3
The Start of a Panic
In the nineteenth century, as during 2007, unusual and discomforting financial events took place, but it was difficult to know whether the distress indicated the start of a panic or reflected the effects of an ongoing panic or were merely a tempest in a teapot that would ultimately calm down— a mild recession. For the Panic of 2007– 8, most observers date the start of the panic as the failure of Lehman Brothers in September 2008, although the start was actually the first or second quarter of 2007.1 The tumultuous event of the Lehman Brothers failure was the catalyst to galvanize a consensus that the events constituted a financial crisis. Only after Lehman’s failure was it widely agreed that events were dire and that congressional action was required to address them. The same problem of distinguishing between panics and moderate distress existed during the National Banking Era. In fact, observers in that era also pointed to the failure of a large financial firm as the start or cause of the panic, as with Lehman. The failure of a large financial firm is typically an effect of a panic, not the cause, but because the failure of a firm is visible, it often becomes a signal that a panic is under way. In this chapter, we explore several issues about panics and financial disturbances generally. First, it is difficult to determine the start of a panic. The New York Clearing House did not announce the suspension of convertibility. How then did a generalized bank suspension of convertibility happen? Second, what is the cause of a panic? The events just prior to a panic are chaotic and, as events evolve, it is not initially clear whether the events are really a panic. The Panic of 1873, the first severe panic of the National Banking Era, is a good example. A front-page story called “A Financial Thunderbolt” in the New York Tribune of September 19, 1873, reporting on the suspension of Jay Cooke and Company in Philadelphia on September 18, 1873, wrote, “The news of the failure of Jay Cooke
