Notes

CHAPTER 8 - American Experience Part 1
Revolutionary war ends, couple decades past
Need for financial facilitation among public and government to ease debts
Bank 1 goes up (1793)
Land is being bought up like cray; speculation
Hundreds of banks become established in under a decade (from 1793 to 1805)
The south is sketched about it and they think that it is for brit intervention
Government has no control over operations involving the bank
Bank 1 goes down
Anglo American war puts nation into more debt
Private banks extend credit too far with no foresight of repercussions
"Small Treasury Notes" are issued to pay for taxes, duties, and government debt
Economy in shitter
Bank 2 Goes up for 20 year charter (1817)
Economy crashes due to overextension of credit and demand for exported goods in the north (1818-1819)
Argricultural importance may have encouraged people to buy in on land with overoptimism
Overextension by banks to speculators causes instability in the banks' books, when grain prices fell it caused a panic which in turn recalled loans and choked credit
In 1814 banks were allowed to suspend payment which carried over into the era of Bank 2
OR: 2nd US Bank issued too many bank notes, paper money outscaled the ratio of species reserves
Money provides lubrication in the channel of commerce; perhaps money is not like every other commoddity? (Grain, Cotton, Textiles, etc.)
Systemic Risk: Risk of collapse under entire financial system
Asymmetric Information Risk: Risk of failure in a particular establishment because of uneven information among both parties of a transaction
Schism still between Jeffersonians of the South and West. Jackson favored Jefferson's views, believed in a non-central financial institution.
Jackson vetoed the 2nd Bank recharter
Federal government withdrew holdings from US banks and distributed them among the many banks that proliferated the market
Railroads started being built, Europe was a huge source of investment for the infrastructure development by the US
Federal Government pays of national debt (1835)
"Land Office Buildings"
Land was bought in foresight of urban development development; cheap prices after 1835 caused more speculators to show their ugly faces
Farmers turned into economic operations, constantly buying and reselling
Gained specie from Mexico and Europe
No Government installation of a plan to keep species reserves 1:1 with actual paper money. Probably good nowadays
"Circular Specie" - Required that some debts owed to the government must be paid in silver or gold as well as paper money
People rushed to acquisition of specie
"Deposit Act" - Required distribution of federal budget surplus held in pet banks to the states
Country kept expanding, land buying and speculation increased
South was always hit hardest financially by this shiznit
Gold rush brought tons of specie to NYC bank
Gold deposits spiked five-fold between 1849 and 1853
"Wildcat Bankers" - Anyone with a thousand bucks could purchase discounted southern land and trade it for bonds/notes to be reissued for profit, hiding in the woods and shit.
"Investment Banks" - Underwrote securities like bonds and used them to finance railway expansion
Crash began because land values started to decline, H&H Wolfe, a reputable grain and flour company went bankrupt, 2m gold sank in a ship on the way to NYC.
Recovery of the market was relatively swift
North - Industry and Finance; South - Agriculture
Land Values declined because of political uncertainty of territories?
Also could be technological revolution, stock risk fundamentals change with new technological increases
"Systematic Risk" - Risk of an entire market segment failure
"Idiosyncratic Risk" - Risk upon one or many of the same assets, by definition unpredictable, usually completely avoidable through diversification
Entirely new technology of railways was idiosyncratic because it was specific to the asset of railroads
Once wide use of a technology is prevalent, the risk changes from small idiosyncratic to large systematic
Crash of 1857 was due to railroads taking over as the dominant transportation form (as opposed to waterways and canals) which caused discount rates to increase because of the transition from low idiosyncratic risk to high systematic risk