Panics and Politics

How often have U.S. financial crises been followed by major political realignments?

Will the current financial crisis spur a major political realignment? If history is any guide, the answer is probably no. America has experienced recurrent financial meltdowns since its birth in the late 18th century. Indeed, there were severe credit crunches and Wall Street collapses in 1792, 1819, 1837, 1857, 1873, 1893, 1907, 1929, 1987, and now 2008. Most of these panics have not been followed by seismic political shifts. To be sure, President Martin Van Buren, who took office a month before the stock market crash of 1837, lost badly when he ran for reelection in the depression year of 1840. But Van Buren was an unpopular and ineffective president, and his defeat did not signal a realignment.

Two post-crisis elections, however, in 1896 and 1932, were focused overwhelmingly on economic issues stemming from a depression. In each case, the victorious party became the dominant force in American politics for a generation.

In the post-Civil War era, there were a number of close elections. The 1876 election wasn’t settled until shortly before inauguration day in 1877. In 1888, Democrat Grover Cleveland won the popular vote but lost in the Electoral College to Republican Benjamin Harrison. Four years later, Cleveland defeated Harrison, becoming the only president to serve two non-contiguous terms.

The 1896 election ended the era of evenly balanced parties. It followed the Panic of 1893, which had triggered a deep and painful depression. The urban working class that had been expanding rapidly as the country industrialized was dependent on wages and was bearing the brunt of high unemployment. GDP had declined by 12 percent in the year after the market crash. Unemployment had increased from 3 percent in 1892 to 18.4 percent two years later. Fifteen thousand companies had failed, as had 491 banks.

Two post-crisis elections, in 1896 and 1932, were focused overwhelmingly on economic issues stemming from a depression. In each case, the victorious party became the dominant force in American politics for a generation.

In 1896, Republican presidential candidate William McKinley ran on the slogan, “Sound Money, Protection, and Prosperity.” McKinley, a former U.S. congressman who had also served as governor of Ohio, was a solid if not charismatic politician. His opponent, Democrat William Jennings Bryan, was another matter. Bryan had spent two terms in Congress but had no other experience in politics. What he did have was a golden tongue. His “Cross of Gold” speech at the 1896 Democratic convention in Chicago had electrified the audience and propelled him to the nomination at the tender age of 36. He was by far the youngest man ever nominated by a major party. Unfortunately, his economic platform essentially called for an inflationary monetary policy based on the free coinage of silver at a price below its true market value.

At first, things looked good for Bryan. Over the summer, the Dow Jones Industrial Average—published for the very first time on May 26, 1896, when it stood at 40.96—declined by nearly a third, hitting a record low of 28.48 in September. But McKinley ran an effective campaign, utilizing new advertising techniques and painting Bryan as a dangerous radical who would wreck the U.S. economy. Aided by returning prosperity and McKinley’s growing popularity, the Dow began to recover. McKinley wound up winning the election with 51 percent of the vote to Bryan’s 47 percent.

With that election, the Republicans became the majority party; they would win every presidential election from 1896 to 1932, with the exceptions of 1912 and 1916. In 1912, Theodore Roosevelt split the GOP and Democrat Woodrow Wilson was elected with only 41.8 percent of the popular vote. In 1916, Wilson barely won reelection despite having the advantage of incumbency and a very dangerous foreign situation.

By the early 1930s, America was experiencing its most profound crisis since the Civil War. The economy had begun slowing in the spring of 1929, and the stock market had crashed that October. Then a series of disastrous policy mistakes turned an ordinary economic downturn into the unique calamity of the Great Depression. The Federal Reserve kept interest rates high when it should have lowered them dramatically. The Smoot-Hawley Tariff Act raised tariffs to their highest level in U.S. history and sparked a trade war that crippled global commerce. In the summer of 1932, as the depression worsened, Congress passed an enormous tax hike in hopes of balancing the budget.

Although President Herbert Hoover, a Republican, tried his best to quell the crisis and did more than any previous president to relieve economic suffering, he failed miserably in his 1932 reelection bid. Democrat Franklin Delano Roosevelt won a landslide and went on to become one of the most consequential presidents in U.S. history. FDR remade American politics, forging an alliance between Southern whites and Northern blue-collar workers that guaranteed Democratic dominance for nearly 40 years. Only when his equal as a politician, Ronald Reagan, rose to power did the Republicans return to being the dominant party.

Will the Panic of 2008 bring about a new shift? If the financial markets calm down and prudent reforms are enacted, probably not. American politics has always been the politics of the center. It’s a good bet that it will remain that way for the foreseeable future.

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