Business Downturn, Banking Crisis of 1893

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The U.S. economy experienced a banking crisis that started in the first half of 1893 and unfolded along with a downturn in economic activity that lasted beyond the end of the diary and William’s death in 1896. William began referring in the diary to general business and banking distress on June 6, 1893 and continued to do so until the end of the diary in late 1896. William was concerned about the downturn not only in terms of the business success of Steinway & Sons, but also in his capacity as a bank officer at several New York banks, such as the German Savings Bank.

At the end of the nineteenth century, analysis of economic developments and understanding of the economic forces at work were far less developed than at present. In particular, the collection and processing of wide-ranging data by the federal government had not begun, although some information was tabulated and reported in the press; the Federal Reserve System had not yet been created; and mechanisms for responding to and limiting economic downturns had not yet been introduced. Economic researchers, looking back on this period, have reconstructed from what information is available some estimates that, taken together, give a picture of the events of 1893 and the following years. The U.S. economy had been expanding for almost two years when it reached a turning point in January of 1893 and began a downturn. The following sharp contraction lasted until the middle of 1894 or about 1-1/2 years. Although data for the period are at best estimates, researchers suggest that overall economic activity declined at an average annual rate of about 5 percent in the two years 1893 and 1894. With the benefit of hindsight, it appears that recovery began at that point and the economy grew in 1895, but then sagged back into contraction in 1896. The economy did not return to sustained vigorous growth until 1898-99.(2)(5, p.1)

As is often the case, the severe economic downturn in 1893 resulted from a combination of factors. First, in the manufacturing sector of the economy, rapid investment in and expansion of the railroads had been occurring in the decades since the Civil War.(4, p.17)(5, pp.3-4) By 1893, signs of overcapacity had emerged in the railroads. As a result, failure of some railroad companies and a reduction in spending on railroad construction contributed to a loss of output, employment, and trade that spread beyond the railroad sector.(4, pp. 32,37)(5, p.6) Second, concerns about the safety of bank deposits and demands for withdrawal of funds grew into a banking crisis that was particularly severe in 1893. The banking crisis resulted in a scarcity of credit for business and agriculture. Third, the banking crisis was related to the debate in political circles about maintaining the U.S. dollar on the gold standard, the role of silver, and the effort to pass the Silver Repeal Bill. This debate and the banking crisis contributed to feelings of business uncertainty and a loss of confidence on the part of entrepreneurs. Finally, an economic downturn in Europe that had started slightly earlier reduced demand for U.S. exports, exacerbated the business cycle in the United States, and contributed to the selling of U.S. stocks and bonds by European investors, depressing U.S. stock prices and increasing U.S. interest rates.(4, pp.23, 79-80)(5, pp.6-9)

In the diary at the end of 1893, William summarized: “The year 1893 was a most terrible one especially to me, and the poorest business year for many years past on account of the fearful money panic and stringency.”(Diary, 1893-12-31) Earlier he had been concerned with the strength of the banks in New York and runs on the banks.(Diary, 1893-07-28, 1893-07-31) He saw the protracted effort to pass the unconditional repeal of the silver purchase provision of the Sherman Act as creating uncertainty and as bad for business.(Diary, 1893-10-15)

By early 1893, the pace of economic activity had begun to slow across the country, with unemployment and the number of business failures rising. This slowing resulted from an excess of capacity that had arisen during the business expansion of the preceding years, in particular in railroad capacity, which in turn had sustained the iron and steel industries and supported economic expansion more broadly. As railroad capacity reached and probably exceeded an amount that could profitably be used at that time, profits fell, investment in the railroad sector declined, failures of railroads and firms in related industries became more common, and overall demand for agricultural and manufactured goods began to sag. In addition, global prices for staple agricultural products were low and/or falling, reducing income in the agricultural mid-section of the country. These developments in the agricultural and manufacturing sectors resulted in difficulties on the part of farmers and firms in making payments on their bank debt.(5, pp.3-7) One year into the downturn, William saw few signs of a recovery.(Diary, 1894-08-30) At the start of 1896, he still described business as bad and finance difficult.(Diary, 1896-01-11)

One prominent feature of this business cycle was the failure of a large number of banks throughout most of the country. Because New York City already was the nation’s major financial center, disruption to the banking system in New York was a critical feature of the national banking crisis, was evident to William, and was mentioned frequently in the diary, particularly during the summer of 1893. (Diary, 1893-07-10, 1893-08-14) The New York Times reported in September 1893 that 560 state and private banks had failed in the United States since January, with 72 of those having resumed operations subsequent to their temporary closing. The numbers reported for New York State were 25 bank closings, of which 2 banks resumed operations.(1) Runs occurred on banks in the city and were widely reported in the press. The reduction in profits and incomes and the general economic uncertainty led households and firms to try to increase their holdings of currency rather than bank deposits, triggering the bank runs. The inability of those who had borrowed from banks to repay their loans undermined the soundness of the banks and contributed to worries about possible bank failures.(3)

The pressures on the banks also arose in part from concerns by investors and businesspersons about the debate within the United States over the roles of gold and silver and the adherence of the United States to the international gold system then in place. The risk that the United States might change the value of the dollar in terms of gold led some to fear for the value of their dollar holdings. Holders of dollars both within the United States and abroad sought to convert their dollars into gold, resulting in flows of gold from the United States to Europe and outflows of gold from the U.S. Treasury. Support for continued buying of silver by the Treasury was centered largely in western, silver-producing states and among those who favored somewhat easy money and even some inflation. In 1889-90, six new states where silver was an important resource had joined the Union. Easy money and inflation would work to benefit anyone needing to borrow or already in debt, often those in the agricultural and rural areas. Those in the eastern financial centers had the opposite concerns; they supported “sound” money and continued commitment to the gold standard. Vigorous debate about the money question kept the level of uncertainty about the dollar and its gold value high throughout the business downturn; this issue was not fully resolved until the defeat of William Jennings Bryan in the presidential election of 1896.(5, p.9) Signs of economic recession had begun in France, Germany and the United Kingdom in 1889-90. Recovery from this downturn did not start until 1895. Weakness in Europe naturally lessened demand for exports from the United States. With part of his business interests in Europe, William was concerned about depressed business in Europe.(Diary, 1894-06-16) A strong U.S. harvest and substantial agricultural exports in 1891-92 masked the effects of other contractionary forces coming from Europe, but by 1893 those forces were in evidence. Downward shifts in demand for trade and goods in the United States and Europe were mutually reinforcing. In addition, strained business conditions in the United Kingdom led British investors to seek to sell their holdings of U.S. securities, adding to financial pressures in New York. Stock prices moved down. U.K. investors sold their dollars for gold, and gold flowed out of the United States to Europe.(5, pp.6-9)

For William, the effects of the general slowdown in economic activity were evident in the sales of Steinway & Sons. He made frequent diary references to both wholesale and retail trade, although those two elements of business did not always move similarly.(Diary, 1894-05-29, 1895-12-25) Despite the severity of the business downturn, Steinway & Sons was able to continue to operate with some success during this period. The terms at which credit could be obtained also affected Steinway & Sons, and William commented on them in the diary. One particular concern was the need of the manufacturing company to provide financial support to its dealers during this time. The general business and employment downturn no doubt also added to the number of persons who sought financial help from William in the last years of his life. Such requests seemed to be never-ending, and William referred to them often in the diary.

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Sources:
1.“Bank Failures of Eight Months,” The New York Times, September 25, 1893, p. 4.
2.Carter, Susan B. et. al. eds, Historical Statistics of the United States: Earliest Times to the Present. New York: Cambridge University Press, 2006, pp. 3-25, 3-59, 3-63 and 3-79.
3.“The Crisis and Its Causes,” The New York Times, July 31, 1893, p. 6.
4.Steeples, Douglas and David O. Whitten, Democracy in Desperation: the Depression of 1893. Westport, Connecticut: Greenwood Press, 1998.
5.Whitten, David O., “The Depression of 1893,” available from the Economic History.net web site
http://eh.net/encyclopedia/article/whitten.panic.1893