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The Depression of the 1890s: Causes
Early in 1893, shortly before Grover Cleveland assumed the presidency for the second time, a seemingly minor but ominous economic event occurred: the Philadelphia and Reading Railroad, once a thriving and profitable line, went into bankruptcy. Like other railroads, Philadelphia and Reading had borrowed heavily to lay more tracks and make costly improvements, such as new stations and bridges. But over-expansion cut into revenues. Profits dwindled, and the company was unable to pay its debts.
Fig. 1- This map from 1893 shows the extent and the rapid expansion of the Philadelphia and Reading Railroad that led to its bankruptcy in 1893
Panic of 1893
Soon, a similar issue began to emerge in manufacturing. Banks suffered too. As primary lending agents, their problems compounded when customers defaulted. The failure of the National Cordage Company in May 1893 set off a chain reaction of business and bank closings. During the first four months of 1893, 28 banks failed. By May, the number had grown to 54; in June, it reached 128.
Output at the McCormick farm machinery factories was nine times greater in 1893 than in 1879, but revenues only tripled. To compensate, the company tried to boost profits by automating production - another heavy expense- and squeezing more work out of fewer laborers. But this strategy only enlarged debt and increased unemployment. And it pushed unemployed workers into the same plight as their employers: they could not pay their creditors.
This snowballing effect created the foundation for the worst economic depression the U.S. had yet to experience between 1893 and 1897.
Depression of the 1890s: Facts
Falling prices and mounting unemployment arrived in the wake of business failures. At one time or another, nearly twenty percent of the U.S. labor force was out of work during the Depression.
Everywhere families had to cut back on expenditures. Falling demand caused the cost of living to drop by seven percent between 1892 and 1895, but that decline was more than offset by layoffs and wage cuts. Many people could not afford necessities. New York police estimated that twenty thousand homeless and jobless people roamed the city's streets.
Economic Impact of the Depression of the 1890s
As the Depression began to affect all aspects of the U.S. economy, the effects of the Depression itself began to change the economic institutions of the U.S. A significant currency crisis struck, forcing legislative and executive action, and new financial systems emerged to pull the nation out of economic turmoil.
Fig. 2 - A depiction of panicked stockbrokers in 1893
Panic of 1893: Effects
- The Sherman Silver Purchase Act of 1890 had committed the government to buy 4.5 million ounces of silver each month
- The ratio of one ounce of gold for every sixteen ounces of silver
- The western mining boom made silver more plentiful, and its value relative to gold fell accordingly
- The government exchanged gold for the less valuable silver every month
- Businesspeople at home and abroad began to exchange paper money and securities for gold
- The nation's gold reserves dwindled, falling below $100 million in April 1893
- President Cleveland struck a deal with J.P. Morgan for gold in exchange for nearly $65 million worth of federal bonds
- However, after a slight improvement in 1895, the economy plunged again.
The $100 million level was psychologically significant. If businesspeople believed the country's gold reserve was disappearing, they would lose confidence in its economic stability and refrain from investing. If the dollar were to depreciate, they would stop investing in American economic growth. Yet the lower the gold reserve dropped, the more people rushed to redeem their money and securities - to get their gold before it disappeared. The panic spread, causing further bankruptcies and unemployment.
New Economic Structures Emerge
In the final years of the 1800s, new gold discoveries, good harvests, and more competent industrial growth brought better times. Despite few Americans realizing it, the Depression had hastened the crumbling of an old system and the emergence of a new one.
The process of industrialization and technological change had been underway for some time. Since the 1850s, railroads had been at the center of American economic development, opening new markets, boosting steel and coal production, spawning new industries, and expanding banking and finance.
By the 1890s, railroads were overextended: their reckless investments inevitably crumbled. And when railroads collapsed, they pulled other industries down with them. In the first half of 1893, for example, thirty-two steel companies failed. A ripple effect occurred across banks, agricultural sectors, and local businesses. The downward spiral reversed late in 1897, but the Depression left deep economic and social scars.
The Social Impact of the Depression of the 1890s
The Depression bared social as well as economic problems to the industrial system. For half a century, technological and organizational changes have increasingly widened the gap between employers and employees. By the 1890s, workers' protests against exploitation threatened economic upheaval. In 1894, when the American economy plunged, there were over thirteen hundred strikes and countless riots, such as the Pullman Strike of 1894. The violence reached an alarming pitch in several places, and radical rhetoric escalated.
Fig. 3- Pullman Strikers outside the Arcade Building in Pullman, Chicago in 1894
Contrary to business leaders' fears, all the protesters were not anarchists or communists from Europe who came to sabotage American democracy. The disaffected included thousands of rural, small-town, and urban men and women who wanted a better chance, regardless of how the government was organized. Far from giving birth to radicalism, the uncertainties of the age merely brought to the surface an activist undercurrent supported by labor unions, the Farmers Alliances, a growing populist and socialist movement, and other cooperative actions that flowed throughout American history.
The Depression of the 1890s: Significance
The economic downturn of the 1890s created the economic and social environment for change. It was during this Depression that progressive era organizations began to form, garnering support from those Americans affected by the Depression. Labor Unions see an increase in membership, women suffrage movements spread, temperance movements and calls for prohibition begin, and a growing distrust in big business takes root.
All of these sentiments came to fruition in the first decade of the twentieth century as the Progressive Era politics and social movements attempted to rectify the causes of the Depression of the 1890s and alleviate the damage.
It was in the aftermath of the Depression of the 1890s that women's suffrage movements took hold, urban reforms were put in place, workplace reforms occurred, and government "trustbusting" of monopolies began as a means of decentralizing wealth to avoid the ripple effects of an industry's potential collapse.
Economic Recession - Key takeaways
- In 1893, the United States began to spiral into what would be, at the time, the worst economic downturn in U.S. history. This event would significantly influence economic policies and social movements shaping the U.S. as it entered the twentieth century.
- Bankruptcies in the Railroad industry had a ripple effect across the U.S. economy that saw businesses and banks fail and unemployment rise to nearly 20%.
- The depression caused issues in currency value, gold and silver reserves and value, and changed economic systems within the U.S.
- The social impact of the depression saw a rise in strikes, such as the Pullman Strike of 1894. It increased the popularity of populist movements, and socialist movements had already taken root in the United States.
- The significance of the depression of the 1890s was that it laid the foundation for the growing progressive movement and the Progressive Era of the 1910s.
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Frequently Asked Questions about Depression of the 1890s
What were the political consequences of the depression of the 1890s?
As the Depression deepened, currency problems reached a critical stage. The Sherman Silver Purchase Act of 1890 had committed the government to buy 4.5 million ounces of silver each month. The payment was to be in gold, at the ratio of one ounce of gold for every sixteen ounces of silver. But the western mining boom made silver more plentiful, and its value relative to gold fell accordingly. Thus, the government exchanged gold, whose worth remained stable, for less valuable silver every month.
What was identified as the cause of the depression in the 1890s?
Early in 1893, shortly before Grover Cleveland assumed the presidency for the second time, a seemingly minor but ominous economic event occurred: the Philadelphia and Reading Railroad, once a thriving and profitable line, went into bankruptcy.
What was the Panic of 1893?
As primary lending agents, their problems compounded when customers defaulted. The failure of the National Cordage Company in May 1893 set off a chain reaction of business and bank closings. During the first four months of 1893, 28 banks failed. By May, the number had grown to 54; in June, it reached 128.
What was the defining moment that started the panic of 1893?
Early in 1893, shortly before Grover Cleveland assumed the presidency for the second time, a seemingly minor but ominous economic event occurred: the Philadelphia and Reading Railroad, once a thriving and profitable line, went into bankruptcy. Like other railroads, Philadelphia and Reading had borrowed heavily to lay more tracks and make costly improvements, such as new stations and bridges. But over-expansion cut into revenues. Profits dwindled, and the company was unable to pay its debts.
What were 3 major strikes in the 1890s?
The Pullman Strike, The Homestead Strike, and the Great Strike of 1877.
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