3JM Company Inc.



Published Articles by David Balovich

Title: History And Credit
Published in: Creditworthy News
Date: 10/9/12


We're often asked why we write about history especially when this is a newsletter for credit and collection professionals. The fact is that history tends to repeat itself and if one pays attention to what has happened in the past then we are better prepared to deal with what is happening today and most importantly we have an idea of not only the cause but also the results. Credit professionals, especially, should look to the past for that is where they will often find the solutions to the opportunities they are dealing with currently. It also provides us the ability to be optimistic in our decision making.

We suspect that future historians will look back on America's economic history as possibly one of the most unique times the public has ever survived. It began with a Republican president and 20 years of legislation, that consistently favored large corporations to the detriment of smaller companies and the average person. It was a period when the C's of credit were blatantly ignored, non-creditworthy customers were consistently approved for mortgages for houses that were priced well out of their income levels and for the most part everyone ignored the obvious conclusion. Along with homes individuals were approved for vehicle loans, plural, that were destined to end up in default but the lenders continued to be oblivious to what they were creating.

It was a period that not only affected the American way of life but also wrecked the economies of many European countries as well and resulted in closed foreign banks and unemployment and homelessness throughout Europe. It included major consolidation in industry; oil companies buying other oil companies, transportation industries buying the less fortunate. The government allowed the bankers and investment community to "police" themselves and set aside previously enacted safeguards and controls. Even though they were considered as good times financially, many companies struggled to make a profit during these years, constantly downsizing and laying off their workers. The executives didn't care. The only thing that really mattered was the price of their company's stock - which was where they derived the vast majority of their annual compensation.

But while the few got rich during this period, increasing numbers of citizens were sliding below the poverty line. Farmers were in trouble, and Washington no longer seemed to care, relying on exports for the majority of agricultural products. And finally, a constant and growing topic of discussion was the continued flood of immigrants into the United States and the fear that America was losing control of its' sovereignty became widespread.

But wait, we're not talking about this decade but rater 116 years ago. We're talking about the events that led up to one of the worst depressions in American and world history, The Panic of 1893.

Now, if people today were asked to describe the 1890s in a sentence, most people would refer to that period as the "Gay Nineties". But, that's how Hollywood movies and badly written history books have portrayed it, back then times couldn't have been less gay. In fact, the 1890s were one of the most desperate times in world history, one of the lowest points the world has ever endured.

Today we think of the period after the Civil War as one of the stronger times for rebuilding and growth in America. American industry before 1893 was dominated by railroads, packing plants, steel industries and the like. However, for the laborer or industrial worker, more often than not a recent immigrant, wages were so low that even working a 96-hour week, a man could not afford a place to live and food to feed his family. Streetcar drivers in New York City earned $.125 an hour ($12) working 16-hour days, six days a week.

Living quarters for the average American worker were squalid tenement apartments. Typically a 12-by-12 room with no windows, no bathroom, and no fresh air ventilation. Many tenements were firetraps and it was not uncommon for one to burn down, killing all its residents. Moreover, local ordinances had been enacted that protected the tenement buildings' owners and the absolute exclusion of any individual renters' rights.

Tenement ownership was a lucrative business: One of the biggest tenement landlords in New York, the Vanderbilt family, amassed the majority of their wealth from their ownership of substandard housing. Toward the 1890s farmers, which comprised most of the population, found themselves earning less money than it took to grow their crops creating a severe farm crisis; sound familiar? No, unless you were a Vanderbilt, an Astor, a Huntington, Rockefeller, or Carnegie, life in America wasn't that great. Unfortunately, it was about to get much worse.

Railroads were the symbol of our nation's might in the period just prior to the Panic of 1893. Yet, because of their rapid expansion, railroads often made little money and the railroad owners preferred to make their millions by manipulating the railroad stocks' prices. Although America was on the gold standard with over $190 million in bullion for reserves, the silver mining interests in the West managed to get legislation passed requiring the U.S. government to buy all the silver the mines produced. In effect, the U.S. currency should have been backed by both gold and silver, but it wasn't - and things were about to go very wrong.

It started in 1890, that's when the Barring Brothers, who operated the largest investment banking firm in London, England and who was the major underwriter of the Atchison Topeka, and Santa Fe railroad, collapsed financially. During the 1890's credit was very easy to come by in the United Kingdom and British bankers not only lent easy money in their own country but also to neighboring countries as well. When Barring Brothers collapsed the British banks panicked and began calling in their outstanding loans whose borrowers in both England and other countries could not pay. On May 4th, 1893, National Cordage, the largest maker of rope in America, suddenly went out of business. It was the largest company failure in America and as America sat stunned, unable to believe that it had happened, European countries started a run on the U.S. gold reserves, refusing to accept treasury bonds and demanding gold bullion. Almost immediately the price of silver also collapsed making it impossible to back U.S. currency with silver. Ironically, the impact the U.S financial institutions had on Europe in 2009 was a reversal of what Europe created in America, 116 years earlier.

Once it became apparent of what was occurring in Europe the collapse of the American banking system began; 128 banks shuttered their doors in June of 1893. At the end of that July, the Erie Railroad had also failed. In all, during 1893, 15,000 companies failed, more than 500 banks closed, and 30% of American railroads, including the Santa Fe and the Union Pacific, became insolvent.

Within two years the United States gold reserves had shrunk to less than $61 million from $190 million. The farmers were forced to burn their own corn to stay warm in the winters and no produce buyers had any money to buy the crops. Unable to care for their children, destitute parents abandoned them; in Detroit alone it was estimated that thousands of abandoned children walked the streets begging for food and shelter. Wages already below the poverty line were cut further. And when workers struck, as in the Pullman Railcar Strike, the National Guard was called out by state government to protect the business owners and their assets. Violence toward workers by the U.S. government included killing individuals who were just asking for a living wage. Labor riots would continue for four years until 1898.

One historian wrote that it was easy to spot photographs from this period because the average Americans pictured in them "are hungry walking skeletons with deeply sunken eyes" It was nothing less than the near total collapse of the American economic system.

It was during this time the Populist movement began and consisted primarily of farmers. Desperate to raise the prices of their farm produce, they lobbied Washington to get U.S. currency insured with both silver and gold backing, but to no avail. Evictions of the poor in New York were so frequent that just one court averaged 150 cases a day. Everyone suffered and by 1898 the depression finally began to end as the U.S. entered into the Spanish American War.

The financial panic of 1893 marked the end of the "Gilded Age" in America. It was also the pivotal point at which the U.S. went from being a nation that built for industry to becoming one that would ultimately be driven by consumers.

Henry Ford would create the Model T just 10 years after the end of The Panic of 1983 and in doing so also created a new middle class of laborers beginning with his five-dollar day wage. It would be a watershed event in this country just like the 40-hour work week also instituted by Ford in 1927.

So why did we grow up thinking that the Great Depression (1929 - 1939) was the only one America suffered? Or was the greatest depression America had ever experienced? We may not have been taught about it in our history classes in school but we may have read about it in a literature class or perhaps seen the movie, an American classic that has always been listed in the Top Ten Movies every year since it was first shown and once was a family Thanksgiving entertainment staple on television. The majority of viewers probably never realized the book and movie represented Americana during the Financial Panic of 1893.

L. Frank Baum was a failure at many things. Born and raised in New York City, in the late 1880s he moved to Aberdeen, South Dakota and during the Panic owned a general store and a newspaper that both failed. Living in the Plains States he was in the perfect position to understand the farmers' plight and to see firsthand how strongly they believed that they were being held hostage not only by the railroad owners but also the eastern banking syndicates. Moving to Chicago, Baum worked as a newspaper reporter from 1894 through 1897 and in 1900 he wrote and published his political and symbolic parable about the Financial Panic of 1893.

The story involved several interesting characters. One was a young girl named Dorothy who lived on a farm with her aunt and uncle. Dorothy represented the "Average American". One particular day a tornado struck at her uncle's farm, the tornado which represented the Depression of 1893, destroyed everything in its path, ripping apart families. Dorothy was swept up by the tornado and fell from the sky into the Land of the Munchkins, who represented the common laborer. Small and insignificant, they're enslaved by the Wicked Witch of the East, which was representative of the Eastern banks and industrialists. Dorothy sets the Munchkins, laborers, free by killing the industrialist, the Wicked Witch. A hero in the eyes of the Munchkins all she wants is to go back to her home and her aunt and uncle, "somewhere over the rainbow" , signifying the real promise of America.

In the movie she's given ruby slippers to wear - but in the book they are made of silver. And she follows a yellow brick road that is supposed to lead her home; these two symbols stood for the farmers' conviction that using both gold and silver would put America back on the path to prosperity.

The Good Witch of the North represented the progressive voters of the Northern states. Along the way she encounters a scarecrow, a tin man, and a cowardly lion who all join her on the road home. The Scarecrow represents the farmers. The average person back then believed farmers had no brains, but Frank Baum believed that they were in fact fairly clever. The Tin Man represented the American industrial worker. Incapable of taking care of himself, he could not even oil his own joints when he encounters Dorothy.

The Lion, who fears combat but is fearless when challenged, is believed by many historians to be the Populist candidate William Jennings Bryan. And the Wizard of Oz is the current president of the United States, a fraud who deceived people. He tells Dorothy to kill the Wicked Witch of the West , who represented the land and mortgage bankers. So Dorothy does and the Good Witch of the South, who does not appear in the movie, but in the book represented the South's progressive voters, tells Dorothy, the American people, that she can always go home by just clicking the heels of her silver slippers. The message being that if they had used silver for currency reserves then things would have been okay.

That's right, The Wizard of Oz is an economic/political parable. It envisioned killing the industrialists, who held laborers hostage, and bankers, who owned farm mortgages. It showed the president as a man who first deceived everyone and then eventually set the workers free. And finally, the progressive voters in the North and South, shown as the good witches, let us know that if America would follow the gold road, and click their silver heels, America would again become a nation of liberty, equality and wealth for all.

These are difficult times for the world but history has shown that we will survive our current economic woes and that prosperity will once again prevail. We may never have known how tragic the 1890s were in America and what occurred in Europe to cause the Panic. We may not have learned in school that the one of the world's worst depressions occurred in 1893 or that it destroyed so many families both in the U.S. and Europe. But you'll never watch The Wizard of Oz again or read it to your children and grandchildren without being reminded that "somewhere over the rainbow cloudless skies are blue, and the dreams that you dare to dream really can come true".

I Wish You Well,

David Balovich is an author, credit consultant, educator, and public speaker.
He can be reached at 3jmcompany@gmail.com or through the Creditworthy website.

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.  

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