Panics of the Late Nineteenth Century
PANICS OF THE LATE NINETEENTH CENTURY
During the late nineteenth century the largely unregulated and unstable U.S. economy witnessed a series of financial panics between 1857 and 1893. Financial panics are socioeconomic events, often psychologically driven, in which a more or less irrational fear and sense of futility sweeps through investors or some other group. Usually occurring during periods of economic optimism and over-expansion the actual panic-driven activity varies depending on the nature of the sudden crisis that spurred the fear. (For example depositors could start a run on banks by demanding their money back out of fear the bank has insufficient capital reserves to cover its deposits.) Often, but not always, panics lead to economic depressions characterized by high unemployment and lower living standards.
Prior to 1863 U.S. banking in the nineteenth century was characterized by widespread recklessness. The money supply used to finance industrial expansion fluctuated markedly. With demise of the Second Bank of the United States in 1836 state banks would periodically print and lend money, or often make loans with insufficient capital on hand while at other times they would greatly restrict credit. Under this relatively unpredictable system commodity prices fluctuated greatly as did the level of business activity.
The period began optimistically with victory in the Mexican War (1846–1848) which resulted in the acquisition of California and the American Southwest followed by the discovery of gold in California. An economic boom period followed. Speculation was rampant in railroad construction, manufacturing, and the newly gained western lands. The first major sign of financial over-extension was the failure of the Ohio Life Insurance Company of Cincinnati in August of 1857. The Panic of 1857 quickly spread through the developing Eastern industrial centers and Western wheat belt resulting in high unemployment. Yet the South's cotton trade with Great Britain, sustained through low tariffs, continued to prosper. By winter squabbling between the North and South intensified. Suffering numerous bank failures, the North and West turned to the newly formed Republican political party. Economics as well as slavery became the key issues of the 1860 presidential election.
The American Civil War (1861–1865) devastated the Southern economy and financing the war left the U.S. government in debt. Congress created a national banking system in 1863 to stabilize the economy. The National Banks Act created a system of privately owned banks that issued notes backed by U.S. bonds driving previously issued state bank notes out of circulation. However, the new "national" banks still failed to take actions to increase the money supply in order to escape the clutches of the threatened depression.
In the 1870s speculators ignored, once again, the problems of the increasing trade deficit. Instead, they loaned more money to the railroad companies. Almost all activity on Wall Street and investment capital was singularly focused on the railroad industry. Unable to raise sufficient loan capital, over four thousand U.S. businesses failed in 1872. In the fall of 1873 a panic ensued as several major New York financial firms failed, including the most noted banking house, Jay Cooke and Company. Wall Street closed for ten days as many other companies and citizens faced bankruptcy. The subsequent severe depression left half a million people unemployed by 1875. Another 18,000 businesses failed in 1876 and 1877 including most railroad companies and iron mills in the United States. With the lack of organized relief programs, hunger and destitution spread. For those still employed, wages declined leading to numerous strikes, including a violent railroad strike in 1877. Finally, by 1878 the economy began to improve and with increasing gold reserves, the U.S. government in 1879 placed the economy on a gold standard.
Nevertheless, economic instability persisted. Capital investments in railroads, the mining of newly found silver deposits in the West, industrialization, and foreign enterprises exceeded possible economic returns in the 1880s. Prices for goods declined and by 1883 an economic depression commenced. Overproducing wheat farmers and silver miners of the West pushed for increased currency circulation through unlimited silver coinage to combat declining wheat prices. Meanwhile Eastern industrial growth outpaced the nation's gold production leaving banks without sufficient gold reserves to adequately back loans for capital investments.
After a mild economic recovery in the late 1880s, the British economy suddenly declined sharply in 1890s leading to failure of the prominent Baring Brothers and Company banking house. Impacts on the U.S. economy were direct and investment of foreign capital, particularly British, into U.S. business dropped dramatically. The sale of American securities by foreign investors led to a Wall Street collapse that year and substantial exporting of gold. In addition, under political pressure from the West, President Benjamin Harrison (1889–1893) promised to relieve the suffering of silver producers from the declining price of silver. Congress passed the Sherman Silver Purchase Act of 1890 which obliged the United States to purchase large amounts of silver on a continuing basis.
By early 1893 the gold reserves dropped below the set $100 million baseline minimum. The amount was considered the minimum to assure redemption of government obligations. With the price of commodities, gold, and silver continuing downward, the Philadelphia and Reading Railroad failed, then the National Cordage Company. The Panic of 1893 had begun. This panic hit banks in the South and West particularly hard as investors rushed to banks to convert their holdings into gold. Almost 600 banks suspended operation and by the close of 1893 4,000 banks and 14,000 businesses had failed and four million people were unemployed.
In an effort to bring relief newly elected President, Grover Cleveland (1893–1897), then in his second term, repealed the Silver Purchase Act. This caused silver prices to drop dramatically and brought economic devastation to parts of the West. A depression with widespread unemployment lasted from late 1893 through much of 1894. Violent strikes erupted, including the Pullman Strike in 1894. Jacob Coxey, a small businessman, led his "army" of unemployed on a march from Ohio to Washington, D.C. to present Congress with a demand for creating jobs, mostly on road repair.
Cleveland arranged for Eastern bankers including J. P. Morgan to purchase specially issued U.S. bonds to help replenish the gold reserves. This action raised public fears over the increasing influence of East financiers.
Due to poor European agricultural harvests in 1897, the export of American produce significantly increased the circulation of gold. In addition, the domestic production of gold increased steadily through the 1890s with gold discoveries in the Klondike region of Alaska. The economy rebounded by 1898.
While the recurrent business cycles left many Americans bankrupt foreign investors also lost millions in each panic episode. The pattern constantly repeated itself. Foreign investors would avoid investment in U.S. securities immediately following a economic downturn and contraction. Then as domestic investors began making fortunes with securities at lowered prices and economic expansion growing, the foreign investors would be lured back only to suffer another panic and downturn.
Such financial business cycles of recurrent panics through the late 19th century established a public mood for substantial economic reform. A major factor behind the dramatic financial swings during this period was a lack of public confidence in the largely unregulated economic system, particularly given extensive political and business corruption. Reformers sought increased protection against concentrations of economic power in the hands of a few private financiers and enhanced stability for foreign as well as domestic investors.
The ultimate bailout of the Treasury came from Europeans and their best-known agents in New York. Despite eighty years of progress, the situation appeared to have changed little since the War of 1812. This was annoying to many advocates of central banking because two private bankers managed to perform central banking operations for the United States, charging a fee in the process.
charles r. geisst, wall street: a history, 1997
See also: Jacob Coxey, Pullman Strike
Sobel, Robert. Panic on Wall Street: A History of America's Financial Disasters. New York: Macmillan, 1968.
Van Vleck, George W. The Panic of 1857: An Analytical Study. New York: Columbia University Press, 1943.