ThePanic of 1893 was aneconomic depression in theUnited States. It began in February 1893 and officially ended eight months later. ThePanic of 1896 followed.[1] It was the most serious economic depression in history until theGreat Depression of the 1930s. The Panic of 1893 deeply affected every sector of the economy and produced political upheaval that led to apolitical realignment and thepresidency of William McKinley.
The panic climaxed with a run on gold from theUnited States Treasury. Unemployment rates in many states rose above 25%, and poverty became widespread.
Causes of the panic include:
During theGilded Age of the 1870s and 1880s, the United States had experienced economic growth and expansion, but much of this expansion depended on high international commodity prices, which were also affected by theMcKinley Tariff of 1890. 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).
One of the first signs of trouble came on 20 February 1893,[7] 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.[8] Upon taking office, Cleveland dealt directly with the Treasury crisis[9] and convinced theUnited States Congress to repeal theSherman Silver Purchase Act, which he felt was mainly responsible for the economic crisis.[10] Concurrently, in 1893, wheat prices crashed.[2]
As concern for the state of the economy deepened, people rushed to withdraw their money from banks, and causedbank runs. Thecredit crunch rippled through theeconomy of the United States. Afinancial crisis in London combined with a drop in continental European trade caused foreign investors to sell American stocks to obtain American funds backed by gold.[3]
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 ofcapitalism, 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. Weaver andJames G. Field, won 8.5% of the popular vote and carried five states (Colorado, Idaho, Kansas, Nevada, and North Dakota), and the1894 United States House of Representatives elections, when it won nine seats. Built on acoalition of 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 ofagrarianism and hostility to elites, cities, banks, railroads, and gold.
| Unemployment rates during the 1890s (rates are per 100 persons)[11] | ||
|---|---|---|
| Year | Lebergott | Romer |
| 1890 | 4.0 | 4.0 |
| 1891 | 5.4 | 4.8 |
| 1892 | 3.0 | 3.7 |
| 1893 | 11.7 | 8.1 |
| 1894 | 18.4 | 12.3 |
| 1895 | 13.7 | 11.1 |
| 1896 | 14.5 | 12.0 |
| 1897 | 14.5 | 12.4 |
| 1898 | 12.4 | 11.6 |
| 1899 | 6.5 | 8.7 |
| 1900 | 5.0 | 5.0 |
TheFree Silver movement arose from asynergy of 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 Act of 1890, while falling short of the goals of the Free Silver movement, 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 notes for gold. Ultimately, the statutory limit for the minimum amount of gold in federal reserves was reached, and U.S. notes could no longer be redeemed for gold.[3] Investments during the time of the panic were heavily financed through bond issues with high-interest payments. Rumors regarding financial distress at theNational Cordage Company (NCC), then the most actively traded stock, caused its lenders to call in their loans immediately, and the company went intobankruptcy receivership as 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 Railroad, and theAtchison, Topeka & Santa Fe Railroad failed. 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 theirmortgage obligations. Many walked away from recently built homes as a result.[13]
As part of the panic, on May 5, 1893, theDow Jones Industrial Average fell 24% in a single day after the bankruptcy ofNational Cordage Company. Soon over 500 banks closed, 15,000 businesses failed, and numerous farms ceased operation. The unemployment rate reached 25% in Pennsylvania, 35% in New York, and 43% in Michigan.Soup kitchens were 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, MayorHazen S. Pingree launched his "Potato Patch Plan," which were community gardens for farming.[14]
PresidentGrover Cleveland was blamed for the depression. Gold reserves stored in theU.S. Treasury fell to a dangerously low level. This forced President Cleveland to borrow $65 million in gold from Wall Street bankerJ. P. Morgan and theRothschild banking family of England, through what was known as the Morgan-Belmont Syndicate.[15] President Cleveland'sDemocratic 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 bad omen of investors switching from equity-basedstocks to constant-returnbonds in 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 were 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. Census placed this value at close to $1.8 billion (not adjusted for inflation), the largest amount recorded between 1876 and 1910. This was over $1 billion (also not adjusted for inflation) more than the next largest amount, in 1884.[19]
The greatPullman Strike shut down most rail traffic in the Northern states from May to July 1894. PresidentGrover Cleveland got federal courts to order a stop. He sent the U.S. Army to protect the railroads against mob violence in many cities. The strike was launched by the newAmerican Railway Union (ARU) under the leadership ofEugene V. Debs at thePullman Company factory in Chicago after its owner refused to either lower rent in the company town or raise wages for its workers. To win, the union tried to stop all trains carrying Pullman passenger cars. The Pullman cars also carried the U.S. mail, which the federal government was obliged to protect. The strike failed, the ARU collapsed, and Debs went to prison.[20]
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, U.S. gross tonnage decreased by 2.9%, and again in 1895 by 1.03%.[21]
In 1894, the rate for abushel of 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 City toLiverpool also decreased, from 2 and 3/8 pence to 1 and 15/16 pence, but this reflected a continuing trend downward from a high of 3 and 1/8 pence in 1891.[19]
In February 1895, theU.S. Government, turned to privatefinancial institutions to underwrite the sale ofTreasury bonds, stabilizeexchange rates, and return the Treasury to itsgold reserve requirement. The result was a contract drawn with what was called "The Morgan-Belmont Syndicate".[22]
The persistent balance of payments deficit in the 1890s, which drained the Treasury gold reserves, caused concern from both domestic and foreign investors that the U.S. would abandon the gold standard. This prompted further gold withdrawals and bond liquidations, which exacerbated the deficit. By February 2, 1895, the Treasury's gold reserves had fallen to approximately $42 million, well below the $100 million level required by theResumption Act of 1875. After a series of failed attempts to restore reserves by issuing bonds and depreciatingspecie issued forlegal tender, the Treasury negotiated a contract with the Morgan-Belmont Syndicate to restore confidence in the government's ability to maintain the convertibility of legal tender into gold.
The full list of syndicate members was not made public; however, the contract namedDrexel, Morgan & Co., A. Belmont & Co.,J. S. Morgan & Co., andN. M. Rothschild & Sons. The syndicate achieved its goals through a combination of purchasing gold from smelters, convincing its members to purchase Treasury bonds with gold, inspiring confidence in bond and railroad securities investors, and unofficialcapital controls by convincing members and gold-exporting houses to "ship no gold" overseas.
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