160 acres or six feet - Real estate cycle 1874 - 1893

"There has never been a time in our history when work was so abundant, or when wages were as high, whether measured by the currency in which they are paid, or by the power to supply the necessaries and comforts of life."
Outgoing President Benjamin Harrison, in his final message to Congress, January 1893.

The 1873 downturn lasted about four to five years though this probably felt like a life time for those sectors of society hardest hit; the workers, the poor and those who came late to the party between 1870 and 1873. As always though, the cycle turns, eventually. Hoyt explains why this must be so (reference may be made also to the business cycle overview section and other parts of the web site): "The prices of raw materials, the wages of labour, the rents of houses and stores, and the interest rates for capital advances having been reduced to an extremely low level by 1877, it became a favourable time to expand manufacturing operations to replenish depleted stocks." (Hoyt, 100 years of Land Value in Chicago, page 128.)

In Chicago itself, the interest rate on loans if you offered good security had about halved, which began to favour the building of houses and dwellings. "Population was about to catch up with the supply of houses, the resumption of specie payments was not far away, and the motive for hoarding money was disappearing. The telephone had been invented and Edison was about to demonstrate his electric light." (Hoyt page 127.) It was in 1881 that electricity was first supplied to New York. Not everyone was taken at first. Many people found the idea of an invisible, yet deadly power source a little bit spooky. When electric light bulbs were introduced, the New York Times gave warning that they might cause blindness. (The Economist, Nov 10 2001.)

For Chicago, good crops in 1878 and the confidence engendered by the resumption of specie payments in 1879 gave the upward movement in that city's land values its initial impetus. "Rising prices and profit margins speeded up production, increased employment, and furnished the funds for a brief era of speculation that culminated in 1883." (Hoyt page 128.) 1883 / 84, our mid cycle slowdown. About 1884, Charles Dow, in his studies on business conditions reported: "The year 1884 brought a Stock Exchange smash but not a commercial crisis. The failure of the Marine Bank, Metropolitan Bank and Grant & Ward in May was accompanied by a large fall in prices and a general check which was felt throughout the year. The Trunk Line war, (a battle between two of the largest rail roads for supremacy of the region they served) which had lasted for several years, was one of the factors in this period." (The Stock Market Barometer, William Peter Harrison, page 27.)

Grant and Ward was a stock broking concern that closed its doors May 6th, 1884, the result of a failed 'Ponzi' type scheme of speculation and fraud initiated by one of its directors, Ferdinand Ward. Some prestige had been associated with the firm, Grant being the son of former President Ulysses S Grant. This failure pulled down an associated bank, the Marine National, which had been lending to Ward. Ward did a ten-year jail sentence for the crime. A week later, the President of another bank, the Second National, John C. Eno, made off with about $4 million of the banks money and fled to Canada, a popular destination for such runners at the time. A wave of stock selling resulted, culminating in a panic sell-off May 14, but a rescue operation mounted by a collection of banks at the New York Clearing house successfully reversed the situation. The panic did not get further than Wall Street, to which it was probably localized anyway. Public land sales continued strongly throughout 1884 and further on into the decade. (See the chart on public land sales, 1800 - 1900.) Therefore, since the resulting loss of confidence in this downturn did not involve bank credit created and loaned against land value, the stock market sell-off becomes far easier to contain and 'manage' by the appropriate authorities should they choose to do so. In the meantime John C's father mounted a rescue operation of his own and repaid the bank his son's stolen millions.

We might note in passing that the 19th Century was generally a century of deflation, prices in 1896 were lower than what they were half a century prior, negating the view, should any economist say so, that inflation is the prime cause of business cycles.

The New York Stock Exchange had its first million-share volume day May 5 1886, 2 years after the events of 1884. These were the years when big changes were forced on the travelling public by railroads attempting to get time 'standardized'. Up until 1883, every town kept its own time. When noon in New York City, it was 11.35am in Pittsburgh for example. With such differences, train scheduling was difficult. In some instances, a train arrived at one station earlier than when it had left the previous one. Since 1872, railroad companies had been meeting to find a solution. On November 18th 1883 the roads put into effect the idea of William F Allen: 4 time zones as standard; Eastern, Central, Mountain and Pacific, assuming the prime meridian running through Greenwich, England. The Attorney General ruled congressional approval was required to do such a thing as change time. Clergymen were furious; the prime meridian ought to run through Bethlehem. "God's time, not Vanderbilt's," they said. The French were livid. But the rail companies stuck to the change and it became a done deed. Congress settled the matter the next year, legislating the changes. (American Heritage, July / August, 2001.)

The other change taking place, if one is to judge by the portraits and photos of the eras; men began shaving. Beards were out, clean-shaven faces were in.


In Chicago the era was working out this way: "With the return of a more prosperous time after 1879…a large number of labourers, employed full time, began to accumulate small amounts of capital. Thus in all ranks of society surplus funds were accumulating or were being made available for investment. To attract this surplus, Chicago real estate was in an advantageous position. As compared with other forms of investment in 1879 it seemed to offer the highest rate of return compatible with safety…the failure of practically all the savings banks in Chicago by 1877 had caused labourers to avoid them as places for depositing their savings." (Hoyt page 130.) A real estate broker of the time said: "Good crops and business activity call for larger stores and warehouses and the rise in rents of such buildings increases their value. The men engaged in business want, as they make money, to live better, to move from small houses in downtown streets into their own houses in more fashionable locations. This makes a demand first for small uptown residences, then for larger ones, then for palaces. This starts the builders and their demand for vacant land increases the price for vacant land where the street improvements are completed, and this finally starts the value of land not yet ready for building, and speculation follows." (Hoyt, page 132.)

Of course it was not the same for all sites in Chicago; some did better than others and in this cycle there were also some special features relevant only to Chicago:

  • George Pullman decided to locate his huge 'carworks' (railroad sleeper carriages) on the outskirts of Chicago. Just where Pullman would choose, huge crowds of brokers and newspapermen followed him to see if they could find out. Wisely, Pullman publicly inspected one area but secretly bought another. Completed in 1883, the nearby land rose by 500 to 1000 percent in price.

  • 'Flat fever'. The building of apartments became popular. Flat fever was the name given the new craze. The apartments appealed to many housewives "because of the convenience of living on one floor, the fewer servants and less furniture required, and the comfort of having the furnace cared for by the janitor," said Hoyt. So here is a more intensive use of residential land, increasing its value. Some of the apartments even had porcelain bathtubs. Other cities soon caught on.

  • The World's Fair of 1893 came to Chicago, created to celebrate the 400th anniversary of Columbus' voyage to the New Americas. (A bit like today's Olympics in its effect on land value; one reason such events are sought of course.) The effect of this fair should not be underestimated. In the lead up to it, efforts were made to make it the biggest event of its type ever held in the whole of history. Every day for two years prior, two to three thousand promotional packages were mailed to all parts of the globe advertising the event and inviting participation in it. Posters could be found at virtually every European railway station depicting the forthcoming attraction. For the fair itself, water treatment plants with a capacity of 64 million gallons per day were built to handle drainage requirements and the sewer needs of 6,500 toilets. A steam plant generating 24000 horsepower was constructed to supply electricity. (users.vnet.net/schulman/Columbian/Columbian.html gives more details.) Ebullience indeed at the peak and a massive building programme. The moving sidewalk and Ferris wheel - put up by George Ferris – were just two items of many to come out of the fair that we would recognise today, and it was at this fair that the humble hamburger was introduced to the US.

The Chicago 'wire store' fraud made its début around this time. The wire store was the place where a suitably connected con man could place a bet on the eventual winning horse, secure in the knowledge that the result of the race, delivered by Western Union wire, was being delayed. The movie 'The Sting' made the operation famous, though the movie was set in the 1930's.

The story elsewhere.

In 1874, another wire was patented, barbed wire, invented by Joseph Glidden. Cheap and long lasting, the wire was proving great fencing material, and eventually fenced off much of the plains as the wild buffalo were being hunted (led by Buffalo Bill, ostensibly to kill off Indian food as much as anything else) to extinction. Agriculture and ranching took their place. Free-range land was quickly turned into private pasture. Within just a couple of years, Glidden was selling 80 million pounds of wire per year with the sales pitch “as light as air, stronger than whisky and cheaper than dirt”. (Holbrook, The Age of the Moguls, page 145.)

In 1877 Congress passed the Desert Land act. Many similar acts had already been passed at this time in the cycle previously. This act though had a special history. The story goes that in 1877, at the urging of California's Senator Sargent, who in turn was acting on behalf of Haggin and Tevis, two wealthy San Francisco tycoons, "Congress approved the Desert Land Act, the bill signed by President Grant in the last days of his administration. The law removed several hundred thousand acres from settlement under the Homestead Act. These lands, alleged to be worthless desert, were to be sold in 640-acre sections to any individual who promised to provide irrigation. The price was 25 cents per acre down, with an additional $1 per acre to be paid after reclamation." (Foldvary, Ground Rent Seeking in US Economic History, page 11) A good deal of this land was being eyed by Haggin and Tevis, the land itself located close to the Kern River and already partially settled. A San Francisco Chronicle story of 1877 describes what happened next:

"The President's signature was not dry on the cunningly devised enactment before Boss Carr [Haggin and Tevis' agent in the valley] and his confederates were advised from Washington that the breach was open. It was Saturday, the 31st of March. The applications were in readiness, sworn and subscribed by proxies... All that Saturday night and the following Sunday, the clerks in the Land Office were busy recording and filing the bundles of applications dumped upon them by Boss Carr, although it was not until several days after that the office was formally notified of the approval of the Desert Land Act."

By hiring a swag of dummy entry-men and vagabonds to enter phoney claims for 640 acres, and then "by transferring those claims to themselves, Haggin and Tevis were able to acquire title to approximately 150 square miles of valley land before anybody else in California had even heard of the Desert Land Act. In the process, they dislodged settlers who had not yet perfected their titles under old laws and who were caught unawares by the new one. The Chronicle called the whole manoeuvre an 'atrocious villainy' and demanded return of the stolen lands. A federal investigation followed, but Haggin and Tevis, as usual, emerged triumphant" (Barnes, The great American Land Grab, part 4.)

Rothbard, History of Money and Banking in the United States, reports that the 1880's went on to become quite a prosperous decade. Indeed, if his figures are to be believed, this decade ended as the most prosperous of any in the US, before or since. (Possibly eclipsed by the 1990's, another deflationary era.) In reality, the 1880's decade may have been prosperous, but amongst whom the spoils were divided is another question. The working conditions of the poor remained arduous to say the least. (Not much has changed.) Prices were generally falling, but wages increasing, so real wages were up more. The overall trend on long-term interest rates had been down since the 1870's, and again with prices falling the real rate of return was higher. This proved to be of great benefit to savers and lenders and helped keep capital investment levels high. In all, the country was again very busy making money. Except perhaps the farmers.

Underlying the seeming prosperity was the same set of circumstances; expansion of the money supply and cheap credit, some of which always finds its way into purchase of those government granted licenses and privileges. Plus of course that old US standard of vested interests clamouring for satisfaction of their legislative demands. The US political system seems uniquely built around it. We have noted already the falling level of prices generally throughout this cycle. (In fact prices had been falling mostly since the civil war.) Whilst this is not necessarily either good or bad, it will have different consequences for different social classes, in particular, those who owe money. In a society where land price is permitted to capitalize into a tradable commodity, farmers, as a rule, will almost always be owers of money. This is because before they start farming, they have often been to the bank for a loan either to buy the land, or buy their seed and equipment before ploughing, or both. In a deflationary era, there is no price inflation to help chip away at what you owe, in addition to your loan repayments. The falling level of prices received for farm produce may not have helped either, though this does not have to mean farmers were not profitable. Their action during this era however, betrays their feelings. They were keen agitators for more inflationary policies, as debtors always are. By 1890 or so, they had aligned with the growing force of silver miners, to demand the remonetization of silver. This had important ramifications for the eventual 1893 panic, but first we need some background about the so-called crime of 1873, which impacted heavily on the economics and politics of the time.

Silver; the crime of 1873.

A claim could be made that history is really just a story of the debtor class versus the creditor class. The creditor class will always win this battle. Simply put, once you borrow money, you surrender a certain degree of your previous autonomy to the lender. A loan must be repaid - the law is very clear on this - so are the penalties.

The US has used both silver and gold as backing for its dollar currency, (at least during those times when specie backing was not suspended) and minted both, though gold had come to be more representative. All nations were doing this actually, backing their respective currencies with silver and gold - specie - as it is known. But in 1867, leading European states met in Paris and agreed to ditch silver as currency backing and leave this responsibility to gold only. In 1871, France and Germany were at war, with the Germans finally victorious. As victors, they proceeded to inflict upon France extraordinarily heavy war reparations. Somewhat different to everyone else in the world, as they are wont to be, the French did actually pay the bill - in gold. The Germans used it to set up and finance a new gold standard for themselves, dumping all their silver holdings. Neighbouring countries feared what might happen; a few smart bankers in the US definitely knew what would happen, and acted accordingly. Eastern industrialist and US bankers wanted a continued gold standard; it was solid, certain, and good for business. The flood of silver was certain to make silver much cheaper on the market, than at the mint, where anyone could take their silver and have it minted at 371 pure grains and receive back one silver dollar. You could do the same with your gold, 23.5 grains getting you one gold dollar. This meant a legally defined ratio of gold to silver of 16 to one. If the US government was to continue to hold that ratio, but with the flood of silver making the price of silver cheaper on the market, than at the mint, one would naturally spend the silver, and hoard the gold. The supply of gold coins would disappear.

Gold and silver had uses other than just being minted into coin; hence there was also an industrial market for these metals. If the market ratio of gold to silver ever changed slightly to the one that existed at law, as it did occasionally, either more silver or more gold would end up in the mint. This is what was about to happen, only on a much larger scale than ever before. Yet another classic example of how national politics is susceptible to the influence of vested interests at the expense of far better economics.

In 1873, the same year as the previous downturn, it became apparent to those in the US who were watching, that silver was about to undergo a radical revaluation downwards: European nations were shifting to a gold standard, thus reducing the demand for silver. But as circumstance would have it, large silver deposits had just been uncovered (on land set aside for Indian reservations mostly) in Nevada and other areas out west, increasing supply. With the US offering to mint silver at the existing 16 to 1 ratio, but silver worth far less on the open market, you would naturally take your silver to be minted, and then convert your coin holding into gold. Silver would pile up at the mint, gold would flow out and be hoarded by those wanting to maintain the value of their wealth, any silver would be immediately spent since one's expectation would be that the silver would be worth less tomorrow, than today. To avoid this, an act of congress was passed, quietly, stopping the minting of any further silver dollars, and then another to end the legal tender quality of any silver coins above a five dollar value. A crime ? Those who wanted silver as legal tender thought so and called it the crime of 1873. They wanted silver back as legal tender and as the specie backing of any note issue.

Galbraith reports (page 98, Money, Whence it Came, Where it went) that it was an English financier, Ernest Seyd, who had bribed congress to this legislation, but does not quote any source. Galbraith goes on to say that the crime was soon expanded to be the result of a banker's - notably Jewish - conspiracy. If you plug in the name Seyd into Google, it will take you to a whole swathe of Jewish banking conspiracy theorists sites. Most, if not all of this stems from a complete ignorance of the capitalization of rent into a tradable government granted license; being a value used by credit creation agencies to lend against. This is the root cause of the real estate cycle. Conspiracy theorists will happily tell you that banks, with their credit creation powers, deliberately expand and contract loans at will to bring on the cycle. One clearly finds however that banks do far better in boom times than in busts (many go out of business in a bust themselves - even before their clients do) and very definitely would, if they could, have the upside of the cycle continue indefinitely. Don't go down the path of Jewish banking conspiracies; such conspiracy theory is just plain wrong.

There is a monetary consideration that needs to be grasped here too. The silver forces saw a 'hard money' way, with the US government maintaining the 16 to 1 silver / gold ratio, of increasing the US money supply and reserve against which banks might lend. A policy of currency inflation. Hence the silver forces agitation for retention of this ratio at a government level. And this is precisely what the US got, first in 1878 with passage of the Bland-Allison Act. This Act mandated the US government to purchase a minimum of $2 million per month of silver from the silver mining corporations, to be minted into silver coin and such silver coin so minted to be restored as legal tender. Their win was only partial however, (in the true spirit of political compromise) and paper notes were still to be backed by gold only. One might note this is a government attempt, against free market forces, of trying to artificially prop up the price of silver. (At the 16 to 1 ratio price of $1.29 per ounce.) As hard as a government might try, and many do, it is a battle governments cannot win; market forces always triumph in the end.

With increasing prosperity through the 1880's little more was heard about silver, until storms and droughts in the late 1880's reversed for farmers their accumulated profits (or more likely their ability to pay off the mortgage) built up over prior good seasons in wheat, corn and cotton. To recover lost profits, a farmer did what seemed eminently sensible to him and increased production the following year, just as his neighbour was doing, putting further pressure on prices. Silver miners found a ready ally in indebted farmers to push for relief. Congress didn't fail them, and delivered the Sherman Silver Purchase Act of 1890; requiring the Treasury department to purchase 4.5 million ounces of silver, per month. (That's 281,250 pounds, which, coincidentally, just happened to approximate the entire monthly production coming out of the silver mines.) The treasury would not this time coin it, but issue new treasury notes, redeemable in either gold or silver at the discretion of the treasury secretary. This policy would lend itself to the probable expansion of bank credit, i.e. an easier credit scenario. The Act passed as a trade off between the silver forces who declared their support for a proposed import tariff demanded by eastern manufacturers, in return for relief on the silver question. (In one sense, US history could be described as the study of the levying of one protective tariff after another, mostly by Republican administrations, designed to shield US manufacturers from overseas competition in home markets. They are still at it.)

A comment that appeared in The Farmers' Alliance, August 23 1890, sums up what indebted farmers would have been feeling: "There are three great crops raised in Nebraska. One is a crop of corn, one a crop of freight rates and one a crop of interest. One is produced by the farmers, who by sweat and toil farm the land. The other two are produced by men who sit in their offices and behind their bank counter and farm the farmers." (John D Hicks, The Populist Revolt, page 85.) We will come back to the silver agitation soon, but might note in passing; popular remedies to economic problems are rarely remedies, merely ideas to satisfy vested interest groups whose problems are often a land question.

Westward expansion.

The expansion westward continued apace. In fact with the propaganda campaign unleashed by railroad companies in Europe and the new farming equipment coming to market, the largest ever mass movement of people in the whole history of frontier settlement took place between 1870 and 1890. In this twenty-year period 225 million additional acres was put under cultivation for the first time. (Billington, The Westward Movement in the United States, page 82.) In addition to Glidden's new fencing wire, windmills were improved to allow plains winds to bring water to the surface for livestock and irrigation. Grain drills, cord binders and then the steam thresher (plus attachments) was soon permitting one farmer to plant and harvest 135 acres of wheat instead of the mere 7 acres beforehand.

(Reminder: such productivity gains feed ultimately into the value of enclosed government granted licences, especially land value. Partial gains flow sometimes to the inventor, of which McCormack and his farm equipment is an excellent example though his profit had as much to do with his business acumen as anything else, but the gain is never to higher wages for the labourer. In a land enclosed society, wages tend always to the least workers are prepared accept.)

By 1880, Kansas and Nebraska were fully settled and the westward movement pushed into the central and northern Great Plains areas of the Dakota Territory, then Wyoming and Montana. This left just one region remaining to be settled; Oklahoma, or the Indian Territory as it was then known.

Into the peak.

A lot of US cities were now experiencing land booms including Los Angeles, Seattle, Kansas City, Omaha, Duluth and Minneapolis; most reaching their peak around 1887 or just after. Many of these land booms were in anticipation of the arrival of the railroad into the town. It was always forecast that the arrival of the train would bring lasting prosperity. What the town got of course was massive land speculation beforehand then a spectacular bust afterwards. Chicago's land boom continued a little longer for some other, special reasons including: its railroad and manufactures growth, the advent of the skyscraper, a 'world's fair' held in the city in 1893 and the growth of department stores.

In particular, the use of steel frames in buildings gave rise to what came to be called skyscrapers; a huge boost to building and real estate generally. At first, at least in Chicago, the upper floors of the taller nine story buildings were avoided by tenants, but when a thirteen-story building went up, demonstrating the 'advantages' of abundant air and light, popularity increased with the height of the buildings. Though not everyone was happy. Speculators wanting to see the city expand horizontally rather than vertically were quick to push for height limits. And as we have seen since: "in spite of (the) apparent lack of need for more office space, great structures were erected." (Hoyt page 151.) Some peculiar results were noticed. Business sought to enhance their prestige "by having an office in these popular skyscrapers. Doctors and dentists found that it paid to have an office in high buildings near the State Street stores. Department stores discovered that people preferred to ascend in elevators rather than walk a block to a side street." (Hoyt page 152.) A new shopping habit.

Chicago now had a boom, captured for all its glory in the 'bizarre and grandiose conceptions' put on the drawing boards for the upcoming world's fair. Ebullience at the peak. Hoyt also reports that as the land boom in the aforementioned cities started to peter out, 'veteran operators' moved in on Chicago, again in expectation of the forthcoming fair. Optimism on the whole prevailed. "Tales of profits in real estate already made by their neighbours circulated amongst the residents of local communities and aroused their desire to use these accumulating funds for the purchase of Chicago land.” (Hoyt page 162.) A desire cultivated and enhanced by professional promoters. When one particular sale of a city lot smashed all previous records, the effect was to convince other Chicago real estate owners that they had "hitherto under-valued their property".

Some quotes of the Chicago boom

Hoyt gives at various intervals some wonderful quotes that illustrate the Chicago crowd of the late 1880's as their emotions carried them away: "The majority of buyers…ran in crowds to the spot where the most rapid rises were taking place and where land values were highest... They were influenced by rumours that were circulating everywhere."

"A majority of the purchases were made with a down payment of not over one-fourth of the total price, the buyer expecting to sell before he was called on for his second payment."

"Again it was pointed out that it was a dangerous game to pay for more than the intrinsic value of the property in the expectation that some one else could be found who would pay still more."

"Early in 1889, thousands of labourers and clerks pooled their savings and formed syndicates to purchase suburban acre tracts. Even servant girls, seamstresses and women clerks have caught the fever, put their savings into a lump sum and become joint owners of suburban property. Kindled by stories of large profits, they believe it is impossible to pay too much." (Who says history doesn't repeat ?)

"The means of spreading information as to land values had changed with the growth of Chicago. In the boom of 1836, when the town was huddled along the banks of the Chicago River, riders on horseback shouted news of land sales through the streets, and crowds thronged auction rooms to keep in touch with prices in the market. Buyers were taken to suburban tracts in omnibuses as early as 1853 and in the boom of 1890 excursion trains carried large crowds to new subdivisions. With the increasing size of the city, other methods were devised by subdividers to get in touch with prospective customers. Canvassers or agents as well as handbills and newspaper advertising were employed in 1890." (Hoyt page 443.) A lot of women were also employed to "go diligently through stores, shops and factories and…tell wonderful stories about values." (Repeat behaviour, but in a style more in tune with the times of course.)

Into the peak continued:

As the US headed into the 1890's, a number of things were taking place beneath the seeming prosperity:

Though railroad construction and expansion was continuing, often frenetically, construction was still mostly financed via bankers underwriting and issuing bonds, i.e. debt financed. Nothing wrong about this, it can be a profitable use of money. However the construction was not always undertaken with revenue in mind. Railroads were the first major listed enterprises that usually saw ownership – by shareholders - divorced from those who ran the day-to-day operations, the directors. So the operations were not always in the owner's best interests, and run even less in the interests of bondholders. Reporting requirements, well there were none. Ditto for the accounting in some instances. The Central Pacific, built through California to connect with the Union Pacific and join East to West, and built by the Contract and Finance Company in the same manner as the Credit Mobilier, 'lost' their books just prior to a government enquiry into the rort. (Holbrook, page 122.)

It was not unusual for rail lines to be built in areas already well serviced, solely for the purpose of affecting a buy out by the other line and so preserve monopoly status. Some directors were busier planning their next on market manipulation rather than tending to earnings and profitability. (As happens today.) Commodore Vanderbilt's son, running the railway empire left to him by his father (which he successfully doubled in value to $200 million) immortalised his own name when asked by a reporter whether he ought to take more interest in his customers and the travelling public, replied: "The public be damned."

And the railroad companies found plenty of ways to remain influential; the issue of free passes being one of them. Newspaper editors, public officials (and family), members of state legislatures and even the judges hearing cases against the rail lines often travelled with the use of their 'free' pass. (Latham, The Panic of 1893, page 14.)

Rail lines were known to have been built in wilderness areas merely to secure the district and later land value growth for the promoters, or to lay sufficient track to win the federal subsidy in land. So by 1890, rate (trunk line) wars were eating into earnings on some lines. Railroad debts were once again building. (The Northern Pacific - Jay Cooke's old line - was finally completed in 1883 at a cost of some $70 million; construction financed by the buyers of the bonds the rail company issued. The sales of the land given it by the government amounted to, by 1930, some $136 million; money that went to the promoters and shareholders. Even in 1939, 15.8 million acres of its land grant still remained to be sold.)

The US government found itself with a continuing surplus on hand after a prosperous decade and rising tariff receipts. Congress in 1890, under the Harrison administration, found plenty of ways to spend it. Dubbed the 'Billion Dollar Congress', it was decided that additional spending was required for further extensive internal improvements; more military hardware was required to build up the navy, and more money needed to improve government pension assistance for older civil war veterans unable to work on account of war injury. (There were plenty of them, the civil war being renowned for the sometimes-needless amputation of injured limbs.) History reveals the election of this administration, in 1888, was in a year when vast sums of money were used to buy votes, particularly in the states where a close contest was anticipated, in particular Indiana, and New York. Some history books and web sites also suggest the government give-aways were thinly disguised programs to further enrich already wealthy industrialists. Whatever, the surplus, 15 or more years into the current cycle, (from 1873) was being distributed.

By 1890, 29 percent of US farmers were mortgaged nationwide, though figures for mid western plains farmers were higher; Kansas lands were mortgaged to 45 percent of value, Minnesota farmers at 44 percent, Montana farmers at 41 percent. (eh.net/encylopedia) In good times such an interest burden is supportable, but should things turn down…

Analysis of the 1890 US census found that for the first time, a majority of Americans no longer lived or worked on the farm; they were instead living in towns and cities. Around this time also, Frederick Jackson Turner gave a soon to be famous speech, The Significance of the Frontier in American History, declaring that the US western land frontier was now almost closed. Access to free land and the government give-away of it was about to cease. "Throughout the 1860's, 1870's and 1880's, the frontier had been advancing westward. It was not just a name but a specific geographical definition. It means land occupied by two or more but less than six persons, on average, per square mile. By 1890 it was gone - there were no more areas which corresponded to this definition." (Johnson, page 523.) Those seeking land and their fortune could not but have been aware of this approaching limit to the frontier, and 'free' land. It would have added to the desperation of all concerned to get a bit of what was left to call your own, before someone else did. The 'sooners' were massing.

Towards the end of the 1880's, Commissioner Sparks of the United States Public Land Office (one of the very few incorruptible commissioners wrote historian Alfred Chandler, page 510) reported: "The near approach of a time when the United States will have no land to dispose of has stimulated the exertions of speculators and promoters to acquire outlying regions of public lands in mass, by whatever means, legal or illegal." Great efforts were undertaken by speculators to have the incorruptible Sparks removed from office; efforts that eventually succeeded.

The 'sooners'.

April 22nd, 1889, dawned bright and clear upon the hordes of people that had massed at the 300 mile perimeter of the Indian lands of Oklahoma; lands that were now being opened up to white settlement for the first time. And it was to be on this day, at the stroke of noon, upon presidential decree, that any US citizen would be permitted to enter the territory and seek a 160-acre lot of unclaimed land. 12,000 plots had been made available; you just had to be the first there and then register your ownership with the nearest Federal land office. 50,000 people now waited impatiently at the Arkansas and Texas borders of the Indian Territory to do just that.

The land in question had remained vacant since the civil war; used to create a reservation for the Plains Indians and other tribes sent there after they were moved on from their former ancestral homes. The region was now considered probably the best 'unoccupied' (in the white sense) land in the nation. People had been gathering for weeks along the border; towns sprung up overnight as the people camped out at strategic entry points to facilitate the best and quickest entry. "160 acres or six feet, and I don't give a damn which", was the cry of those demanding the land, and probably sums up best the lawlessness of the days and nights in the lead up to the 22nd. At noon on this day, buglers stationed at intervals along the border perimeter played reveille. All hell broke loose. In a great surge forward, families in covered wagons, men on horseback, trains packed to absolute capacity, (ordered to go no faster than 15 miles per hour - considered the average speed of a man on horseback), hastened to claim the best site they could find, before some one else got there first. The first great Oklahoma land rush was on.

Theoretically, the entry of all citizens was to be controlled and supervised by US cavalry forces. But by nightfall it was clear that more than a few persons had, well, jumped the gun, and were already settled in the region. Such persons earned the name for themselves of 'sooners', and plenty would challenge these premature claim jumpers. But without great success it seems, for many 'sooners' were there legally, as the very persons put in charge to supervise the rush. There were more 'rushes' in the years following; 1891, 1893, 1901 and 1911, though for the last two, a lottery system was used to help give fairer access to the riches. On the eve of the first rush, the New York Herald observed that: "men will fight harder for $500 worth of land than they will for $10,000 in money."

As the sun set on the 22nd, Oklahoma station, a previously isolated rail stop, had become a tent city of some ten thousand new inhabitants. The outpost of Guthrie, previously just a few huts housing soldiers and rail staff, was now a town of 15,000 citizens.

Shocks into the peak.

There were a number of shocks in the lead up to 1893. (Perhaps again giving false comfort to those who believed the US economy could take anything and helping develop further a 'buy the dips' mentality again, though this is pure speculation on my part.) On November 20, 1890, Baring Brothers Bank stunned the English market by suspending operations. The 1st Baron Revelstoke, Edward (Ned) Baring, had promoted and bought a few too many Argentine bonds, in a declining market. This was a tad embarrassing for the English, since it was in this bank that the Queen had deposited all her money and a good many of the family jewels too. Only the importation of a vast shipment of gold from French banks saved Barings (and the Royal family) from complete ruin. (A bank friend in need, can be a war enemy anytime.) Nick Leeson will make a better demolition effort 100 years later. Other British investors began selling good US stocks to carry bad Latin American loans, which resulted in some financial stress in New York, but not yet a banking panic. It did mean though that finance for further US railroad expansion was now proving a bit harder to procure.

A downturn appeared imminent. Nature to the rescue. (Or was it God this time without being asked ?) A much-improved US wheat crop proved handy as the grain crop in Russia failed. US wheat exports to this region improved the gold position of the US markedly in 1891 / 92, a buoyancy in which England and Europe did not participate. (Famine in Russia cost hundreds of thousands of lives.) The boost to the US economy though was short lived.

Events led to a bit of 'money stringency' (the phrase used by historians to describe the time), or in other words a sharp curtailment in the availability of credit, but nothing like a banking panic of earlier times such as in 1873. Interestingly, the stock market had been declining since May of 1890 until the October; a decline that was greater than the disturbance the public news of Baring's collapse actually brought on. Perhaps insiders were already aware of the problems looming.

We can now revisit the silver question. Fortunately, the history books tell us something of the money supply impact of the Silver Acts, especially after 1890. "The coinage of over valued silver dollars since 1878, and the issue of Treasury notes on silver bullion since 1890, have actually increased the country's silver and paper circulation, between 1879 and 1894, by seventy-five percent." (A D Noyes, The Banks and The Panic of 1893.) "Between January 1891, to June 1893, there was an increase of $68 million in the estimated amount of money in circulation." (O M W Sprague, History of Crises under the National Banking System, page 158.) Sprague noted further for 1892 that: "The low rates for loans were a clear indication that the banks would have been glad to lend more than the demand of borrowers made possible." In other words, easy credit conditions and plenty of funds to furnish speculation. Unemployment was low and the country appeared prosperous, as it always will when awash with paper money. To take advantage of the credit expansion some 163 new national banks were founded in 1892. On the last day of this year, R. G. Dun & Company's Weekly Review said: "The most prosperous year ever known in business closes today with strongly favourable indications for the future." (Lightner, page 188.) The outgoing President, Benjamin Harrison told Congress in January of 1893: "There has never been a time in our history when work was so abundant, or when wages were as high." (Sobel, Panic on Wall Street, page 243.) The sun shines brightest at midday said Gann.

We have seen how the US government, under pressure from vested interests, had mandated by law that the silver to gold ratio was to stay at 16 to 1, despite the fact that Mr. Market was indicating otherwise: that the value of silver was declining relative to gold, the ratio by 1893 being almost 32 to 1. The buying power of silver had about halved in other words. If you owned silver, you could take it to the mint, receive the equivalent face value in treasury notes, for which you could then immediately redeem them in gold. Thus, silver flows into the treasury, gold flows out. Important since the US government was advertising its notes as redeemable in gold. How long would the government's store of gold last became the question on Wall Street upon which everyone was having a bet.

You were on a certain winner however, if you had a contracted debt payable in 'coin', but not specifying gold. Picture it this way: the government was giving its official imprimatur to a silver coin containing 371 and a quarter grains of silver as being worth one dollar, when the market was saying it was worth just slightly more than fifty cents. Is this not fraud ? A falsification of weights and measures ?

Government support in buying silver created a glut of the commodity. It is still practised today, with both European and US farm subsidies. And Asian governments tried it with the artificial pegging of their currencies to the US dollar. The final day of reckoning can be delayed, but never put off. Market forces must in the end prevail and if the distortion lasts long enough, will be accompanied by drama. How long would the US gold reserves last ? Well, the markets had focussed (as they are wont to do) on the magic number of $100 million, at which level if the gold reserves at Fort Knox dipped below it, the US was no longer obliged to note redemption. The number was purely symbolic of course; the real worry was the possible US default on its debt and the implications this might potentially have on interest rates, sending them much higher.

With the focus on this number, banks were cautious and started quietly calling in loans. (Loan growth in fact declined some 10 percent from February to May of 1893 reported Hoffman, The Depression of the Nineties, page 56.) On the 20th of February, the Philadelphia and Reading railroad declared bankruptcy. This was probably a shock as only the very month before, in January, the stock had paid its usual dividend. (The company's assets were subsequently found to be practically nothing.) The financial condition of other railroads was now open to question. On April 22nd, (some books say the 21st), that magic number was triggered. It was obvious there was not enough gold left to preserve the value of the notes the treasury was issuing. This fact hastened the contraction of credit now under way, with the banks calling in loans even faster to preserve their own gold in the vaults. ("Banks were frightened and began calling in loans at a frantic pace." Reed, The Silver Panic of 1893, page 58, quoting Fels, American Business Cycles, page 186.) Pennsylvania Steel announced its failure at this time, and some of the other rail lines suffered heavy downward moves of their stock price; Missouri Pacific, and Manhattan Elevated being two that suffered heavy falls.

The Panic.

On May 3, 1893, for no obvious reason on the day, a wave of selling hit the New York Stock Exchange. "Not since 1884 had the stock market had such a break in prices as occurred yesterday," wrote the New York Times a day later, and “few days in its history were more exciting." The next day, May 4th, National Cordage failed, giving meaning to the prior day's heavy selling most likely. This was big. National Cordage had become the darling of Wall Street, a new 'industrial' stock, manufacturing rope and cord, widely held and the most actively traded. History records that in the Cordage Trust circle of the New York Stock Exchange: "hats were being smashed, coats torn, cravats ruined. Here was an agony that meant financial life or death to many. Cordage common had gone off 18 points. The preferred had lost 22. Suddenly howls went up from the floor. Those who could distinguish the words, heard the ominous cry: Nineteen for Cordage ! The shares a few moments later, went down to $12." (Collman, Our mysterious Panics, page 164.)

The stock was down to $12 from $140, and now quite possibly worthless. The stock market panic was on. (I note this was 30 degrees from a New York Times report of April 5 which read: “There was an entire change of sentiment in Stock Exchange orders today, and it was accomplished by what appeared to be a pre-concerted movement to cover outstanding short contracts all along the line. It is too soon to say that a bull market is upon us, but the figures show that the tendency is toward higher prices.” (Quoted in The Great Game, page 164.) I have not seen a chart of this era, if indeed there is one, but I would wager that was describing a lower bottom.)

128 banks failed in June.

52 days (7 weeks) after May 4, US markets heard on June 26 that India was no longer to coin silver. India was the world's second largest buyer. There was panic in the silver market. Within 24 hours most silver mining companies were out of business. At the end of July, (don't have an exact date yet, but is close to 30 days later) the Erie appointed receivers. It was the turn of the Northern Pacific in August, the Union Pacific in October. On December 23, the Atchison, Topeka and Santa Fe line declared bankruptcy.

The banking panic began this time in the interior of the country - in Chicago. On May 8th, without any prior warning whatsoever (to the public and its depositors at least) the Chemical National Bank of Chicago did not open for business. Its doors never did in fact reopen and depositors were faced with the prospect of losing a collective $1.6 million. Its failing did not apparently come as a surprise to Chicago bankers however, for they thought the bank had not been competently managed. “Excessive loans had been made to the bank's directors and to some of the shareholders.” (Wicker, Banking Panics of the Gilded Age, page 60, quoting James, The Growth of Chicago Banks, Vol 1 page 581.) No support was offered the bank. The timing is interesting in view of what Hoyt says about Chicago and the land speculation surrounding events of the World's fair, which was opened on the 1st of May by the president himself. By the commencement of the Fair, it might have become obvious to enough market operators, all at the same time, that the city was way overbuilt, causing a marked and rapid change of speculator sentiment. (Especially in view of the prior weeks stock market events.) As to whether this led to a bank run must however remain conjecture at this stage. Notable nevertheless that the bank panic started in Chicago, where the real estate speculation had in the end become concentrated, as a result of the world's fair.

In Indianapolis, the Capital National Bank, closely associated with the Chemical National, failed three days later on May 11th. Depositors here lost $1.1 million. The next day, May 12th, the Columbia National Bank of Chicago failed (the result of rumours caused by the Chemical National failure), with $1.5 million of depositors cash lost. This was a bit more serious, since the Columbia's deposits were mostly deposits from other banks. Now we had a possible catalyst for spreading the banking disturbance to other states, though for the next three weeks relative calm ensued and no real loss of confidence by depositors at other Chicago banks was in evidence.

June 3 saw a renewal of depositor unrest however. The largest commercial paper house in Chicago, Herman Schaffner & Co. closed its doors on this day, taking with it depositors money to the tune of $850,000. A private bank, Schaffner & Co. had been speculating in railway bonds, which, as a result of the stock market collapse, were now worth far less than previously. The bank's president was last seen renting a boat, rowing far out into the waters of Lake Michigan and is then presumed to have jumped overboard, never to return. The panic was on.

No longer could it be said that panics were a result of the usual money stringency in the fall (September / October) as a result of farmers wanting cash to pay for the harvest. June 5 was described as “the most exciting day in Chicago's financial affairs in a decade.” (Wicker, page 63.) Runs spread to Spokane, (Washington) June 5 and 6, then to Cleveland, Kansas City (Missouri), Omaha and Detroit. Californian cites saw runs in the third week of June. The runs then accelerated in the second week of July to affect the western and mid western states: the farm belt, where farmers were heavily mortgaged it might be noted. Most stocks reached their lows on Wall Street in this month. On the 19th of July, one mortgage broker in Boston "was forced to sell a $220,000 mortgage for $9,000 in gold as a result of the sharp decline in real-estate values and the increase in the gold price." (Sobel, page 253.)

Therein lies the difference between this downturn, the prior downturn in 1884 and the money stringency of 1890; the deflating of land price.

In the middle of the panic, it was discovered that President Cleveland had cancer of the mouth and required immediate surgery. On June 30th, under the pretext of a fishing trip, the operation was carried out on a yacht belonging to a friend. It was feared that informing the market would only add to the panic.

On August 3rd New York banks started restricting, though did not stop completely, their shipments of currency to banks in the interior of the country. Although the bank runs had by now begun to slow, a scarcity of money and coin for normal day-to-day transactions developed. Both banks and depositors were hoarding it. Cotemporaries spoke of a currency famine the further west one went. An economic depression was at hand; a depression that ended up worse than all those that had occurred previously.

Those currency shipments, if one may surmise a little here, probably had to be restricted as much for the following reason as any other. As noted already, under the national banking system, New York banks held the deposits (reserves) of smaller Reserve City banks, many of which were located in the interior. The New York banks did not leave these deposits sitting idle and found a use for them by lending them out – at call - to those wanting to participate in the stock market. A call for those deposits would in turn necessitate calling in the loans, leading to probable forced sales of stocks in an already declining market. Any default by the borrower (stock speculator) would make repayment of the deposits that much harder. The unsound conditions of the banks and their prior lending practices was now obvious. "It became evident during the crisis," said Sprague (page 161) "that the banks had been carrying a large amount of loans which should have been long since written off or at least written down. These loans had been made in many instances before…1890, and in part they had been made more recently, serving to bolster up weak enterprises and to make an already unhealthy situation more unsound."

After effects of this particular downturn.

The causes of this depression, listed by historians, are generally given as one, or a combination of, the following:

  • The deflation since the civil war,
  • Under-consumption, i.e. production of goods and services at a rate higher than could be consumed, resulting at some point in too large an inventory holding, so producers cut back on production and employment,
  • Government over spending and extravagance, or
  • Government purchases of a commodity - silver - for which it had no use.

Farmers blamed the bankers, and the bankers blamed the Sherman Silver Purchase Act. The speculation in government granted licences is rarely mentioned.

Hoyt reports that the land boom peaked in Chicago in June, July and August of 1890: "when the volume of weekly and monthly sales broke all past records." At this time Chicagoans regarded anyone a traitor to the city if they questioned "any part of the process that was making so many people rich." (Hoyt page 173.) So screaming fire in the theatre will not win one many friends, even if there really is smoke in the stalls. When news of the failure of Barings Brothers reached Chicago, a "serious financial stringency" developed, whereby the banks suddenly refused further loans on real estate, though there was no problem made on loans for other purposes. No real panic resulted; indeed an air of confidence remained for the spring of 1891 on account of the forthcoming World's Fair of 1893. But by the time the crowds had departed, the overbuilt conditions of the city had become obvious. "The termination of the World Fair projects, and the contraction of firms into smaller quarters reduced the demand for office space at the very time when its supply was being greatly increased by the completion of a number of new skyscrapers." A developing pattern.

In Seattle: "The Panic of 1893 thundered west from Wall Street, first clobbering San Francisco, then spreading its carnage up the West Coast. In Washington State, as elsewhere, a run on banks ensued. Depositors withdrew their savings, converted them into gold when possible, and just buried or otherwise hid them when they couldn't. Credit became impossible to procure. Construction came to a dead stop. Banks tried to collect mortgage payments, foreclosed on those who couldn't pay, then went bankrupt themselves. Within a year, 11 Seattle banks had bolted their doors. After the Panic, local land values sank by as much as 80 percent. Some people fled the area with only their last savings in their pockets, hoping to protect what little they had. Others vanished with other people's life savings in their pockets. In September 1893, Seattle City treasurer Adolph Krug hopped an early morning train to Canada, taking with him about $225,000 in public funds. At the end of November, the president and cashier at Buckley State Bank of Tacoma skipped with $30,000…So precious was cash in Everett, that at one point the Merchants' Protective Association actually began publishing the names of people who spent their money in Seattle. The Everett Times endorsed running those 'traitors' out of town." (historylink.org/output.cfm?file_id=2030)

It is the sinking of land values that will differentiate the decade cycle downturn from the property cycle downturn. The deflating of land values is inevitable, if they are permitted to inflate in the first place. This appears to take place every eighteen to twenty years or so, subject only to the influence of world war. More is given about this subject in the section on 'things to learn'.

In Utah: "Even before the panic, Utah had experienced hard times. During the territorial boom of 1889-90, the value of land and of business and residential property had skyrocketed to as much as ten times pre-1889 prices. Speculators reaped enormous paper profits, and real estate transactions in Salt Lake City alone reached an unprecedented $100,000 daily. To meet voracious demands for credit, nine new banks opened in the city. Then, in December 1890, shock waves from the collapse of London's Baring Brothers bank burst Utah's speculative bubble, and Utahns numbly reaped the harvest from their craze: depressed prices, lowered profits, overextended credit, and tight money…Thus, when the Panic of 1893 reached Utah, it found--and worsened--an already precarious situation. By the end of June, Utah businessmen began to lay off workers and reduce wages. A half-dozen prominent citizens were bankrupt and many more were on the verge. "I have never witnessed a greater stagnation in business enterprises than has manifested itself during the last month," wrote a prominent Utahn. "Money is not to be had, confidence seems to have disappeared, and credit is denied by nearly all tradesmen." (media.utah.edu/UHE/p/PANIC1893.html)

In Wisconsin: "The panic of 1893 flooded the mid-West with misfortune. The failure of the Wisconsin Marine and Fire Insurance Bank involved the financial ruin of David Ferguson, its cashier and also the Treasurer of the Diocesan Missionary Funds. With the collapse of this bank about a half million dollars of diocesan money was lost, about $25,000 of which belonged to the endowment fund of the diocese and the remainder to Nashotah House. Using his experience as a banker, Bishop Nicholson took the situation into his own hands. The fund had been wiped out. Mr. Ferguson offered the diocese his only asset, his home, which the bishop administered. So well was this done that it subsequently began to make small returns to the diocesan loss." (justus.anglican.org/resources/pc/usa/ilnicholson/wagner.html)

1894 proves to be a tough year: "Jacob Sechler Coxey leads 400 people, known as Coxey's Army, from Ohio to Washington, D.C. The marchers protest unemployment. Underlying their protests is their sense that the government refuses to legislate in favour of working people. Coxey is arrested for trespassing, and the 'army' melts away. The Pullman Strike erupts. Workers at the Pullman Palace Car Company protest the fact that the management has reduced its payroll and substantially reduced wages without reducing rents in its model workers homes, nor prices in its company stores. Eugene V. Debs calls a sympathy strike of all railway workers. The Railway Managers Association refuses to negotiate and hires 3,600 deputy marshals to break the strike. The U.S. Government issues an injunction against the striking railway workers on the grounds of 'interference with interstate commerce and postal service.' The injunction orders Debs to call off the strike. That the Pullman cars do not carry mail is disregarded by Cleveland. Federal Troops are sent to enforce the injunction, and several months later, Debs is sent to prison for his part in the railway strike." (pinzler.com/ushistory/timeline7.html)

Some further quotes of interest.

Ebullience at the top:
President Harrison's comments, January 1893, noted already. "There has never been a time in our history when work was so abundant, or when wages were as high."

The turn to fear:
"There is depression, distrust and gloom on every hand."
New York Herald, April 30 1893

"What a wonderful spectacle it is that Europe now presents ! Her population claims now a sort of monopoly in civilization; yet every nation has reached the limit of its endurance in preparing for a war which nevertheless does not arrive. The surplus energy and money for the whole continent is devoted to keeping up the security which is nowhere felt to be quite certain."
Leslie's Weekly, July 13 1893, quoting the London Spectator

"There will be few regrets in Wall Street at the passing away of the old year. The net losses in commercial, industrial and financial circles have been the severest ever met. At the moment the outlook is as discouraging and forbidding as ever."
New York Commercial Advertiser, December 30 1893

Blame the government:
"The president had depreciated the currency, looted the national vaults. At this rate the peculiar pyrotechnic methods of the Administration will have nothing left upon which to experiment."
Colorado Sun (Denver) May 9 1893

It is all plainly the result of the wild profligacy and reckless management of Republican control."
New Orleans Daily Picayune, June 28 1893

Blame anything, except the speculation in government granted licenses and privileges:
"The theories as to causes of panics range from that of the late Professor, who imagined that the periodicity of panics might be connected with that of spots on the sun, to that of the writer who recently informed us that they are intimately related to the prophecies of the Hebrew scriptures."
New York Times, June 19 1893

"Wall Street is not liked. It has not only to bear the odium that has rested on money lenders from time immemorial, but, in addition, it suffers from the reputation it has gained of selling goods at more than their true value, of floating doubtful enterprises, of listing securities of notorious swindlers, of fleecing trustful investors, of doing in a large way and without suffering the appropriate penalty that which when done in a small way is rightly called swindling."
New York World, July 24 1893

Summation of this cycle:

The government ran budget surpluses for all the years 1866 to 1893. Despite this, business boom and bust was still in evidence and a major downturn had still taken place some twenty years after the last one. In years past, the depressions had occurred in an economy without electric light, without telephones or fax machines (or any other fast means of communication for that matter) and in conditions that would seem less than civilized to on-lookers from today's era. What's more, despite the US economy operating under either a central bank, a national banking system, paper money issues or using fixed ratios of gold to silver, at a time of inflation or at a time of deflation, under conditions of a budget surplus or deficit, severe downturns (depressions in fact) were still occurring roughly every eighteen to twenty years.

And all of this had taken place within an ever-expanding frontier of settlement: a frontier that was now rapidly closing. It was dawning on more and more Americans that in the future they would have to face an expansion-less existence for the first time in their history.

For this cycle to 1893, the government revenue surpluses arose in part from the tariffs that were levied on goods into the US (tariffs high enough to raise money but not high enough to stop the flow of goods) and in part from lower growth in expenditures. But under the national banking system this was a bit of a problem. For every dollar increase in the surplus, it was a possible dollar decrease in the currency. And since the issue of bank notes was tied to the issue of government bonds, the surplus was a contraction in the money supply and available credit. As a result, each time farmers had a tough year, agitation for an expansion in the money supply increased, to help inflate the currency and make their debts easier to pay. Perhaps the tariffs could have been lowered to offset the surplus, but that would have angered the business lobby desirous of protection from overseas competition.

Such was the perception of the silver forces throughout the years after 1873. As regards the money supply however, the facts speak otherwise. The Silver Acts of 1878 and 1890 did actually increase the country's silver and paper circulation over the course of the cycle. Nevertheless these were deflationary times as regards commodity prices, which appears something to do with the larger Kondratieff wave effect first observed by Nikolei Kondratieff only in the 1920's, (see the commodities section of the site for more on this) and augmented by the relentless innovations of the era applied to improving the manufacturing and production processes.

The government soon found ways to spend its surplus, doing so freely by 1890, the same year as the Sherman (second) Silver Purchase Act. Both these events, increasing the availability of credit, led directly to an increase in speculation, despite the troubling news coming out of England about Baring's Bank, in November of 1890. The Baring's news (plus the effect of English selling of US stocks and bonds) caused a sharp sell off on Wall Street late in the year, but not a panic. Indeed, the market had already been in decline since May. The market steadied once it was learned that the Bank of London had affected a rescue of Baring's and no doubt, once the market realized the inflationary effects of the increasing availability of local credit.

The increasing coinage of silver under the Sherman Silver Act however was eroding the governments supply of gold: so much so that by early 1893 the spectre of the US government defaulting on its loans - payable in gold - looked probable. This may have upset Wall Street, but does not appear to have been the catalyst for the following banking panic. A slight variation to earlier panics and depression (though in effect the same thing) was brewing: the banking panic this time began in the interior of the country, in May, not October as in previous downturns.

Not one historian ever links the credit creation process, used to finance speculation in government granted licenses and privileges, the largest and most important of which is land value, to the fact that the economy experiences sharp and periodic booms and then slumps. So we are out on a bit of a limb here in this belief. Nevertheless, not one historian has ever managed to forecast with any precision the next downturn, which this material will teach you to do. Everything plays its part in the unfolding drama of a downturn of course. Under normal circumstances an economy will weather such problems. But when the economy is weighed down by heavy debts to purchase land or to speculate in its value, any shock, but more particularly a shock to the related credit creation process, will expose the lack of solid foundations to the process. Economists consider land purchase as wealth production. It isn't, unless perhaps you can time it right. One of the timing secrets it appears is to watch for signs of a contraction in credit. A downturn is yet to happen without one.

Land sales peaked in 1888, well before the months of panic as usual, with sales falling markedly after 1890. Railroad stocks could never quite manage to rise above the peak they made in June of 1881, (probably due to increased government regulation, increased competition and the increasing clout of the Granger movement), but did rise to a lower top in March of 1892, within the overall decline of the 1880's. Interestingly, rail stocks bottomed in August of 1896, 15 years from the high. The March 1892 peak was itself 15 years from the June 1877 low. (Both McCartney and Macauley's index figures, two different sources, post the June 1877 low, which is always good to know.)

Interest rates on New York commercial paper peaked in July and August of 1893, in line with the final crisis in New York at the end of the panic. This was 20 years (238 months actually) from the October 1873 panic high, and exactly 15 years from the 1878 low. The 1893 high was also 144 months from the 1881 June low, which itself was ten years - 120 months - from the 1871 low. All good points on the square and the triangle within the circle.

Further reading:

Fels, Rendigs. American Business Cycles: 1865 – 1897, University of North Carolina Press, 1959; reprinted Greenwood Press, 1973.

Hoffman, Charles. The Depression of the Nineties: An Economic history, Greenwood Press, 1970.

Holbrook, Stewart H. The Age of the Moguls, Doubleday & Company, 1954

Lauck, W. Jett. The causes of the Panic of 1893.

Noyes, A. D. The Banks and The Panic of 1893, Political Science Quarterly 9, no 1, page 15.

Reed, Lawrence W. A Lesson from the Past. The Silver Panic of 1893, The Foundation for Economic Education Inc. 1993.

Sobel, Robert. Panic on Wall Street: A History of America's Financial Disasters, Collier Books Edition 1972.

Sprague, O. M. W. History of Crises Under the National Banking System, Washington, Government Printing Office, 1910.

Wicker, Elmus. Banking Panics of the Gilded Age, Cambridge University Press, 2000.

Copyright Phil Anderson 2004

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