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Panic of 1893

The panic of 1893 was one of the most severe financial disturbances the country had experienced, with suffering perhaps the greatest in the West. Commercial failures continued above the average for several years. The darkest point in the depression came with the failure of the Erie Railroad and the suspension of the Milwaukee Bank. Industries fell off 60 percent within five months.

This was brought about to some extent at least by the unfavorable working of the silver coinage law, which necessitated a special session of Congress, at which the law was repealed. However, it soon became apparent the silver coinage law was not alone responsible for the previous panic, and its repeal by Congress came too late to restore confidence.

During the prosperous years following the depression of the 1880s there was a decided upward trend in the promotion of monopolies, for the purpose of controlling the products of industry. Combinations and mergers were made or attempted in almost all lines of industry and trade. These monopolies or combinations were as usual accompanied by the creation of holding companies, price fixing and pool agreements, overcapitalization, overvaluation, excessive promotion costs. In order to finance the same, huge blocks of bonds and stocks, both preferred and common, were offered to the public at fictitious values, which brought about an era of wild speculation.

The outstanding example of the period, illustrattng generally the methods used, was the Cordage Trust, organized by James M. Waterbury, the failure of which is credited with having precipitated the panic of 1893. The National Cordage Co. was originally organized in 1887 as a private combination of a few leading manufacturers of rope and twine to purchase and control the raw material used.

Promoters, bankers, and stock-market interests were at first excluded. Later, in order to control the entire industry, the company was changed into a public corporation, with capital stock of $15,000,000, divided into one-third preferred and two-thirds common. The common stock was issued to the promoters and placed in the hands of Waterbury & Co. under a trust agreement. The preferred stock was offered to the public through the firm of August Belmont & Co. and other professional promoters. The administration of the stock pool which was formed was placed in the hands of James R. Keane and several New York bankers who were interested in the success of the pool.

Through the activities of Keane and the use of extravagant financial statements issued by the company, the stock was forced up from $73 a share at the time the pool was formed to $142 a share in December, 1892. The pool was liquidated and the profits divided early in 1893. During this same time the company had incurred great losses in its efforts to control and market the raw material, hemp and sisal. Notwithstanding such losses and the lack of revenue, the company continued to pay 8 percent on the preferred stock and 9 percent on the common stock. Moreover, the company had, in January, 1893, declared a 100 percent stock dividend and increased the common stock from $10,000,000 to $20,000,000.

The book value of the subsidiary plants was marked up to correspond with the inflation of the capital assets, and glowing statements were issued to the effect that the preferred stock would be placed on a 10 percent dividend basis and the new common stock on a 7 percent basis. Furthermore, the company had already borrowed on demand loans and short-term initial notes upwards of $5,000,000 from New York and New England banks.

Rumors of the company's actual condition began to reach the public. In the face of these conditions, the company undertook to market a new issue of stock, which failed. Within a few days, with its stock values disappearing and its credit destroyed, the company collapsed and a receiver was appointed. The stock of this company had been one of the leaders on the stock exchange, and its failure carried with it three stock exchange firms.

The failure of the Cordage Co. uncovered the manipulation of stock pools, the juggling of figures in financial statements, and disclosed the many questionable methods used in many other concerns as the failures multiplied in the panic of 1893, resulting in a complete loss of public confidence in the affairs of big business.

At the beginning of this ten-year period Morgan, Vanderbilt, Jay Gould, Collis P. Huntington and James J. Hill were the railroad kings. Morgan and Vanderbilt held the coal roads and the trunk lines of the East; Gould, Huntington and Hill held the great bulk of the Western roads. The panic of 1892-3 furnished Harriman his opportunity. In 1892, there was a money stringency, crops promised failure, labor restlessness led to the Homestead riots, Jay Gould died; and dozens of small railroads failed.

Eighteen hundred and ninety-three was even a more disastrous year. February 20, the Reading was crushed byits debts; in May. the National Cordage scheme burst; July 25 the Erie fell; August 16 the Northern Pacific collapsed and passed into a receivership on October 13. In December the Atchison tumbled and during the same period of panic 642 State and national banks collapsed, and the mercantile failures totaled more than $350,000,000.

The first part of 1893 found business and financial conditions abroad far from satisfactory. England and the European countries were in the throes of a depression of their own. The depression in England started with the failure of Baring Brothers in 1890, and continued until 1896. The failure of the National Bank of Australasia and a doubt concerning the outcome of currency legislation in this country caused an uneasy feeling in the London markets. Rates of foreign exchange were very high and gold was steadily exported.

The United States Treasury, to stem the outward flow of gold, proposed that the United States banks loan the Treasury $50,000,000 in gold. This action caused a severe contraction in mercantile credits and a tightening of the money market.

In fact, money trouble was the manifest peculiarity of this long-drawnout depression. Commodity prices fell to a low level. Wages were reduced. Unemployment became general and many large cities were compelled to provide public relief. Labor strikes and riots occurred, the most conspicuous being the A.R.U. railroad strike in 1894. Distress was increased for the agricultural classes in that year by the failure of the corn crop and the decline in European demand for wheat.

There was a temporary revival of business in the United States ln 1895, but a further recession immediately followed the President's Venezuelan proclamation in December of that year. A recession also occurred during the campaign of 1896, when abolition of the gold standard became a political issue. Retention of the gold standard following the presidential election in 1896 brought a return of prosperity, which grew to boom proportions in 1899.

By the time the stock boosting campaign culminated in 1898, Harriman was rich. He had freed millions that had been tied up in stocks and bonds and the bank accounts of his friends in the syndicate were overflowing.