On this day in economic and business history...
The national debt of the United States was measured in billions for most of the country's history, until Oct. 22, 1981, when routine Treasury transactions pushed the debt above the not-at-all-routine $1 trillion level.
The U.S. government only managed to zero out its debts once -- in 1835, during the debt-fearing administration of President Andrew Jackson. But by the middle of the Civil War the government's debts soared past $1 billion as the Union threw all its resources toward victory. By 1974 the national debt had reached $500 billion, and it took a mere seven years of increasingly high deficit-spending to add $500 billion more. "If we as a nation needed a warning," President Ronald Reagan said of the 13-figure debt, "let this be it." However, by the end of his second term the national debt had more than doubled.
Due to the ratcheting-up of already high interest rates, the U.S. government expected to spend about $100 billion on interest payments for the 1982 fiscal year. Three decades later, despite a 16-fold increase in the national debt, interest payments had increased only fourfold. The national debt remains a huge political issue. Unfortunately, solutions are far harder to find than talking points, and meaningful reduction seems impossible to enact without causing significant economic pain.
A panic takes hold The Knickerbocker Trust, a large New York trust institution, became a Lehman Brothers of turn-of-the-century Wall Street when it failed on Oct. 22, 1907. The trust became insolvent after a run of depositors removed $8 million from its coffers in a single morning. The Panic of 1907, as it's now known, was already rolling past the point of no return after two Wall Street insiders failed spectacularly in their efforts to create a short squeeze in the stock of United Copper. However, the collapse of Knickerbocker was the first major bank failure that resulted from this scheme, and the tightly bound world of Wall Street banks threatened to tip over into oblivion.
The Dow Jones Industrial Average, which had been in gradual decline since the start of 1906, had begun to plunge in winter 1907 as investors awakened to the realities of a weakening economy. By the following summer, the market was in full-fledged bear territory in response to an increasingly militant antitrust crusade marching forth from President Theodore Roosevelt's White House. When a federal judge fined Standard Oil a record-breaking $29 million for anticompetitive activities that August, the market began to waver. Standard Oil's shares, which were largely beyond reach of the investing public, fell by 16% over the following week. Market watchers began to see catastrophe ahead, and Standard Oil founder John D. Rockefeller warned his son to "be prepared for very disastrous results to our commercial fabric" should the crusade continue.
By the standards of most financial panics, this one had a light touch on the Dow. From the start of October to Knickerbocker's collapse, the index lost only 13%. But fear was palpable on Wall Street, which had no central bank to fall back on for emergency liquidity in the event of a widespread run on banks -- not that any central bank might have proven particularly effective, as the gold standard then in place severely constrained the short-term flexibility of the nation's monetary supply. News broke of Knickerbocker's precarious state the day before its run, which was, according to The New York Times, considered "so important that a separate meeting of Presidents of many of these big institutions was held ... last night." These big institutions were led by the bank of J. P. Morgan, who decided against supporting the ailing Knickerbocker and thus precipitated a run. The run lasted all of three hours on Oct. 22 before the trust's coffers were exhausted and it was forced to close.
The collapse of Knickerbocker, unlike that of Lehman Brothers a century later, did not push the markets into immediate or sustained free fall. The Dow fell a rather modest 2.8% on the day of the run, and only lost another 1.5% the following day. By this point, however, the Dow had already lost 43% of its value from the 1906 peak. By comparison, the Dow lost more than 4% of its value on the day of the Lehman collapse but was only just barely into a bear market at the time.