The Greatest Economic Collapses In History

great depression

War and politics have been the focal point of the downfall of many dominant nations over the course of world history, but poor economic decisions have also led to countries falling, people dying from hunger, and revolutions changing the course of world history.

Niall Ferguson’s book, “The Ascent of Money” details the course of economic collapses. The further back the collapse, the less detail there is on the decisions made, the decision makers, and issues surrounding the decisions. But Ferguson does a great job of explaining in detail the effects the collapses had on each particular nation and the global economy.

The development of economic principles and financial methods of accounting for money throughout time are also detailed in “The Ascent of Money”, as Ferguson paints a timeline of how economies developed and crashed, and what was learned afterwards.

Ferguson’s book was the primary source for the information in this article. 

The Medici Bank, a lack of focus by the principal of one of the world's biggest banks leads to its demise

The Medici Bank, during its high point, was one of the most respected banks in the history of the world. The Medici family revolutionised accounting by invoking the ledger system and double entry system of credits and debits, which is essentially still the backbone of an introduction to accounting class at most colleges.

The bank rose to massive size, leading the family to become heavily involved in Florence's and subsequently many parts of Europe's politics, specifically Lorenzo de' Medici. The emergence of politics into the family was eventually one cause of its downfall, as the focus on the bank became less and less. Eventually, high leverage caused fiscal problems for the bank. With the problems growing, the company defrauded the fund that pays for dowries and was conceded to Charles VIII of France in 1494. The entire bank was dissolved.

The bank grew the family's fortune to 122,669 Florin, which fell to 57,930 florin under Lorenzo's rule. That is the modern day equivalent of

Source: 'The Ascent of Money'

Price Revolution, Spanish conquistadors import gold and silver at a record pace leading to massive price inflation

In the second half of the 16th century, Spain began importing silver and gold at a rapid pace from Peru. Metals were extremely valuable to Spain but relatively unimportant to the natives, and once Spain conquered the natives they put natives into the mines.

The import provided a huge, unexpected supply of silver and gold to Spain and all of Europe, causing massive price inflation. Inflation and high taxes hurt Spanish industry, and much of the country's wealth was subsequently spent on wars. Spain went bankrupt for the fourth time in 1596, eventually leading to the country losing its position in America to the Dutch, English, and French.

Source: 'The Ascent of Money'

Mississippi Bubble, a financial scheme goes bad and taxpayers suffer as the man at fault flees France

John Law was a Scottish economist who established Banque Generale, a private bank which acted as the first ever central bank of France. Additionally, Law also oversaw France's tax collection and minting of money.

Law developed the Compagnie des Indes in 1719, which had a monopoly on both the French tobacco and African slave trades. Due to the fact that the company had a monopoly on two large markets, there was an enormous potential for profits. This led to a large public demand for shares in the company, which eventually pushed its share price far higher than its earnings.

The stock-market boomed along with the company, and the government printed more paper money in order to buy more shares of Law's company. This caused inflation and the company never lived up to the expected profits that initially caused the stock to boom. The stock crashed, as did the stock market around it in France as well as other countries. Law fled France after the crash of his company and the nation's economy, as taxes were raised significantly in order to pay for the debt left behind by the company and bank failed.

It would be 80 years before France again introduced paper to its economy.

Source: 'The Ascent of Money'

Overend, Gurney and Company was a London bank involved in the discounted buying and selling of bills of exchange. During the banks time, it become one of the most successful banks in the world. Even during a huge financial crisis, the company remained strong and was known as 'the bankers bank' as it was able to make loans to other banks.

Founder Samuel Gurney was the key member of the company and kept the focus on bills of exchange. When he retired, the bank attempted to expand its investment portfolio. It invested in long term investments rather than short term cash reserves, specifically railway stocks. When stocks and bond prices, specifically railway stocks, went down significantly later in the 19th century, the company required a bailout from England. The bank refused, the bailout, halted payments in May of 1866, causing panic and protests throughout the United Kingdom. The bank collapsed, causing over 200 other companies to fail as a result.

The bank lost nearly $1 billion, but the larger issues occurred due to its affect on the closure of other banks.

Source: 'The Ascent of Money'

Confederate Army, cutting off cotton imports destroys the Confederacy's revenues

In the mid-19th century, the Confederate Army felt that it needed diplomatic recognition. In order to achieve this status, the army decided to cut off all cotton imports to Europe. Cotton was essential to Europe and it was America's leading export, and the decision ultimately led to a substantially lower amount of revenues.

Inflation also destroyed the value of the Confederate dollar, sinking it from 90 cents compared to the American dollar to less than 2 cents by the end of the war. The main focus of the Confederate States was political, but the lack of alternate sources of revenue with exports nearly nonexistent was a huge burden to its finances.

Source: 'The Ascent of Money'

The Panic of 1893, overbuilding of railroads sets off a series of bank failures

The 'Panic of 1893' is often overshadowed because of the following Great Depression roughly 30 years later and the fact that three other 'panics' occurred during the 19th century. In fact, the only larger depression in American history was in fact the Great Depression, which explains the magnitude of what happened in the late 1800's.

The bankruptcy of the Philadelphia and Reading Railroad in February of 1983 was one of the first signs of serious trouble. The collapse of the railroad was due to over expansion in the 1880's and railroads becoming a large tool for speculation.

In June of 1893, the stock market crashed, causing a severe credit crisis. Over 16,000 business failed during the final six months of the year, and unemployment rose to nearly 17 per cent. The economy did not recover until four years later.

Russian Revolution, overprinting money to fund a war leads to huge changes in Russia

Industries collapsed in Russia and the nation was nearly bankrupt after Wold War One, leading to a surge in strikes and riots throughout Russia.

The cause of the economic issues was an overprinting of money to pay for the war deficit. Unemployment surged and wages fell across the board. People even left their own jobs to hunt for food, hurting industries even more.

The financial issues in Russia led to militias fighting and eventually beating the nation's army, and creating the USSR in 1922.

Russia's national debt was as high as 50 billion rubles, or roughly $2.9 trillion in today's USD.

Source: 'The Ascent of Money'

The Great Depression, a stock market crash and poorly designed tariff destroy the global economy

The precise causes for the Great Depression are still up for debate, but the grandiose nature of the Depression were caused by a few decisions. Namely, the Smoot-Hawley Tariff, which raised tariffs on imported goods to record levels.

The issues in the United States began when stock markets declined and eventually crashed on October 29, 1929 -- 'Black Tuesday.' The tariff was then pushed through in 1930, causing international trade to drop by 50 per cent, unemployment rising in the United States to 25 per cent, and other countries sat at similar levels.

To go along with the lack of imports and very high unemployment rates, a drought in the midwest hurt crop development even further, causing prices to fall more than 50 per cent. The Depression lasted from 1929 to the mid-1940s.

On Black Monday stockholders lost over $40 billion, and over 9,000 banks failed in the 1930's.

Source: 'The Ascent of Money'

The British Empire Falls, war debts lead to hasty decolonization

Much like many of the previous economic collapses, the British Empire fell due to massive war debts. America loaned the Empire $1 billion of necessary items to assist in its recovery, which was fully paid off in 2006.

The Royal Navy was dismantled, and decolonization occurred at a rapid pace that led to many political issues that still remain today -- namely the Israel and Palestine conflict. Wars broke out in Africa and Asia while the middle east saw its leaders overthrown.

These nations separating from the Empire was certainly a good thing, but the fall of the Empire due to an economic burden from Wold War Two led to a hasty dismantling of England's colonies that is still causing problems today.

In 1949 the British Debt/GD ratio was over 250%.

Source: 'The Ascent of Money'

The Housing Bubble, subprime lending leads to a massive bubble that pops and rocks the global economy

The subprime mortgage crisis had a number of different causes, the main cause being mortgage brokers lending more frequently to unqualified home owners than in the past.

A factor on top of this was that banks began packaging these loans into bonds, then trading and insuring the newly created mortgage backed securities. With banks earning large sums from these bonds, the demand rose and mortgage brokers continue to lower their standards and push as many mortgages as they could to put them into the hands of the banks.

When the bubble finally burst, everything came crashing down. Homeowners were forced to default, banks -- such as Bear Stearns and Lehman Brothers -- crumbled, the government bailed out other banks, and the stock market got destroyed. The effects of the bursting housing bubble are still being felt today.

The Troubled Asset Relief Program, otherwise known as TARP, was a $700 billion bailout of the financial sector.

Source: 'The Ascent of Money'

Greek Sovereign Debt Crisis,

With the global financial crisis pressuring many nations, Greece held a snap general election to elect a president who could handle the crisis. The Panhllenic Socialist Movement wins the election, and the national debt rises to 252 billion euros from 168 billion euros in 2004.

In 2009, Fitch cuts Greece's rating to BBB+ from A-, marking the first time in a decade that Greece did not have an A-rating. Protests begin after deficit cuts are announced, and fear of a potential default rises at the start of 2010.

Goldman Sachs is accused of helping Greece hide how heavily it was borrowing, and the crisis continues to mount as Germany opposes a bailout. In 2012 it is announced that Greece will be given 130 billion euros and banks agree to write of 75 per cent of their loans. The crisis is still in tact as new elections have failed to ease the market fears about eurozone debt crisis contagion.

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