill that stopped any further printing of paper money and required the money in circulation to be backed by gold. Opponents argued that more money needed to be created to restore prosperity. However, creating more money only devalues the money already in existence, which harms everybody. It also gives more power to manage the economy to the same politicians that had bungled things in the first place through shady subsidies and nationalized banking.
Grant’s decisions to curb inflation and stabilize the currency were a painful but necessary correction to an economy that had been poisoned by bad investments, excessive paper money with little worth, and a corrupt alliance between government and business. This reduced the long-term pain, and as a result this severe depression was over within six years.
In 1873, banks were forced to either cut back or go under. In 2008, they were bailed out by taxpayers under TARP (Troubled Asset Relief Program) because they were “too big to fail.” Thus, an economic crisis caused by a corrupt government/business alliance was “solved” by an even stronger alliance among those who caused the problem in the first place.
To restore the U.S. economy today, individuals and businesses must do as they did in the 1870s: work harder, spend less, save more, and reduce dependence on government. Also, government must reduce borrowing, pay down debt, eliminate needless departments and bureaucracies, and end frivolous taxpayer-funded subsidies. If this is not done, then any perceived “recovery” will only be another bubble just waiting to burst once more.