The news from Wall Street is prompting a lot of comparisons with the Great Depression, but the history books are filled with other similar financial crises. Throughout the 1800s, when the government barely regulated the financial markets at all, speculative bubbles and piles of bad loans caused several panics. History repeats itself.
Here's the story of one panic--a series of bank collapses that hit Chicago in 1896. I researched the Chicago Panic of 1896 when I was writing my book, Alchemy of Bones: Chicago's Luetgert Murder Case of 1897.
Although it seems arcane now, the hot topic of 1896 was whether gold or silver should be the nation's monetary standard. Some people, fearing that populist Democrat William Jennings Bryan would defeat Republican William McKinley in the presidential election, began buying up gold. Meanwhile, the Chicago firm W.H. and J.H. Moore was getting deep into stock-market speculation, heavily investing money from wealthy Chicagoans in the Diamond Match Co. and the New York Biscuit Co. When the Moore brothers went bust on Aug. 3, short selling was blamed for their collapse. Fearing a big sell-off, the Chicago Stock Exchange closed down for three months.
McKinley won the election, and two days later, the Chicago Stock Exchange reopened. Everything seemed fine. "Millions of dollars came out of the hoarding and hiding places where they had been kept under cover during the period of fearful apprehension over the stability of values," the Chicago Daily Tribune reported. "This money filled the vaults of the banks." But the good news did not last long.
On Dec. 21, the National Bank of Illinois failed, rapidly setting off a chain reaction. The bank had made some questionable loans, including $2.4 million to the unprofitable Calumet Electric Street Railroad. Bankers kept a $900,000 payment to the railroad secret by hiding it in a foreign-exchange account. Examiners discovered the bank didn't have enough money to cover all of the loans it had been making.
The collapse of the $22 million National Bank of Illinois sounds miniscule today, but at the time, it was record-breaking. "Never in the history of the national banking system had there been as great a failure," F. Cyril James wrote in his book The Growth of Chicago Banks. "The public was astounded."
A crowd gathered outside the bank at 115 Dearborn St., waiting in vain for the big doors to open. Other Chicago banks, including E.S. Dreyer & Company, relied on the National Bank for financing, and they began closing their doors as well.
"Dark, sullen, foreign faces were surging thick around the doors of E.S. Dreyer's bank at noon," the Chicago Daily News reported. "Men in rough, shaggy overcoats, teamsters, small storekeepers - Germans and Scandinavians nearly all - were crowding up the stairs. The guttural accents flew fast - angry words, cried of despair came from the men whose all had been stowed in the vaults of the Dearborn street concern ... Inside were a few husky, powerful fellows--evidently the guardians of the establishment. They opened the doors at times and talked pleasantly enough, but would not let anyone in. Once a big bearded man, in a checked gingham roundabout, got off his wagon and ran up to the door. He saw the sign, he noted the staring, wailing crowd and then sank back against the opposite wall: 'Mein Gott!' he cried. 'Id is all gone--all gone--und now I haf got not so much as I gome ofer mit!'"
Another bank used by many Germans and Swedes, Wasmandorf & Heinemann, also posted a placard in its window, declaring it was defunct. On Dec. 27, banker Otto Wasmandorf arose and breakfasted at his usual hour. After playing for almost an hour with his 8-year-old granddaughter, he said he was tired, raised her in his arms, and kissed her on the lips. Saying nothing to his wife, he went upstairs and into a little bedroom, where almost nothing had been touched since his grown son, Richard, died in the room of pneumonia four years earlier. Wasmandorf carried a revolver that had belonged to his son. He stretched himself across the bed, put the muzzle to his right temple and pulled the trigger.
Another banker, William Hammond, vice president at the National Bank of Illinois, was reportedly the source of much of the trouble. He had a reputation for being thrifty and shrewd, but in recent days, he had been making risky loans. And when he lost money on personal investments, he began using bank funds. Later, when examiners went through the books, they found everything completely "juggled."
During the first days of the banking panic, Hammond went about his business as if nothing were amiss. "He always acted as if nothing had happened," a bank security guard remarked. But Hammond's attorney, Gardner C. Willard, presented a different picture of his reaction to the scandal: "Failure came upon him like a terrible blow and seemed to stun and paralyze him... His mental condition and emotional condition ... have been ... like one in a trance ... I have absolutely no doubt that he was mentally deranged."
On Saturday, Jan. 2, 1897, Hammond's wife awoke at 6 o'clock at their home in Evanston, noticing that the door connecting their separate bedrooms was ajar. She went into his room and saw that his night robe was hanging over the rear of the bed. His gold watch had been wound and hung on the arm of the chair near his bed, where he always put it before going to sleep. His trousers, coat and underclothing were nowhere to be found. Neither was he.
Neighbors and police searched for Hammond, heading for the shore of Lake Michigan, which was a few blocks away. They found some torn scraps of rain-soaked paper clinging to the boards of a pier. The rain had washed away most of the ink, but the men recognized Hammond's handwriting and his signature. The neighbors found footsteps in the wet sand, indicating that Hammond had paced up and down the beach. That afternoon, two boys found Hammond's body, lying at the water's edge a half-mile away. A memorandum in Hammond's bathrobe listed the bank's assets and outstanding loans.
Another Chicago banker, Edward S. Dreyer, was holed up inside his home. While the Panic of 1893 had forced other banks to shut down, Dreyer had managed to hold off failure that time by taking out loans from his friends at the National Bank. More loans were always needed, and National Bank willingly obliged, until Dreyer had piled up $500,000 in debt. Dreyer also developed a habit of "borrowing" money from the West Park Board, one of the Chicago's park districts, where he served as treasurer.
Now he lay in bed day after day, expecting criminal charges and suffering from a malady that the newspapers never bothered to diagnose. Police officers guarded the entrance to his house. A visitor asked him, "Mr. Dreyer, you will do nothing rash?"
"My dear friend," Dreyer replied, "I will not. I have inclination to. I will never commit suicide."
Four months later, Dreyer was indicted on 15 charges, including obtaining money under false pretenses, conspiracy and larceny. The grand jury commented: "The investigation of the affairs of E.S. Dreyer and Co. has revealed a condition at once criminal and shocking." Dreyer was convicted and appealed his case to the Illinois Supreme Court. He was finally sent to prison in Joliet on New Year's Eve, 1902. As he went to prison, Dreyer told a bailiff, "I am going to the penitentiary an innocent man. This talk that I have something to expose when I am free is all rot." He was released on parole in 1905 and died in 1918.
Another Chicago financial institution, Globe Savings Bank, failed in the spring of 1897, nearly wiping out the accounts of the University of Illinois. But the crisis seemed to fade by the middle of 1897.
The Chicago Daily Tribune described the panic as if it had been a necessary spasm of the banking industry. "The weak banks which had been a menace to the business community had been forced to the wall and those that were left had increased in public esteem and confidence, owing to the strength they had manifested in trying times," the newspaper observed.