2 August 2010

The War of Wealth

Sometimes its’ worth looking back though history to see what we can lean from the past. Sometimes even Wikipedia has a better understanding of how an economic panic develops and what the lasting consequences can be than many of us who haven’t yet experienced living through a long lasting depression;-

The 1880s had seen a period of remarkable economic expansion in the United States. In time, the expansion became driven by speculation much like the tech bubble of the late 1990s except that the preferred technology of the time was railroads. The speculative bubble caused railroads to become vastly over-built. Also a frenzy ensued in which many companies tried to take over many others, despite seriously endangering their own stability to do so. In addition, many new mines were opened (frequently with rail connections), and their products, especially silver, began to flood the market. One of the first signs of trouble came on February 23, 1893, with the bankruptcy of the Philadelphia and Reading Railroad, which had greatly over-extended itself.

Resulting concerns over the state of the economy caused people to rush to withdraw their money from banks, leading to bank runs. The ensuing credit crunch rippled through the economy. Soon European investors began to only accept payment in gold. This of course, weakened the US gold reserves and further reduced the US dollar’s value. Consequently there was a clamour to redeem silver notes for gold (the US Dollar was a bi-metallic currency at this stage but the gap in perceived value between the 2 metals began to widen substantially feeding the demand for gold even more). 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 and liquidity had to be heavily financed through bond issues which had to offer high interest payments and yet credit remained scarce. Business suffered and The National Cordage Company (the most actively traded stock at the time) went into receivership as a result of its bankers calling their loans in response to rumours regarding the company’s financial distress. The company, a rope manufacturer, had tried, and failed, to corner the market for imported hemp. As the demand for silver and silver notes fell, the price and value of silver fell even further. Holders worried about a loss of face value of bonds, and in a self-fulfilling spiral many became worthless.

A series of bank failures quickly followed, and the Northern Pacific Railway, The Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad all failed. This was followed by the bankruptcy of many other companies; in total over 15,000 companies and 500 banks failed (many in the west). 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 by failed banks, meant that a once-secure middle-class could no longer meet their mortgage obligations. As a result, many walked away from recently built homes. It’s been written that “from this, the sight of the vacant Victorian (haunted) house entered the American mindset.” The inter-connectivity of all aspects of the economy and the speed with which contagion spread should be a warning to all of us today. By 1896 Broadway even ran a melodrama The War of Wealth which was inspired by the Panic of 1893.

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. Economic problems begat social distress:- “Coxey’s Army” was a highly publicized march of unemployed laborers from Ohio and Pennsylvania to Washington to demand relief. A severe wave of strikes took place in 1894, most notably a coalminers strike of the spring, which led to violence in Ohio and the Pullman Strike, which shut down much of the nation's transportation system in July, 1894. A prosperous and rapidly developing nation seemed to be falling apart overnight.

Politically, the Democrats and President Cleveland were blamed for the depression. The Democrats and Populists lost heavily in the 1894 state and Congressional elections, which marked the largest Republican gains in history and 2 years later the pro-gold, high-tariff Republicans led by William McKinley decisively defeated the pro-silver Democratic Presidential candidate William Jennings-Brown. 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. Many people abandoned their homes and came west. The growing railway towns of Seattle, Portland, Salt Lake City, Denver, San Francisco and Los Angeles took in these migrant populations, as did many smaller centers.

Eventually, America bounced back again but for those who lived through it the Panic must have seemed interminable and must have seemed as though the very fabric of their lives had been torn apart. When you’re living through it, the problem with history is that you don’t have the luxury that future generations have of knowing what the outcome is.