Topic 2. Part 3.

Post-Civil War Financial Panics: The Panic of 1893

A Bubble in US Railroad Construction, a run on Gold, Bank Runs, and an International Crisis

Baring Brothers had been encouraging investment in

Argentina. However, a failure in the wheat crop and a coup

in Buenos Aires ended further investments. This shock

started a run on gold in the U.S. Treasury, as investors

were cashing in their investments.

The booming USA economy was generating an outflow of gold

due to trade deficits.

Then on 23 February 1893, the Philadelphia and Reading

Railroad went bankrupt.

In early May 1893 the New York stock market dropped

sharply, and in late June panic selling caused the stock

market to crash.

A severe credit crisis resulted, and more than 16,000

businesses had failed by the end of 1893. Included in the

failed businesses were 156 railroads and nearly 500 banks.

Unemployment spread until about 13-18% were unemployed.

The depression caused by the Panic of 1893 lasted for

about four years, ending in 1896.

Newly Reelected President Cleveland had to move quickly

to stop the outflow of gold before the USA went

bankrupt. This meant repealing the Sherman Silver

Purchase Act of 1890.

President Grover ClevelandMarch 4, 1885 – March 4, 1889 and March 4, 1893 – March 4, 1897

18 March 1837 – 24 June 1908

The Act obligated the Treasury to purchase 4.5m ounces

of silver per month (essentially the entire output of

the silver mines). The silver bullion was paid for with

U.S. Notes. The Notes were redeemable in either gold or

silver coin. Because the price of silver was falling

relative to gold, the arbitrage opportunity was too

good to pass up: Sell silver to get the notes; cash the

notes for gold; use gold to buy silver; etc.

The Repeal of the Sherman Silver Purchase Act was not

enough to stop the run on the USA Gold Supply. Investors,

both foreign and domestic, unloaded their USA Treasury

notes in exchange for gold. By February, 1894, Gold

Reserves were only $65.7 million.

President Cleveland was forced to borrow $65 million in

Gold from the Morgan and Belmont banking syndicate on

terms unfavorable to the Government (which is not

surprising given the circumstances).

John Pierpont Morgan17 April 1837 – 31 March 1913

This was politically unpopular but it did slow down the

outflow of Gold enough so that the US Government was able

to float a Bond issue of $128 million in February, 1896.

That ended the Gold crisis.

Beginning in 1896 the development of the cyanide leaching

process and discoveries of gold in the Yukon, South

Africa, and Australia produced a sharp increase in the

world-wide supply of gold and by 1897 The US economy began

a decade long boom.

Congressional Elections: 1854 - 1896

HOUSE SENATE Democrat Opposition Democrat Opposition Republican Republican 1854 83 100 (51A) 39 22 (1A) 1856 132 90 (14A,1) 41 20 (5A) 1858 83 116 (5A,36) 38 26 (2A,2) ----------------------------------------------------------------------- Democrat Republican Unionist Democrat Republican Unionist 1860 44 108 30 (1I) 15 31 3 1862 72 85 25 (2IR) 10 33 5 1864 38 136 18 (1IR) 11 39 4 ----------------------------------------------------------------------- 1866 47 173 (6) 9 57 (2 Vacant) 1868 67 171 24 (5C) 12 62 1870 104 136 (3IR) 17 57 1872 88 199 (4LR,1ID) 19 54 (1 Vacant) 1874 183 106 (1I) 28 47 (1 Vacant) 1876 157 136 35 40 (1I) ----------------------------------------------------------------------- 1878 148 132 (13NL) 42 33 (1I) 1880 129 151 (10NL,2J,1I) 37 37 (1I,1J) 1882 199 118 (4J,2I,2NL) 36 38 (2J) 1884 183 141 (1NL) 34 42 1886 167 154 (2L,1NL,1I) 37 39 1888 152 179 (1L) 37 51 1890 238 86 (8P) 39 47 (2P) 1892 220 124 (11P,2S) 44 40 (3P,1S) 1894 93 254 (9P,1S) 40 44 (4P,2S) 1896 124 207 (22P,1S,3SR) 34 44 (5P,2S,5SR) ----------------------------------------------------------------------

Presidential Elections: 1864 - 1896

Democrat Republican---------------------------------------------------------------------------1864 McClellan 21 1,836,072 44.91 Lincoln 212 2,220,846 55.08*1868 Seymour 80 2,708,744 47.29 Grant 214 3,013,650 52.70*1872 Greeley --- 2,835,315 43.82 Grant 286 3,598,468 55.63*1876 Tilden 184 4,288,191 51.01* Hayes 185 4,033,497 47.871880 Hancock 155 4,445,526 48.21 Garfield 214 4,453,611 48.311884 Cleveland 219 4,915,586 48.49 Blaine 182 4,852,916 48.261888 Cleveland 168 5,539,118 48.68 Harrison 233 5,449,825 47.791892 Cleveland 277 5,554,617 46.07 Harrison 145 5,186,793 42.921896 Bryan 176 6,370,897 46.70 McKinley 271 7,105,144 51.02*---------------------------------------------------------------------------

The Bankruptcy Act of 1898

Berglof and Rosenthal (p. 47): “The [1898] Act, as

pointed out earlier, followed the usual nineteenth century

pattern. A severe Panic in 1893, followed by the absence

of legislation until Republicans get complete control of

the executive and legislative branches, following the

election of McKinley in 1896.”

The Act, which included a total of 38 rules, was the first

Act of its kind to protect corporations from creditors. If

a corporation felt that it was slipping into debt the Act

presented the option of “equity receivership' to protect

their assets. Corporations also had the option of complete

liquidation of assets to avoid bankruptcy.

The 1898 act further established a bankruptcy referee to

be appointed by the state judge. The responsibilities of

the referee included attended all hearings and making

decisions on any contested evidence. The referees worked

to alleviate the work load of circuit judges so that they

may attend to other matters.

Unlike the 1841 Bankruptcy Act Passed by the Whigs, Why

did the 1898 Act passed by their Conservative Descendants

stick? Primarily because the Republicans Dominated

Congress until 1910.

HOUSE SENATE Democrat Republican Other Democrat Republican Other 1898 163 185 9 26 53 11 1900 153 198 5 29 56 3 1902 178 207 32 58 1904 136 250 32 58 1906 164 222 29 61 1908 172 219 32 59 1910 228 162 1 42 49 1912 290 127 18 51 44 1 1914 231 193 8 56 39 1 1916 210 216 9 53 42 1 1918 191 237 7 47 48 1 1920 132 300 1 37 59 1922 207 225 3 43 51 2 1924 183 247 5 40 54 1 1926 195 237 3 47 48 1 1928 167 267 1 39 56 1

-------------------------------------------------- 1900 Bryan 155 6,357,698 45.5 McKinley 292 7,219,193 51.7 1904 Parker 140 5,083,501 37.6 Roosevelt 336 7,625,599 56.4 1908 Bryan 162 6,406,874 43.0 Taft 321 7,676,598 51.6 1912 Wilson 435 6,294,326 41.8 Taft 8 3,486,343 23.2 Roosevelt 88 4,120,207 27.4 1916 Wilson 277 9,126,063 49.2 Hughes 254 8,547,039 46.1 1920 Cox 127 9,134,074 34.2 Harding 404 16,151,916 60.3 1924 Davis 136 8,386,532 28.8 Coolidge 382 15,724,310 54.0 La Follette 13 4,827,184 16.6 1928 Smith 87 15,004,336 40.8 Hoover 444 21,432,823 58.2 ---------------------------------------------------

Berglof and Rosenthal (p.50): “Why did the 1898

legislation achieve stability? Skeel (2001) argues that

the Act created entrenched interests in both the

bankruptcy bar and bankruptcy judges (referees before

1973) who sought to maintain and expand the scope of

bankruptcy proceedings. He also emphasizes the influence

of committee jurisdictions within Congress, with Judiciary

not wanting to surrender turf.”