#60 The panic of 1893

In case you missed our fantastic interview with Mark Moss, check it out here.

Today we have a new story with an all too familiar theme. A continuation of our look at the panics of the Pre-Federal Reserve American monetary systems, from which we continually hear that hard money standards were the cause of so many problems.

Remember, bimetallism is a form of fiat monetary expansion, as we’ve discussed in the past.

To understand the Panic of 1893 we need to rewind the clock just a few years to the Sherman Silver Act of 1890. As should be no surprise to our readers by now, the Sherman Silver Act of 1890 ushered in a period of inflation by decreeing an increase in the amount of silver purchased by the US government, to the tune of 4.5 million ounces of bullion a month. This caused a sharp increase in the paper money supply of the US and encouraged rampant speculation.

The US treasury purchased the silver bullion using a special issue treasury note which could then be redeemed for either gold or silver, and a run on the gold reserves of the US began. Artificially overvalued silver drove gold out of circulation and into hoards.

In the metals markets, silver was now worth less than the fiat exchange rate of silver to gold. Investors would buy silver from the booming mining economy, exchange it for gold with the Treasury, and then sell the gold claims for a profit. These profits were then reinvested in more silver and on the cycle went.

This continued until the Treasury nearly ran out of gold. President Grover Cleveland repealed the Sherman Act to prevent further loss of gold reserves.

By the end of 1890, the price of silver had dropped from $1.16 an ounce to $0.69 per ounce. By early 1894, the price had dropped to $0.60. By November of 1895 US mints entirely halted all production of silver coins and outright discouraged the use of silver dollars.

Runs were made on the US treasury gold reserves, not just by silver speculators, but by European financiers as well, in anticipation of a spreading global financial turmoil. Concern over the weakening financial state of the United States led to bank runs and a nationwide liquidity squeeze as the mal-investment wrought by monetary expansion began to purge.

In the midst of this man made regulatory fiscal crisis, global commodities prices (particularly that of wheat) tanked due to a cascade of liquidations in emerging markets. In 1894, the rate for a bushel of wheat dropped from its 14.7¢ 1893 price to 12.88¢ per bushel, continuing to fall all the way to 9.92¢ in 1901. Over-leveraged US farming operations dependent on high international commodity prices went belly up.

Feel free to take a stab at the moral of our story.


Book of the Month:

The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

-“Countries often devalue currency to help their export markets. But in a globally connected world with many countries driving each other of their own national interests and jobs, this makes less sense. Other countries trying to compete for the same scarce jobs devalue their currencies to keep their economies from collapsing. This race to the bottom on currencies only serves to further push up global asset prices. And the endless game of reducing the value of currencies relative to others only serves as a short-term panacea, because asset prices will rise far more quickly than jobs can be created- and pay rates increased- to keep pace with the asset price rise.”

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