As we await California’s impending financial collapse, you might think that booms and busts are new here. They’re not. In fact, California (and U.S.) history is chock full of booms and busts, going all the way back to the early days of our statehood. Since 1854, the whole of the U.S. has encountered no fewer than 32 cycles of expansions and contractions, averaging some 17 months of contraction and 38 months of expansion, as tracked by the NBER (National Bureau of Economic Research). From 1945-2007, the NBER has identified 11 separate recessions; averaging 10 months in duration (peak to trough).
The Gold Rush, starting in 1849, saw many ships simply abandoned in Yerba Buena harbor – what would soon be San Francisco – as everybody on board lit out for the gold fields, leaving nobody to sail the ships back to from whence they came. Some of the ships were filled in right in place, becoming buildings or foundations of buildings – every now and then, we hear of construction sites uncovering parts of long forgotten, old buried ships – San Francisco has a lot of filled land that was water back in the 1850’s. The Gold Rush itself went from boom to bust very quickly, leaving ravaged, barren countryside at the diggings and, it is often repeated, that significantly more people made serious money selling equipment to the gold digging Forty-Niners than by actually digging gold.
After the Civil War, the Panic of 1873 started when troubled European economies brought about the failure of Jay Cooke & Company, then the largest bank in the U.S., and blasting to smithereens the post-Civil War speculative bubbles. Then the Coinage Act of 1873 helped things really go to Hell in a Handbasket, immediately depressing the price of silver, and seriously harming North American, including California’s, mining interests.
Next came the railroads and more boom and bust cycles, topped by the height of the Southern California land boom of the mid-1880s. Transcontinental railroads, first completed in 1869, with others coming in rapidly after connecting Southern California with the rest of the US, caused rail fares to go as low as $1 for a trip from the Missouri River to the West Coast, bringing many people West far easier than the months-long ordeal of coming by covered wagon. This, and marketing California to people freezing Back East as the biblical Land of Plenty, ignited a land and population boom here, sweeping in a tidal wave of over-hyped buyers whose wild speculation pushed some land prices up as high as 500% in a single year. What goes up must come down, and down it came, wiping many out.
For 23 years, between 1873 and 1896, during what historical economists call the Long Depression, the world went into depression and although many countries’ manufactured output sank, the U.S. output actually dramatically increased. California had a few mini-booms and busts during this stretch and many lost properties that had just made them rich when they could no longer pay their mortgages. Cattle prices went way up and way down again, wiping out more.
The Panic of 1893 lasted three years, kicked off by the failure of the United States Reading Railroad and European investors yanked their money out of the U.S. stock market leading to collapses of the stock market and many banks with California a run on the gold supply. Imagine China suddenly stopping buying our U.S. Treasury Bills, a major source of our financing of late.
The Panic of 1907, a year-long down cycle 102 years ago, began as a run on then giant Knickerbocker Trust Company’s deposits on October 22, 1907, and the ensuing severe monetary contraction lasted a year only to be stopped when J.P. Morgan locked his banker buddies in his smoking parlor (stocked with humidors-full of Cuban cigars and lots of brandy, no doubt) until they figured out how to raise capital among themselves and other FatCats to bail out the U.S. – a tactic recommended not long ago for our Governor and Legislature by F&HD (See, Joel Fox’s article).
Three years after WWI featured yet another recession caused by the end of wartime production along with a deluge of returning troops looking for jobs, in turn causing high unemployment. This happened again in the late 40’s after the Boys came Home from WWII as well. Of course, the Fall of 1929 started the Great Depression, which devastated all of the U.S. and the rest of the world, leaving California hardly unscathed. Only WWII production finally pulled us out of that one.
Today, California is responsible for 13% of the United States’ gross domestic product (GDP) – about $1.7 trillion (as of 2006). The economy of California –statistics vary widely, usually placing California between 7th and 10th largest in the world, depending on whom you read and the year in question- most recent estimates (provided by the CIA Factbook) put California as 10th largest in the world if it were a separate country. So, while we are wealthy and productive when things are going well, California is no stranger to boom and bust cycles. Yet, the crisis we now face will render California very soon unable to function, putting IOU’s into government employees’ pay envelopes, and is unprecedented in size, deficit number (a gag-in-your-throat $42Billion worth) and in the fact that the way out of this one, unlike all those reviewed above going back to the mid-1800’s, does not offer any solution that anybody has yet thought up.
All the solutions being bandied about (higher sales taxes; disguised and probably unconstitutional taxes; more accounting sleight of hand) will all surely cause yet more businesses and residents to flee this once Promised Land – the exact opposite of what we need right now. “Broke, Busted and Disgusted,” sang the Mama’s & Pappa’s back in the 60’s – that’s California’s sorry financial history and current plight.