Economic statistics in 1893 modestly signaled the recession to come in the United States. The economy had improved during the previous year. Business failures had declined, and the average liabilities of failed firms had fallen by 40%. The actual crisis was set off by the collapse of two of the country's largest employers, the Philadelphia and Reading Railroad and the National Cordage Company.
On February 20, 1893, the Philadelphia and Reading Railroad, with capital of $40 million and over $125 million worth of debt, went bankrupt. Shock was great for the stock market, which suffered another blow after the National Cordage Company announced further bad news.
One of the biggest rope manufacturers of the time was also the most actively traded stock. The stock became a favorite of Wall Street speculators, soaring to an amazing $147 in January. The company unsuccessfully tried to corner the market for imported hemp, which resulted of going into receivership.
The bankers called in their loans as the rumors regarding the financial adversity of the National Cordage Company spread. In May, the Cordage went bankrupt and the stock market collapsed to below $10 a share.
Stock market panic and failures
After the failure of two major companies, a panic erupted on the stock market. Hundreds of businesses that had overextended themselves, borrowing money to expand their operations suddenly had no more support from the banks as all their bad decisions came to light. When the financial crisis struck, banks and other investment firms began calling in loans, causing a series of bankrupt businesses across the United States.
The crisis of 1893 is often referred as a railroad bubble, mainly because of the growth that railroads provided. However, speculation in stock market followed the economy closely and when the crisis came, several other seemingly indestructible railroad companies bankrupted. By May 15, stock prices reached an all-time low. It should be noted that among them were Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad.
Over 500 Banks which financed the railroad expansion and were involved in speculation failed next. Bank runs were not a rare scene; the panic began to spread nationwide. It is considered that over 15,000 companies failed during the course of the crisis. Unemployment steadily grew, rising from 1 million in August 1893 to 2 million by January 1894. According to some estimates, over 20% of the workforce was unemployed at the panic peak. Homelessness skyrocketed, as workers were laid off and could not pay their rent or mortgages. The unemployed also had difficulty buying food due to the lack of income.
The credit crunch effects
Concern for the state of the economy worsened, and more people rushed to withdraw their money from banks causing large number of bank runs. The credit crunch rippled through the economy. A growing depression in Europe resulted in British investors selling their American investments and redeeming them for gold. This fostered a growing American gold loss, creating a panic.
People attempted to redeem silver notes for gold in accordance with The Sherman Silver Purchase Act of 1890. Passed in response to a large overproduction of silver by western mines, the Sherman Act required the U.S. Treasury to purchase silver using notes backed by either silver or gold. The growing decline of the gold reserves stored in the U.S. Treasury continued, and the reserves fell to a dangerously low level.
In order to support the gold standard the President Cleveland borrowed $65 million in gold from Wall-Street banker J.P. Morgan. Morgan made an intriguing offer to Cleveland. He and the Rothschilds, the two most powerful international banking concerns, would purchase for the Treasury 3.5 million ounces of gold in exchange for $65 million worth of 30-year gold bonds. Morgan promised that the gold would remain in the Treasury. In essence, the financier was proposing to act as the nation's central bank during the crisis, protecting the Treasury from market forces.
Ultimately the statutory limit for the minimum amount of gold in Federal Reserve was reached and US notes could no longer be successfully redeemed for gold. Investments during the crisis of 1893 were mostly financed through bond issues with high interest. As the demand for silver and silver notes fell the price and value of silver dropped. Holders worried about a loss of face value of bonds and many became worthless. The severity was great in all industrial cities and mill towns. Farm distress was great because of the falling prices for export crops such as wheat and cotton. "Coxey's Army" was a highly publicized march of unemployed laborers from Ohio and several Western states to demand relief in the form of a jobs program.