Panic of 1826

The Panic of 1826 was a financial crisis built upon fraudulent financial practices from the management of various firms. The height of the panic occurred during July 1826 when six of the sixty-seven companies publicly traded on the abruptly failed. Within the coming months, twelve more NYSE firms would also fail. The panic sparked New York State to bring in extensive legislation seeking to regulate financial companies and protect investor interests. These regulations, legislations, and precedents like the shareholder derivative precedent were some of the first ever enacted in America and provided the basis for today’s financial regulations after the panic of 2008.

One of the primary causes of the Panic of 1826 was the rise in the number of incorporations in New York during the 1820s. From having only one bank and no insurance corporations in 1791, by 1830, there were over 150 financial companies and 1000 businesses. With this rise in number of incorporations, there were no statutes to protect stockholders and creditors as financial reporting and accounting standards did not exist. This spike in financial incorporations, specifically during the period from early 1824 to mid-1825, led to a 60% increase in market value of the New York Stock Exchange from 1824-1825. The rise of these new financial companies and how they were managed led to the eventual failure of these new firms.

The founders of the financial companies in the 1820s utilized lending and stock notes to retain full control of the firm and to vote themselves into the office of directors. Once they were able to establish majority ownership, the speculative owners were able to use their corporation’s resources as collateral to finance their own acquisitions and personal investing. Through borrowing on collateral and shifting assets around, the controlling investors were able to maintain directorships in a large number of firms. In the month of July 1826, there was a series of runs on three critical banks, which led to a halting of payments and the collapse of companies controlled by these investors. In a study regarding detailing shareholder ownership during the 1820s, it was shown how director of firms that failed controlled 62% of the share in their companies, which was double the proportion of the surviving firms.

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