This Day in Economic History (The Stock Market and the Panic of 1893)

May 5, 1893—Almost two months to the day after returning to the White House, Grover Cleveland experienced the second-worst (the worst being a catastrophic attack on the nation’s citizens) nightmare of an American President: an economy that goes south on his watch. In this case, the major signal of precipitous economic decline was a panic on the New York Stock Exchange, the first tremor of a far worse convulsion some months later that produced the Panic of 1893, a downtown surpassed in severity only by the Great Depression that began in October 1929.

A President exerts much less influence over the economy than over foreign affairs. That relative impotence was even greater in the nineteenth century, before a consensus formed during the New Deal that the executive branch of the federal government, if only as a last resort, must staunch the worst bleeding in the economy. Without a national bank or other central financial authority that could control markets (the charter of the Second Bank of the United States had not been renewed during the Jackson Administration, and the Federal Reserve would not be created until 1913), mostly all a President could do was wring his hands and pray.

While in office, Bill Clinton looked backward to the turn of the century to see how Americans had managed the convulsions of a new economy. If he read closely about the plight of his Democratic predecessor Cleveland, he must have felt as if he were reading a horror novel rather than an academic history. A kind of perfect storm produced the May 1893 frenzy:

* Then, as now, foreign investors bought heavily into U.S. companies. The 1891 failure of British banking house Baring Brothers made them especially timorous, with call rates on loans in New York rising to over 180 percent.
* While the subprime mess precipitated much of our current economic distress, the wild ride given investors by the American railroad industry lay behind the 1893 disruption. The February 1893 collapse of the Philadelphia and Reading, with debts up to $125 million, underscored the risks. By year’s end, 74 American railroads would collapse. (A fascinating phenomenon developed as railroads hit the financial wall; they needed well-connected attorneys at the helm of their companies to steer them through their legal morasses, including Frederick Billings of the Northern Pacific and Robert Todd Lincoln – yes, the President’s son – of the Pullman Palace Car Co.
* A Republican Congress frittered away a $100 million Treasury surplus.
* The Sherman Silver Purchase Act of 1890 pushed gold reserves below the $100 million mark and sent inflation through the roof.
* The National Cordage Co., a major rope trust and employer as well as big stock-market favorite, went belly up on May 4, immediately precipitating the stock market plunge.

Cleveland felt strongly that the Silver Purchase Act needed to be repealed, but Congress was oddly dilatory about the matter. Then, as now, the Constitution’s system of checks and balances ensured that the government wouldn’t move until a crisis came. It did so on June 27, when the stock market really crashed—the start of a four-year depression in which as much as a fifth of the nation’s factory workers lost their jobs.

By the time Congress could be persuaded to move, Cleveland couldn’t, for medical reasons. Also in May, it became apparent that a cancerous lesion in his mouth required surgery. The trouble was this: If anything should happen to the President, the next in line would be Vice-President Adlai Stevenson (grandfather of the later Illinois governor and Presidential candidate), whose pro-silver stance made him anathema to Wall Street.

Not a word could get out, then, about his medical condition, and to ensure that it didn’t the President had to have the surgery performed on a yacht in New York’s East River. Only after he was recovered, over a month later, was he prepared to call Congress into special session on August 7. Finally, they agreed to rescind the Silver Purchase Act. While investors were reassured, the damage continued to be long-lasting, ensuring that a Democrat would not hold onto the White House during the election of 1896.