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
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
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
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
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
David Balovich is an author, credit consultant, educator, and public
can be reached at
email@example.com or through the Creditworthy website.