It is extremely rare for an incumbent president to lose re-election. As a matter of fact, as you can see from the below table, only 10 presidents in the history of the United States have lost re-election as incumbents.
|Election Year||Incumbent||Challenger (Winner)|
|1800||John Adams||Thomas Jefferson|
|1828||John Quincy Adams||Andrew Jackson|
|1840||Martin Van Buren||William Henry Harrison|
|1888||Grover Cleveland||Benjamin Harrison|
|1892||Benjamin Harrison||Grover Cleveland|
|1912||William Howard Taft||Woodrow Wilson|
|1932||Herbert Hoover||Franklin D. Roosevelt|
|1976||Gerald D. Ford||Jimmy Carter|
|1980||Jimmy Carter||Ronald Reagan|
|1992||George H.W. Bush||Bill Clinton|
The 10 one-term presidents listed above all have one thing in common: they were presidents during difficult economic times. A few of them presided over Depressions. If you’re hoping President Trump will be a 1 term president, one way it could happen is if a Depression hits in the next 2 years. That’s what happened to Benjamin Harrison, Grover Cleveland, and Herbert Hoover. Let’s discuss.
Benjamin Harrison: Elected 1888: 1-Term President Grover Cleveland: Elected 1892: 1-Term President
The late 1800’s aren’t always pointed to in history as significant. Most of us see the time between the end of the Civil War in 1865 and the beginning of American involvement in the first World War, as uneventful. That is far from the facts.
“ …the Panic of 1890 was an acute recession. Although less serious than the other panics of the era, still it is the nineteenth century’s most famous sovereign debt crisis.”
It’s important to understand what sovereign debt is. Sovereign debt, according to TheBalance.com, is,
“…how much a country’s government owes. It means the same thing as national debt, country debt, or government debt, because the word ‘sovereign’ also means national government.”
So sovereign debt is to government debt as corporate debt is to private company debt. I added the descriptor private because the general public is not liable for corporate debt. BUT, the general public is liable for government debt, because governments can and will tax the public in order to pay down debt.
The Baring Crisis was named after a London based bank named the Barings Bank. The Barings Banks, just like banks throughout history, was bad at managing risk. You can almost say Barings Bank is cursed; it was finally brought down permanently in 1995, by a rogue trader. It was oldest bank in London when it finally collapsed. Back in 1890, the Barings Bank took far too much risk and invested far too much of capital in a single country: Argentina.
Argentina has a long history of defaulting on debt obligations. Argentinian debt is sovereign debt. A country defaults on its debt when it cannot make interest payments on its debt, or can’t make payments on debt that is due in full. Argentina experienced a Great Depression about 100 years after the Baring Crisis, between 1998-2002. Why? Because of a sovereign default on debt, to the tune of $155 Billion, the largest default in history at that time. Just as Barings Bank seemed cursed, Argentina seems the same.
What causes governments to default on their debt obligations? In the case of Argentina in 1890, it was a coup that fell the first domino. The coup was called the Revolution of the Park, or the Revolution of 1890. The revolution was caused by three things: government corruption, fraud, and inflation.
Why is it that countries that have inflation issues are also very often plagued by corruption? We are seeing this today in Turkey. The Bipartisan Policy Center put out a report on Turkey’s corruption, and the consequences.
There is clear causation that can be drawn between corruption and inflation. When a bank like Barings Bank, invests in Argentina, they bring foreign currency into the country. This foreign currency, especially when it is valuable reserve currency (which the Pound Sterling was in the 19th Century) serves as a way to legitimize and empower the local currency, which in Argentina’s case, was/is the Argentinian Peso. When we say stabilize, we mean that as long as Argentina has foreign currency reserves, then the currency is worth something to foreign investors; the currency becomes readily exchangeable, meaning it is liquid (supply and demand exists). A foreign investor is more likely to invest in Argentina if he/she knows that he will recuperate his/her Pound Sterling when he makes a profit on his investment (denominated in Argentinian Peso). Simply put, foreign investors can do business in Argentina with confidence that they can reap the rewards in their home countries.
When a government is corrupt, it means that the members of the government are stealing money from the public coffers. When corrupt governments steal money, they don’t steal money denominated in Peso (domestic currency) Why? Because it doesn’t make sense for them to steal the currency that is only valuable domestically.
Corrupt government officials are always planning their escape, for the day they get caught, and so they steal foreign currency, specifically, the reserve currency that makes the domestic currency worth something. When this type of theft is discovered, foreign investors flee; they attempt to recuperate as much of their money as possible, meaning they sell Pesos and domicile their Pound Sterling. Foreign investors rely on lawful governments to assure the value and security of their property. If that security is not there, foreign investors leave in herds.
This is why it is often said that the US Dollar is a safe-haven currency. US Treasuries are safe-haven bond investments for foreigners. Everyone from drug cartels to foreign central banks, have invested their money in US Dollar denominated treasury bonds, because it is safe haven and guaranteed by the full force and might of US law. Ultimately, US law is backed by the Constitution, and the Constitution is backed by the greatest military force man has ever known.
Justifiably, foreign investors doing business in the US rely on the protection of the law; this is why the US attracts incredible amounts of foreign capital, as can be seen here at the World Bank website. No other country attracts as much foreign direct investment as the United States. Second to the United States is the Netherlands, followed China.
The response by Great Britain to the 1890 Barings Crisis is a study on how history will always, always, always repeat itself. From Wikipedia,
“An international consortium assembled by William Lidderdale, governor of the Bank of England, including Rothschilds and most of the other major London banks, created a fund to guarantee Barings’ debts, thereby averting a larger depression. Nathan Rothschild remarked that if this had not happened, perhaps the entire private banking system of London would have collapsed which would have caused an economic catastrophe.”
Fear inducing commentary like the above in bold has striking resemblance to what US citizens were told during the Great Financial Crisis of 2008. In September of 2008, the Treasury Secretary Henry Paulson and the Federal Reserve chairman Ben Bernanke, went to Nancy Pelosi, the Speaker of the House, with a message. The following excerpt from a New York Times article describes it well:
“In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to several participants, “we may not have an economy on Monday.”
As in the case of the Barings Crisis in 1890, fear was the force that led to action. Whether the fear was justified, we will never find out. What we do know is that Argentina’s problems had only just begun; even today, Argentina is struggling with massive inflation caused by unsustainable debt loads. Argentina is currently negotiating with the International Monetary Fund (the IMF) to receive reserve currency loans (in US Dollars, new reserve currency) in order to stabilize its currency (still the Peso).
We also know that the late 19th Century and the early to mid 20th century saw the gradual decline of the British empire, itself burdened by inflation.
Nathan Rothschild, as noted above, was afraid of contagion when he helped to organized the British bail-out of Barings Bank. That contagion became apparent just a few years later, in 1893. The United States was running on the Gold Standard in the 1890’s. This meant that the US Dollar was backed by Gold; anyone could trade in their paper currency (USD) into the Federal Reserve and receive Gold in exchange.
According to Wikipedia,
“Because European investors were concerned that these problems might spread, they started a run on gold in the US Treasury.”
This run on the US Treasury by European investors proved correct Nathan Rothschild’s concerns regarding contagion from the Barings Bank collapse. Where he was wrong was in thinking his bail-out of Barings would prevent the contagion; it didn’t.
The run on the US Treasury resulted in a run on other banks in the US by US citizens holding paper currency. The issue became not that the banks were broken, but that trust in the banking system was lost. This is the real problem, when a people lose faith in a country’s ability to back its currency, and therefore demand tangible hard assets over government issued paper currency.
A few decades earlier, the Panic of 1857 was another run on the banks triggered by, wait for it….the discovery of a massive embezzlement scam by the New York manager of the Ohio Life Insurance and Trust Company. According to Wikipedia, the manager had,
“…embezzled funds and made excessive loans. The company’s president announced suspension of specie [Gold] redemption, which triggered a rush to redeem banknotes, causing many other banks to fail because of lack of specie [gold].”
Specie redemption refers to GOLD; when people found out that one bank had suspended Gold redemptions, account holders at other started a bank run on banks that had nothing to do with the embezzlement. Notice the recurring theme: when Trust is lost, financial crises become contagious.
When perfectly solid good banks get run on, they unexpectedly lose Gold reserves. When these banks lose their Gold Reserves, they go to the US Treasury, to buy Gold with paper currency. This causes the US Treasury to lose its gold reserves. When that happens, cash loses its value, because there is a much higher demand for Gold than Cash. When cash loses its value, inflation rises; it takes much more dollars to pay for something, anything, everything. The effect of this then hits the general population; it becomes much more expensive to live, pay for food, rent, clothes, etc… Every asset is exposed to selling in this scenario. In specific, stock markets are particularly exposed because individual investors sell their holdings, simply to raise money for living expenses. When individuals sell stock, brokerage houses and investment banks must do the same, and if these institutions hold stock with borrowed money, the contagion is even further amplified.
The term “Cash is King” was coined in crisis. During the days of the Gold Standard, before the US Dollar was a reserve currency, “Gold is King” would have been more accurate.
Nathan Rothschild was correct in being worried about contagion during the Barings Crisis. Panics are triggered by the dissolution of trust; panic is when we no longer believe.
The Panic of 1857 mentioned earlier started because a greedy bank manager embezzled bank funds. Even in 1857, a single such event could lead to economic depression. Corruption can take down entire banking systems and economies. It has done so in Argentina several times since the 1890 events; it did so in the 2008 Financial crisis in the United States. Corruption reduces trust. Banking relies on trust, especially when transaction are conducted in paper money. There is no longer enough Gold supply in the world to keep up with growth. Paper money is critical to sustain economic growth. This is why the US has an especially unique role in upholding lawfulness in banking, given that the US Dollar became the new international reserve currency, as of the end of the Gold Standard in 1971.
Without law and order in the banking system, nations and economies collapse.
It can be argued that President Nixon rid the US of the Gold standard in order to permanently reduce the likelihood of bank runs. After all, paper currency can always be printed when demand rises; gold mining is much more difficult.
The final domino to drop after the Barings crisis was the crash of wheat prices in 1893; it was the last event caused by the contagion of the Barings Bank crisis, and it led the US into the Depression of 1893.
In the 19th century, farming was a huge component of US GDP. What drove the growth of farming was the expansion of the railroads. The US Treasury had very few assets in the 19th century, but they owned a bunch of land from the Louisiana Purchase agreement and the Oregon Purchase Treaty with Britain. According to Economic History Association,
“Railroads opened new areas to agriculture, linking these to rapidly changing national and international markets. Mechanization, the development of improved crops, and the introduction of new techniques increased productivity and fueled a rapid expansion of farming operations. The output of staples skyrocketed. Yields of wheat, corn, and cotton doubled between 1870 and 1890 though the nation’s population rose by only two-thirds.”
That kind of supply expansion of wheat and corn meant that either new demand had to be found to absorb it, or prices had to come down. There were significant drivers to the above noted supply increase. One of drivers that I find worth pointing out is the Crimean War that took place in Russia between 1853-1856.
Recall that Crimea was in the news a few years ago when Russia invaded and annexed Crimea from Ukraine. One reason Russia wants Crimea? Its vast agriculture industry and farm output.
Wheat prices had been driven sharply higher by the Crimean War of the 1850’s. That was one reason US farm production soared in the 19th century, because the prices made it so profitable! According to the following on Wikipedia,
“Increased grain production was able to capitalize on high grain prices caused by poor harvests in Europe during the time of the Great Famine in Ireland. Grain prices also rose during the Crimean War, but when the war ended U.S. exports to Europe fell dramatically, depressing grain prices. Low grain prices were a cause of the Panic of 1857.”
Prices can only collapse if they rise to unsustainable prices. A few things worked to create a bubble in grain prices in the US:
- Railroads made it easy to farm in places where people had never farmed. Railroads made it possible to access remote farms.
- Land grants by the US Treasury distributed land in remote areas. We mentioned earlier that the US provided land grants. The Homestead Act, signed into law by Abraham Lincoln in 1862, was the law that authorized the land grants. The Homestead Act encouraged Americans to move West, such as in the Northwest/Oregon. Much of that land was used for farming, given the rise in prices caused by….
- The Great Famine in Ireland.
- The Crimean War, which led to a drastic drop in wheat exports to Europe from Crimea.
The combination of the above factors increased demand for wheat and other grains, and simultaneously reduced the supply.
When demand goes up and supply comes down, prices go up, and in a free market economy like the United States, farmers, aided by land grants, rose to to fill the demand, and make a handsome profit.
With that said, the end of slavery in the US meant that a substitute for labor had to be found to work the land. Paid labor filled some of that demand, but a farming technology boom in the 19th century meant supply would rise even further, despite the end of slavery, and despite the American Civil War that took manpower off the crop fields, and onto the battlefields. Threshing machines, the cast steel plow, and the Adriance Reaper were just a few examples of technological advances in farming that helped lead to a spike in supply of wheat, and other crops.
The end of the Crimean War in 1856 was the beginning of the end the farming boom in the United States. Prices crashed, the Panic of 1857 happened. Between 1857 and 1870, prices recovered, causing farmers to increase planting, setting the market up for another crash.
The recovery peaked in 1870, according to Economic History. An excerpt from them follows:
“Over 1870-73, corn and wheat averaged $0.463 and $1.174 per bushel and cotton $0.152 per pound; twenty years later they brought but $0.412 and $0.707 a bushel and $0.078 a pound. In 1889 corn fell to ten cents in Kansas, about half the estimated cost of production. Some farmers in need of cash to meet debts tried to increase income by increasing output of crops whose overproduction had already demoralized prices and cut farm receipts.”
That means between 1873 and 1893…
- Wheat Prices fell 40%
- Corn Prices fell 11%
- Cotton Prices fell 49%
Cotton prices fell the most, largely because of foreign competition and supply from Egypt and India.
Wheat prices also fell for the same reason; supply had increased dramatically and with the economic downturn in Europe in 1890, and the contagion that followed, prices eventually also collapsed.
Interestingly, corn prices were the least affected; the most likely reason was that corn prices were primarily a domestic crop. This made it less susceptible to international market conditions.
At this point, the Irish Famine had also spread to Europe, where France and Germany were more-over suffering from the Barings Bank default. How did France and Germany end up being involved in the Baring Bank default? It’s because of the chain-linking of debt, and the contagion that happens as a result. To understand, take a look at the below excerpt detailing the chain of debt that existed in the run-up to the Panic of 1893.
“As would be repeated a century later, the financial crisis was precipitated by an unexpected event, when Baring Brothers, a financial house in London, defaulted on 21 million English pounds of debt which had been collateralized by its heavy investment in Argentina. To cover the default the Bank of England borrowed from the Bank of France which borrowed from the Bank of Imperial Russia, and in November of 1890 there were numerous bank failures and run on currency in Europe.“
The run on the European currencies led to the run on the US Treasury we mentioned earlier by European investors.
This shows that ultimately, private debt and crises that originate in private banking and business, CAN make their into the public (government) sphere. For 3 years, the US did not suffer much. The following excerpt from a piece at northwestern.edu gives us an explanation:
“The financial crash of 1893 would have come sooner to America had there not been a bumper crop of wheat in the face of European famine, and thus gold temporarily poured into the coffers of United States banks.”
So the massive yield of wheat in America, caused by the mechanization and the gigantic increase of farming land that escalated dramatically between 1870 and 1890, caused an influx of Gold into the US Treasury. Foreign governments bought the excess supply of wheat from the United States because of the psychological effects the Irish Famine had caused in Europe in the 19th century; food was stockpiled in case it happened again. They paid for this wheat with Gold, and the US Treasury compensated farmers with US Dollars, keeping the Gold in its own reserves. When European holders of US dollars came to exchange their dollars with Gold to pay for their losses in the European crisis, the US Treasury had the gold to oblige them.
But when the buying of wheat by Europeans subsided, the influx of Gold ceased. Wheat prices crashed, as we mentioned earlier. The Gold redemptions by Europeans did not stop; they were still reeling from the Barings Bank crisis 3 years earlier. A new run on banks began, when world got out that the US Treasury was running out of Gold.
The Irish famine and the European economic crisis caused massive immigration to the United States during the second half of the 19th century. First, the Irish showed up to get away from the famine. Then, the economic depression led to a spike in immigration from France and Germany, also during the late 1800’s. Many of those immigrants showed up in Chicago, where the meat packing industry was a promise for a better life.
The Populist movement that rose from the 1893 Depression was real and powerful. It rose out of the farming class, and it was a major left-wing force in American politics. Left-wing then, had a different meaning from left-wing today; left-wing at that time was defined by the farmer class seeking government subsidization. They felt they were innocent victims of the elitist, banking class. They, not them, said the farmers, were responsible for the crisis and the depression that followed. From Wikipedia,
“The People’s Party, also known as the Populists, was very critical of capitalism, especially banks and railroads, and allied itself with the labor movement.”
Does any of this sound familiar? Every since 2008, the modern populist rhetoric has been similar. It’s anti-capitalist, anti-banking, and anti-elitism.
What eventually pulled the United States out of the depression was a replenishment of gold reserves paid for by Nathan Rothschild and J.P Morgan. The US was on the verge of defaulting on a $12 Million redemption of Gold. It only had $9 Million on hand. How was it resolved?
At the time, congress refused to authorize the sale of bonds to fund the government. JP Morgan and Nathan Rothschild discovered a loophole that allowed then President Grover Cleveland to conduct the bond issue without Congress approval. The injection into the US treasury coffers was $65 Million dollars worth of Gold; in exchange, Rothschild and JP Morgan received bonds worth $62.3 Million with an interest rate of 4%.
When JP Morgan and Rothschild went out and sold those bonds to investors, they sold out in 20 minutes. It turns out investors were not scared to own US government bonds. This was eye opening for congress; they had been very reluctant to issue debt. It seemed that investors had more faith in the US government, than the US congress itself.
Herbert Hoover: Elected 1928: 1-Term President
Herbert Hoover was a Republican who came into office at the worst possible time: the onset of the Great Depression.
The only other president who may have had it just as bad as Hoover was President Barack Obama, who took the helm at the height of the 2008-2009 Financial Crisis.
President Hoover took office in 1929, just months before the 1929 Stock Market Crash on October 29th. According to the History Channel,
“…by 1932 stocks were worth only about 20 percent of their value in the summer of 1929. The stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom. By 1933, nearly half of America’s banks had failed, and unemployment was approaching 15 million people, or 30 percent of the workforce.”
Any president who oversees a 30% unemployment rate usually doesn’t get re-elected. This is why Presidents constantly tout jobs growth, anytime they are given a chance. This is also why believers in trickle-down economics say tax cuts for business are good; they claim businesses will use the money to hire, a optimistic claim at best.
Hoover was defeated by President Franklin Roosevelt in the 1932 election. The difference between Hoover and Roosevelt was the New Deal. Hoover had vehemently opposed federal government spending programs. Hoover continued the isolationist policy favored by presidents before him; early 20th century isolationism was a consequence of the populist movement started by the 1893 depression. Instead of government spending, he instituted new tariffs, the Smoot-Hawley Tariff Act, which sent foreign trade crashing, and sealed his political fate.
In 1932, Hoover established the Reconstruction Finance Corporation. By that time President Franklin Roosevelt was traveling the country marketing his New Deal platform. It was too little too late for Herbert Hoover.
If President Trump is reading this, let Hoover be an example, tariffs are not good for political careers.