Silver and Gold: Bank Runs and the Economic 'Panic of 1893' - Brewminate: A Bold Blend of News and Ideas (2024)

One of the first clear signs of trouble came twelve days before the inauguration of President Grover Cleveland.

Curated/Reviewed by Matthew A. McIntosh
Public Historian
Brewminate

Causes

ThePanic of 1893was aneconomic depressionin theUnited Statesthat began in 1893 and ended in 1897.^[1]It deeply affected every sector of the economy, and produced political upheaval that led to thepolitical realignmentof1896and thepresidency of William McKinley.

The Panic of 1893 has been traced to many causes. One of those points to Argentina: Investment was encouraged by the Argentine agent bank,Baring Brothers. However, the 1890 wheat crop failure anda failed coup in Buenos Airesended further investments. In addition, speculations in South African and Australian properties also collapsed. Because European investors were concerned that these problems might spread, they started a run on gold in theU.S. Treasury.Speciewas considered more valuable than paper money; when people were uncertain about the future, theyhoardedspecie and rejected paper notes.^[2][3]

During theGilded Ageof the 1870s and 1880s, the United States had experienced economic growth and expansion, but much of this expansion depended on high international commodity prices. Exacerbating the problems with international investments, wheat prices crashed in 1893.^[2]In particular, the opening of numerous mines in the western United States led to an oversupply of silver, leading to significant debate as to how much of the silver should becoined into money(see below). During the 1880s, American railroads experienced what might today be called a “bubble”: investors flocked to railroads, and they were greatly over-built.^[4]

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One of the first clear signs of trouble came on 20 February 1893,^[5]twelve days before the inauguration of U.S. PresidentGrover Cleveland, with the appointment of receivers for thePhiladelphia and Reading Railroad, which had greatly overextended itself.^[6]Upon taking office, Cleveland dealt directly with the Treasury crisis^[7]and successfully convincedCongressto repeal theSherman Silver Purchase Act, which he felt was mainly responsible for the economic crisis.^[8]

As concern for the state of the economy deepened, people rushed to withdraw their money from banks, and causedbank runs. Thecredit crunchrippled through theeconomy.Afinancial panicin London combined with a drop in continental European trade caused foreign investors to sell American stocks to obtain American funds backed by gold.^[9]

The economic policies of PresidentBenjamin Harrisonhave been characterized as a contributing factor to the depression.^[10]

Populists

ThePeople’s Party, also known as the ‘Populists’, was anagrarian-populist political party in the United States. From 1892 to 1896, it played a major role as a left-wing force in American politics. It drew support from angry farmers in the West and South. It was highly critical of capitalism, especially banks and railroads, and allied itself with the labor movement.

Established in 1891 as a result of the Populist movement, the People’s Party reached its height in the1892 presidential election, when its ticket, consisting ofJames B. WeaverandJames G. Field, won 8.5% of the popular vote and carried five states (Colorado, Idaho, Kansas, Nevada, and North Dakota), and the1894 House of Representatives electionswhen it won nine seats. Built on acoalitionof poor, white cotton farmers in the South (especially North Carolina, Alabama and Texas) and hard-pressed wheat farmers in thePlains States(especially Kansas and Nebraska), the Populists represented a radical form ofa*grarianismand hostility to elites, cities, banks, railroads, and gold.

Silver

TheFree Silvermovement arose from asynergyof farming and mining interests. Farmers sought to invigorate the economy and thereby enddeflation, which was forcing them to repay loans with increasingly expensive dollars. Mining interests sought the right to turn silver directly into money without a central minting institution. TheSherman Silver Purchase Actof 1890, while falling short of the Free Silver movement’s goals, required the U.S. government to buy millions of ounces of silver above what was required by the1878 Bland–Allison Act(driving up the price of silver and pleasing silver miners). People attempted to redeemsilver notesfor gold. Ultimately, the statutory limit for the minimum amount of gold in federal reserves was reached and U.S. notes could no longer be successfully redeemed for gold.^[9]Investments during the time of the panic were heavily financed through bond issues with high-interest payments. Rumors regarding theNational Cordage Company(NCC)’s financial distress (NCC was the most actively traded stock at the time) caused its lenders to call in their loans immediately, and the company went into bankruptcyreceivershipas a result. The company, a rope manufacturer, had tried to corner the market for imported hemp. As demand for silver and silver notes fell, the price and value of silver dropped. Holders worried about a loss of face value of bonds, and many became worthless.^[12]

A series of bank failures followed, and theNorthern Pacific Railway, theUnion Pacific Railroadand theAtchison, Topeka & Santa Fe Railroadfailed. This was followed by the bankruptcy of many other companies; in total over 15,000 companies and 500 banks, many of them in the West failed. According to high estimates, about17%–19%of the workforce was unemployed at the panic’s peak. The huge spike in unemployment, combined with the loss of life savings kept in failed banks, meant that a once-secure middle-class could not meet theirmortgageobligations. Many walked away from recently built homes as a result.^[13]

Effects

As a result of the panic,stock pricesdeclined. Five hundred banks closed, 15,000 businesses failed, and numerous farms ceased operation. The unemployment rate hit 25% in Pennsylvania, 35% in New York, and 43% in Michigan.Soup kitchenswere opened to help feed the destitute. Facing starvation, people chopped wood, broke rocks, and sewed by hand with needle and thread in exchange for food. In some cases, women resorted to prostitution to feed their families. To help the people of Detroit,Mayor Hazen S. Pingreelaunched his “Potato Patch Plan”, which were community gardens for farming.^[14]

PresidentGrover Clevelandwas blamed for the depression. Gold reserves stored in theU.S. Treasuryfell to a dangerously low level. This forced President Cleveland to borrow $65million in gold from Wall Street bankerJ.P. Morganand theRothschild banking family of England.^[15]His party suffered enormous losses in the1894 elections, largely being blamed for the downward spiral in the economy and the brutal crushing of thePullman Strike. After their defeat in 1896, the Democrats did not regain control of any branch of the Federal Government until1910.

The Panic of 1893 affected many aspects of theshipping industry, both byrailand by sea. It arrested the acquisition of ships and rolling stock and pushed down shipping rates. The bad omen of investors switching from equity basedstocksto constant returnbondsin 1894 was mirrored in the corporate finance actions of railroads which reduced their acquisition ofrolling stock. Railroad expansion including capital expenditures rose again in 1895, but slowed in 1897 during another economic trough.^[16]

In 1893, the total railroad mileage in the U.S. was 176,803.6 miles. In 1894 and 1895, railroads only expanded 4,196.4 miles, although 100,000 miles of rail was added from 1878 to 1896.^[17]In 1893, the year following the panic, one fourth of all rail mileage went into receivership.^[18]TheU.S. Censusplaced this value at close to $1.8billion (not adjusted for inflation), the largest amount recorded between 1876 and 1910. This was over $1billion (also not adjusted for inflation) more than the next largest amount, in 1884.^[19]

In 1894, the U.S. Army intervened during a strike in Chicago to prevent property damage.^[20]The strikebegan at thePullman CompanyinChicagoafter Pullman refused to either lower rent in the company town or raise wages for its workers due to increased economic pressure from the Panic of 1893.^[21]Since the Pullman Company was arailroad carcompany, this only increased the difficulty of acquiring rolling stock.

The maritime industry of the United States did not escape the effects of the Panic of 1893. The total gross registered merchant marine tonnage employed in “foreign and coastwise trade and in the fisheries”, as measured by the U.S. Census between 1888 and 1893, grew at a rate of about 2.74%. In 1894, however, U.S. gross tonnage decreased by 2.9%, and again in 1895 by 1.03%.^[22]

In 1894, the rate for abushelof wheat by rail dropped from 14.70¢ in 1893 to 12.88¢. This rate continued to decrease, reaching a terminal rate in 1901 of 9.92¢ and never reached 12 cents between 1898 and 1910.^[19]

Between 1893 and 1894, average shipping rates by lake or canal per wheat bushel decreased by almost 2 cents, from 6.33¢ to 4.44¢. Rates on the transatlantic crossing fromNew York CitytoLiverpoolalso decreased, from 2 and 3/8 to 1 and 15/16, but this reflected a trend downward since 1891.^[19]

Appendix

Endnotes

1. Timberlake, Jr., Richard H. (1997).“Panic of 1893”. In Glasner, David; Cooley, Thomas F. (eds.).Business Cycles and Depressions: an Encyclopedia. New York: Garland Publishing. pp.516–18.
2. Nelson, Scott Reynolds. 2012. A Nation of Deadbeats. New York: Alfred Knopf, p. 189.
3. “The Depression of 1893”.eh.net. Retrieved2019-09-27.
4. Daniel Gross,The Bubbles that Built America: the Railroad; accessed 2021.02.25.
5. “IN RE RICE”.Findlaw.
6. James L. Holton,The Reading Railroad: History of a Coal Age Empire, Vol. I: The Nineteenth Century, pp. 323–325, citing Vincent Corasso,The Morgans.
7. “Grover Cleveland
8. “Grover Cleveland Resource, millercenter.org
9. Whitten, David O.“EH.Net Encyclopedia: Depression of 1893”. eh.net.
10. Taylor, Mark Zachary (2021-03-23).“Ideas and Their Consequences: Benjamin Harrison and the Seeds of Economic Crisis, 1889-1893”.Critical Review.33: 102–127.
11. Romer, Christina(1986).“Spurious Volatility in Historical Unemployment Data”.Journal of Political Economy.94(1): 1–37.
12. Northrup, Cynthia Clark (2003).The American Economy: Essays and primary source documents. ABC-CLIO. p.195.
13. Hoffman, Charles.The Depression of the Nineties: An Economic History. Westport, CT: Greenwood Publishing, 1970. p. 109.
14. Parshall, Gerald. “The Great Panic Of ’93.” U.S. News & World Report 113.17 (1992): 70. Academic Search Complete. Web. 26 Feb. 2013.
15. Faulkner, Harold U. (1959).Politics Reform and Expansion: 1890–1900. pp.143–44, 155–57.
16. Hoffmann, Charles (1956). “The Depression of the Nineties”.The Journal of Economic History.16(2): 137–164.
17. “Annual report of the Interstate Commerce Commission. 1896”.Interstate Commerce Commission … Annual Report. 1887.
18. Leonard, W. N. (1949). “The Decline of Railroad Consolidation”.The Journal of Economic History.9(1): 1–24.
19. “Internal Communication and Transportation”(PDF).United States Census Bureau. 30 Mar 2015.
20. Rondinone, Troy (2009). “Guarding the Switch: Cultivating Nationalism during the Pullman Strike”.The Journal of the Gilded Age and Progressive Era.8(1): 83–109.
21. Bigott, Joseph C. (2001-08-15).From Cottage to Bungalow: Houses and the Working Class in Metropolitan Chicago, 1869-1929. University of Chicago Press. p.93.
22. “Merchant Marine and Shipping”(PDF).United States Census Bureau. 30 Mar 2015.

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