In the decades between 1870 and 1900 the United States experienced remarkable economic growth—averaging about 4 percent a year—a process that helped to raise the standard of living per capita by about 2 percent a year. The population also grew from 40 million in 1870 to 76 million in 1900, while the labor force increased at an even greater rate, expanding from 13 million to 29 million. During these years industry hurtled past agriculture as the major engine of economic development. In 1870 the agricultural sector supplied 47 percent of the value added to the economy while industry took a 43 percent share. By the end of the century the figures were entirely reversed, with industry garnering 65 percent of value added while agriculture was reduced to 35 percent.
This rapid growth, and industry’s rise to dominance, did not take place smoothly or without sharp ups and downs but proceeded within a context of what economists would later call “business cycles,” pronounced periodic swings in output, employment, and prices. Laypeople would term these swings “boom-and-bust” cycles, and the Gilded Age economy seemed to be pockmarked with them, especially the busts that ranged in duration from many months to several years and in severity from mild to deep. Notable among them were the depression following the panic of 1873, the panic of 1884, and the depression after the panic of 1893. To some contemporary critics of the new industrial society, these periodic spasms of mass unemployment, bankruptcies, and social insecurity were evils endemic to industrial capitalism. Edward Bellamy made this point in his utopian novel Looking Backward (1888). “Your system,” he wrote, “was liable to periodic convulsions, overwhelming alike the wise and the unwise, the successful cutthroat as well as its victim. I refer to the business crises at intervals of five to ten years, which wrecked the industries of the nation.”
Contrary to what Bellamy implied, such economic crises were not unique to the Gilded Age. In the early decades of the 19th century, when agriculture was preeminent, boom and bust fluctuations were frequent and extensive. In the years between 1816 and 1847, two economic downturns of great severity, the panics of 1819 and 1837, followed periods of prosperity and roiled the American economy with widespread bankruptcies, deflation, severe unemployment, and general social distress. And although the nation enjoyed a long period of prosperity after 1843, the two decades preceeding the Civil War also witnessed a sharp crisis in 1854 and a brief, nasty depression from 1857 to 1858.
Yet, the business cycles of the Gilded Age were different in some ways from their predecessors. As industrial capitalism transformed the country, what had formerly been an economy dependent on agriculture and exports of cotton and wheat for its prosperity now became a selfsufficient economy of complex characteristics. Because of this fundamental shift, the business cycles of this period took another shape and displayed unique attributes. In the preindustrial era, cyclical fluctuations arose largely because of excessive speculation in new agricultural lands and an unstable money supply, currency, and banking system. In the Gilded Age, however, business cycles were mainly due to changes in the rate of investments in factories, railroads, and mines and to alterations in the supply of money brought about by structural changes in the banking and financial systems. Also, as a result of dramatic improvements in communications and transportation—the invention of the telephone, widespread usage of the telegraph, the expansion and integration of the railroads—and the economic and geographical interdependency arising therefrom, changes in business activity more easily and forcefully rippled through the economy. As a consequence, the two major depressions of the Gilded Age, beginning in 1873 and 1893 (the panic of 1884 was not as severe), were two of the worst downturns the nation had ever experienced. And although they were different in detail, each, including that of 1884, followed the same general pattern of development and were linked to investment swings in the new, dynamic sectors of the economy, particularly the railroads.
The depression of 1873 began with the collapse of the country’s leading brokerage house, Jay Cooke & Company, an event that reverberated throughout the nation. Jay Cooke, known as the “financer of the Civil War,” had expanded his activities following the conflict beyond that of handling government securities. He became a major broker and financer of ventures in coal, iron, and especially railroads. These and other investments stimulated rapid growth in transportation, mining, and large-scale cattle raising. But as was often the case in periods of prosperity and profit-making, there were excessive investments in speculative enterprises. Too many railroad lines were built; too many cattle ranches put too many cattle out to pasture; and too much silver was mined. And as billions of dollars in foreign capital flowed into the country, there was a constant drain of gold to service the burgeoning debt. With the unexpected failure of Jay Cooke, panic ensued. Commodity prices and prices for manufactured goods plunged. The stock exchange closed for 10 days; credit dried up; and stunned depositors initiated runs at hundreds of banks. Between 1873 and 1878, there were almost 50,000 bankruptcies, with losses estimated in the billions. The panic soon turned into a severe retrenchment, then a depression, and unemployment skyrocketed to levels never seen before. All segments of the increasingly integrated economy appeared to grind to a halt. For the first time in history, the majority of Americans appeared to be caught in the coils of an economic crisis not of their making and over which they had no control.
Many analysts regard this depression as the worst of all the economic downturns of the 19th century and, with the possible exception of the Great Depression of 1929, the most severe in the nation’s history. But hard statistical data that accurately measures the severity of the depression of 1873 is lacking. It was not until the 1880s and 1890s that many state and local governments, especially in the East, began to establish agencies to collect data on such things as employment, housing, and immigration. As a result, the depression beginning in 1893 offers a better window into the economic crises of the period.
While perhaps not as serious at the 1873 contraction, the depression of the 1890s appeared to be, by almost any measure, a bad one. Perhaps 20 percent if not more of the workforce experienced unemployment at one time or another. Almost 50 percent of all businesses failed. More than 156 railroads, controlling 30,000 miles of track and with a capitalization in excess of $2.5 billion went under. At its worst, the economy is estimated to have contracted about 25 percent below its pre-depression level.
The factors responsible for this downturn were similar to those of 1873, although this time it was the collapse of the great British banking house, Baring Brothers, which helped trigger the crisis. Having overextended itself in Argentina, Baring was forced to liquidate its holdings in American securities, particularly railroads. This precipitated a heavy outflow of gold, which put a strain on American banks. The banks might have been able to withstand the drain on their gold reserves but for the fact that, for political reasons, the Treasury Department was then engaged in trying to support the price of silver by buying 4.5 million ounces of that metal per month under the terms of the recently enacted Sherman Silver Purchase Act (1890) and issuing Treasury notes, redeemable in gold, for those purchases. This required a large supply of gold to maintain redemption. Bankers, concerned about their falling gold reserves, petitioned the Treasury for conversion of greenbacks and other paper into gold. But the government’s gold reserves were clearly inadequate to the task, and the possibility that the government might have to suspend payments in gold sent shivers through Wall Street and set off a panic in the spring of 1893. Again the financial panic spread disruption to other areas of the economy. Railroads went under. Investors found that many of their holdings were worthless. As prices for their goods fell, manufacturers of all sorts retrenched or closed their doors, banks failed, and credit became scarce. Once more the economic system seemed to be in disarray after another boom-and-bust cycle.
But was the underlying economy truly in such bad shape or were all of these crises just a lot of sound and fury signifying nothing? One recent historian has advanced the argument that the panics and depressions of the era were largely mirages of little economic significance. When viewed from the perspective of long-term growth trends during the period, he claims, the depressions were not “of any great seriousness or duration.” To be sure, the pace and rate of economic activity fluctuated and was erratic. And, yes, factories might close for short periods of time, unemployment might increase, and public confidence might fall. “But it was,” he concludes, “in the main, a time of rapid expansion,” and it was that expansion of production that had a much greater impact on American history and development than the downturns that accompanied it.
Still, whatever their long-term significance, those periodically recurring business cycles and breakdowns were real, and economists in the 20th century have analyzed them extensively and developed numerous theories seeking to explain their causes. One of the pioneers in the understanding of business-cycle behavior was Wesley C. Mitchell, who presented a theory of self-generating cycles. Basically, his theory held that when prospects for profits improved, business activity increased, and when prospects became less certain, business declined. After a period of depression, the stage was set anew for a revival and a combination of forces then converted incipient prosperity into another boom, which once again eventuated into a bust. Other scholars have built on Mitchell’s analysis, some looking for the key initiating forces or starters of the process, others constructing theories to explain the cycles on the grounds of monetary or investment factors. But however much economists might differ in their analysis of the whys and wherefores of the business cycle, all students of the phenomena agree that it is deeply embedded within the capitalist system and must be taken into consideration by policy makers if its worst tendencies are to be avoided.
Further reading: Rendigs Fells, American Business Cycles, 1865-1897 (Chapel Hill: University of North Carolina Press, 1959).
—Jerome L. Sternstein
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