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History shows some common themes

By From page B7 | May 04, 2014

Maybe I should take some medication, or drink heavily when I watch cable television.

For some reason, and I don’t understand precious metals, the gold purveyors seem to be the heaviest advertisers on TV. They all seem to use the same theme in one form or another. You know what it is by now: an economic disaster is about to befall us, and the only way to protect yourself is to own gold. Or, since gold hasn’t moved in the past couple of years, some of the propaganda is now devoted to silver.

Well, in spite of looking at the gold market, mostly from the sidelines, I am no more in position to make an intelligent forecast than I was 42 years ago. Oh, sure, there are some factors that usually prevail, such as unexpectedly high inflation, perhaps caused by a spike in oil prices. That’s what happened about 40 years ago, around the time of the 1973 Arab-Israeli war and the resulting boycott by Saudi Arabia.

But if we just look at oil, we’re missing a lot of other possibilities.

The cover story in a recent issue of The Economist was titled “A History of Finance in Five Crises, and how the Next One Could be Prevented.” From the introductory essay, “These five crises reveal where the titans of modern finance – the New York Stock Exchange, the Federal Reserve, Britain’s giant banks – come from . . .” but they also highlight the way investors have deceived themselves that each “reform” would protect them from a future collapse.

The first crisis took place in 1792, shortly after the founding of the Republic. The First Bank of the United States was conceived and guided by Alexander Hamilton, our first Treasury secretary. Investors were so excited by the possible rewards of stock ownership that they risked much of their own capital. Sure enough, the bank ran into trouble when it ran out of the hard currency that backed their paper notes. There was a panic and multiple bank and business failures, but Hamilton saved the day with a multitude of actions.

In 1825, the financial curse shifted to Britain, whose citizens became enamored of bonds issued by newly independent Latin American countries.  As Spain – the “mother” country – lost its power and influence, the new countries became a “sure thing.” In fact, British believers, who were six months by sea away from their investments, had no idea what they were doing – (has anything changed?), but soon learned the hard way. They discovered there was nothing behind the certificates they had bought, and so much money was lost that it almost destroyed the entire British economy.

In 1857, the frenzy was triggered by an infatuation with a new industry: railroads. Once again, investors, both American and British, were snookered so badly that the failure of a few railroads had a devastating effect on the U.S. economy, so bad that it took years, not months, to recover.

1907’s collapse was almost directly caused by two swindlers, Augustus Heinze and Charles Morse. These two crooks had borrowed and embezzled in order to gain control of United Copper. The collapse of that company caused the empire created by Heinze and Morse to fall apart.

It also caused the destruction of Knickerbocker Trust, a new kind of lender. There was a run on Knickerbocker when the news came out that it was controlled by our two friends. Macy’s flagship store, by the way, is located at 34th and 5th, the site of the failed trust.

That brings us to the Crash of 1929. I’ll get to that in next week’s column.

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]

Bud Stevenson

Bud Stevenson


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