July 24, 2011

Panic of 1893

By Brandon Dupont, Ph.D.
While it was later eclipsed by the 1907 financial crisis and the Great Depression, the Panic of 1893 remains one of the most severe financial crises in American history. Its impact on Sierra County, New Mexico was lasting. Silver mining towns, like Kingston, were all but abandoned in short order.

This 1895 poster for the Broadway melodrama, The War of Wealth, depicted the national economic crisis, and the run on banks that effected lasting change at Kingston and silver mines in the West.  Library of Congress.

The panic, and the economic depression that followed through the year 1897, had wide-ranging effects on the national economy, including an unemployment rate that remained stubbornly above 10 percent for five consecutive years. Its impact goes beyond just the widespread bank runs and the negative effects of high, persistent unemployment; perhaps more importantly, the crisis brought the decades-long debate over the bimetallic standard to the forefront, culminating most colorfully in William Jennings Bryan’s 1896 presidential campaign. Bryan’s “Cross of Gold” speech ended with a flourish:  "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Named for U.S. Mint engraver,
George Morgan, the Morgan Dollar was
common currency in 1890. U.S. Mint.
Since bimetallism was an important factor in 1893, as evident in Bryan’s speech, a quick review should be helpful. Starting with the first Treasury Secretary Alexander Hamilton, the U.S. economy had been on a bimetallic standard. Under that standard, U.S. currency was equivalent to a certain quantity of gold and a certain quantity of silver; initially, the prices were set such that 15 ounces of silver were equivalent to 1 ounce of gold. Because of deviations between this official price and the world market price, only one of the two metals would circulate in the American economy at any given time. From Hamilton’s 1792 coinage act until 1834, silver was in circulation because gold was undervalued at its official price; therefore, it made economic sense to export gold coins to Europe, exchange them there for silver, then import that silver back into the U.S. This all changed in 1834 when the official ratio was changed to 16 ounces of silver per 1 ounce of gold, which then made gold overvalued so that it slowly began to replace silver, which was either hoarded or exported. Starting in 1834, the U.S. moved to a currency system where gold was the circulating coin. Silver dollars remained largely out of circulation from 1836 until the 1873 coinage act. 

At first, the 1873 act seemed only to legally recognize the demonetization of silver dollars; after all, they had not been used since 1834. Even the representatives of the silver interests in Congress did not object to the legislation. But in a curious twist of history, what was thought to be mere legislative housekeeping quickly became a highly politically charged issue. Silver prices had started to fall in 1872, but the decline accelerated shortly after the 1873 legislation mostly because of increased silver supplies from new mines in the American West. Because of the falling silver prices, U.S. silver producers had an incentive to bring silver to the U.S. mint for coinage. They did just that only to discover that they were legally barred from having silver coined by the 1873 legislation, which they quickly dubbed the “crime of ’73.” 
Kingston came to life in fall of 1882. Its roughly 1,200 residents circa 1890 were tucked in the narrow Middle Percha Creek canyon captured on a glass-plate negative here by photographer J.C. Burge. Photo Black Range Museum

By 1878, the silver interests were successful in getting Congress to pass the first of two significant silver purchase laws, the Bland-Allison Act, but the pro-silver interests were not satisfied because that legislation did not provide for unlimited coinage of silver. The second significant Congressional action did not come until the 1890 Sherman Silver Purchase Act. This legislation also failed to provide for unlimited silver coinage but it did increase the amount of silver purchased every month by the U.S. government, and by then, silver mining was in full-swing in Kingston and Lake Valley, New Mexico.

All of this led to considerable uncertainty by the early 1890s as to whether the U.S. economy could remain on the gold standard. Adding to the problems, the Treasury’s gold reserves had fallen to dangerously low levels by 1893; this was exacerbated by news that the Treasury would stop redeeming the notes issued under the 1890 act in gold if the reserves fell below $100 million. 

Lots of flags waved in Kingston at the patriotic event circa 1890. Only the Percha Bank building remains today, and is a beautiful museum.  The bank incorporated in 1886 by President McKinley pal, Jefferson Raynolds, and boasted holding $30,000 in cash in 1890. J.C. Burge photo courtesy Black Range Museum.
These long-running issues of gold versus silver certainly played a role in the 1893 crisis but there were many other contributing factors. Important among them were significant distress in western agricultural markets caused by declining crop yields and falling agricultural prices. Another factor in the depression was the slowdown in railroad construction that had peaked in the railroad boom of 1880s. Moreover, American exports to Europe had dropped as European economies struggled. 

The Percha Bank building stands on the left, looking west, in 1919. The Panic of 1893 devastated silver mining towns throughout the West. Kingston produced $6.2 million in mineral wealth, mostly silver, according to a 1904 report. Photo courtesy Black Range Museum.
The crisis culminated in the summer of 1893 with widespread bank runs. Of course, this was long before the introduction of federal deposit insurance (that does not arrive until 1933), so any risk that a depositor’s bank would fail tended to immediately lead that depositor to withdraw funds from the bank. Bank runs, wherein large numbers of depositors did just this, spread rapidly and, while they occurred nationwide, they were concentrated in the western states. In total, nearly 500 banks in the U.S. suspended their operations at least for a time to weather the storm. The economy officially went into recession in January 1893, a few months prior to the waves of bank runs that hit that summer. The affect was felt locally -- Kingston being a silver town was abandoned and never rebounded. After a brief economic recovery in late 1894 and into 1895, the economy plunged back into recession by the end of 1895 and would not officially climb out of recession until the summer of 1897. 

A legacy of the 1893 crisis remains with us today: the National Monetary Commission, whose work and recommendations led to the formation of the Federal Reserve System in 1914, noted in its report on financial crises that, while the causes of crises were varied, the method of handling them was simple. There should be, the report concluded, a reserve of lending power because the ability to increase loans from a central reserve to meet the demands of depositors “would have allayed every panic since the establishment of the national banking system [in 1864].”  Locally, the hillsides around Kingston are pocked with the work of expectant silver prospectors in what they left behind.

Dr. Brandon Dupont is an Associate Professor of Economics at Western Washington University in Bellingham, WA. He teaches American Economic History; History of Economic Thought; Microeconomics; and Political Economy. He has published a number of journal articles on the financial crisis of 1893, and has more in the works, including a textbook on the history of economic thought. The Hillsboro Historical Society appreciates his contribution. 

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