General Electric Company (GE): A Panic Stands Between the Old Economy and the New

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Agriculture accounted for a mere 19% of gross national product by 1890, well below the 30% contribution of manufacturing and mining. However, agriculture had spread far across the heartland and still made up 40% of the workforce. Many small farms were heavily indebted — by one contemporary estimate, 2.3 million farms held mortgages worth a collective $2.2 billion in 1890, which amounted to some 15% of national GDP at the time. Many farms faced foreclosure as the economy went into a tailspin, and farmers saw no relief from crop prices, under persistent deflationary pressure even as yields plunged as a result of poor weather conditions.

Unemployed laborers staged mass marches on Washington, and many laborers undertook a wave of strikes (which often turned violent) that set the stage for the workers’ populism of the Great Depression and beyond. Political reactions to the way large business trusts of the era (such as the Cordage trust) could undermine the economy led to the “trust-busting” era of subsequent decades — but the immediate aftermath of the panic would actually create more trusts as large businesses consolidated to avoid failure.

Rigid adherence to the gold standard also proved disastrous, and legendary banker J.P. Morgan and his bank of the same name — now known as JPMorgan Chase & Co. (NYSE:JPM) — were eventually forced to step in and supply gold to the Treasury in 1895 just to maintain minimally acceptable levels of gold in the vaults. This was one of Morgan’s earlier efforts to be a “Federal Reserve of one” — his intervention in the Panic of 1907 tipped the national conversation toward creating the Federal Reserve, so as to avoid any further situations where one man might so control the fate of the nation’s economy. At the same time, many small farmers supported a move to bimetallism, under which payment in silver might create inflation and thus ease pricing pressure on indebted farms. The Klondike Gold Rush, which flooded American markets with new gold mined from Alaskan territories, would actually provide a major economic lift out of the depression once it began in earnest in 1897.

The widespread failure of overextended railroad enterprises also had another unexpected consequence. In 1893, Charles Dow worked for the precursor to The Wall Street Journal and had been offering a “Transportation Average” of 12 stocks — all but three were railroads, and two others were waterway shippers — for readers to follow the moves of the market. In 1896, as the depression ground on to its final stages, Dow decided to adopt a new model, dubbed the Dow Jones Industrial Average (Dow Jones Indices:.DJI) and containing not one rail-exclusive stock on its list of 12. These 12 stocks (later expanded to 20, and finally to 30 in 1928) were meant to better represent a cross-section of American industry. The launch of the new Dow index was well timed, as the American economy developing after the crash far more closely resembled a modern industrial powerhouse than the agrarian society from which it had arisen.

If the Great Depression was the economic spark that helped create the present relationship between Americans and their government, it was the Panic of 1893 that laid the foundations to make it possible.

The article A Panic Stands Between the Old Economy and the New originally appeared on Fool.com and is written by Alex Planes .

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology.The Motley Fool owns shares of General Electric and JPMorgan Chase.

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