11.2 Panic of 1893
9 min read•august 21, 2024
The was a major economic crisis that exposed weaknesses in America's rapidly industrializing economy. Caused by overspeculation, agricultural decline, and issues, it led to widespread bank failures, business bankruptcies, and record .
The crisis prompted significant government and private sector responses, reshaping economic policies and business practices. It had lasting impacts on industries, social structures, and politics, influencing future approaches to economic management and setting the stage for Progressive Era reforms.
Causes of the panic
- Panic of 1893 marked a significant economic crisis in American business history, highlighting vulnerabilities in the rapidly industrializing economy
- Rooted in a combination of domestic economic issues and international financial pressures, the panic exposed weaknesses in the U.S. financial system
- Resulted in a severe depression lasting several years, reshaping economic policies and business practices
Economic instability factors
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- Overspeculation in railroads led to market saturation and decreased profitability
- European economic downturn reduced foreign investment in U.S. markets
- Lack of a central banking system left the economy vulnerable to financial shocks
- Depletion of U.S. gold reserves raised concerns about currency stability
Agricultural sector decline
- Overproduction of crops led to falling prices and reduced farm incomes
- Drought in western states exacerbated agricultural struggles
- High mortgage debt levels among farmers increased financial strain
- Competition from international markets further depressed agricultural commodity prices
Railroad overexpansion issues
- Excessive railroad construction created overcapacity in the transportation sector
- Declining freight rates due to competition reduced railroad profitability
- High fixed costs and debt burdens made railroads vulnerable to economic downturns
- Bankruptcy of major railroad companies (Philadelphia and Reading Railroad) triggered wider financial panic
Silver vs gold standard
- Debate over bimetallism vs. gold standard created monetary policy uncertainty
- of 1890 required government to purchase silver, depleting gold reserves
- Concerns about U.S. ability to maintain gold standard led to capital flight
- Silver demonetization in other countries (India) further destabilized global silver markets
Key events and timeline
- Panic of 1893 unfolded as a series of cascading economic failures, illustrating the interconnectedness of various sectors in the late 19th-century American economy
- Timeline of events demonstrates how initial financial tremors quickly spread to affect multiple industries and regions
- Crisis highlighted the need for more robust financial regulations and economic safeguards
Stock market crash
- May 5, 1893: National Cordage Company declares bankruptcy, triggering stock market panic
- New York Stock Exchange experiences sharp decline in stock prices
- Investor confidence plummets, leading to widespread sell-offs
- Railroad stocks particularly hard hit due to sector's overexpansion and debt levels
Bank runs and failures
- Depositors rush to withdraw funds from banks, fearing insolvency
- Hundreds of banks suspend operations or close permanently
- National Bank of Kansas City failure in July 1893 intensifies banking crisis
- Lack of deposit insurance exacerbates public fear and financial instability
Business bankruptcies
- Over 15,000 businesses fail during 1893, a record high at the time
- Manufacturing companies struggle with reduced demand and tightening credit
- Small businesses particularly vulnerable due to limited capital reserves
- Bankruptcies lead to widespread unemployment and economic contraction
Unemployment spike
- Unemployment rate rises to approximately 18% by 1894
- Millions of workers lose jobs across various industries
- Urban areas experience severe unemployment, leading to social unrest
- Lack of social safety net programs exacerbates hardships for unemployed workers
Political and economic responses
- Panic of 1893 prompted significant government and private sector interventions, shaping future approaches to economic crises in American business history
- Responses highlighted tensions between different economic philosophies and interest groups
- Crisis management efforts set precedents for handling future financial emergencies
Cleveland administration actions
- President Grover Cleveland calls special session of Congress to address crisis
- Administration focuses on maintaining gold standard to preserve economic stability
- Government reduces spending and increases tariffs to bolster federal revenues
- Cleveland resists calls for direct federal aid to unemployed, citing limited government role
Gold reserve depletion
- U.S. Treasury's gold reserves fall below $100 million, threatening gold standard
- negotiates loans with to replenish gold reserves
- Government issues bond sales to raise gold, maintaining confidence in U.S. currency
- Controversy over reliance on private bankers to support public finances
J.P. Morgan's intervention
- J.P. Morgan organizes syndicate of bankers to purchase government bonds
- Morgan-led group provides $65 million in gold to U.S. Treasury in February 1895
- Intervention helps stabilize financial markets and restore confidence
- Morgan's role highlights growing influence of private financiers in national economic affairs
Repeal of Sherman Silver Act
- Cleveland pushes for repeal of Sherman Silver Purchase Act to stem gold outflows
- Congress passes repeal on November 1, 1893, after contentious debate
- Repeal reduces government silver purchases, easing pressure on gold reserves
- Action deepens political divide over monetary policy, fueling populist movement
Impact on industries
- Panic of 1893 had far-reaching effects across multiple sectors of the American economy, reshaping industrial landscapes
- Crisis exposed vulnerabilities in key industries, leading to restructuring and consolidation
- Impact varied by sector, with some industries experiencing long-lasting changes in structure and practices
Railroad industry collapse
- Nearly one-fourth of railroad track mileage enters receivership
- Major railroad bankruptcies (Northern Pacific, Union Pacific) shake investor confidence
- Overcapacity leads to price wars and reduced profitability
- Railroad reorganizations result in consolidation and improved efficiency post-crisis
Manufacturing sector decline
- Factory output decreases by 20-30% during peak of crisis
- Steel production falls dramatically, with many mills shutting down temporarily
- Textile industry experiences widespread layoffs and reduced production
- Durable goods manufacturers particularly hard hit due to decreased consumer spending
Agricultural sector struggles
- Farm prices continue to decline, exacerbating pre-existing agricultural depression
- Many farmers lose their land due to foreclosures and inability to repay mortgages
- Rural banks fail at high rates, further restricting credit availability for farmers
- Crisis accelerates trend of farm consolidation and migration to urban areas
Banking system weaknesses
- Lack of central bank leaves financial system vulnerable to panics
- State and national banks fail in large numbers, eroding public trust in banking system
- Clearing house loan certificates emerge as temporary solution to liquidity crisis
- Crisis highlights need for banking reform, influencing later creation of Federal Reserve System
Social consequences
- Panic of 1893 had profound social impacts, revealing and exacerbating inequalities in American society
- Crisis led to significant demographic shifts and social movements that shaped future American business and political landscapes
- Social upheaval resulting from the panic influenced public attitudes towards government's role in economic affairs
Unemployment and poverty
- Widespread job losses lead to increased poverty rates across the country
- Charity organizations and soup kitchens struggle to meet growing demand for assistance
- Homelessness increases, with "Hoovervilles" (tent cities) appearing in urban areas
- Long-term unemployment leads to skill erosion and lasting economic hardship for many workers
Labor unrest and strikes
- Pullman Strike of 1894 becomes major labor conflict, disrupting national rail traffic
- American Railway Union led by Eugene V. Debs organizes nationwide railroad strike
- Federal troops intervene to break , escalating tensions between labor and government
- Homestead Strike and other labor conflicts highlight growing industrial unrest
Coxey's Army march
- Jacob Coxey leads "army" of unemployed workers on march to Washington D.C.
- Protesters demand public works programs to create jobs for unemployed
- March gains national attention, highlighting severity of unemployment crisis
- Government's response to march reflects reluctance to intervene directly in economy
Urban vs rural effects
- Urban areas experience higher unemployment rates and social unrest
- Rural communities suffer from declining farm incomes and bank failures
- Migration from rural to urban areas accelerates, changing demographic patterns
- Disparities in impact fuel regional political divisions and populist sentiments
Long-term economic effects
- Panic of 1893 had lasting impacts on American business practices and economic policies
- Crisis led to significant structural changes in various industries and financial systems
- Long-term effects of the panic influenced economic thinking and policy-making for decades
Depression of 1893-1897
- Economic contraction lasts for four years, one of the longest in U.S. history
- Gross National Product declines by 10% during the depression period
- persists, with consumer prices falling by 18% between 1893 and 1897
- Recovery begins in 1897, aided by gold discoveries and agricultural price increases
Shift in economic policies
- Crisis fuels debate over role of government in managing economy
- Monetary policy shifts towards stronger support for gold standard
- Increased support for antitrust measures to address industrial concentration
- Growing recognition of need for more robust financial regulations and institutions
Business consolidation trends
- Economic turmoil accelerates trend towards mergers and acquisitions
- Formation of large trusts and holding companies in various industries
- J.P. Morgan and other financiers play key role in industrial reorganizations
- Consolidation leads to increased efficiency but also raises concerns about monopoly power
International trade implications
- U.S. export growth slows during crisis, affecting balance of trade
- Debate over tariff policies intensifies, influencing future trade legislation
- Crisis highlights interconnectedness of global financial markets
- U.S. economic troubles contribute to global economic slowdown in 1890s
Political ramifications
- Panic of 1893 had significant political consequences, reshaping party alignments and policy debates
- Crisis fueled populist movements and challenges to established political and economic orders
- Political fallout from the panic influenced American politics well into the 20th century
Rise of populist movement
- People's Party (Populists) gains support, especially in agricultural regions
- Populists advocate for free silver, graduated income tax, and other economic reforms
- Movement challenges two-party system, aligning with Democrats in some elections
- Populist ideas influence future progressive reforms and economic policies
1896 presidential election
- Economic issues dominate campaign, particularly debate over gold vs. silver standard
- William Jennings Bryan's "Cross of Gold" speech galvanizes support for free silver
- Republican William McKinley defeats Bryan, solidifying gold standard support
- Election results reflect urban-rural divide and regional economic interests
Debate over monetary policy
- Silver vs. gold standard controversy becomes central political issue
- Bimetallism supporters argue for monetary expansion to aid debtors and stimulate economy
- Gold standard advocates emphasize currency stability and international trade benefits
- Debate shapes party alignments and influences future monetary policy decisions
Progressive era roots
- Economic hardships of 1890s fuel demand for social and economic reforms
- Crisis highlights need for stronger regulations of banks and corporations
- Growing support for government intervention to address economic inequalities
- Panic's aftermath contributes to rise of Progressive movement in early 20th century
Recovery and aftermath
- Recovery from the Panic of 1893 was gradual, with lasting impacts on American business practices and economic policies
- Process of recovery revealed strengths and weaknesses in the U.S. economic system
- Lessons learned from the crisis influenced future approaches to economic management and financial regulation
Economic recovery factors
- Agricultural prices begin to rise in 1897, boosting farm incomes
- Industrial production increases, driven by technological advancements and efficiency gains
- Foreign demand for U.S. goods grows, improving balance of trade
- Banking system stabilizes, with stronger institutions emerging from crisis
Gold discoveries impact
- Klondike Gold Rush and other discoveries increase global gold supply
- Expanded gold reserves help stabilize currency and restore confidence in financial system
- Increased money supply contributes to mild inflation, benefiting debtors
- Gold standard strengthened, influencing monetary policy for decades
Industrial restructuring
- Many industries emerge from crisis more consolidated and efficient
- Vertical integration becomes more common in manufacturing and other sectors
- Improved management practices and cost-cutting measures increase productivity
- Some industries (steel, oil) experience rapid growth in post-crisis period
Lessons for future crises
- Recognition of need for more robust financial system leads to banking reforms
- Crisis highlights importance of maintaining adequate gold reserves
- Experience informs handling of future panics (Panic of 1907)
- Debate over government's role in economy continues to shape economic policies
Key Terms to Review (19)
American Federation of Labor: The American Federation of Labor (AFL) was a national federation of labor unions in the United States, founded in 1886 by Samuel Gompers and others. It aimed to organize skilled workers into national unions and promote collective bargaining to improve labor conditions, connecting with various aspects of the industrial landscape, worker rights, and economic challenges of the time.
Bank failure: A bank failure occurs when a bank becomes insolvent and is unable to meet its obligations to depositors and creditors. This situation often leads to the closure of the bank, requiring regulatory intervention to protect the financial system and depositors' funds. Bank failures can trigger widespread economic repercussions, affecting both individual savings and the broader banking industry.
Classical economics: Classical economics is a school of thought in economic theory that emerged in the late 18th and early 19th centuries, emphasizing the importance of free markets, competition, and self-regulating behavior of economies. This approach suggests that individuals acting in their self-interest can lead to overall economic prosperity through mechanisms like supply and demand. The principles of classical economics are critical to understanding the debates surrounding monetary policy and economic crises.
Cleveland Administration: The Cleveland Administration refers to the two non-consecutive terms of Grover Cleveland as the 22nd and 24th President of the United States, from 1885 to 1889 and 1893 to 1897. This administration is significant for its commitment to economic reform and fiscal conservatism, particularly during times of financial crises, such as the Panic of 1893, when it faced severe challenges including national economic instability and high unemployment rates.
Deflation: Deflation is the decrease in the general price level of goods and services in an economy over a period of time. This phenomenon often results from a reduction in the supply of money or credit, leading to increased purchasing power of money. It can also occur during periods of economic downturns, creating a cycle where consumers delay spending in anticipation of lower prices, further contracting economic activity.
Economic depression: An economic depression is a prolonged period of significant decline in economic activity, typically characterized by reduced consumer spending, high unemployment rates, and widespread business failures. This term describes more severe downturns compared to recessions and often leads to long-lasting effects on the economy and society, as seen during critical historical events.
Interstate Commerce Act: The Interstate Commerce Act of 1887 was a landmark piece of legislation that aimed to regulate the railroad industry and its monopolistic practices, ensuring fair rates for shipping goods across state lines. It marked the first federal effort to regulate private industry, driven by widespread public demand for government intervention against unfair railroad practices that were prevalent during the rapid expansion of transportation technologies.
J.P. Morgan: J.P. Morgan was a prominent American banker and financier in the late 19th and early 20th centuries, known for his significant influence in the financial sector and his role in consolidating various industries. He played a critical role in shaping the modern corporate landscape by reorganizing struggling companies and creating powerful trusts and holding companies, especially in the steel industry. His financial strategies contributed to the stability and growth of the stock market during turbulent economic times.
Keynesian Economics: Keynesian economics is an economic theory that emphasizes the role of government intervention in stabilizing the economy, particularly during periods of recession. It argues that active fiscal and monetary policies can help manage demand, influence employment levels, and spur economic growth, contrasting with classical theories that advocate for limited government involvement.
Monetary Policy: Monetary policy refers to the actions taken by a country's central bank to manage the money supply and interest rates to influence economic activity. It plays a crucial role in stabilizing the economy by controlling inflation, consumption, and employment levels, impacting how banks lend money and how consumers spend.
Over-speculation: Over-speculation refers to the excessive investment in assets, typically based on inflated expectations of future returns, rather than on their intrinsic value. This practice can lead to unsustainable financial bubbles, where asset prices rise rapidly, only to crash when the reality fails to meet expectations. In the context of economic downturns, over-speculation can exacerbate financial crises, as it creates an environment ripe for panic and instability.
Panic of 1893: The Panic of 1893 was a significant economic depression in the United States that began in May 1893, characterized by a collapse of the stock market, widespread bank failures, and high unemployment. This event marked a crucial moment in American economic history, revealing the vulnerabilities of the financial system and leading to important reforms like the Interstate Commerce Act, which aimed to regulate railroads and stabilize the economy.
Pullman Company: The Pullman Company was a significant American manufacturing company, founded by George Pullman in the 19th century, best known for producing luxury railroad cars. The company became famous for its innovative sleeping cars, which revolutionized rail travel in the United States. Its impact on the industry and workers was profound, especially during the economic turmoil surrounding the Panic of 1893, which highlighted labor disputes and economic inequality.
Railroad industry: The railroad industry refers to the network of railways and companies that transport goods and passengers using trains. This industry was a crucial driver of economic growth in the United States during the 19th and early 20th centuries, facilitating trade, expansion into new territories, and the rise of influential business leaders. The railroad industry also played a pivotal role during times of economic turmoil, influencing events like financial panics and shaping the country's infrastructure and labor landscape.
Recession: A recession is a significant decline in economic activity across the economy that lasts for an extended period, usually visible in real GDP, income, employment, industrial production, and wholesale-retail sales. It often leads to increased unemployment and reduced consumer spending. Understanding recession helps to analyze historical economic downturns, such as those in the 19th century, where financial instability created widespread economic challenges.
Sherman Silver Purchase Act: The Sherman Silver Purchase Act, enacted in 1890, was a U.S. federal law that mandated the government to purchase silver and issue currency backed by that silver. The act aimed to increase the money supply and stimulate the economy, responding to the economic struggles of the time, particularly as it led to inflation and concerns over deflation.
Steel industry: The steel industry refers to the sector involved in the production of steel, a critical material for construction, manufacturing, and infrastructure development. This industry played a pivotal role in America's industrial growth, becoming synonymous with the rise of powerful industrialists and significant economic events.
Strikes: Strikes are organized work stoppages by employees to protest against their employers, typically aimed at improving working conditions, wages, or other labor-related issues. They are a critical tool used by labor unions to assert workers' rights and negotiate better terms with management. Strikes can significantly impact industries and economies, often leading to heightened tensions between workers and employers.
Unemployment: Unemployment refers to the state of being without a job while actively seeking employment. It is a significant economic indicator that reflects the health of an economy and can have far-reaching social and political implications. When unemployment rates rise, it often signals economic distress, leading to lower consumer spending and decreased production, which can further exacerbate economic downturns.