The debate over U.S. monetary policy led to an economic crisis that became the worst depression in U.S. history up to that time.
May 5, 1893 became “Industrial Black Friday” as railroad and industrial stocks plummeted and several major companies went bankrupt. This sparked the Panic of 1893, and an average of 24 businesses a day failed in May alone. The panic began a four-year depression in which over 15,000 companies and 600 banks closed throughout the U.S. One of the most predominant causes of the panic and depression was the contentious debate over U.S. monetary policy.
Silver versus Gold
A primary cause of the panic was the coinage of silver alongside gold in the U.S. currency system. The Sherman Silver Purchase Act of 1890 required the government to buy and coin silver at a fixed ratio of 16 ounces to one ounce of gold. However the silver ratio should have been much higher due to excessive silver mining in the West.
As the silver supply increased, people began exchanging their silver for the more stable and valuable gold. This weakened the U.S. Treasury’s gold supply, and since gold was the basis of U.S. credit abroad, the national credit rating suffered. Consequently, business confidence was damaged and the U.S. currency system became devalued.
Since people were scrambling for gold, the silver supply exceeded demand, and many western silver mines closed down. This prompted western railroads serving the mining towns to close. These closures bankrupted many who had overinvested in railroads and led to a series of commercial and banking failures throughout the country. By June 1893, the U.S. was in a full-fledged economic depression.
At the depression’s peak, roughly 17 to 19 percent of the workforce was unemployed. Many people abandoned their homes when they could not meet mortgage payments. A massive migration to the West ensued, and towns like Denver, Salt Lake City, Los Angeles, San Francisco, Portland and Seattle boomed as a result.
Strikes erupted in various industries as unions railed against businesses for lowering production and wages. In May 1894, a group of unemployed workers led by Jacob Coxey marched on Washington to lobby the government to create jobs through public works projects. “Coxey’s Army” was mostly ridiculed by the press and the public for begging the government for assistance.
President Grover Cleveland called Congress into a special session to address the panic. Cleveland, like many who supported gold as the sole basis of national currency, believed that the crisis was caused by excessive coinage of silver. As such, he urged Congress to repeal the Silver Purchase Act.
Silver advocates, mostly Democrats and Populists who represented capital-starved farmers and laborers, blamed Cleveland and his fellow “Bourbon” Democrats for adhering to the gold standard that favored the rich. Pro-silverites argued that inflating the currency with more silver would provide government relief to the poor and unemployed. Gold advocates like Cleveland reasoned that contracting the currency by reducing silver would be painful but necessary to sustain the free market.
After heated debate, Congress finally agreed to repeal the Silver Purchase Act. The repeal helped boost business confidence and gradually stemmed unemployment. It also reduced runs on exchanging silver for gold, although the exchange was still being conducted at an unsustainable rate.
With the Treasury’s gold reserve nearly depleted, financier J.P. Morgan agreed to bail out the federal government by loaning the Treasury 3.5 million ounces of gold. In addition, Cleveland agreed to sell gold bonds to stem the runs. The repeal of silver purchasing, the gold loan and the bond sales stabilized the economy, which gradually strengthened over the next four years. Adding to the recovery was the discovery of gold in the Klondike in 1897. By that year, the depression had ended.
The Panic of 1893 provided the key issue in the 1896 presidential campaign: the coinage of silver versus gold. The Democrats turned pro-silver, thus disowning the old-line gold Democrats led by President Cleveland. This took the party in a liberal direction that has continued to this day. Despite the shift, voters favored gold over silver, and pro-gold Republicans won the next four presidential elections. Silver was never used as the basis for U.S. currency again.
Perhaps more importantly, the panic and subsequent depression caused many people to lose faith in both the economy and politics. The press had revealed many shady deals between politicians and businessmen that horrified the public. The shattered confidence never fully recovered, and a sense of cynicism developed that has steadily increased ever since.
- Schweikart, Larry and Allen, Michael: A Patriot’s History of the United States (New York, NY: Penguin Group, Inc., 2004)
- Wallechinsky, David and Wallace, Irving: The People’s Almanac (Garden City, NY: Doubleday and Company, Inc., 1975)