Although the long-run trends for the economy were positive after the Civil War, the economy was hit repeatedly by banking crises, which on two occasions foreshadowed major depressions. The first postwar panic occurred in 1873. The economy had surged in the early 1870s; railroad building was the leading sector. But in the fall of 1873 the financial system was hit by a cluster of failures. The most important was the failure of Jay Cooke and Company in September. Cooke was widely admired for helping the Treasury sell bonds during the Civil War. But in 1873 excessive advances to the Northern Pacific Railroad and deposit losses forced the company to close. The result was a major banking panic. The stock market was closed, and the New York banks were forced to suspend. Although quantitative data for these years is limited, the data that we have along with the testimony of observers is that the economy remained depressed for a number of years following the panic. The National Bureau of Economic Research dates the recession that began in October 1873 as ending in March 1879—65 months, one of the longest recessions on record. To be sure, this dating has been challenged, and it may be that there were positive surges during the period, but there can be no doubt that Americans experienced hard times during the 1870s.
There was a minor banking panic in 1884 and another in 1890. Although the economy began to recover after the 1890 panic, it remained weak. In 1893 there was another, more severe financial panic. The first blow was the failure of the Philadelphia and Reading railroad in February. In May another failure, the National Cordage Company, sent the stock market into a tailspin. Only a few months later a wave of bank failures hit the South and West. Here excessive real estate speculation in preceding years played a role in undermining the banks. Finally, in July the banks, beginning in New York, suspended specie payments. The money supply fell 7 percent from the third quarter of 1892 to the fourth quarter of 1893, when the suspension was lifted. After that it began to rise but did not reach a substantially higher level until the third quarter of 1897. The real economy was devastated. One fourth of the capital of American railroads was in bankruptcy. Manufacturing output plunged and unemployment rose. The unemployment figures are shown in Figure 19.4. Unemployment rose to over 9 percent in 1894. The rate began coming down in 1897, but it was not until 1901 that the rate of unemployment returned to the precrisis level. People referred to this period as the Great Depression until that title was usurped by the greater depression of the 1930s.
What about fiscal and monetary policy? In 1894 “Coxey’s Army” of the unemployed marched from the Midwest to Washington demanding a public works program to provide jobs. But the plea fell on deaf ears. Fiscal policy simply wasn’t considered a respectable option. It would not be until the 1930s that the federal government would attempt to provide jobs for the unemployed. Coxey’s Army had also called for the issue of paper money. But paper money was anathema to supporters of the gold standard. Even the more moderate Populist plan for adding silver to the money supply was rejected. But as we noted earlier, the discovery of new supplies of gold in South Africa and other places did produce a significant monetary stimulus that helped the economy recover.
The commonweal army leaving brightwood camp.
FIGURE 19.4
The Percentage of the Civilian Labor Force That Was Unemployed, 1890-1902.
Source: Data from Historical Statistics of the United States 2006, series Ba475.
The economy was hit yet again by a banking panic in 1907. In many ways it was a familiar story. Early in 1907 the economy began to deteriorate. One cause, which was probably not recognized at the time, was the San Francisco earthquake that had occurred in April 1906. Fires had devastated the city and British fire insurance companies had to pay out large sums in gold. The Bank of England then raised its interest rate to replenish its gold reserves, starting a cascade of rising interest rates and slowing economies around the world (Odell and Weidenmier 2004). In October 1907 the Knickerbocker Trust Company in New York City failed because of the growing apprehension about the state of the economy and in particular its connections with failed copper speculations. Like the other trust companies in New York, it had been chartered by the state of New York and did a regular deposit business as well as a trust business, so it was highly vulnerable to withdrawals by depositors.99 Soon other institutions with connections to the Knickerbocker closed their doors and soon after that a general banking panic was underway. The stock market also plunged, magnifying the fear paralyzing financial markets. The financier J. P. Morgan organized a pool to help support the stock market, and this provided some temporary relief. But this intervention and others by Morgan and his associates were unable to arrest the growing lack of confidence in the banking system. The New York Clearinghouse issued clearinghouse loan certificates and the New York banks suspended conversion of deposits into specie. The suspension then spread throughout the country. Suspension was more general geographically and longer (over two months in some cities) than ever before. In the Southeast and Midwest, the resulting shortage of cash was so serious that local clearinghouses issued emergency notes in small denominations that people could use to carry on business.
For reasons that are still not entirely clear, recovery from the panic of 1907 went much better than the recovery from the panic of 1893. The recovery began in June 1908, and unemployment, although elevated for several years, never reached the levels recorded in the 1890s. One possibility suggested by Friedman and Schwartz (1963, 166) is that the early and lengthy resort to suspension provided a cooling off period and reduced the number of bank failures and contraction of the money supply.
World History
