Top 10 Worst Financial Crises in History, Part 2

Editor’s Note: This article is the second feature in a two-part series on the top financial crises in U.S. economic history.

From reading the first recap of the Top 10 Financial Crises in History (Crises 6 through 10), you may have noticed that certain patterns emerge.

Sometimes we have an overblown sense of optimism, even in the face of empirical evidence to the contrary. At times, it has led our country into a number of financial crises. And while these crises have proven to be more exception than norm, they are yet another reminder of how we just can’t put off personal financial planning.

Not only that, history repeating itself shows that every investor is responsible for protecting their own financial future. With the days of employer-backed pensions fading away, Americans are more responsible for their personal financial security than before.

Having all that in mind, here are five more historical market events which remind us that bad things happen to good investors.

5. Gold Panic of 1893

Sometimes a financial crisis is so great, it sends shockwaves beyond financial markets.

Such was the case of the Gold Panic of 1893. It led to an economic depression that is considered among the worst in American history.

This watershed crisis not only depleted the fortunes of American companies and individuals. It drummed up political unrest among farmers and Midwesterners, who channeled their anger toward the East Coast elite, politicians, and other groups. That led to the birth of a new populist movement.

There were many contributing factors to the Gold Panic, including the collapse of railroads, such as Reading Railroad. But the run on gold was the result of the bimetallism movement trying to shift our country toward a monetary standard based on not just gold, but on gold and silver.

Investors, worried about the U.S. abandoning the gold standard, drove up the demand for gold. This drained the Treasury’s gold reserves and strained the liquidity of the financial system.

In April 1893, news that the government had run low on gold created the Panic and a severe Depression. The result? Widespread bank failures, farm failures, commercial failures, and high unemployment of 11%.

4. OPEC Oil Crisis

Raise your hand if you remember those half-mile lines to get gas during the oil crisis of 1973.

When Arab oil producers quadrupled prices in the early 1970s, the American economy suffered a sucker punch.

A decade passed before economic recovery came. The rising cost of gasoline and higher interest rates strangled the economy and stunted the stock market for the next 10 years.

Before the oil crisis, the Dow Jones Industrial Average hit an all-time high of 1051.70. Just two years after the crisis began, the DJIA had dropped to 577.60. It didn’t recover to pre-embargo levels until 1983.

3. Subprime Mortgage Crisis

This one hits close to home, in fact close to many peoples’ homes.

If you have seen the movie “The Big Short,” you have an idea of how mortgages were being handed out like candy to borrowers. Borrowers were not even required to prove their income.

You “stated” your income and signed below that you were telling the truth. Then, poof, you got a mortgage. And with prices escalating so quickly up until 2006, everyone wanted to jump on the bandwagon and ride real estate appreciation to the top.

Unfortunately, the top soon turned into the bottom, as many homebuyers found themselves in over their heads.

In mid-2006, the U.S. housing market started to stabilize from its meteoric rise, as prices began falling back to more sustainable levels.

About this time, buyers began to see their once-cheap adjustable rate mortgages reset into rates and payments they couldn’t afford. Then the flood of foreclosures began.

The crisis led to the failure of Lehman Brothers and government bailouts of such “too-big-to-fail” companies as AIG.

When Congress rejected the bank bailout bill, the stock market crashed on Sept. 29, 2008, with the DJIA falling 777.68 points. At that point, it was the worst one-day drop in history to that point.

Since then we have experienced the two largest one-day drops in U.S. history: the 1,175.21-point drop on Feb. 5, 2018, and the 1,032.89-drop on Feb. 8, 2018.

It was a slow climb back for many Americans and for our economy overall.

2. Panic of 1873 & The Long Depression

Several factors led to the long, deep crisis that affected both the U.S. and European economies.

Post-Civil War optimism fueled widespread speculative investments, primarily in railroad expansion. The failure of Jay Cooke & Company, then the largest bank in the U.S., threw markets into chaos.

The Coinage Act of 1873 depressed the price of silver, which hurt American mining interests. Property losses from the Chicago and Boston fires, the impact of the demonetization of silver in German and the U.S., and other factors strained bank reserves.

As a result, bank reserves plunged from $50 million to $17 million in New York City in September and October 1873.

This financial crisis triggered a depression in both the U.S. and Europe. It lasted for 6 years here and led to two decades of stagnation in France and England.

Oversees it was called the “Long Depression.” In America it was referred to as the “Great Depression,” until 1929 and the years that followed redefined that name.

1. The Great Crash

During the 1920s, the U.S. stock market was expanding rapidly. In fact, it experienced a 6-year bull run, with the DJIA increasing in value by 500%.

Much of this growth was the result of wild speculation. Brokers loaned clients as much as 66% of the money used to purchase shares.

American production had already begun to decline, and unemployment was on the rise. Stocks were priced beyond their real value. A perfect storm of negative factors led to the Great Crash.

Proliferation of debt, a pool of large bank loans that couldn’t be liquidated, a weakened agricultural sector, low wages, and even investor fear of a tariff war with Europe caused a series of market drops in October of 1929.

It culminated in the day that would be known as Black Tuesday.

On Tuesday, October 29th, stock prices imploded with 16,410,030 shares traded on the New York Stock Exchange in a single day.

Thousands of investors lost billions of dollars. It’s said that stock tickers ran hours behind because the machinery couldn’t handle the overwhelming trading volume.

Within a year, the DJIA was at 41.22, a nearly 90% loss from its pre-crash high. The Dow didn’t claw its way back to that pre-panic high until 1954. The Great Depression that ensued lasted a decade and only subsided with the onset of World War II.

Putting Your Financial Future in Your Hands

Now, back to the idea that all of these financial meltdowns were unforeseen. These historical market events were often preceded by a period of great expansion or optimism. In some cases, the optimism was excessive, leading from euphoric bullishness to bearishness in quick turnarounds.   

The greatest lesson from these crises of the past? Have a plan, and be ready to readapt, depending on your current financial progress, your retirement timeline, and other variables that play into an appropriate level of risk for your portfolio.

For those nearing retirement and needing reliable income, instruments offering lifetime income such as annuities can be attractive. Annuities may also be worth a look if you are near retirement and need to protect some of your principal for future income needs or goals.

Planning for Lifelong Financial Security

Consult with your financial professional about ways you can ensure that, should another economic reversal occur, your hard-earned nest egg will retain its value. And be sure to work with someone who acts and guides in your best interest.

If you are ready for personal help, financial professionals at SafeMoney.com can assist you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.