A Panic Stands Between the Old Economy and the New


On this day in economic and business history ...

The Panic of 1893 reached its frenzied apex on May 5, 1893. This event, and the depression that followed it, represent a major turning point in the economic growth of the United States. Let's take a good look at what happened that day, and how it changed the country.

The signs were not always obvious, but by the spring of 1893 it was increasingly apparent that the American economy was slowing. Construction of all sorts had been in decline for the past year. Consumption and production trends fell across a broad range of materials (cotton, rubber, iron, coal, crude oil, and so on) throughout the early months of 1893. Vicious cycles of overproduction and weather-diminished poor harvests had ground all prosperity out of agriculture. Railroad shares, which had driven a huge investment boom through the decade's early years, were starting to wobble, as many shaky business models became apparent throughout the sector.

By the end of trading on May 5, 1893, the bubble had well and truly burst, and the Panic of 1893 had taken hold. The day's trading on the stock exchange floor was frenzied enough to be later memorialized in an illustration in Frank Leslie's Illustrated Newspaper, printed two weeks later:

"The recent panic scene in the New York Stock Exchange on the morning of Friday, May 5th," published on May 18, 1893 in p. 322 of Frank Leslie's Illustrated Newspaper.
Retrieved from Wikipedia via the U.S. Library of Congress.

"All through the trading hours the brokers had been under the most intense of strains; they had seen three failures, accompanied by almost unheard-of slumps in securities, and, gathered on the floor of the Stock Exchange, they had cheered wildly when 3 o'clock struck and business for the day was over," wrote The New York Times of that hectic day. The general attitude of the day was not unlike that seen after several days of steep declines during the Crash of 1929, when highly engaged participants refused to believe they had only drawn closer to the precipice, and had not actually touched bottom.

Three trading houses -- S. V. White, Ferris & Kimball, and W.L. Patton -- all failed on May 5, and the news contributed to the bedlam seen above. Some of the most exciting stocks of the day, including the one-year-old 19th-century technology conglomerate General Electric , suffered precipitous intraday losses. GE's shares lost 30% of their value a short time after the opening bell, but a late-day recovery shaved its loss to a somewhat more tolerable 7%. It took trading of a mere 29,100 GE shares to cause so much panic, and only 755,000 total shares were traded on May 5.

The National Cordage Company, which endured a multi-day collapse that was one key trigger of the panic, ended the day slightly higher after news broke that the insolvent rope-making trust had been placed in receivership. "Thus the great Cordage collapse of 1893 came to an end," wrote the Times. Of course, this also meant that the company itself had essentially come to an end -- little mention is made of it in the historical records after this year. But no one wanted to say that in print at the time.

The Panic of 1893, rather than drawing economic woes to a close as it ended, instead exacerbated the recession already under way. Gold shortages, commodity devaluations, widespread business failures and bank runs, and soaring unemployment all attacked the American economy simultaneously at a critical time in its industrial development. David O. Whitten of Auburn University writes on the post-Civil-War economic development that led to the Panic of 1893:

The post-Civil War generation saw an enormous growth of manufacturing. Industrial output rose by some 296 percent, reaching in 1890 a value of almost $9.4 billion. In that year the nation's 350,000 industrial firms employed nearly 4.75 million workers. Iron and steel paced the progress of manufacturing. Farm and forest continued to provide raw materials for such established enterprises as cotton textiles, food, and lumber production. Heralding the machine age, however, was the growing importance of extractives -- raw materials for a lengthening list of consumer goods and for producing and fueling locomotives, railroad cars, industrial machinery and equipment, farm implements, and electrical equipment for commerce and industry. The swift expansion and diversification of manufacturing allowed a growing independence from European imports and was reflected in the prominence of new goods among U.S. exports. Already the value of American manufactures was more than half the value of European manufactures and twice that of Britain.

For the first time in American history, a significant number of people were employed in something akin to modern industry. Estimates of unemployment during this time (there were no official figures on unemployment until the Great Depression era) show that more than 10% of the working populace was out of a job from 1893 all the way through 1898, a stretch of workforce misery that would remain unequaled until the Great Depression.

Agriculture accounted for a mere 19% of gross national product by 1890, well below the 30% contribution of manufacturing and mining. However, agriculture had spread far across the heartland and still made up 40% of the workforce. Many small farms were heavily indebted -- by one contemporary estimate, 2.3 million farms held mortgages worth a collective $2.2 billion in 1890, which amounted to some 15% of national GDP at the time. Many farms faced foreclosure as the economy went into a tailspin, and farmers saw no relief from crop prices, under persistent deflationary pressure even as yields plunged as a result of poor weather conditions.

Unemployed laborers staged mass marches on Washington, and many laborers undertook a wave of strikes (which often turned violent) that set the stage for the workers' populism of the Great Depression and beyond. Political reactions to the way large business trusts of the era (such as the Cordage trust) could undermine the economy led to the "trust-busting" era of subsequent decades -- but the immediate aftermath of the panic would actually create more trusts as large businesses consolidated to avoid failure.

Rigid adherence to the gold standard also proved disastrous, and legendary banker J.P. Morgan and his bank of the same name -- now known as JPMorgan Chase -- were eventually forced to step in and supply gold to the Treasury in 1895 just to maintain minimally acceptable levels of gold in the vaults. This was one of Morgan's earlier efforts to be a "Federal Reserve of one" -- his intervention in the Panic of 1907 tipped the national conversation toward creating the Federal Reserve, so as to avoid any further situations where one man might so control the fate of the nation's economy. At the same time, many small farmers supported a move to bimetallism, under which payment in silver might create inflation and thus ease pricing pressure on indebted farms. The Klondike Gold Rush, which flooded American markets with new gold mined from Alaskan territories, would actually provide a major economic lift out of the depression once it began in earnest in 1897.

The widespread failure of overextended railroad enterprises also had another unexpected consequence. In 1893, Charles Dow worked for the precursor to The Wall Street Journal and had been offering a "Transportation Average" of 12 stocks -- all but three were railroads, and two others were waterway shippers -- for readers to follow the moves of the market. In 1896, as the depression ground on to its final stages, Dow decided to adopt a new model, dubbed the Dow Jones Industrial Average and containing not one rail-exclusive stock on its list of 12. These 12 stocks (later expanded to 20, and finally to 30 in 1928) were meant to better represent a cross-section of American industry. The launch of the new Dow index was well timed, as the American economy developing after the crash far more closely resembled a modern industrial powerhouse than the agrarian society from which it had arisen.

If the Great Depression was the economic spark that helped create the present relationship between Americans and their government, it was the Panic of 1893 that laid the foundations to make it possible.

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The article A Panic Stands Between the Old Economy and the New originally appeared on Fool.com.

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