The year was 1893. Grover Cleveland, the first Democrat elected President after the Civil War, was back in office, and the world was going to heck.

Hundreds of banks were folding, thousands of businesses shut down, and millions of households had no providers. Among the causes was a depletion of gold from the national reserves. Another were years of falling crop prices, leading to more output from desperate farmers. And then there were protectionist tariffs to make foreign goods more expensive, which can be a good thing, except when we badly need to increase trade to keep every possible sector alive.

Among what tipped this leaning scale over was a drop in the price of wheat, and that is what we will talk about today.

Wheat Prices Drop Like a Stone in a Pond

When the price of a bushel of wheat fell from $0.83 to $0.62 from 1892-1983, and then more the next two years, it was such a deep cut that even continued over-production couldn’t save farmers. As such, many who grew wheat found themselves unable to pay their bills, which meant banks didn’t get paid.

When farmers can’t pay their loans, community banks suffer

To try and spare some of the losses, other businesses cut the cost of shipping wheat. Rail rates for each bushel fell 15% from $0.147 to $0.1288. Ship rates fell even more from $0.0633 to $0.0444. In many cases, the farmers still couldn’t pay, so the logistics industry shrunk by both price cuts and lost customers. Many had loans, which meant that more banks didn’t get paid.

Businesses shrunk and couldn’t meet their obligations

With delivery companies losing revenue, there were layoffs. With lost jobs, people were spending less, which meant businesses lost business, and some tried to meet their customers part-way by lowering prices. The customers and merchants could not meet some expenses, including loans, so even more banks didn’t get paid.

Workers were out of work and couldn’t pay their bills

Communities dependent on a large company, like a railroad that shuttered, took a total hit. Less money was spent locally and smaller businesses made less money. Those who couldn’t make rent on their shops may have taken proprietorships into their homes, or to the streets. Landlords had vacancies; mortgages were defaulting.

Knowing that banks weren’t getting paid, people were fearful they could lose all their money on deposit.

There’s a Run on the Banks

How a bank run works is this:

A bank has customers with accounts. Those accounts have deposits. With these deposits, the bank loans out as much as it can. This is part of how they make money – by giving out loans that are then paid back with interest.

If a bank has $4,000,000 on deposit and $3,500,000 on loan, it will be fine in a good economy where people are making deposits and withdrawals, and generally going about their business. However, if everyone takes their money out of the bank at once, the moment that $500,001 is withdrawn, the bank can no longer satisfy withdrawals and has failed.

When people let worry turn to panic about a bank having no money, they physically run to the bank, and then make a run on the bank by demanding all of their money for fear it won’t be there later. A bank run may or may not lead to a bank failure, depending on how much is withdrawn before the panic subsides.

Hundreds of banks failed. Many due to customers losing faith in them.

Wheat Prices Stop Falling; Depression Ends

The price of wheat finally stopped falling in 1896, and then rose during the McKinley administration. However, from 1899-1903 wheat prices were back down to depression-era rates, but the economy stayed afloat – perhaps now buoyed by so much affordable bread.

Was it because of tariffs? The 1890 McKinley tariffs were partly blamed for the depression, but they were reinstituted and the economy didn’t crash again. How could bad wheat prices and “bad” tariffs not lead to another depression?

Among the answers are:

  • Spanish-American War
  • Gold Standard Act of 1900
  • The Presidency of Theodore Roosevelt

 

War is hell on those whose soil it is waged, but great for business. Red Cross donations were bolstered, and jobs in textiles, mining, and government were increased. Plus, the US gained control of several territories it still holds today. This brought forth international fear of, and respect for, the US. Domestically, it brought forth pride and confidence.

Remember how there was so little gold in the Treasury when Grover Cleveland took office again? Well, what helped him get elected also hurt him economically. Silver and Populist movements sought a system of bimetallism. Legislatively, this was done by the Sherman Silver Purchase Act of 1890, which was passed the same year as the McKinley Tariffs. In 1900, a Gold Standard Act returned a sense of stability to the dollar by backing it by gold instead of instability by making more changes.

Tariffs stayed, bimetallism left, and the economy didn’t crash as a result.

Theodore Roosevelt’s passion for a robust Navy and his continuance of the horrific ground invasion of the Philippines helped boost up the economy, but so did his expansion of government via the expansion of National Parks and preserved lands. Additionally, great deals of money were made in the media attention on his family. Newspapers were quick to print a photo of his daughter, “Princess” Alice, because it boosted sales, which meant more money flowing through many communities, and their related industries (from the timber that became pulp to the newsboys selling papers that now had a wider readership, meaning they could charge more for advertising).

 

Some may wonder, did the price of wheat have anything to do with the economic hits in the 1890s?

Yes, absolutely!

While wheat prices were not the be-all-end-all of the economy, the fall in prices hurt farmers who could not pay their bills, which included bank loans but also merchants and logistics companies. Such businesses tried to meet their customers some of the way, and they also took a hit in terms of potential revenue and total income. The effect of wheat prices combined with other economic factors brought together several situations that made bad times for millions of families and thousands of towns.