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Saturday, October 23, 2010

A US History of 'Panic' - Part III- 1884-1897

This is the third installment in 'A US History of Panic'.  To those who have taken the time to read the first two installments, it is A&G's pleasure to educate &  inform you on the constant financial ups and downs through this nation's history.  To those who didn't bother reading or only skimmed, I suppose its like the adage suggests- you can pull a mule to water but can't make it drink.  Onto part 3 of the history lesson...

Panic of 1884

~ Image depicting Panic of 1884

This was a panic during the Recession of 1882-85.  Gold reserves of Europe were depleted and the New York City national banks, with tacit approval of the U.S. Treasury Dept. halted investments in the rest of the US and called in outstanding loans. A larger crisis was averted when New York Clearing House bailed out banks in risk of failure. Nevertheless, more than 10,000 small firms failed.

Panic of 1893

This was a serious economic depression similar to the Panic of 1873, which was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. Until the Great Depression, the Panic of '93 was considered the worst depression the United States had ever experienced.

The 1880s were a period of remarkable economic expansion in the US, one which eventually became driven by railroad speculation. Railroads were over-built, and many companies continued growth by taking over competitors, endangering their own stability. In addition, many mines were opened (frequently with rail connections), and their products, especially silver, began to flood the market. Farmers, particularly in the Midwest, suffered a series of droughts which left them short of cash to pay their debts, which drove down the value of their land.

The 'Free Silver' movement arose, gaining support from farmers (who sought to invigorate the economy and cause inflation, thus allowing them to repay their debt with cheaper dollars) and mining interests (who sought the right to turn silver directly into money). The Sherman Silver Purchase Act of 1890, required the U.S. government to buy millions of ounces of silver (driving up the price of the metal and pleasing silver miners) for coining money (pleasing farmers and others) .

One of the first signs of trouble was the bankruptcy of the Philadelphia & Reading Railroad. Congress responded by repealling the Sherman Silver Purchase Act. As concern of the state of the economy worsened, people rushed to withdraw their money from banks and caused bank runs. The credit crunch rippled through the economy. A financial panic in the United Kingdom and a drop in trade in Europe caused foreign investors to sell American stocks to obtain American funds backed by gold. People attempted to redeem silver notes  for gold; ultimately the statutory limit for the minimum amount of gold in federal reserves was reached and US notes could no longer be successfully redeemed for gold. Investments during the time of the Panic were heavily financed through bond issues with high interest payments.

~ NYSE during Panic of 1893

 As the demand for silver and silver notes fell, the price and value of silver dropped. Holders worried about a loss of face value of bonds and many became worthless.  A series of bank failures followed along with bankruptcy of many other companies; in total over 15,000 companies and 500 banks failed (many in the west). According to high estimates, about 17%-19% of the workforce was unemployed at the Panic's peak. The huge spike in unemployment, combined with the loss of life savings kept in failed banks, meant that a once-secure middle-class could not meet their mortgage obligations. Many walked away from recently built homes as a result.

The severity was great in all industrial cities and mill towns. Farm distress was great because of the falling prices for export crops such as wheat and cotton.  A severe wave of strikes took place in 1894, most notably the bituminous coal miners' strike that spring, which led to violence in Pennsylvania, Ohio, and Illinois. Even more serious was the Pullman Strike which shut down much of the nation's transportation system in July, 1894.

The decline of the gold reserves stored in the U.S. Treasury fell to a dangerously low level, forcing President Cleveland to borrow $65 million in gold from Wall-Street banker JP Morgan in order to support the gold standard.  Many of the western silver mines closed and a large number were never re-opened. A significant number of western mountain narrow-gauge railroads, which had been built to serve the mines, also went out of business.  The U.S. economy began to recover in 1897. Confidence was restored with the Klondike Gold Rush and the economy began 10 years of rapid growth, until the Panic of 1907.

~  If there's one thing you, the reader should be taking from this, is that the entities that are causing all the economic pain and suffering today in 2010- banks, investment firms, Wall Street, speculators, investors- These are the same sinfully Evil entities which have caused misery and suffering for everyday people for the entirety of this nation's economic history.  The greed, lust for power and hunger for more money have caused every period of economic suffering-  from 1796 to the present.

Everyone wants their 'cut'- their piece of the profit pie and 'F' anyone who may get hurt in he process.  This is how the sociopathic financier thinks, and as this history lesson is meant to show, this mindset goes back farther back than 2007 or even the Great Depression.   And government's response to the economic elite is always to bend over with hands on ankles.

Part four- Panic of 1907 and Depression of 1920-21 coming soon

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