[War & Business] The World's First Economic Panic

Cotton plantation in the Mississippi region of the southern United States in the 19th century [Image source=U.S. National Archives]

[Asia Economy Reporter Hyunwoo Lee] Even after the inauguration of the Joe Biden administration in the United States, the trade dispute stance between the U.S. and China from the previous Donald Trump administration is not expected to change, drawing recent attention to the "1837 Financial Panic," known as the world's first Great Depression. Despite occurring over 180 years ago, this financial panic offers many insights into the current structure of the U.S.-China trade dispute.

The 1837 Financial Panic ostensibly began with the collapse of U.S. cotton prices. Until 1836, U.S. cotton prices had been rising by more than 5% annually, but suddenly plummeted by over 70% that year. The cotton price crash originated from the Qing Dynasty's opium prohibition law in China, thousands of kilometers away. In 1837, Emperor Daoguang of the Qing Dynasty decided to ban the opium trade after a court report indicated that 28,000 tons of silver?equivalent to the annual budget?were flowing out to Britain, causing a severe trade deficit. As a strict opponent of opium, Lin Zexu was dispatched to Guangdong to crack down on the opium trade. This news triggered a red alert for Britain's trade balance with China, which had barely been in surplus due to the opium trade.

British companies announced significant reductions in imports of U.S. cotton in anticipation of worsening trade deficits with China, leading to a domino effect of bankruptcies among U.S. cotton plantations. Subsequently, 1,500 regional U.S. banks that had extended credit loans to cotton plantations collapsed simultaneously, triggering an unprecedented global financial crisis. This was because the real estate bubbles in major cotton-producing areas like Chicago and Illinois, where land prices had surged over 1,000% due to speculation over the previous five years, burst all at once, causing European investors who had invested there to go bankrupt en masse.

When the financial crisis occurred, even the gentlemanly nation of Britain abandoned its pride. In October 1839, after a trade delegation sent to the Qing Dynasty failed again to abolish tariff barriers, the British Parliament resolved to wage war. After winning the Opium War, Britain received $33 million in reparations through the 1842 Treaty of Nanking. This enormous sum?more than four times the $7.2 million the U.S. spent to purchase Alaska from Russia?effectively ended the 1837 Financial Panic.

Today’s U.S.-China trade dispute is evaluated to be following a similar structure, except that China’s dispute counterpart has shifted from Britain to the United States. The clash between the U.S., suffering from a worsening trade deficit with China compounded by the COVID-19 pandemic, and China, as the world's factory advocating for strengthening its domestic economy, has the world watching closely to see if it will culminate in another Opium War.