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Causes of Depression in the 1890s Cause and Effect Essay


Synopsis

This paper provides acumen into the occurrence of the global depression of the 1890s. It is founded on the words of Henry Lawson ‘there is no prison like the city for a poor man.’ The introductory section provides a general explanation of the occurrence of the depression.

The background information expounds on the various situations that led to the economic instability that resulted in a crisis. The rest of the paper then explains the specific causes of the depressions and its effects on white men and women.

Introduction

The 1890s marked a significant shift that caused a prolonged period of economic instability all over the world. The depression had severe implications on the lives of many communities globally. According to Rockoff, employment became a palpable problem due to the closure of gold mines and industries in various parts of the world such as Australia, Canada, and the United States1.

Floating markets and flooding of both local and export products changed the trends of industrial production since consumers offered incredibly low prices in exchange for commodities. A variety of factors led to the depression of the 1890s. Generally, the depression led to global trade and industry volatility that broke many business interrelationships among nations.

Inspired by the depression, Henry Lawson wrote ‘there is no prison like the city for a poor man’. In the light of these words, this paper reveals the causes of the depression in the 1890s and the effects it had on the white women and men.

Background of the Depression

During the last half of the 19th century, the world underwent a series of technological advancements that played a great role to change the way people lived. Himmelberg unveils that the advancement of the whaling industry together with the invention of petroleum revolutionised industrial activities2.

This situation led to significant developments in mining and agricultural industries between 1870s and the late 1880s. Countries developed strong interrelations with the British and the European colonies whose financial support enabled the expansion of industries3.

The enormous expansion of the mining industry attracted many people. For instance, the Chinese people immigrated to Australia to seek job opportunities in the gold mines. The discovery of gold resulted in the gold rush era that amplified the interest of other countries in Australia and the United States. Similarly, the agricultural sector also expanded.

Production accelerated in textile industries, thus leading to increased exports to Britain, Europe, and other countries that formed huge markets for the growing industries. Some industrialising countries, especially Canada, the United States, and Australia gained significant global reputation after enjoying social, economic, and political stability.

By the third quarter of1880s, developed economies had entered important business interrelations with these countries. Foreign investments in these countries became evident as alien powers ventured into the most significant economic sectors. British and European colonies continued to fund industrial activities that took place in Canada, America, and Australia.

Generally, colossal developments in industrial technology and the acquired financial stability led to overproduction. As a result, export products flooded international markets. This situation reflected a decreasing demand for the products and a similar decrease in price. Apparently, debt was becoming a liability for industrialising countries.

By the onset of 1890s, the foreign debt had exceeded the asset base. This situation marked the beginning of depression4. The British and European colonies withdrew the financial support they had been offering to support industrial production. Largely, they drained all their bank accounts and demanded repayment.

The economic state of affairs worsened to the extent that the debtor nations could not repay the loans it had borrowed from the British and European capitals. What caused the depression?

Causes of Depression in the 1890s

Overdependence on Foreign Capital

Although many developments occurred in the 1870s and the late 1880s, capital remained a problem to many countries. This situation led to borrowing across countries to satisfy the capital demands for the growing sectors of the economy. Many countries were still expanding their production capacities. For instance, Australia relied heavily on foreign capital from the British colonies.

The Australian government needed money to expand the gold mines and/or boost the agricultural sector. Mining and agriculture were the main economic activities in Australia. They surpassed production in similar sectors in the United States. To resolve financial shortcomings, Australia borrowed hefty sums from the British colonies to fund the then ongoing industrial developments.

Garrett, Kozak, and Rhine disclose that by 1893, the Australian debt exceeded its assets5.The government could not repay the overgrown debt to the British. As a result, British colonies withdrew their financial support from Australia. This situation did not only happen in Australia but also in the United States. The United States had inadequate capital to establish transport networks and gold reserves.

As a result, the country relied heavily on European colonies for capital. The Europeans also ventured into the gold investments. By 1892, they had big shares in the gold market. The Europeans established their own banking systems in the United States to ease capital and profits transfer. However, the situation worsened as the United States debt increased to the point of no return.

It could not pay back the loans to the European colonies. Consequently, the European investors withdrew the financial support and started exhausting the gold resources in a bid to have their capital paid back. By 1893, the United States entered a period of depression because of overreliance on foreign capital. Both conditions led to the depletion of gold mines in Australia and the United States.

According to Himmelberg, the consequences of depleting the gold mines in both countries led to serious depressions that posed panic to the perpetuation of the economies6. Closure of gold mines became inescapable as both economies fell below production capacities. Many people lost their jobs and some foreigners began to flee back to their own countries while others migrated to other countries to seek employments.

Industrialisation and Overproduction

Many countries underwent industrial transformation during the 1880s. Successful economies such as Europe and Britain overfunded the growth of industries and other developments in the lesser economies7. This favour led to overgrowth of industries. Due to technological innovation together with foreign fund, companies could handle higher production capacities.

The dependency on foreign capital facilitated the ability of establishing more factories and mine plants. Mining was the most significant sector during the colonial period. The gold mines in Australia and the United States expanded significantly, thus attracting more foreign investors. The existence of many mining fields led to overexploitation of gold in Australia and America.

Similarly, the abrupt expansion of the agricultural industry led to the flooding of agricultural products in both the local and foreign markets. Farmers used this opportunity to borrow massive loans to purchase efficient farm machinery that could handle commercial farming duties. Apparently, farmers used these foreign grants to enrich their farms with fertilisers and crop varieties.

The use of advanced farming methods in the agricultural industry resulted in increased production of cereals such as wheat and maize for both local consumption and export markets. Similarly, the sugar industry experienced similar agricultural developments, with the United States leading in sugar production. Beef farming agricultural industries overstocked cattle.

Overstocking led to the adverse degradation due to overgrazing. Livestock-related products also flooded the market. With many countries experiencing overproduction, many products from the industries flooded the local and the international market. This situation led to incredibly high supply of products with less customer demand.

Despite the increased production of agricultural and mine products, countries suffered significant losses since both the local and export markets were flooded with products. The demand for products fell. This occurrence led to insignificant profits. In 1893, the booming business abruptly collapsed, thus resulting in an adverse depression8.

Property Speculation

Rainey reveals that the nature of business relations that existed between countries up to the late 1880s was highly speculative. The European and British colonies heavily funded investments in localities such as United States and Australia with the aim of reaping more profits in return. The invention of gold mines convinced the booming economies to fund vulnerable economies with foreseeable benefits.

However, the anticipation of donor countries did not materialise in the 1890s. The speculative business led to blind funding by the European and British colonies without taking into account the future economic state of the productive countries. Despite the market fluctuations that existed during 1891, financiers provided enough running capital to ensure that the mine factories operated as usual.

Sustained availability of capital led to increased supply of gold in the flooded markets, thus reducing the value of gold in the mid-1891. In 1892, the booming economic structure preceded the closure of many gold companies in Australia and the United States. The aftermath of the closure of companies let to the termination of many businesses that dealt with gold merchandise.

The closure of the mine companies caused the fall of the North Queensland, Standard, and National Bank9. Further speculative ideals continued as banks were required to fund the ongoing projects, such as the construction of roads and railway lines. This decision marked a financial collapse that indicated a serious depression of the economy.

Fragile Banking Structure

The banking system that existent prior to the 1890s depression suffered fragility10. The banking industry grew at the same time with the increase in economic activities. However, the banking system lacked insurance policies that could cover losses in case investors claimed abrupt repayment. The shifting economic state of affairs drastically manoeuvred the way banks operated.

The rapid growth of industries in 1880s created a quick pace of development for the banks. Garrett, Kozak, and Rhine reveal that smaller banks had developed alongside the establishment of the National and Standard Bank in various parts of the world11. These banks literally offered unsecured loans at reasonable interest rates that farmers acquired easily.

Therefore, the banking system enabled farmers expand production means. However, this trend directly matched the production levels that existed during the 1890s. The value for money deteriorated as a pool of commodities overcrowded local and export markets. The gold and silver standards caused monetary inflexibility in the banking system.

The value for gold or silver determined the amount of other variables within the stock market. This inflexibility had a very poor implication on business transactions of the 1890s. Speculation of prices led to big losses for the banks. Unaccountable amounts of money that banks released to perpetuate circulation created severe banking instability.

Bigham reveals that the significant decline of gold reserves in the United States led to the fall of the treasury. Many investors withdrew all their money from bank accounts. This occurrence led to the fall of many volatile banking institutions.

Moreover, in the 1890s, banks and other moneylenders offered very low interest rates in a bid to persuade businesspeople and foreign countries to borrow loans. Garrett, Kozak, and Rhine state that most banking institutions believed that the circulation of loans meant big profits for investors since they would broaden their capital base, and in return borrow more loans12.

This fiction had very severe implication on the economy. The circulation of loans did not eventually imply an increment in the gross domestic product. Instead, the strategy contributed to the fall of currency value and flooding of the export market, which was a clear indicator of a depressed economy.

Poor Governance

Perhaps, the overall cause of the depression of the 1890s was poor governance. The rarity of democracy shaped meagre governments. Corruption and lack of concern to state affairs led to irregularities in many sectors of the economy. Mostly, influential leaders and tycoons colluded to invest in the gold and silver mines. Individualistic interest in the high-profit gold and silver merchandise aggravated the urge to source for foreign capital.

Governments strove to put high amounts of money into circulation without projecting the effect it had on the demand for future credit13. According to Grant, the effect of corporate governance across the globe had highly contributed to the fall of the economy14.

The United States, Australia, and Canada engaged in hefty capital bonds with the European and British colonies. Peltzman accentuates that the government decisions led to disproportional growth of the economic sectors that eventually resulted in unbalanced international trade15.

Government ignorance also contributed to the depression of the 1890s. For instance, Grant unveils a case in the United States whereby the National Bureau of Economic Research warned of a possible economic decline by the in 189316. However, the government was not concerned with the warning.

Ignorance together with the lack of cooperation amongst government officials grouped them according to opinion. The situation resulted in the execution of half-baked decisions that led to economic flux.

Effects of the Depression on White Women and Men

Underemployment and Unemployment

The state of prolonged economic instability led to underemployment. Many industries were forced to scale down the wages of their workers in an attempt to resolve the financial stalemate that was getting out of control. The rapid influx of new immigrants from foreign countries increased the population, especially the white settlers who had immigrated to seize job opportunities in gold and silver mines.

Initially, the availability of workers weakened the power of bargaining that led to poor salaries. However, the continued depression resulted in unemployment as companies continued to close down. Eventually, governments closed down major sectors of the economy that led to loss of employment for many people17.

According to Bigham, over five hundred banks across the world were closed while fifteen thousand other businesses terminated their operations18. The rate of unemployment surpassed ten-percent during the depression period. White women who had acquired jobs in the textile industry lost their jobs after the crash of the cotton market.

McMahon article gives an elaborate picture of the status of white women during the depression19. On the other hand, white men worked mostly in the gold and silver mines. The gold and silver market fell drastically with the decreasing demand for export products.

Evictions

Prior to the 1890s depression, Spencer and Huston confirm that the white settlers characterised the gold fields and arable farms around the world20. White women and men who had settled on foreign lands in search of employment began living in the fear of violent reactions from the natives. White tenant farmers were evicted from the farms.

During the start of the depression, many white settlers who worked in the mine industries and banks lost their jobs after the closure of such business activities. This situation compromised their way of living in foreign lands since they could not afford to pay rental fees. Tenants threatened to close down apartments since most of the tenants were unable to raise rental charges.

The worst experiences happened to the white women who had accompanied their husbands in search of a living in the gold-rich localities. During the depression, many women had conflicts with the apartment owners and police. After the eviction from the farms, women struggled to seek food and shelter for their children21. The situation marked the growth of slum settlements that were quite affordable.

Incapacity to Support Family

The depression made life more difficult for families22. Parents who had lost their jobs in the terminated businesses could not provide adequate basic needs for their families. The situation was worse on women than on men. As Kendall confirms, white women who mostly worked in the farms had no other alternative than to stay at home to take care of the children23 24.

Faced with unemployment, many white families disintegrated as men left their families to search alternative means of survival. Some women engaged in prostitution and extramarital relationships with wealthier men to take care of their children.

In addition, the harsh climatic conditions predisposed children and their mothers to diseases. Because of poverty, the kids suffered childhood diseases such as kwashiorkor and marasmus. Their mothers could not afford hospital services.

Conclusion

Although there is adequate documented literature on the cause of the 1890s depression, there remains unanswered questions about the control measures that previous governments had set in place to regulate the economic growth. The crisis was neither the first nor the last in the world history of economic depressions. Despite the six-year economic fall, governance did not change significantly.

Perhaps, similar political opinions led to the Great Depression. However, the notorious times heightened social thoughtfulness as people became interested in modern civilisation. Leaders, especially in the United States, Canada, and Australia, began exercising liberalism on major economic business activities. The consideration of public opinion in formulating government decisions began to make sense in the economic sector.

Banks adopted better ways of money lending and investment. Nevertheless, the situation never improved as every person had thought. The product markets remained unpredictable, with elements of poor leadership flourishing in an unstable economic state.

Bibliography

Bigham, Darrel. Epilogue: From the 1890s to the Great Depression. Ohio River Valley: University Press of Kentucky, 2005.

Garrett, Thomas, Andrew Kozak, and Russell Rhine. “Institutions and Government Growth: A Comparison of the 1890s and the 1930s.” Review 92, no.2 (2010): 109-119.

Grant, Roger. Self Help in the 1890s Depression. Ames: Iowa State University Press, 1983.

Himmelberg, Robert. The Rise of Big Business and the Beginnings of Antitrust and Railroad Regulation, 1870-1900. New York, NY: Garland, 1994.

Kendall, John. “Poverty and Government in America: A Historical Encyclopaedia.” Reference Reviews 24, no.5 (2010): 26-27.

McMahon, Kathy. The Invisible Women of the Great Depression. Web.

Merrett, David. “The Australian Bank Crashes of the 1890s.” Business History Review 87, no.3 (2013): 407-429.

Peltzman, Sam. “The Growth of Government.” Journal of Law and Economics 23, no.2 (1980): 209-287.

Rainey, Sue. Challenges and Triumphs – The 1890s and Beyond. Amherst: University of Massachusetts Press, 2013.

Rockoff, Hugh. “The Great Fortunes of the Gilded Age and the Crisis of 1893.” Research in Economic History 28, no.3 (2012): 233-262.

Spencer, Roger, and John Huston. “The ‘Taylor Rule’ and Three Monetary Regimes.” Studies in Economics and Finance 20, no.2 (2002): 78-101.

Footnotes

1 Hugh Rockoff, “The Great Fortunes of the Gilded Age and the Crisis of 1893,” Research in Economic History, 2012, 233.

2 Robert Himmelberg, The Rise of Big Business and the Beginnings of Antitrust and Railroad Regulation, 1870-1900 (New York: Garland), 1994.

3 David Merrett, “The Australian Bank Crashes of the 1890s,” Business History Review 87, no.3 (2013): 407.

4Himmelberg, 13

5 Thomas Garrett, Andrew Kozak, and Russell Rhine, “Institutions and Government Growth: A Comparison of the 1890s and the 1930s,” Review 92, no.2 (2010): 110.

6 Himmelberg, 24

7 Merrett, 413

8 Rockoff, 237

9 Garrett, Kozak, and Rhine, 114

10Roger Spencer, and John Huston, “The ‘Taylor Rule’ and Three Monetary Regimes,” Studies in Economics and Finance, 2002, 81

11 Garrett, Kozak, and Rhine, p. 114

12 Ibid, p. 115

13Spencer, and Huston, 79

14 Roger Grant, Self Help in the 1890s Depression (Ames: Iowa State University Press, 1983), 54.

15 Sam Peltzman, “The Growth of Government,” Journal of Law and Economics 23, no. 2 (1980): 209.

16 Grant, 55

17Garrett, Kozak, and Rhine, 113

18 Darrel Bigham, Epilogue: From the 1890s to the Great Depression, (Ohio River Valley: University Press of Kentucky, 2005), 34

19 Kathy McMahon, The Invisible Women of the Great Depression

20 Spencer, and Huston, 81

21Sue Rainey, Challenges and Triumphs – The 1890s and Beyond (Amherst: University of Massachusetts Press, 2013), 219.

22Spencer and Huston, 79

23John Kendall, “Poverty and Government in America: A Historical Encyclopedia,” Reference Reviews, 2010, 26

24 McMahon, Para. 2

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