THE READING RAILROAD AND THE PANIC OF 1893
By David N. Brunk
COMBINATION TO COLLAPSE
THE PANIC OF 1893 began a depression in the United States that lasted into 1897. Theories for the cause of the panic have included an inadequate money supply, a European depression, and a hit to national credit caused by the passage of the Sherman Silver Purchase Act. While historians such as Douglas Steeples and David O. Whittenhave pointed more generally to over-speculation, under-consumption, or even unavoidable economic law as the cause of the crisis, I argue that the failure of the Reading Railroad triggered the Panic of 1893.
Just one year before the collapse, the Reading nearly secured a monopoly when it combined with two other companies to control the production and transportation of 50-60 percent of the anthracite coal used by northeastern cities. The company’s bold president Archibald Angus McLeod, earned the nickname “the Napoleon of railroad combination.” In the period between the combination in February 1892 to collapse in February 1893, McLeod extended the company’s credit too far and estranged its most powerful financier, John Pierpont Morgan. Without Morgan’s support, the Reading became insolvent, sparking an unprecedented stock market collapse. The events leading up to the collapse illustrate how ineffectual government action, monopolistic attitudes, and divergent meanings of a company shaped how and why the Reading crumbled.
In some ways, the collapse of the Reading Railroad supports the notion that businesses operated free from government regulation in the last decades of the 19th century. While New York State policymakers responded weakly to railroad combinations, the judiciary countered forcefully and effectively. The termination of the Central of New Jersey lease by a Pennsylvania court eventually led to renewed competition in the industry. Yet in light of the collapse, no public institution addressed the real public danger, which was McLeod’s speculation in New England. Behind closed doors, the ambitious company president operated freely. He ultimately failed, however, dragging the entire market down with him, while the government did nothing to prevent McLeod’s speculation.
In a particularly weighty State Senate hearing, McLeod argued that the Reading combination benefitted the public by eliminating inefficient middlemen. Although he did not make a specific offer, McLeod suggested an agreement between the Reading and the City of New York, whereby the City guaranteed a monopoly and the combination guaranteed a low consumer price. A committee member then asked a difficult question: If a single coal retailer benefitted the public, would single retailers of any dry good benefit the public? “I don’t think it would make any difference if you could control the other businesses,” McLeod’s responded. His argument for monopoly could be applied to other industries, to end market competition and to institute state-sanctioned control by single-providers. Ironically, in the era esteemed as the zenith of laissez-faire economic rights in the United States, McLeod argued for state-sanctioned control.
The Reading collapse shows how ineffectual government action can combine with cronyism and dismissal of procedure to cause economic catastrophe. More fundamentally, it shows how an individual’s actions can cast economic outcomes for others. Despite the public’s interest in preventing behavior like McLeod’s, the Enron collapse in the early 2000s showed that executives of large corporations can still use information and control for personal advantage. Clearly, the problems that gave rise to the Reading collapse are not resolved and without fundamental changes they will likely remain.
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To read the full article, see the Columbia Undergraduate Journal of History.
Douglas Steeples and David O. Whitten, Democracy in Desperation (Westport Connecticut: Greenwood Press, 1998), 1-25.
“He Startled New-England: Mr. M’leod’s Invasion of the Eastern Territory.” New York Times. February 24, 1893.
New York State Senate, Committee Relative to the Coal Monopoly, 333.
 “No Limit to Their Greed.” New York Times. September 8, 1892.
“Stenographic Report Questioned.” New York Times. February 5, 1893.