Panic of 1893

Not since the depression of 1873 had America experienced economic hardship like that felt by Americans of all socioeconomic classes in 1893. A depression is a long-term economic state characterized by high unemployment, minimal investment and spending, and low prices. This depression was one of the worst in American history. The unemployment rate (percentage of the total working population that was out of a job) exceeded 10 percent for half a decade, something that had never happened before and would not happen again until the Great Depression (1929–41). No city or region was left unscarred. One of every four workers in Pennsylvania was unemployed; in Chicago, Illinois , one hundred thousand people were sleeping in the streets.

Causes of the depression

The depression in 1893 was ushered in with financial panic as the value of American currency (money) weakened. Since the time of President George Washington (1732–1799; served 1789–97), the U.S. monetary system had been based on bimetallism, or the use of both gold and silver coins. But the California gold rush in 1849 resulted in the discovery of such large quantities of gold that its value decreased. Before 1849, gold had been sixteen times more valuable than silver.

People soon began melting their silver dollars and using the metal for other purposes, such as jewelry. In 1873, Congress ceased making silver coins, and America was placed on a “gold standard.” A series of silver strikes in the San Juan Mountains of Colorado and nearby regions that began in 1875 and continued throughout the 1880s caused the price of silver to fall even further. In spite of this decrease in value, silver mining as an industry continued to grow. Farmers, however, were going further into debt as prices per bushel of their crops continued to decrease quickly because of increased foreign competition and supply. In order to remain competitive, farmers had to continue lowering their prices, yet they still had monthly payments to make on expensive farm equipment and mortgages.

The Sherman Silver Act

To help balance the economy, President Benjamin Harrison 1833–1901; served 1889–93) agreed to buy 4.5 million ounces of silver every month at market price. The U.S. Treasury, in turn, would issue notes that could be redeemed in either gold or silver.

This plan was known as the Sherman Silver Purchase Act of 1890. The legislation was named after the Republican who initiated it, U.S. senator John Sherman (1823–1900) of Ohio . Although the idea may have been solid, in reality the act did not work very well. The increased supply of silver forced down the market price. Mine owners tried to make up for their loss by cutting the wages of their miners and laborers, a move that led to unrest and violence throughout the mining regions. As holders of the notes understandably redeemed them for gold rather than silver (thereby getting more money for each note), the federal gold reserve was steadily drained.

Three weeks after Grover Cleveland (1837–1908; served 1885–89 and 1893–97) was sworn in as president for the second time in 1893, the gold reserves dipped below $100 million. This event weakened an already unsteady trust in the federal government. The Sherman Act was repealed, but it was too late. Silver mines were shut down across the mining regions. The price of silver per ounce dropped from 83 cents to 62 cents in one four-day period. Banks failed by the hundreds, and property values decreased to nearly nothing. The American economy was in serious trouble.

Trouble on the rails

Another factor in the 1893 depression was a decrease in the amount of money being invested in railroads. Between 1870 and 1890, the railroad industry accounted for 15 to 20 percent of all federal investments. Tens of thousands of miles of track were laid, and loans were approved for additional construction and equipment purchase.

Private investors in America and Europe bought stock in U.S. railroads. It seemed like a sure thing—an easy way to make money. Stocks were bought for a particular amount, and if the company did well, each stock earned money. With the increase in immigration , the explosion in the railroad construction industry, and the increasing settlement of the West, investors believed they could not lose. But they did lose, and in a big way.

The railroad system was overbuilt and overfunded. Companies were often mismanaged. In 1892, just 44 percent of all railroad stocks offered investors received a return (profit) on their investment. European investors pulled out before the situation got worse. The Philadelphia and Reading Railroads were the first companies to file for bankruptcy (a legal declaration that a company cannot pay its debts. By May 1893, more railroads shut down; 156 railroads would fail before the crisis was over. Without the railroads, industries like iron, steel, and farming had no way of shipping their products. America fell into a serious economic depression marked by high unemployment rates and tens of thousands of business failures.

Plight of the farmer

Farmers were perhaps the hardest hit by the depression of 1893. Prior to that year, the agriculture industry had enjoyed expansion and increased profits, thanks to improved farming methods, the introduction of machinery that could do a worker's job in half the time, and the railroads, which opened new regions to business. Between 1870 and 1890, the number of U.S. farms rose to 4.5 million, an increase of nearly 80 percent. By the end of the nineteenth century, that number increased yet again by 25 percent. Across the nation, about 29 percent of farmers were paying on mortgage loans (money loaned to them by banks so that they could live on and farm their property). One expert estimated that by 1890, 2.3 million farm loans were worth more than $2.2 billion. During that year, Kansas , Minnesota , Nebraska , North Dakota , and South Dakota had more farm mortgages than they did families.

But the depression was preceded by six years of bad weather and drought. Crop seasons were shortened, or in some cases, nonexistent. Before farmers understood the importance of sustainable farming methods (which includes crop rotation to decrease the chances of disease and to maximize crop output), they farmed land in such a way that it no longer produced healthy or big crops. The combination of nature and ignorance proved too much for many farmers. On top of that, they were expected to take into consideration the dismal economic conditions across the country and accept lower prices for their product. Wheat prices fell 20 cents per bushel in 1892. When crop prices dropped below the cost of production, farmers chose instead to use their crops for firewood.

Different regions, different hardships

The depression did not affect all farmers in the same way. Those in the West and on the Plains suffered most in that they were unable to obtain credit from banks and stores. Weather in this region was harsher than climates elsewhere, so the chances for making a profit were uncertain, and lenders knew that. They developed tougher standards regarding farm loans, and most farmers did not meet those standards. Unable to pay their existing loans, farmers knew it would be impossible to get new loans. Creditors began foreclosing on (taking away) farms. Between 1889 and 1893, more than eleven thousand Kansas farms went into foreclosure. Western farmers were being evicted from (thrown out of) their homes and farms; many were homeless.

Other farmers went into tenancy, meaning they no longer owned their own farm, but they farmed someone else's land and were paid a share of the harvest. Farm tenancy increased from 25 percent across the country in 1880 to 36 percent by 1900. The very farmers who had been encouraged to borrow money as the Plains and western regions were being settled spent the last decade of the nineteenth century losing their farms or farming for someone else. It was a miserable existence.

The situation in the South was somewhat different. Once slaves were freed after the American Civil War (1861–65), they usually refused to work land in gangs under the supervision of an overseer. It reminded them too much of the slave conditions they had just escaped. With this attitude, commercial farming was out of the question. Most wanted to own their own land and equipment. The problem was not that land was not available; it was. Huge plantations had been broken into smaller properties. The outlawing of slavery made money scarce, however, so freedmen had nothing with which to purchase a plot of land.

Many landowners let freedmen farm the land and agreed to accept a portion of the crop, rather than money, as rent. These owners also became merchants who sold farmers seed, equipment, and other necessities. As collateral (something of value used to insure repayment of debt), farmers signed a mortgage on their crop. Because the only crop most landowners wanted was cotton , farmers were without food for their families. They had to buy food from local stores. After 1870, cotton prices fell, and farmers did not earn enough to settle their debts. The merchant landowners then forced them into signing yet another mortgage on the next year's crop. It was a never-ending cycle that led farmers only further into debt.

This system made tenant farmers of both African American and white men in the South. For the whites, tenancy was especially demeaning because it forced them into a status historically associated with slaves. It also represented a loss of freedom that hurt their pride. With credit nearly impossible to attain and few skilled laborers in the region, the South's economy was uncharacteristically hopeless.

Farmers in the Midwest and Northeast, though affected by the depression, faired better than those in other regions. These farmers had been able to pay off their mortgages because of the inflation of the Civil War economy. During the war, there was a general increase in the price of goods, including crops. Farmers were getting more money per bushel. Even though there was less money in circulation at the time, people still had to eat, so farmers were making money.

These farmers had another advantage because they lived among a more developed railroad system. They were less likely to be charged higher rates than their fellow farmers in the West and South were. These lower rail costs allowed the farmers to plant grain, which grew well in nearly any soil. Because they lived near cities and growing urban areas, the farmers of the Midwest and Northeast were also able to engage in dairy farming. Cows could survive on land that had been overused. Milk could be transported before it had time to spoil, because the distance from the farms to the cities was short.

Obtaining credit was much easier in these regions as well. Most farmers had lived in the area their entire lives. They knew the bankers and the local agricultural conditions. They knew how to successfully farm in those local conditions and knew which crops would sell.

Recovery from the depression began in mid-1897, but the American economy was not prosperous again for another year.