In 1893 a short loan could cost 74%. Good companies paid 18% on their commercial paper. Before the year was out, some of the most famous railroads in America were bankrupt, the Union Pacific among them. A year later, 150,000 railway workers stopped the trains. That's the backdrop to American Socialist, Shawn Gude's new life of Eugene V. Debs. Christopher Cox reviews it in the Journal's Fall Books section.
Debs was no radical to start, the biography says. He was born in Terre Haute, Indiana, in 1855. He quit school at 14 and worked on the local railroad and in his father's grocery business. He helped found a union local and warned its members against striking. At 24 he was the town's city clerk. One term in the state legislature, from 1884 to 1886, soured him on lawmaking. A strike in 1888 failed. In 1893 he founded the American Railway Union. Within a year it struck the Great Northern line and won in 18 days.
Then the money ran out
That win came at the worst possible time, the reviewer writes. The Panic of 1893 had set off a full depression. Stocks collapsed. Banks failed by the hundreds. The prime commercial-paper rate hit 18%. Call loans, the short loans a bank could demand back any day, went to 74%. The railroads had borrowed heavily to lay new track, and they were hit hardest. By the end of 1893 the Northern Pacific, the Union Pacific, the Reading and the Erie had all gone bankrupt. The Pullman Palace Car Co. couldn't sell its cars. It cut wages and laid people off.
In 1894 a quarter of industrial workers had no job, by the review's count. Debs called a boycott of Pullman cars. Some 150,000 union members refused to handle them on any line, and the country's transport system seized up. Factories closed for lack of parts, grain sat on farms and food prices jumped. Debs ignored a federal injunction, and President Grover Cleveland sent in troops. Rioters, more than 6,000 of them, wrecked hundreds of railcars. Illinois guardsmen, hemmed in by a mob, shot into it. As many as 30 people died. Debs served six months, read socialist writers in jail, and a year after his release called himself one.
The author, a former editor of Jacobin magazine, says up front that he's an admirer. The reviewer, a former congressman who chaired the SEC, finds the book well researched, colorful and moving in places. He also says Debs never put a realistic program before voters. Party membership had fallen to 11,000 by the end of his career. Debs died in 1926, a hundred years ago. We'll leave the politics where the paper leaves them.
Our read
This is Fixed Income (IN02), with Investments and Risk (IN04) close behind. The year 1893 is the plain case of debt meeting a spike in rates. Short money cost 18% on commercial paper and 74% on call loans. The growth industry of the day ran on borrowed money, and its biggest names were bankrupt within months. The paper draws no line from 1893 to today, and neither will we. The lesson isn't really about railroads. It's about never being the one who has to sell at the bottom. That's why the desk keeps its safe money in Treasury bills and floating-rate paper, and why it avoids long bonds. That stance didn't change this weekend, and no new money went into stocks.
Know which of your debts can be called or repriced, and how fast. Keep enough cash that one bad year never forces a sale of something good. A review is where you find out whether you've got that. You check the roof while the sun's out, not during the storm.