Panic! Like It’s 1837
In 1837, New York banks realized that the easy money they were lending was unsustainable, and demanded payment in specie, or in gold and silver. They had previously accepted paper currency that, for every $5, was backed by only $1 in silver or gold.
At the same time, the value of silver was falling because of increasing US supply. Great Britain, which had been lending much of the money, was less interested in silver because they could pay for trade with China in opium.
So the US was depending on loans from a country that they had seceded from less than 50 years earlier. At the same time, Britain also needed 25% less cotton, the foundation of the US economy, and this exacerbated the trade deficit.
Still, the situation would have been cushioned if fractional reserve banking had not been used.
President Andrew Jackson was not blameless either. When he deconstructed the federal bank, he deposited the money into state banks, and encouraged them to go ahead and lend. When the time came for the banks to return the deposits, the money was gone. So when this massive real estate bubble burst in 1837, it caused a panic and ensuing recession that lasted until 1844.
Sound familiar, especially the part about government creating incentives for home loans that could not be paid back, culminating in the crash of 2008?
Instead of prohibiting fractional reserve banking, the Federal Reserve made things worse. They required no hard money backing of US currency, while still allowing banks to lend out much more money than they possessed. Today, not only do banks not have enough money to cover what they lend, but the money itself is still just paper.
In the years preceding the panic of 1837, state banks had basically done the same thing. The money represented nothing of value, and was primed for rapid devaluation, which contributed to the burst bubbles of 1837.
Now, the stock market is higher than ever, and interest rates are lower than ever. Easy money! What could go wrong?