Banking System of the Late Nineteenth Century

The banking system of the late nineteenth century was plagued by great instability. The Panics of 1873 and 1893 were sparked by banking collapses. As a result, farmers demanded banking reform after blaming the banks for their perilous economic condition in the late nineteenth century.

In 1873, a financial panic was sparked by the collapse of the Jay Cooke and Company banking firm. The firm had been instrumental in selling bonds during the Civil War. Jay Cooke and Company declared bankruptcy due to its overinvestment in the Northern Railroad Company. The collapse of Jay Cooke and Company caused a chain reaction throughout the economy. Credit became scarce. As many as 18,000 businesses and thousands of banks failed throughout the country. By 1876, unemployment reached 14 percent. It took five years for the nation to recover from the Panic of 1873.

Likewise, the banking system proved vulnerable during the Panic of 1893. The panic began when the Philadelphia and Reading Railroad failed. By the time that the Panic of 1893 ended, thousands of businesses and hundreds of banks collapsed. At the height of the panic, more than 3 million Americans were unemployed. The unemployment rate averaged more than 10 percent during the Panic of 1893. The depression was exacerbated by the fact that President Grover Cleveland believed that the federal government should not take any action. According to Cleveland, this was just part of the business cycle and the economy would eventually recover. The economy did not recover from the depression until 1897.

The People's Party was formed in 1890 and gave voice to farmers’ anger concerning their economic plight. In 1892, the party nominated James B. Weaver of Iowa as their nominee. Many of their planks were meant to address the economic concerns of farmers. A good example was the Subtreasury Plan, which called for the federal government to create national warehouses where farmers could store their crops. They could then use these warehoused crops as collateral to negotiate favorable loans from bankers. The Populists also wanted to inflate the currency to make it easier for farmers to pay their debts. They proposed printing more paper money as well as the unlimited coinage of silver. The People's Party performed well in 1892, receiving more than 1 million votes and 22 electoral votes. The People's Party died in 1896 when it supported the losing candidacy of Nebraska Congressman William Jennings Bryan.

Lack of government regulation is one main reason for the instability of banking in the late nineteenth century. Politicians such as Grover Cleveland reflected the conventional wisdom of the day, arguing that any government intervention would have a negative impact upon the economy. These men believed that the government that governed least governed best. There did not yet exist a centralized body such as the Federal Reserve System that could influence the lending rates of banks or inject liquidity into the banking system. Unlike today, the deposits of customers were not insured if a bank failed.

While the economy did recover in 1897, there was further banking turmoil into the early twentieth century. In 1907, there occurred another banking panic. It was prompted by a stock market crash, which led to a number of banks and businesses failing. The panic would have been worse but for the intervention of banker and financier J. P. Morgan. Morgan raised millions of dollars from other bankers to help save the nation's banking system.

Public officials realized after the Panic of 1907 that they needed a more stable banking system. Fears of future panics led to the creation of the Federal Reserve System in 1913. The Federal Reserve could inject liquidity into the banking system and could influence the lending rates of banks. Further actions in the twentieth century enhanced the stability of banks. As a part of the New Deal, the Glass-Steagall Act separated commercial and investment banks. The Federal Deposit Insurance Corporation insured customers’ deposits in the event of a bank failure. Despite these reforms, banks have not been impervious to collapse in the early twenty-first century.

Jason Roberts

See also: Cleveland, Grover (1837–1908) ; Depression of 1873 ; Depression of 1893 ; Federal Reserve Act (1913) ; New Deal ; Northern Securities Case (1904) ; People's Party ; Progressivism ; Railroad Regulation ; Subtreasury Plan


Chernow, Ron. The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. New York: Atlantic Monthly Press, 1990.

Grant, James. Money of the Mind: Borrowing and Lending in America, From the Civil War to Michael Milken. New York: Farrar, Straus, Giroux, 1992.

Hixson, William F. Triumph of the Bankers: Money and Banking in the Eighteenth and Nineteenth Centuries. Westport, CT: Praeger, 1993.

Kazin, Michael. A Godly Hero: The Life of William Jennings Bryan. New York: Alfred A. Knopf, 2006.

Mackenzie, Kenneth. The Banking Systems of Great Britain, France, Germany, and the United States of America. London: Macmillan and Company, 1932.

Wood, John H. A History of Central Banking in Great Britain and the United States. Cambridge, UK: Cambridge University Press, 2009.