FINANCIAL PANIC

A financial panic is a sudden, drastic, widespread economic collapse. All at once, many people become convinced their money or investments are at risk and rush to the institutions holding their assets. Unable to pay back all their customers at once, the institutions go bankrupt, starting a domino effect that brings down the whole economy. Typical "symptoms" of a panic are many bankruptcies, loan defaults, or bank failures at the same time; It also includes a period of intense stock market or real estate speculation followed by a steep decline in prices; and/or a sudden run on banks by large numbers of people trying to withdraw their deposits.

Between 1790 and 1907 there were 21 financial panics in the United States. The first major panic occurred in 1819, when the Bank of the United States, the nation's central bank, tried to reduce the number of new speculative banks being founded in the United States. The bank called in its loans to the new speculative banks and required them to redeem their paper bank notes for hard gold and silver. Many of these banks had printed far more notes than they had real reserves and quickly failed. The Panic of 1837 was also the result of the government's attempt to control the rapid spread of bank notes not backed up by hard currency. The Panic of 1857 came about when U.S. banks overextended themselves loaning money to railroads, and railroads defaulted on their bonds. Several hundred U.S. banks failed.

Other painful panics followed in 1893 and 1907, but it was the anxiety brought on by the stock market speculation of the 1920s that caused the most destructive panic in U.S. history—the stock market crash of 1929. By October 1929, the stock market had climbed to new heights in part because anyone could buy a stock by putting down only a fraction of its face value. Many investors became wealthy on paper but there were few real assets behind the speculative frenzy. When millions of investors simultaneously began selling their shares, the prices of stocks plummeted and many paper fortunes were wiped out sparking the Great Depression (1929–1939). Because of the severity of the panic of 1929, the U.S. government implemented fundamental reforms that have prevented the recurrence of a major financial panic through the end of the twentieth century.

See also: Currency, Money, Panic of 1919, Panic of 1837, Panic of 1907, Panics of the Late Nineteenth Century, Stock Market Crash of 1929