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Panic of 1884

The Panic of 1884 was an economic panic during the Depression of 1882–1885.[1] It was unusual in that it struck at the end rather than the beginning of the recession. The panic created a credit shortage that led to a significant economic decline in the United States, turning a recession into a depression.[2]

A newspaper illustration from Harper's Weekly, depicting the scene on Wall Street on the morning of May 14, 1884

Background

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In the late 19th century, the gold reserves of Europe were depleted and, as demand for it rose,[3] more than $150 million in gold was exported from the United States between 1882 and 1884.[2][4] The New York City national banks halted investments in the rest of the United States and called in outstanding loans.[1]

The Panic of 1873 was also a factor in the Panic of 1884. The 1873 panic was caused by practices including speculative bonds and overextension of credit to fund the construction of infrastructure.[5][6] Part of the overextension of credit before 1873 was for railroads, particularly the Northern Pacific railroad, which was financed by Cooke & Co.[6] In addition, the failure of banks in 1873 undermined the confidence people had in them, increasing mistrust.[5]

Causes

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The failure of several banks set off the panic of 1884.

Grant and Ward

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Around 1880, Ferdinand Ward and Ulysses “Buck” Grant Jr., son of former president Ulysses S. Grant, joined to form Grant and Ward, a brokerage firm.[7][8] Ward made a series of bad investments but altered the books to make it appear that the firm was still making money.[8] He then raised money through a Ponzi-style scheme by promising investors a 10% per month return on investment, but no money was invested. Payments came from new investors.[8] In addition to capital from investors, the firm was financed in part by James Fish's Marine National Bank.[9] The Marine National Bank had taken a $1.6 million loan from the city.[8] In April 1884, the city's comptroller reduced the city's deposits with the bank, causing the bank to fail and Ward's scheme to be exposed.[8]

In May 1884 the two firms, the Marine National and the brokerage firm Grant and Ward, crashed when their owners’ speculative investments lost value. The failure of Grant and Ward[3] and Marine National Bank tipped off the Panic of 1884.[7] When the firms collapsed, it had a ripple effect across Wall Street, causing other firms to fail.

John Chester Eno

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Another cause of the panic and mistrust in 1884 was John Chester Eno's embezzlement of over $3 million from the Second National Bank.[10] The embezzlement was news around the country and he fled to Canada after the bank was almost out of money.[10] In light of the situation, large numbers of depositors ran to the bank to withdraw their deposits.[11] His father, Amos Eno, replaced the money Eno had stolen.[11]

Result

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The panic was mostly contained to banks in New York City.[12][13]

The Metropolitan National Bank closed after a rumor spread that the president was going to borrow money from the bank to use on railroad securities.[12] This claim was proven untrue later.[12] The institution had financial ties to the banks around it, which raised doubts to the banks it was linked with, after its closure.[12] This started to spread through Metropolitan's network to institutions located in New Jersey and Pennsylvania. But, it was quickly contained.[12]

The New York Clearing House thoroughly examined the Metropolitan and deemed it solvent.[12] The Clearing House advertised the solvency and loaned the bank $3 million so it could withstand the situation and not crash.[12] These actions reassured the public that their money was safe, and the panic came to an end.[12]

Some accounts blamed the New York Clearinghouse's decision to stop publishing bank-specific information along with other actions since it is viewed to have alleviated the need for a suspension of convertibility.[13] It is argued that this is evidenced in the way the panic was largely confined to New York.[13]

See also

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References

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  1. ^ a b Sherlock, Thomas J. (2013-04-15). Colorado's Healthcare Heritage: A Chronology of the Nineteenth and Twentieth Centuries Volume One — 1800-1899. Bloomington, IN: iUniverse. p. 287. ISBN 9781475980257.
  2. ^ a b Quentin, Skrabec (2015). The 100 Most Important American Financial Crises: An Encyclopedia of the Lowest Points in American Economic History. Santa Barbara, CA: ABC-CLIO. p. 103. ISBN 9781440830112.
  3. ^ a b Maslin, Janet (2012-05-13). "Great-Grandfather Was a First-Class Bamboozler". The New York Times. ISSN 0362-4331. Retrieved 2021-02-04.
  4. ^ Nelson, Scott (17 October 2008). "The Real Great Depression". The Chronicle of Higher Education. Retrieved 2021-02-04.
  5. ^ a b Lee, Jennifer (2008-10-14). "New York and the Panic of 1873". City Room. Retrieved 2021-02-04.
  6. ^ a b Hiltzik, Michael. "Perspective | Presidents who don't act decisively make financial crises worse". The Washington Post.
  7. ^ a b "The Pioneers Of Financial Fraud". finance.yahoo.com. Retrieved 2021-02-04.
  8. ^ a b c d e "Great frauds in history: the downfall of Ferdinand Ward – the "Napoleon of finance"". MoneyWeek. Retrieved 2021-02-04.
  9. ^ "Great frauds in history: the downfall of Ferdinand Ward – the "Napoleon of finance"". MoneyWeek. Retrieved 2021-01-29.
  10. ^ a b Unterman, Katherine (2015-10-19). Uncle Sam's Policemen. Harvard University Press. ISBN 978-0-674-91589-3.
  11. ^ a b Wicker, Elmus (2000). Banking Panics of the Gilded Age. Cambridge University Press. p. 36. ISBN 978-0-521-02547-8.
  12. ^ a b c d e f g h "Banking Panics of the Gilded Age | Federal Reserve History". www.federalreservehistory.org. Retrieved 2021-02-04.
  13. ^ a b c Gorton, Gary B.; Tallman, Ellis W. (2018). Fighting Financial Crises: Learning from the Past. Chicago: University of Chicago Press. p. 51. ISBN 9780226479514.

Sources

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