The Panic of 1893 was a serious economic depression in the United States that began in 1893 and ended in 1897. It deeply affected every sector of the economy, and produced political upheaval that led to the realigning election of 1896 and the presidency of William McKinley.
One of the causes for the Panic of 1893 can be traced back to Argentina. Investment was encouraged by the Argentine agent bank, Baring Brothers. However, the 1890 wheat crop failure and a coup in Buenos Aires ended further investments. In addition, speculations also collapsed in South African and Australian properties. Because European investors were concerned that these problems might spread, they started a run on gold in the U.S. Treasury. Specie was considered more valuable than paper money; when people were uncertain about the future, they hoarded specie and rejected paper.
During the Gilded 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. To exacerbate the problems with international investments, wheat prices crashed in 1893.
One of the first clear signs of trouble came on February 20, 1893, twelve days before the inauguration of U.S. President Grover Cleveland, with the appointment of receivers for the Philadelphia and Reading Railroad, which had greatly overextended itself. Upon taking office, Cleveland dealt directly with the Treasury crisis and successfully convinced Congress to repeal the Sherman Silver Purchase Act, which he felt was mainly responsible for the economic crisis.
As concern for the state of the economy deepened, people rushed to withdraw their money from banks, and caused bank runs. The credit crunch rippled through the economy. A financial panic in London combined with a drop in continental European trade caused foreign investors to sell American stocks to obtain American funds backed by gold.
The People’s Party, also known as the ‘Populists’, was an agrarian-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 zenith in the 1892 presidential election, when its ticket, composed of James B. Weaver and James G. Field, won 8.5% of the popular vote and carried five states (Colorado, Idaho, Kansas, Nevada and North Dakota), and the 1894 House of Representatives elections, when it won nine seats. Built on a coalition of poor, white cotton farmers in the South (especially North Carolina, Alabama and Texas) and hard-pressed wheat farmers in the Plains States (especially Kansas and Nebraska), the Populists represented a radical crusading form of agrarianism and hostility to elites, cities, banks, railroads, and gold.
The Free Silver movement arose from a synergy of farming and mining interests. Farmers sought to invigorate the economy and thereby end deflation, which was forcing them to repay loans with increasingly valuable dollars. Mining interests sought the right to turn silver directly into money without a central minting institution. The Sherman Silver Purchase Act of 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 the 1878 Bland–Allison Act (driving up the price of silver and pleasing silver miners). People attempted to redeem silver 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 successfully redeemed for gold. Investments during the time of the panic were heavily financed through bond issues with high interest payments. Rumors regarding the National 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 bankruptcy 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.
A series of bank failures followed, and the Northern Pacific Railway, the Union Pacific Railroad and the Atchison, 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, about 17%–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 their mortgage obligations. Many walked away from recently built homes as a result.
As a result of the panic, stock prices declined. 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 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, Mayor Hazen S. Pingree launched his “Potato Patch Plan”, which were community gardens for farming.
President Grover Cleveland was blamed for the depression. Gold reserves stored in the U.S. Treasury fell to a dangerously low level. This forced President Cleveland to borrow $65 million in gold from Wall Street banker J.P. Morgan and the Rothschild banking family of England. His party suffered enormous losses in the 1894 elections, largely being blamed for the downward spiral in the economy and the brutal crushing of the Pullman Strike. After their defeat in 1896, the Democrats did not regain control of any branch of the Federal Government until 1910.
The Panic of 1893 affected many aspects of the shipping industry, both by rail and by sea. It arrested the acquisition of ships and rolling stock, and pushed down shipping rates.
Fluctuations in railroad investment after the Panic of 1893
The bad omen of investors switching from potentially volatile stocks to more stable bonds in 1894 was mirrored in railroads by slower acquisition of rolling stock. Railroad expansion rose again in 1895, but was arrested in 1897 by another economic trough.
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. In 1893, the year following the panic, one fourth of all rail mileage went into receivership. The U.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.
In 1894, the U.S. Army intervened during a strike in Chicago to prevent property damage. The strike was instigated at the Pullman Company in Chicago after it 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. Since the Pullman Company was a railroad car company, this only increased the difficulty of acquiring rolling stock.
American merchant tonnage
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%.
In 1894, the rate for a bushel of wheat by rail dropped from 14.7¢ 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.
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 from New York City to Liverpool also decreased, from 2 and 3/8 to 1 and 15/16, but this reflected a trend downward since 1891.
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Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.