23 February 2010

The Crisis of 1893 (2)

Note: this post has been substantially updated (26 Feb 2014)

(Part 1; 1893, India, and the USA)

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Nicholas Poussin,
"The Adoration of the Golden Calf"
One misleading rumor of the 1893 Crisis focuses on the currency situation. This claims that the currency was "debauched" by the Sherman Silver Purchase Act, which was the result of wild-eyed radicals; that sober heads were overruled by the contumacious mob. The Crisis raged and raged, as Old Testament smitings do, until the Lord J.P. Morgan called on David Grover Cleveland to repent because the Treasury Reserves were down to $9 million.1 Morgan then led the Israelites Americans out of the house of bondage into possession of $65 million worth of additional gold via a bond syndicate, and the Republic was saved.

Like a Shakespeare history play, the plot requires one to ignore major lapses of time. The Sherman Act was passed on 14 July 1890 and revoked by special session of Congress 8 August 1893.2 Morgan's intervention was 7 February 1895, and failed to stem the hemorrhage of gold for another year (even after it was repeated).  The Act seems to have allowed metals arbitrage, and this probably may have led to another sort of economic crisis than the one which actually happened if the Act had not been repealed in 1893.  The gold import phase that followed the Act's repeal seems to have begun even before it was formally repealed, which suggests that perhaps metals arbitrage was a minor factor in the gold outflow in the lead-up and Stage I of the Crisis.3

I have leaned very heavily on O.M.S. Sprague's account of the crisis because his analysis includes the most careful examination of relevant data.  Other accounts, like Sobel's and Conant's, generally assumed the truth of prevailing theories, but did not examine the data in the sort of detail needed to falsify their pet hypotheses. Conant's account is valuable, however, because he includes many different countries and their reserve systems.

Stage I of the 1893 Crisis (26 February--10 June)4

Unless otherwise noted, I will be referring to Spague (1910), backed up NBER statistics. One point needs to be made in advance, which is the difficulty of making comparisons of 1893 monetary amounts with those of 117 years later. It's not just the price index, with controversial weightings of different mixes of "equivalent" goods; it's the macroeconomic impact of startlingly small amounts of money. In 1893, the GNP of the USA was about $448 billion (in 2010 dollars),5 and even then, the Treasury Reserves of $100 million would seem like a pitifully small amount of money. In fact, at the time, data on national income and product accounts were extremely limited, and there was a certain totemic nature to gold reserves anywhere. I say this because credit has always been by far the most important component of the money supply, and systems of credit have always made the difference between a resilient industrial system capable of surviving a crisis, and economic apocalypse.

Stage I of the 1893 Crisis was the collapse of the Philadelphia ξ Reading Railroad, followed by the National Cordage Company. The previous year had seen a collapse of the banking system in Italy, famine in Russia, and the Austro-Hungarian Empire's establishment of gold convertibility of its florin.6 Both Australia and the United States suffered from excess projected capacity ("projected" in the sense of planned, with capital outlays and investors), so of course at a certain point it was inevitable that many banks would accumulate nonperforming loans even in the absence of serious corruption.  Adding to the problem was a severe real estate bubble in the Southeastern USA and Australia.

(Unfortunately, I lack space to write much about the crisis in Australia.)

The USA mostly had a favorable balance of trade with Europe, although this balance oscillated over the course of the year; indeed, the private sector and the financial sector had a large net indebtedness to Europe; Markets for US securities were brisk, and there was a substantial net flow of finance capital to the USA from Europe. This was the case well into Stage I.  Moreover, the crop failures overseas led to high demand for US wheat, in a year of abundant harvest domestically.  However, as Sprague observes, this was offset by the limited means of Europeans to pay for this: the Europeans  responded by selling US securities for dollars to buy American wheat.

Following typical seasonal patterns, gold mostly flowed out of the USA in the first half of 1892, then inward in the last quarter.  The comparative size (and duration) of the two movements varied from year to year, and 1892 the gold import phase was smaller than the export phase by the amount of $50 million.7 Yet the money supply grew, in part because the US government was running a large budget surplus, so large in fact that it was buying back bonds and creating more high-powered money.  For this and several other reasons, Sprague rejects the hypothesis that money was tight.  Sprague observed that bank lending was contracting, but also that this was demand-driven: enterprise was interested in reducing its debt load.

Stage II of the 1893 Crisis (10 June--12 July)8

Stage II was essentially a routine seasonal transition in currency flows that went terribly wrong.  During this period (Hayes through McKinley administrations), US imports tended to be low in winter, then surge between March and June (inclusive).  The variation in monthly imports was typically over 33%, meaning that a typical March meant an influx of imports 20% over the annual average, and a typical September meant 15% less than the annual average.  This seasonal variation was remarkably consistent with respect to composition: as total imports fell off in the 3rd quarter, imports specifically of manufactured items grew both absolutely and (obviously) as a share of the total quarterly import bill.9

This is important for understanding the financial situation that followed. The stock market collapse did not look as though it would have further repercussions for the credit markets, and reserves of the New York banks were recovering as the annual "flowback" of currency from the rest of the USA began. Around the beginning of June, however, exports of gold from New York banks to foreign destinations intensified.  At the same time, the lag effect of the first stage of the Crisis was now felt: 19 nationally chartered banks failed, plus several state and merchant banks. This meant that reserves in New York were redirected to the interior as depositors and bank managers warily anticipated a potential run on currency.

In later economic parlance, the liquidity preference of Americans shifted sharply in favor of holding cash.  Sprague notes that the amount of currency required to conduct business became absurdly large.  The banks resorted to a technical refinement, the "clearinghouse loan certificate" (CLC) to avoid the need for costly liquidation of bank assets. They would play a major role in mitigating the Crisis of 1907.10 CLCs were used like checks, only for fixed denominations (typically $1, $5, $10, or $20) and issued in lieu of currency.  They worked because banks were essentially told by their clearinghouses to accept them as tender during the subsequent suspension of payments by the banking system.

Loan portfolios by banks in all sections of the USA contracted by about 7%.

Stage III of the 1893 Crisis (12 July--2 September)11

Stage III of the Crisis saw a special session of Congress called to revoke the Sherman Silver Purchase Act of 1893.  At this time, there was a second wave of bank suspensions, much worse than the first.  By the 28th of July, banks were making the shift to payment of depositors (rather than other banks) in CLCs. 

In Stage I of the Crisis, the banks had a surplus of reserves; by Stage III, despite the contraction of loan portfolios and the currency shipments from the central reserve cities, the banking system had inadequate reserves (because of excessive withdrawals by depositors). Suspension of payment in cash by the banks became more complete and more widespread, leading to a premium charged on payments in cash.

The currency premium in New York seems to have created the shift in trade position of the dollar.  Note that, during the time of the gold standard, shifts in the exchange rate between major currencies were very small and had large consequences.  In the USA, the effect of the currency premium was to create a profit opportunity for people holding dollars.  The one way to buy dollars without paying a premium was to offer gold (certificates) or pounds sterling for them, then use the cash to buy future claims on dollars.  In a month, $40 million worth of gold flowed into the USA. Sprague notes that, if it were not for the currency premium, gold would have continued to flow out of the USA (p.191) because of the exchange rate.

In August, the Bank of England raised the discount rate from 2.5% to 5%, a catastrophic event then as it would be now.  This probably led to the further increase of the premium itself, and also led to money centers other than New York importing gold. It also created a vicious cycle in which a vastly increased amount of currency was required for a given number of transactions (p.195).  It is easy to see how this sharply increased liquidity preference could become semi-permanent.


Stage III was not the ending of the Crisis for millions of Americans. While output may have recovered by 1895, unemployment remained exceptionally high until 1900.12 Owing to the extreme concentration of income in time and household, the effect on the working class of North America was probably devastating. In the American Southeast, the campaign to disenfranchise and terrorize African Americans reached its post-Reconstruction peak (for example, all Southern states had policies to effectively disenfranchise non-White voters by 1893; that same year saw the Southern states completing their program to segregate all public transportation), while in the Midwest, the Pullman Strike was the occasion for extremely violent, unrestricted anti-union terror by state and federal governments.

The financial crisis was experienced very differently in different parts of the country, with New York's financial center being tightly squeezed between foreign demands for immediate gold payments, and "internal" demand for currency. Additionally, seasonal flows varied from region to region (for example, New Orleans suffered the effects much later than the rest of the country, and Chicago experienced an exceptionally high currency premium).

(Part 3)


  1. The most familiar source on this subject for most readers will most likely be either Ron Chernow, The House of Morgan, Atlantic Monthly Press (1990), Chapter 5: "Corner" (p.71) or else Robert Sobel, Panic on Wall Street, Truman Talley Books (1988), Chapter 7: "Grover Cleveland and the Ordeal of 1893-95" (p.230). I have addressed these in two posts, "Digression on the 1893 Crisis and Currency" and "A Digression on Crappy History: Ron Chernow's House of Morgan." One crucial point to be made here is that Chernow and Sobel support the idea of Conant (see p.527) that the Sherman Silver Purchase Act was to blame for the 1893 Crisis. Conant remarked on the correlation of gold exports to the period of the Sherman Act, but declined to implicate the Sherman Act as a primary cause, let alone the only cause, whereas Sobel was uninhibited in blaming everything on it alone.

    I suddenly switched Bible passages from Exodus 32 to II Samuel 2, where God punishes King David (actually, the Israelites--again!) for his temerity in making a census. It sounds like a very Austrian Bible story, in which God is Ludwig von Mises, and his wrath is kindled by the introduction of statistics to public administration.

  2. For a handy summary of the Act and objections to it, I recommend Grover Cleveland's message to Congress on the repeal of the Act. See "Grover Cleveland, Message on the repeal of the Sherman Silver Purchase Act August 8 1893," hosted by the University of Groningen, Groningen, NL.

  3. One point raised by Davis Rich Dewey, 1922--p.443 is that "nine-tenths or more of the customs receipts at the New York customhouse were paid in gold and gold certificates; in the summer of 1891 the proportion of gold and gold certificates fell as low as 12 per cent, and in September, 1892, to less than 4 per cent."  He includes a chart on the next page, which paints a murkier picture.  First, both 1891 and 1892 were under the same silver regime; and the payments of customs receipts in NY follow a seasonal pattern described below, with gold certificates predominating in the early months of the year, then declining as the year progresses. Silver certificates in both years rose as a share of payments in the spring, then gave way to Treasury notes in the summer, and United States notes ("Greenbacks") in the fall. 

  4. Sprague, 1910--p.162 and Conant, 1909--p.524.

  5. Balke ξ Gordon (quoted in Lord Keynes--pseudonym--2011). I converted Balke ξ Gordon's figures from 1982 dollars to 2010 dollars using the BIS Inflation calculator. The gross national product (GNP) differs from the gross domestic product (GDP) by the amount of net factor payments.

  6. Conant, 1909: Economic collapse in Italy, p.29; famine in Russia, followed by customs war with Germany, p.242; Austro-Hungarian Empire going on the gold standard, p.228, "The receipts of gold by the bank from April 11th to October 10, 1892, were 38,759,000 florins ($19,000,000), of which a large part was in pieces of American origin." Owing in part to conditions in the money markets of Germany (huge amount of failed Latin American securities in Berlin) as well as the crisis in the USA and Australia, the Austro-Hungarian banks did not actually achieve full gold convertibility. Russia began to shift away from a silver-based monetary system to a gold-based one in 1893, as did India.

    Conant pays special attention to the banking crisis in Italy, which created the need to recapitalize and reorganize the decentralized national banks (into the Bank of Italy).

    The banking crisis of 1893 in Australia is described on p.443.

    On the collapse of the National Cordage Company: "cordage" refers to rope and string. The National Cordage Company was the first of the major trusts of the Gilded Age, and is an interesting story in itself. See Arthur Dewing, A History of the National Cordage Company, Harvard University Press (1913).  Link goes to the full text hosted on the Internet Archive.
    [I]t showed the gradual concentration under one control of upwards of ninety per cent of the American production in an industry where every condition favored competition. It dominated the market for the raw material and controlled as well the essential machinery used in the process of manufacture. [...]

    The common stock was issued to the promoters and the preferred stock to the public; the stock was marketed by a professional operator; officers of the Company participated in speculative "pools"; a stock dividend was declared on the basis of fictitious earnings in order to aid the speculation in the Company's securities. Unable to carry the burden of an oversupply of raw material and finished product, with its trade position undermined by new competitors, the consolidation collapsed in a day.(pp.3-4)
    The "other" Sherman Act, against trusts, was passed 12 days before the Sherman Silver Purchase Act (2 July 1890); I suspect efforts to blame the silver purchase act for the 1893 Crisis was stimulated in part by the desire to poison public opinion against antitrust law. 

  7. Sprague, 1910--p.157. Sprague also mentions (p.161) "speculation in town lots and mineral lands" as "the most unsound element in the situation." Sprague mostly focuses on the reserves of the New York national banks because his book is about the national banking system in the USA, and during this period (1870s-1924) the national banks were dominant.  He mentions that the state-chartered banks suffered somewhat higher rates of suspension or failure in the Crisis, but cautions that the crisis hit Western states worst--where there was an unusually large concentration of state-chartered banks (except for Texas).

    The seasonal pattern of US finance is extremely pronounced, particularly prior to the 1920s.

  8. Sprague, 1910--p.167

  9. "Price Quantity Indexes and Values for U.S. Exports and Imports, 1879-1923," NBER (May 2004); data is "Appendix A Table A-29. Quarterly Values, Selected Major Import Classes (Millions of Dollars),"  worksheet A29.  Data collated by James R. MacLean for this essay.

    It would appear from the data that, during the 1st and 3rd quarters of most years, the USA imported larger than average volumes of manufactured goods, and less than average volumes of everything else.  In the 2nd and 4th quarters, imports of agricultural products like rubber, or minerals such as tin, increased. These more than offset an absolute decline in finished goods imports.  This pattern is consistent over the "Cleveland Era" (1885-1896) except for 1890 and 1893-1894.

    Year Q Agr. Share Manu. Share Total
    1888 1st 87 14.36% 59 46.28% 188
    1888 2nd 97 20.65% 42 52.72% 184
    1888 3rd 70 14.53% 58 40.70% 172
    1888 4th 93 12.15% 45 51.38% 181

    "Agr." is agricultural imports in millions of current (i.e., 1888) dollars; "Manu." is manufactured goods, also in millions of current dollars.  "Share" is percentage of "Total" [imports]; total imports is greater than the two categories shown.  Notice that the import bill for the 1st two quarters is somewhat greater than for the 2nd two quarters.  This is a pretty typical year, and in fact was chosen at random.

  10. For an introduction to the clearinghouse loan certificate, see any of the following:

    Clearinghouse loan certificates were inevitably used as a stepping stone to partial suspension of cash payment of demand deposits.

  11. Sprague, 1910--p.175

  12. Romer (quoted in Lord Keynes--pseudonym--2011).

Sources and Additional Reading:

Charles Conant, A History of Modern Banks of Issue, G.P. Putnam ξ Sons (1909), esp. "The Crisis of 1893," p.523. Vital resource, although chapters on crises require close reading. Very useful to cross-reference with Friedman ξ Schwartz (1963).

Davis Rich Dewey, Financial History of the United States,  8th Edition, Longman, Green and Co., NY (1922). Excellent resource, and frankly a pleasure to handle.

Lord Keynes (pseudonym), "US GNP Estimates in the Recession of the 1890s," Social Democracy for the 21st Century: A Post Keynesian Perspective blog (18 Jan 2011)

  • N. S. Balke ξ R. J. Gordon, "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy 97.1: 38–92 (1989); data found in "Lord Keynes" (2011)

  • Christina Romer . “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37 (1989); data found in "Lord Keynes" (2011)

Milton Friedman, Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, Princeton University Press (1971), "Gold Inflation and Banking Reform, 1897-1914"

Robert Sobel, Panic on Wall Street: a Classic History of America's Financial Disasters, E. P Dutton (1988), "Grover Cleveland and the Ordeal of 1893-1895".

O.M.W. Sprague, History of crises under the national banking system, Volume 5624, United States. National Monetary Commission (1910). Discovered via Friedman ξ Schwartz (1963); totally indispensable resource. Detailed but concise.

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