When Republicans Deliberately Sowed a Financial Crisis

This week, President Barack Obama won re-election in a victory that so surprised many of his ideological opponents that they have spent the hours since wailing that the country is going to wrack and ruin.

With a divided and polarized government, and a battle looming over a “fiscal cliff” of more than $600 billion in tax increases and spending cuts scheduled for next year, Obama faces a rocky term ahead -- even assuming his Republican opponents negotiate in good faith.

But good faith fiscal negotiation isn’t something a president can always count on. In 1892, a dramatic Democratic victory prompted Republicans to sabotage the economy in order to ruin the incoming administration.

Then, as now, Republican insiders couldn’t believe that misguided voters had bucked the wise business leaders who backed the Republican incumbent. At the annual meeting of the New York Chamber of Commerce, held at the fancy Delmonico’s restaurant shortly after the election, members commiserated over vintage wine and an expensive dinner. Republican railroad baron Chauncey Depew snarled to his comrades about the Democrats who had just taken over Congress and the White House for the first time since the Civil War. “Business interests” were dangerous, he warned, and the Democrats had better be careful.

Businessman’s Administration

Outgoing President Benjamin Harrison and his men had presided over what they dubbed a “businessman’s administration.” The nation’s industrial giants ran their corporations without the nuisance of foreign competition, thanks to a high tariff wall the Republicans had maintained since 1861. Safe behind this wall, men like Andrew Carnegie and J.D. Rockefeller could carve up markets and charge whatever prices they wanted. When workers and farmers complained that high prices were ruining them, the Republican Congress responded in 1890 by raising rates even higher. The Harrison administration had been “beyond question the best businessman’s administration the country has ever seen,” the members of one Republican business association insisted.

Farmers and workers agreed, and they turned away from the Republican Party. In 1892, voters re-elected Democrat Grover Cleveland (who had already served a term as president from 1885 to 1889) to the White House on a promise to reform the tariff that protected big business. They also elected a Democratic Congress.

Republicans were outraged. The Democrats would destroy the economy, they predicted. Their policies would throw people out of work. The unemployed would starve in the streets. But, the staunchly Republican Chicago Tribune mused, “perhaps the working classes of the country need such a lesson.”

Businessmen set out to teach it to them. Although economic indicators remained steady, Republicans trumpeted that businessmen feared a coming catastrophe. The Democrats had only won with the votes of “socialists and anarchists,” Republican Senator Henry Teller of Coloradorailed. Such men would deliberately create rampant inflation to wipe out their debts. Or they might slice away the tariffs altogether, throwing industry into a global market where foreign competition would instantly undercut it. Businesses would fail overnight. Newspapers warned investors to avoid stocks, which could only plummet under the new administration.

Abandoning Hope

Within days of the election, Wall Street was feeling a strain and gold was flowing out of the country as foreign investors brought their money home. “WALL STREET DAZED,” said a Chicago Tribune headline. “Republican millionaires are in the dumps.”

The situation deteriorated rapidly. “OPERATORS ABANDON HOPE,” announced the Washington Post in mid-February. J.P. Morgan rushed to Washington to beg the president to issue bonds to replenish the Treasury. But Harrison rebuffed him, and Treasury Secretary Charles Foster airily announced that the Republicans were only responsible for the nation’s finances until March 4, Inauguration Day. All they had to do was “avert a catastrophe” until then.

Harrison’s men didn’t quite make it. On Feb. 20, 1893, Wall Street crashed, taking more than $20 million with it. The next day, the plunge continued. Businesses folded overnight, starting the Panic of 1893. Over the next two years, the country convulsed with riots, strikes, and marches on Washington by farmers and workers demanding relief.

Republicans had set out to sow fear and panic in advance of the transfer of power. It worked. The crisis hit in the last days of the Harrison administration, but the Republicans successfully blamed the chaos of 1893-1894 on the Cleveland administration and the new Congress. The falling wages, unemployment, business failures, strikes and desperation all proved what they had always said: Democrats destroyed the economy.

As they planned for midterm elections in 1894, the National Republican Congressional Committee published a “Campaign Text Book” promising that a new Congress with their party in charge would restore the nation’s economic health. Businessmen would no longer worry about the safety of their money, knowing that Republicans would legislate in their favor. With business safe, the economy would recover. Workers would have jobs again. This all added up to one conclusion: Republican government was the only way to ensure a sound economy.

Persuasive Argument

Although the economy was slowly improving by mid-1894, voters found this argument persuasive. The 1894 election remains the largest midterm turnover in the nation’s history. Republicans gained an astonishing 130 seats in the House and regained control of the Senate. The economy recovered, in part because of increased investment, in part because of the discovery of gold in the Klondike.

Mostly, though, it recovered because investors had confidence again. With the election results, “American manufacturers and merchants and business-men generally will draw a long breath of relief,” the Chicago Tribune promised.

While big-business Republicans had managed to scuttle the Democrats and regain control of the government, their victory was short lived. Within a decade, younger members of their own party, led by Theodore Roosevelt, would challenge the Old Guard’s determination to promote business at the expense of workers and farmers. Unlike the Democrats, they would succeed.

After an election fought largely over Obama’s handling of the economy, it’s hard not to note the similarities between 1892 and 2012. And the fight over taxes, spending and jobs will only intensify in the months to come. Noting the relative positions of Benjamin Harrison and Theodore Roosevelt in our national memory, though, might encourage Republicans to consider a more conciliatory approach.

(Heather Cox Richardson is a professor of history at Boston College and the president of the Historical Society. The opinions expressed are her own.)

Read more Echoes columns online.

To contact the writer of this article: Heather Cox Richardson at heather.richardson@bc.edu.

To contact the editor responsible for this article: Timothy Lavin at tlavin1@bloomberg.net.