Don’t lose heart. Though many view the current financial crisis as the beginning of the end of an era, it is not the first time our global markets have been shaken by large, earth-shattering financial debacles. And while these disastrous events brought immediate turmoil to most of society, the economies that were struck, like the proverbial phoenix, always rose from the ashes stronger and healthier.

 

The Nineteenth century housing crisis

One hundred and thirty five years before “sub-prime” rocked our world, markets globally were already shaken by a mortgage-inspired crisis.

 

In the wake of the second industrial revolution Europe saw increased urbanization and with it a boom in infrastructural and real estate investment. The United States, which had just suffered a civil war, was boosted by Europe’s increased demand for agricultural products and similarly saw a boost in infrastructural spending.

 

Railroad and real estate speculation became rampant and as private investment slowed around 1871, companies sought to finance their expansion through short-term bank loans. Credit was easy and new forms of railroad bonds were traded widely; about two-thirds of American securities were held overseas.

 

By May 1873, Vienna banks that had believed real estate prices would continue rising started experiencing a cash crunch. British banks, which had been central to much of the global financial system, froze credit to continental concerns for fear of contagion. In September of that year, the first victim to the housing speculation fell in the U.S., causing panic on Wall Street which took a slate of other victims in its tow. The U.S. government agreed to buy $10 million in bonds to infuse confidence into the financial system, but ongoing panic led to the New York Stock Exchange’s (NYSE) first suspension of trade. 

 

Overnight the lending rate shot to a quarter of a percentage point, or 148 percent annually. New York’s top national banks formed a clearing committee, pooling their cash and collateral into a common fund and issuing loan certificates that would operate like cash, which would become the basis for the reconstruction of the credit markets.

 

By the time panic on Wall Street subsided, 73 members of the NYSE and 5,000 mercantile companies had failed. The lingering credit crunch spread nation-wide leading to a commercial crisis. Several railroads defaulted on bond payment, effectively cutting down railroad construction, and cotton and iron mills and many other manufacturers threw thousands into unemployment.

 

In early 1875 Congress passed the Specie Resumption Act backing the U.S. currency with gold.

 

In Central Europe, the financial crisis led to social unrest, which in turn unleashed its frustrations in social riots against the Jewish minority. As many diamantaires were Jews, given that it was one of the few crafts they had been permitted to participate in by the medieval guilds in Europe, this boosted the outflow of diamantaires to Amsterdam, Antwerp, New York, and eventually the Ottoman province of Palestine. 

 

The roaring depression

The depression that rocked the 1930s, though notably different from our contemporary drama, is similarly rooted in mortgage foreclosures and debt mongering.

 

Due to the agricultural boom, a significant minority of farmers entered into farmland mortgages in the late teens of the twentieth century. Owner- operated farms’ mortgage debt increased from 33 percent in 1910, to 37 percent in 1920, and 42 percent in 1930. Of the nearly 29,000 banks in 1920 two-thirds were in towns with a population of less than 2,500.

 

Meanwhile in the cities, most of the industries that were prospering in the 1920s were in some way linked to the automotive and radio industries. The U.S. government cut back spending to balance the budget in 1920. The industrial boom sped up urbanization, which necessitated the building of infrastructure. Since the war economy invested heavily in the manufacturing sector, the explosion in production masked an inevitable recession.

 

As technology improved, manufacturing output soared by as much as 32 percent per worker between 1923 and 1929, while wages did not rise accordingly. Given that the majority of the population could not take advantage of the nation’s improved production capabilities this led to two phenomena: customers started buying on credit, and the country was left with an oversupply of goods.  

 

When the agricultural boom ended in 1920, indebted farmers had difficulty meeting their mortgage payments and farm failures reached historic highs, causing bank insolvency. Small rural banks with few resources, limited facilities, and restricted activities found it particularly difficult to cope.

 

In addition to indebtedness, all farmers were squeezed by increased real estate taxes and deteriorating terms of trade. An index of real estate taxes of 100 in 1920 rose to 114 by 1929. Wholesale prices weakened during the 1920s reversing a longstanding favorable relationship between farmer's output prices and prices paid for inputs and consumer goods.

 

About 500 U.S. banks failed in 1921. Failures continued to mount, averaging over 680 annually from 1923 to 1929, and peaking in 1926 at more than 950 failures; by 1929 the number of banks had dropped to 23,700 nation-wide.

 

Several key events accompanied the developing crisis throughout the roaring twenties:

 

1. Banks: Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exasperated the situation leading to less and less expenditures.
2. Mergers: Over the decade, about 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry.
3. With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As the unemployment rate rose above 25 percent that meant even less spending.

The 1980s Savings & Loans Crisis

The S&L crisis was the failure of 747 savings and loan associations in the United States. The crisis cost around $160.1 billion of which the U.S. government, through its taxpayers, paid about $124.6 billion. A booming real estate market in the late 1970s, a rise in mortgage loans to $1.2 trillion in 1980 from $700 billion in 1976, and high interest rates provided fertile ground for S&L’s to greatly increase their lending. Though these associations had many of the capabilities of banks, they were not similarly regulated and were allowed to enter new lending businesses with very little oversight.

 

The Tax Reform Act of 1986 removed many tax shelters, in particular as related to real estate investments, and thereby significantly decreased the value of many such investments, the majority of which had primarily been held for their tax-advantaged status rather than their actual profitability. This contributed to the end of the real estate boom and triggered the S&L crisis.

 

Diamond Depression

The diamond industry bloomed until the Great Depression spilled over into Europe in the early 1930s. As the depression deepened, demand for diamonds and other luxury goods went into a free-fall, and by 1934 South African diamond giant De Beers began to stock up on diamonds, restricting supply in order to stabilize pricing.

 

De Beers, which now controls only about 40 percent of the $14 billion-a-year global market for rough diamonds, established its hegemony on diamond prices when the Great Depression caused a slump in diamond prices. De Beers Chairman Sir Ernest Oppenheimer bought rough stones on the market, laying the foundation for the company’s dominance for when the price would recover.

 

As the situation deteriorated, the Antwerp and Amsterdam diamond exchanges cut production by 50 percent to limit overcapacity. Factories and trading centers were forced to severely limit operations, cutting work-hours and dismissing as many as 25,000 workers.

 

By 1940, up to 80 percent of Antwerp's Jews were involved in the diamond trade. With the onset of World War II in 1939, many of them fled to Cuba, England, Palestine, Portugal and the U.S., taking as many stones as they could -up to 90 percent by German estimates- to prevent them from falling into German hands.

 

Expatriate Jewish diamantaires fortified the establishment of the Israel Diamond Exchange and the New York Diamond Dealers Club.

 

As the luxury market was particularly hard hit during the 1930s, De Beers President Harry Oppenheimer in 1938 started keying a series of diamond related slogans into the American lexicon. In 1948, coinciding with the rise from World War II economic woes, the famous “a diamond is forever” slogan was introduced. It was later named the best advertising slogan of the twentieth century.