By Jason Zweig | Oct. 31, 2011 8:30 am ET
Image credit: Earliest known photograph of Wall Street (ca. 1860-1870), Museum of American Finance
Quantitative easing—in which the Federal Reserve buys securities to bolster the financial markets—worries many investors, because they fear the Fed won’t be able to prevent a flood of liquidity from setting off inflation and debasing the dollar.
But QE certainly isn’t new.
A little birdie recently emailed us a striking passage about a U.S. government intervention in the financial markets 145 years ago, almost to the day.
In October 1866, the stock markets were tumbling. The great speculator Jay Gould was falsely rumored to be dead. Cyrus Field lost a fortune, even though he had just succeeded in laying the transatlantic cable that joined the United States to Europe.
To rescue the markets from panic, the U.S. Treasury first bought $14 million of bonds “in a lump,” according to chronicler Cuthbert Mills. When interest rates didn’t stay down, the Treasury also flooded the markets with $27 million in cash.
These numbers sound small to modern ears; $14 million is about $200 million in today’s money, and $27 million in 1866 dollars is roughly $383 million in 2011. But these two interventions by the government totaled $41 million at a time when all the money held by the U.S. Treasury amounted to $139 million, according to the Statistical Abstract of the United States.
As Mills put it two decades later, the intervention “beyond question averted a panic.”
In short, back in 1866—what many Americans think of as the heyday of unfettered free enterprise—the U.S. government was willing to put nearly a third of the Treasury’s balance sheet at risk to prop up the capital markets.
Quantitative easing may well turn out to be a bad idea this time. But, for better or worse, it’s as American as apple pie.
Note on original source: Cuthbert Mills, “Recent Movements of the Stock Market,” The North American Review, vol. 146, no. 374 (Jan. 1888), pp. 47-54.
Source: Total Return blog, WSJ.com