Friday, September 11, 2009

Panic Blogging: 1893

The panic of 1893 and the resulting depression that lasted for the next five years were by far the worst economic collapse in American history before the Great Depression.

This story is pretty similar to 1873--corruption, a railroad bubble, terrible financial policies, deep and long-lasting suffering by the poor. Little had changed in American economic life between 1873 and 1893. In fact, I'd argue that the nation learned virtually nothing from that previous crisis. Corporations still owned Congress and state legislatures. The regulatory state was completely nonexistent. Even the most tame anti-business legislation like the Sherman Anti-Trust Act was interpreted by the courts to apply only to labor, not to business. The reinterpretation of the 14th amendment to given corporations the rights of individuals was well underway. Robber barons controlled the American economy while presidents and leading politicians were in their pockets, ready to do the bidding of their corporate masters.

Like in the 1870s and like in the 2000s, the economic boom of the late 1880s and early 1890s was built upon speculative bubbles that literally had to burst. And like in the 1870s, it was railroad construction that fueled the bubble. Many companies had gone deep into debt to both finance their own construction and to take over other railroads. Meanwhile, severe poverty overwhelmed American farmers upon which much railroad traffic was based. Still a majority of the American population in 1893, the terribly high prices railroads charged farmers to ship their products drove many of them to collapse. When the Philadelphia and Reading Railroad declared bankruptcy in February 1893, sparking the panic, farmers suffered even more as prices for their goods fell.

Banks failed around the country, as did leading railroads. The Atchinson, Topeka, and Santa Fe Railroad went bankrupt, which was a huge and powerful railroad system. It's probably not quite on the level of Countrywide going under, but it had a major downward effect on the economy. Unemployment shot up to nearly 20%; given that so many poor people were working as farmers during these years, that number is much higher than it first seems.

The economic policies that helped lead to the panic and subsequent depression, particularly a lack of currency in the U.S. because of the nation's commitment to the gold standard, helped spur the Populists on. This movement of farmers and mining interests who wanted the U.S. to allow silver as the basis of its currency had already main major strides in the late 1880s and early 1890s. Ironically though, increased support for their positions, particularly on silver, doomed them in the end because their platform was co-opted by William Jennings Bryan and the Democrats in 1896.

Ultimately, what brought the nation out of the panic was nothing Washington did. Because Washington, still under the control of big business, did virtually nothing. It's that the currency supply significantly eased after the discovery of gold in Alaska and other parts of the world in the 1890s, increasing the money supply and credit availability, leading to another economic boom that would last until the late 1900s.