Fears about the American gold standard were intensified in March 1891, when the Treasury suddenly imposed a stiff fee on the export of gold bars taken from its vaults so that most gold exported from then on was American gold coin rather than bars. A shock went through the financial community, in the U.S. and abroad, when the United States Senate passed a free-silver coinage bill in July 1892; the fact that the bill went no further was not enough to restore confidence in the gold standard. Banks began to insert clauses in loans and mortgages requiring payment in gold coin; clearly the dollar was no longer trusted. Gold exports intensified in 1892, the Treasury’s gold reserve declined, and a run ensued on the U.S. Treasury. In February 1893, the Treasury persuaded New York banks, which had drawn down $6 million on gold from the Treasury by presenting Treasury notes for redemption, to return the gold and reacquire the paper. This act of desperation was scarcely calculated to restore confidence in the paper dollar. The Treasury was paying the price for specie resumption without bothering to contract the paper notes in circulation. The gold standard was therefore inherently shaky, resting only on public confidence, and that was giving way under the silver agitation and under desperate acts by the Treasury.
The genesis of the panic is dated from the collapse of Baring Brothers in London, which occurred as the result of an over-extension of credit in South America and a resulting Argentine default. To preserve the liquidity of English banking, the Bank of England was forced to obtain a gold loan from the Bank of France, and English banking houses began to withdraw their American credits. In addition to these influences, there had been a febrile expansion of American business, with excessive purchases from abroad, financed by foreign credits, and a consequent decline in the American trade balance. The uneasiness over the soundness of the money system was intensified by the proposed demonetization of silver in India in 1893—which meant a further drop in the value of this metal. The national banks of the East, warned by the European crisis, began to scan their loans and to strengthen their gold holdings—at the expense, naturally, of their correspondent banks. All these forces came to a head in 1893. On May 9, the Chemical National Bank of Chicago closed its doors, and two days later, the Columbia National Bank of the same city. The infection spread rapidly, and by July the country was in the grip of a financial paralysis.
In May 1893, the stock market collapsed, and a month afterward, in June 1893, distrust of the fractional reserve banks led to massive bank runs and bank failures throughout the country. Once again, however, many banks, national and state, especially in the West and South, were allowed to suspend specie payments. The panic of 1893 was on. In a few months, Eastern bank suspension occurred, beginning with New York City. Twenty-five national banks suspended in June—a number never before exceeded in an entire year—seventy-eight suspended in July, and thirty-eight in August. The collapse of private and state banks was even more alarming. An average of about seventy suspensions a year—a figure disturbing enough when the influence of banking on general business is considered—swelled to 415 during the first eight months of 1893. Though the New York banks had succeeded in increasing their reserves to 30 per cent of net deposits in June, by August 5, their reserves were below the legal minimum, and the only alternative was to suspend specie payments.
The total money supply—gold coin, Treasury paper, national bank notes, and national and state bank deposits—fell by 6.3 percent in one year, from June 1892 to June 1893. Suspension of specie payments resulted in deposits—which were no longer immediately redeemable in cash—going to a discount in relation to currency during the month of August. As a result, deposits became less useful, and the public tried its best to intensify its exchange of deposits for currency.
By the end of 1893, the panic was over as foreign confidence rose with the Cleveland administration’s successful repeal of the Sherman Silver Purchase Act in November of that year. Further silver agitation of 1895 endangered the Treasury’s gold reserve, but heroic acts of the Treasury, including buying gold from a syndicate of bankers headed by J.P. Morgan and August Belmont, restored confidence in the continuance of the gold standard. The victory of the free-silver Bryanite forces at the 1896 Democratic convention caused further problems for gold, but the victory of the pro-gold Republicans put an end to the problem of domestic and foreign confidence in the gold standard.