The Panic of 1893 was perhaps the hardest depression in American history, in terms of its total impact. Thousands of banks closed, millions went out of work, and the westward expansion that had defined the post-Civil War era vanished for nearly 25 years. It is a wanton tale of greed, overregulation, and ignorance. But first, a little economics 101.

For whatever reason as nature saw fit, silver and gold were selected to be the primary metals by which our monetary standard in America and abroad is governed. Due to various market rules regarding supply and demand, gold had more or less been 15 times as valuable as silver in terms of trading and the market. Recognizing this ratio, then-Secretary of the Treasury Alexander Hamilton declared this the fixed ratio for dealing with the metals in the federal government in 1792.

There is a little known law, Gresham's Law, which states that when two monies are set at fixed ratios, then the bad money (money that is overvalued) will drive out the good money (money that is undervalued) from the market. In this case, gold was actually trading at a rate closer to 15½ to 1. Thus on the bullion market a piece of gold could get you 15½ pieces of silver. Soon silver flew freely into the mint (since an investor got a better deal from the government for it) and became coined more, while gold vanished into hiding or to overseas market. In time, a de facto silver standard existed in the United States.

To remedy this, in 1834 Congress changed the ratio to 16 to 1. Unfortunately, the real ratio had not changed much in that time, and now gold become overvalued and soon gold was being traded at high volume. To make matters worse, gold was much more expensive in general than silver, and thus only richer people could afford to speculate on the bullion market and deal with the treasury.

Now that we understand a bit more about the commodities market and the general flow of currency, let's resume our history lesson.

In 1870, shortly following the Civil War, a political party was formed whose sole purpose was to artificially inflate the U.S. economy. During the Civil War, the Union had printed paper money called "greenbacks", which they had traded much like the war bonds of today in order to fund the Army. After the war, the Greenback Party was formed for the sole purpose of expanding this paper money supply into its own flexible market. They claimed (partially correctly) that the current hard money standard based on silver and gold mainly benefited the rich, but that a flexible supply could be manipulated by the government to help working people, particularly farmers in the West and South. The Party fought hard to create the supply, but instead were met with the Specie Resumption Act of 1875, which offered a gold redemption for the currently issued greenbacks, and a limit of $100,000,000 in greenbacks to be kept in circulation, backed by gold.

The next step towards disaster was the free silver movement that dominated the early 1880s. Since gold was overvalued, and silver undervalued, the demand for silver had dropped significantly, and with it, its market price. This was actually a modified plan of the inflationists before, to reduce the impact of hard money by making the government a trading tool for silver, which was much cheaper than gold. With the Blaid-Allison Act of 1878, the government agreed to buy $2 million worth of silver every month, and to coin it at a rate of 16 to 1, the lawful ratio. This foolhardy measure (silver was currently trading at the ludicrous rate of 18¼ to 1) was vetoed by then-President Rutherford B. Hayes, but overridden by Congress. Soon, silver speculators and mine owners alike were taking silver to the government, and then returning with more gold than they would be paid on the real market. In turn, they would use the gold to acquire even more mines and cover the costs of production. Silver miners were essentially being subsidized by the government for their work, when the free market would've driven most of them out of business due to lack of demand. This subsidization was only worsened by the Sherman Silver Purchase Act of 1890, which legislated that the Treasury buy 4.5 million ounces of silver per month - essentially the entire output of silver mines in America.

At the same time that America was moving towards this hard silver standard at the unreasonable rate of 16 to 1, nearly every other world economy had dropped the silver standard altogether. Holland, France, Denmark, Austria-Hungary, England, Italy, Greece, and Russia had all gone to the gold standard, leaving America alone as the single silver-backed economy in the major powers of the world. And now, for some more economics 101.

The overabundance of silver in the coin supply made its market value continue to decline (although silver mine owners still made a healthy profit through the government.) From 1878 to 1895 a 371¼ grain silver dollar had plummeted nearly 40% in value. What made matters worse was that many people who had entered into contracts with promises to be repaid in coin, were being paid back in silver, which had lost considerable value since the contract had been entered into. Even worse, since silver had become such an easy sell to the government, and the government only had gold to pay out, gold reserves had become seriously depleted within the Treasury. This had the added effect of limiting production in the country, due to people's reluctance to depend on the gold that may or may not be in the bank when payment was due. Back to the history.

In response, many foreign investors began abandoning the American securities market, and in fact, many Americans began spending their capital in Latin America and Canada, predicting the collapse of the U.S. economy in a self-fulfilling prophecy. The cycle of silver to gold to more silver had increased circulation of paper money and silver in the country by nearly 75% in the past 20 years, causing the inflation that the Greenback Party had so desired. This inflation caused more investors in the open market, and loan rates dropped considerably to accommodate these new borrowers. Call margins grew outrageously, and soon loans had exceeded the physical reserves of the banks. All of the classic warning signs of a panic were there; simply nothing was done to solve it.

Finally in January 1893, the rising prices of industry began to recede, part of the cyclical nature of the economy and showing no particular biases or evidences. Banks in their nature are conservative beasts; they began calling in their formerly "easy money" loans as quickly as they had handed them out. The credit industry dropped nearly 20% in the two months following. Finally, on February 20, 1893, the Reading Railroad declared bankruptcy on $18 million worth of debt and only $100,000 of accounts receivable. When President Benjamin Harrison left office on March 4, many merchants were already refusing to accept the highly inflated silver as payment, and many factories were going on strike, because their employers chose to pay them in silver certificates.

On May 3, 1893, a huge brawl ensued on the New York Stock Exchange floor, as banks called in loans and panicked business owners rushed to sell off their flailing companies before their stocks went completely belly up. The following day, National Cordage Trust provided a harrowing example of the folly of the entire silver standard as it stood:

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.

Within weeks, hundreds of companies had gone out of businesses and locked up their gates. By July of 1893, 3400 companies had gone bust, with over $169,000,000 lost in the economy. That same month, Grover Cleveland ordered a special session of Congress to repeal the Sherman Purchase Act and end the fixed trading that had caused so much disaster in America. Finally on August 28, the Sherman Act was repealed. Unfortunately, it would take another 4 years for the Panic's effect to lessen, and by then, thousands of people across America had literally starved to death, waiting on checks that they simply couldn't cash.

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