The U.S. bank panic of 1907 and the Mexican depression of 1908-1909.
Historians have long recognized that the U.S. bank panic of 1907 was the stimulus for the Federal Reserve Act of 1913 that was designed to regulate the nation's money and supply and credit by buying and selling government bonds and issuing Federal Reserve Notes. By paralyzing the nation's financial network and precipitating an acute depression, the panic demonstrated the frailty of the nation's financial system. However, the repercussions of the bank panic were not limited to the United States. Scholars of the Mexican Revolution, including Friedrich Katz, Michael Hart, and Ramon Ruiz, believe that the panic and subsequent depression were among the catalysts for the Mexican Revolution. They contend that because Mexico depended heavily on foreign markets and capital, particularly that of the United States, the U.S. depression crippled the Mexican economy. Generating widespread dissatisfaction with President Porfirio Diaz's government, it thus was one of the factors that provoked the Maderistas and other revolutionaries to rebellion in 1910. However, the relationship between the U.S. bank panic and the Mexican depression of 1908 and 1909, on which the theory rests, has never been substantiated. This study will test the validity of scholarly assumption by investigating the effect of the bank panic on the United States and its effect on the Mexican economy.(1)The primary cause of the U.S. bank panic was the unstable financial system that allowed questionable financial practices by unscrupulous businessmen. On 16 October 1907, F. A. Heinze, president of the Mercantile National Bank of New York City, used the resources of his banks in an attempt to seize control of the copper market from John D. Rockefeller. Rockefeller thwarted his efforts by unloading millions of pounds of copper on the market, which precipitated a drop in the price of copper and caused the value of copper stock to plunge. When Mercantile's depositors learned of Heinze's financial schemes, many began liquidating their accounts. Unable to meet its financial commitments, the Mercantile National Bank asked its clearinghouse, the central agency where member banks settled accounts, for assistance, which was granted only when Heinze and the entire board of directors agreed to resign their positions.(2)
During the reorganization of the bank, clearinghouse officials discovered that one of the Mercantile Bank directors, C. F. Morse, was also a director of six other banks, three of which he managed with virtually absolute autonomy. The officials were concerned because Morse had used the shares of one bank as collateral for loans to buy shares in the other banks. Thus, if one bank failed, the other six banks would collapse as well, as happened when the press revealed Morse's involvement with Mercantile. Widespread withdrawals produced by the publication of Morse's activities actuated the reorganization of four other banks: National Bank of North America, Mechanics Bank, Traders Bank, and the Consolidated Bank.
The crisis began when bank officials announced that the president of the Knickerbocker Trust Company, the third largest trust company in New York, had business connections with Morse, prompting most of the company's depositors to withdraw their funds. The publication of business ties between the directors of the embroiled banks provoked more depositors to withdraw their funds. Because trust companies were only required to have 15 percent of their depositors' holdings in the vaults, Knickerbocker Trust Company soon was unable to meet its financial obligations. The unexpected announcement by the National Bank of Commerce that it would discontinue clearing checks for the Knickerbocker Trust Company provoked widespread withdrawals from all of the prominent trust companies; the panic spread beyond the trust companies as depositors withdrew funds from savings banks throughout New York City.(3)
To prevent the stock market from collapsing from loss of business confidence and severe credit shortage, J. P. Morgan and several other leading bankers consolidated a portion of their assets to replenish the depleting accounts of the trust companies, but these funds proved insufficient and failed to subdue the panic. Secretary of the Treasury George B. Cortelyou furnished an additional $25,000,000 to prevent the collapse of the ailing trusts. Initially, these measures suppressed public anxiety, and by 25 October it appeared the hysteria had abated. However, newspaper cover age of the difficulties of the New York banks as well as the failure of several banks in other regions caused the panic to spread to the rest of the country. Facing their own runs, local banks petitioned their reserve banks. This set off a chain reaction as the reserve banks requested New York banks (who held the reserves for most interior banks) to furnish them with their reserve holdings. By the end of October, New York banks had sent $42,000,000 to interior banks, depleting the $25,000,000 supplied by Cortelyou and renewing the difficulties of the New York banks.(4)
The fundamental difficulty created by the panic was a scarcity of currency. To limit withdrawals, governors of Nevada, California, Oklahoma, Washington, and Oregon suspended bank operations and issued bank holidays. Typically, banks closed for one to four weeks. Several Midwestern states, including Illinois, Iowa, South Dakota, and Oklahoma, instructed their banks to limit cash payments. Only six states did not suspend or limit payments.(5)
Substituting clearinghouse loan certificates for cash was a more common method of managing the crisis. Normally, clearinghouse certificates were merely loans between member banks and their clearinghouses, but to provide a medium of exchange during the crisis, banks sometimes issued clearinghouse certificates directly to depositors. Large denomination certificates ranged from $500 to $20,000 and were used strictly as a medium of exchange between banks, and smaller denominations ranging from $1 to $20 were issued directly to customers. Ninety-one percent of the clearinghouse certificates distributed during the panic were in large denominations. These clearinghouse certificates were redeemable in one to three months. From October 1907 to March 1908, New York clearinghouses issued over $100,000,000 in clearinghouse loan certificates and other cash substitutes. Banks also issued clearinghouse checks, cashier's checks, bank drafts, and negotiable certificates of deposit. For more than two months, clearinghouse loan certificates and other cash substitutes were the medium of exchange for much of the nation.(6)
The bank panic hindered the economy in several ways. First, it forestalled economic growth by undermining general confidence in the economy. Second, the shortage of cash induced banks to postpone their loan services temporarily. Third, the substitution of clearinghouse certificates for cash dislocated domestic exchange; certificate exchange rates varied, preventing banks and subsequently businessmen from accepting certificates from establishments outside their locality. Finally, the shortage of currency deprived manufacturers of resources to pay wages and salaries, and many shut down their operations or reduced their production hours. These reverberations delayed economic recovery until 1909, ten months after the currency shortage had been resolved.(7)
The dislocation of domestic exchange and the suspension of loans triggered an economic downturn in every sector of the economy. Numerous economic indicators illustrate the acute nature of the depression. Most revealing is the amount of liabilities that accrued from business failings. In 1906 aggregate business failures totaled $119,395,225. In the next two years liabilities grew to $197,395,225 in 1907 and $220,787,939 in 1908. The majority of liabilities were in manufacturing. Production levels declined radically as well. The Miron and Romer Index of industrial production reveals that production levels dropped from 93 percent in October 1907 to 71 percent in December, remained below 80 percent until July 1908, and did not exceed 90 percent until the following November. The decline in production also affected foreign trade as 1908 imports and exports fell by 22 percent and 9 percent respectively. Unemployment levels increased from 2.8 percent in 1907 to 8 percent in 1908. Reviewing the financial conditions of 1908, one of the leading business journals of the time, The Commercial and Financial Chronicle, wrote:
In trade and mercantile affairs the year of 1908 was one of intense
depression, relieved only by partial recovery the latter part of the
year. It is probably no exaggeration to say that the industrial
paralysis and the prostration was the very worst ever experienced in
the country's history.(8)
To understand how the U.S. bank panic caused massive depression in Mexico, it is first necessary to examine the expansion of the Mexican economy during the Porfiriato, the period from 1876-1910, when Mexico was governed by Porfirio Diaz (1876-1880 and 1884-1910) and Manuel Gonzales (1880-1884). Upon regaining control of the presidential office in 1884, Diaz's primary goal was to generate economic growth by reorganizing the banking system. Prior to 1884, there were only seven functioning banks in Mexico. Lack of available credit made it virtually impossible for Mexicans to acquire the resources necessary to build industrial enterprises, making Mexico dependent on foreign capital. The system also impeded the influx of capital into Mexico. To rectify the situation, Diaz's minister of finance, Jose Yves Limantour, instituted the 1897 Banking Law. The new law assured that those banks entrusted to oversee the republic's financial system were sound; new banks were required to obtain the authorization of both Congress and the secretary of the treasury and to possess an exorbitant minimum capital requirement of 1,000,000 pesos ($233,973) as well as a high reserve requirement before beginning operations. These requirements made Mexico more attractive to foreign investors, but Mexicans found it even harder to obtain credit. Although there were 47 banks in 1910, only ten were authorized to make loans for longer than one year, and only those few manufacturers with ties to one of these banks were able to finance their businesses.(9)
The second step of Limantour's plan was to assign banks one of three functions: issuing currency, providing mortgages, and granting loans. The National Bank of Mexico and the Bank of London and Mexico became the principal banks of issue. By 1907, these two banks controlled more than 75 percent of the deposits of the nations' nine largest banks and 50 percent of all bank notes in circulation. The mortgage banks were authorized to make loans on properties and issue bonds, while the loan banks provided capital to mining, agriculture, and industrial enterprises. The 1897 Banking Law also restricted the term of most bank loans to six months. By 1910, only ten banks could provide loans whose terms extended beyond one year. Access to credit was therefore limited to a minority of well connected individuals.(10)
Despite the government's regulations, many state banks employed unsound banking practices. State banks were formed when an individual with the necessary connections to borrow money from the National Bank of Mexico secured a loan. Prospective bankers sold stocks offering interest rates of 25 percent to family and friends. Using the money from depositors, banks granted loans to the same individuals with insufficient collateral. Moreover, they ignored the government's regulation and gave their borrowers indefinite extensions on their short-term loans.(11)
As Diaz and Limantour had hoped, the advent of a seemingly stable banking system attracted foreign investment. Between 1884 and 1909 foreigners invested over one billion dollars in Mexico, mainly invested in the export sector. Minerals, including silver, gold, copper, zinc, and lead, were the foundation of the export economy. With few exceptions, Americans invested the capital to restore the mining industry. By 1911, Americans had invested more than $249,500,000 while the combined investments from other nations totaled only $73,930,000. The massive implant of foreign investment into northern Mexico revitalized the mines, and production increased rapidly. By 1901, annual silver extraction had increased by 1,748,611 pounds over 1877, and the annual extraction of copper and lead increased by 21,725 tons and 40,927 tons respectively.(12)
The most successful mining companies were Greene Consolidated Copper Company, Cananea Consolidated Copper Company, American Smelting and Refining Corporation, and Phelps Dodge Corporation. Despite its huge profits, however, the mining industry had an inherent flaw: its dependence on international markets ensured that every global depression would cause mineral prices to plummet. Since the resurrection of the Mexican mining industry, the economies of the mining sectors collapsed during the panics of 1893, 1901, and again in 1907.(13)
Agricultural goods such as sisal grass, coffee, chicle, sugar, vanilla beans, istle, and Indian rubber were also important export commodities. In the 1880s, the Porfirian government instituted a land enclosure program to facilitate the development of a commercial agricultural system. The Land Law of 1883 empowered private land companies to survey public lands. If the individual owners or the ejidos (communal land of Indian villages) could not produce legal title to the land, it reverted to the government, and the land companies received part of the expropriated land as payment for their services. Between 1880 and 1900 more than 134 million acres of the best land was expropriated by the state, subdivided, and sold to foreign and local interests. These lands and the dispossessed Indians became the foundation of the commercial agricultural system. Without their communal land, the majority of the dispossessed Indians were forced to join the agricultural or industrial workforce. The best and largest commercial farming enterprises were foreign owned, with Americans acquiring 46 percent of the capital in agricultural companies. The Mexican commercial agriculture sector became completely modernized, resulting in a 6.1 percent growth rate for agriculture, cattle, and forestry exports between fiscal years 1877 and 1900. With the exception of istle and Indian rubber, the agricultural exports derived from the Center and South regions.(14)
The emergence of a thriving export sector and a seemingly stable banking system spurred Mexico's industrialization as the rapid development of the mines and commercial farms created a wage earning class to consume manufactured goods. Convinced that industrial enterprises would be profitable, foreign entrepreneurs, mainly Europeans, invested in numerous industries. These industries, primarily in the Center and North regions, included steel, iron, cement, and glass industries; shoe manufacturing; cigarette processing; breweries; and soap factories.(15)
Mexico's principal industries shared three characteristics: they were capital intensive, foreign-owned, and monopolistic or oligopolistic. Mexico began industrializing when the United States and Europe were entering the mass-production stage of the industrial revolution. The dearth of capital industries in Mexico forced its manufacturers to import industrial equipment, and mass production machinery was the only technology available. Importing these machines proved costly, and the shortage of credit in Mexico ensured that Mexican manufacturing firms were owned primarily by foreigners. These entrepreneurs often were not engineers or experts in their industry; instead, their skill lay in raising capital and manipulating markets. Together with the high start-up costs, this ensured that one or two firms dominated their particular market as board members of Mexican industries used their entrepreneurial skills, close ties to the Mexican government, and financial resources to buy out competition or prevent new competitors from entering the markets. For example, while none of the board members of Fundidora de Fierro y Acero de Mexico, S.A. steel plant were familiar with the production of steel, their firm, along with Consolidated Rolling Mills and Foundries, produced all of Mexico's steel. Still, they were not competitors as each produced different steel products. All of Mexico's key industries were dominated by one to three firms, and as a result a small clique of investors controlled Mexico's industrial sector.(16)
The U.S. depression of 1907-8 denied Mexico her two primary sources of capital: profits from the sale of raw materials and the influx of foreign investment. The demise of the export economy constricted the market for the manufacturing sector, while the curtailment of investment reduced the access to capital, further impeding economic growth.
The Mexican banking system was first to feel the effects of the U.S. bank panic. By depriving the Mexican banks of their chief supplier of capital, the bank panic precipitated a severe credit shortage. In 1906 over $57,000,000 of foreign investment poured directly into Mexican banks, but when this influx ceased at the end of 1907, money became scarce. As Minister of Finance Jose Limantour reported,
The stringency, which originated in the United States gradually extended
to Europe, and by the middle of the year business in the chief money
centers of the world was almost at a standstill. European capital became
more and more reluctant to engage in Mexican undertakings, and not only
new issues, but even old ones, came to be regarded with disfavor by
European investors, who gradually realized on them, preferring to have
money lying idle in their strong boxes.(17)
The loss of foreign investment caused the total assets of Mexican banks to plummet from $360,434,265 in 1907 to $305,429,297 in 1908, and the credit shortage caused the nation's circulation of notes to decline by over $3,000,000 from 1907 to 1908. New bank loans also declined from $68,867,088 in 1907 to $36,046,729 in 1908, and banks were forced to call in existing loans. More than 90 percent of the total bank credits, which amounted to 631,000,000 pesos ($315,500,000), were extended short term loans, many made without sufficient collateral, and so collecting the loans was a difficult task.(18)
A large majority of borrowers were unable to repay their loans. Two consecutive years of drought curtailed agricultural production, making it impossible for the hacendados (commercial farmers) to repay their debts. Moreover, individuals throughout the republic had borrowed money to buy stocks on margin. The collapse of the economy caused stock prices to decline, and many of these investors faced bankruptcy.(19)
The inability of the banks to collect their debts produced profound difficulties for banks at all levels. The most important bank to fail was the Mexican Central Bank; Although both the National Bank of Mexico and the Bank of London and Mexico survived the credit stringency, the decline of resources prevented them from assisting the state banks, and many went bankrupt as a result. The Sociedad Cooperativista de Ahorros e Inversiones de Sonora, an institution to help small enterprises, and the Banco Jalisco both became insolvent. The Banco de Michoacan required federal assistance, and the Banco de Oaxaca survived only by merging with her sister bank, the Banco de Veracruz. By wiping out their clients' savings and canceling promised loans, the failure of these state banks triggered bankruptcy in many small businesses and farms. Moreover, the credit shortage prevented large manufacturers, mine owners, and hacendados from obtaining loans during the depression that followed, and they were forced to curtail their operations.(20)
The most detrimental by-product of the U.S. bank panic was the contraction of the Mexican export market, as the purchasing power of the primary consumer of Mexico's exports was dramatically reduced. In 1908, U.S. imports of Mexican products declined by more than $14,000,000 from the previous year. Because more than 70 percent of Mexico's exports were purchased in the United States, this had a devastating impact on Mexico's export economy. Mexico's second quarter exports for 1907 (the quarter in which the panic began) totaled $10,748,503, or $3,935,068 below first quarter levels, a 27 percent decline. Until the second quarter of fiscal year 1909, Mexican exports to the United States remained 20 percent below pre-depression levels (see Figure 1).(21)
In 1908, the decline in American imports most severely affected northern Mexico, accounting for roughly 92 percent, or $14,667,195, of export losses. The mineral sector was especially hard hit, as mineral exports fell by more than $12,000,000 from fiscal year 1907. The prices of silver, copper, zinc, and lead declined by 30 percent, 46 percent, 28 percent, and 10 percent respectively from 1907 prices. The only significant decline from the Center and South was the $960,000 decline in the export of sisal.(22)
In 1909, the Mexican export economy began to recover, increasing by $6,938,680 over 1908 levels, though exports remained more than $7,000,000 below 1907 exports. The partial recovery of the mining sector was responsible for this improvement; mineral exports were more than $8,000,000 above 1908 exports but still remained $4,000,000 below 1907 levels. The South and Center regions suffered significant losses, however; 1909 exports of sisal, chicle, vanilla bean, wood, and sugar declined by $4,859,880, $365,683, $126,504, $176,844, and $94,801 respectively from pre-depression levels. The nominal increase in northern exports combined with the reduction of southern exports caused the North's proportion of Mexico's export losses to fall to 70 percent (see Table 1).(23)
Table 1. Mexican Exports to the United States
1907 1908
Northern Exports
copper 19,298,605 9,814,848
silver 32,821,856 29,703,173
gold 11,666,026 11,022,535
zinc 1,442,773 678,457
lead 2,613,728 3,995,512
istle 1,369,156 893,273
rubber 2,877,022 3,888,684
cattle & cattle hides 2,196,378 2,015,313
Total Northern Exports 74,285,544 62,011,795
South & Center Exports
coffee 1,697,094 3,338,510
chicle 728,072 532,800
sisal grass 14,662,062 13,701,759
vanilla bean 782,222 692,483
wood 899,311 915,151
sugar 196,264 898,907
Total South &
Center Exports 18,965,025 20,079,610
All other exports 8,470,840 5,579,993
Total Exports 101,721,409 87,671,398
1909 1910
Northern Exports
copper 11,278,959 12,451,589
silver 27,847,659 26,139,963
gold 19,050,205 20,214,846
zinc 944,275 961,524
lead 4,147,379 3,557,283
istle 675,654 642,965
rubber 5,466,904 10,918,104
cattle & cattle hides 3,641,671 6,727,446
Total Northern Exports 73,052,706 81,613,720
South & Center Exports
coffee 3,754,522 2,298,986
chicle 362,389 708,416
sisal grass 9,802,182 10,894,460
vanilla bean 655,718 706,097
wood 722,468 918,594
sugar 101,463 13,820
Total South &
Center Exports 15,398,742 15,540,373
All other exports 6,158,630 7,996,659
Total Exports 94,610,078 105,150,752
In 1910, Mexican export levels increased by $10,540,674 from 1909 levels and were $3,429,343 above 1907 levels. The North shared this improvement as 1910 exports were nearly $8,561,014 above 1909 levels and $7,328,176 above 1907 exports. However, this increase in northern exports was mainly a function of the dramatic growth in India rubber exports; mineral exports in 1910 remained more than $4,500,000 below mineral exports of 1907. The South and Center regions also failed to achieve a full recovery as their exports were 18 percent below 1907 exports. Sisal, the principal export of this region, was $3,767,602 below pre-depression levels.(24)
Clearly, the Mexican export economy experienced an acute depression whose effects began in late 1907 and persisted until 1910. It is also certain that its effects were not distributed evenly throughout Mexico. The North, and specifically the mineral sector, was most affected. Reports from U.S. consular districts throughout northern Mexico verify these findings. Of the 14 consular officials who issued reports in 1908, 10 reported significant trade losses averaging 27 percent from 1907. Moreover, of the four consular officers who reported increases, three qualified their findings by stating that the export statistics were misleading and failed to represent the economic condition of their district. As Charles Freeman, U.S. consul in Durango, explained:
This increase in exports to the United States in the face of a business
depression in the district is remarkable, and the reasons advanced for it
are that all the industries in the district are in the need of spot cash
to meet bills, and to keep going have sold off surplus stock on hand, and
that many articles usually exported to Europe were sent to the United
States because of quicker cash returns.(25)
Only a few U.S. consular officers stationed in the South and Center regions issued reports in 1908. Of the five reports made, two cite reduced exports. The consular officer from Progresso district in Yucatan (the sisal producing region) reported a 36 percent drop, and Manzillo, which was responsible for less than 1 percent of the nation's exports, suffered a 47 percent decline in exports. The other three consular officers who issued reports in 1908 reported significant export gains, most notably in Mexico City and Veracruz, which enjoyed 68 percent and 11.5 percent increases respectively in exports to the United States. The consular reports and export statistics indicate that with the exception of the Yucatan, which endured the collapse of the sisal market, the export sector of the Center and South were not overly affected by the bank panic. In 1908, 1909, and 1910, sisal accounted respectively for 77 percent, 86 percent, and 93 percent of Central and Southern Mexico's export losses derived since 1907.(26)
Reduction in imports of agricultural equipment, livestock, and mining machinery reflect the depression of the export sector. As shown in Table 2, imports of agricultural and mining equipment, in 1908, 1909, and 1910 declined respectively by 34 percent, 53 percent, and 54 percent from 1907 levels. Mexico experienced a prolonged drought in 1908 and 1909, which likely had a significant impact on importation of agricultural equipment. Declining exports and severe weather caused Mexican imports to decline by 12 percent in 1908 and 23 percent in 1909. The agricultural sector began to recover in 1910 as the imports of agricultural equipment increased by nearly 13 percent from 1909. Cattle imports declined by 14 percent in 1908 and continued to decline until 1910 when these imports fell 70 percent below 1907 imports. The collapse of the mineral sector in 1908 is documented by the respective 25 percent and 63 percent decline in mining machinery and pumping machinery. Even more interesting is the fact that imports of this essential equipment did not return to pre-depression levels. The 1910 and 1911 imports of pumping machines remained 60 and 57 percent below the 1907 levels while the 1910 and 1911 imports of mining machinery remained 53 and 45 percent below pre-depression levels.(27)
Table 2. Key Mining and Agricultural Imports from the
United States
1907 1908 1909
Agricultural
equipment 498174 439260 384904
Cattle 836,729 722,585 381,481
Horses & mules 726,464 270,906 228,205
Other animals 442,728 295,980 144,332
Pumping machinery 1,144,069 418,917 359,994
Mining machinery 3,280,987 2,451,569 1,724,385
Total Agricultural
& Mining Imports 6,929,151 4,599,217 3,223,301
1910 1911
Agricultural
equipment 442934 679,037
Cattle 253,160 306,615
Horses & mules 361,398 261,061
Other animals 79,931 50,698
Pumping machinery 455,993 492,886
Mining machinery 1,557,453 1,804,522
Total Agricultural
& Mining Imports 3,150,869 3,594,819
The mining sector underpinned the Mexican economy, comprising approximately 70 percent of Mexican exports. When the mineral exports declined by 19 percent in 1908, economic problems reverberated to affect the entire economy as Mexican manufacturers also depended indirectly on the export industry. Mexican manufacturers were unable to compete on the international market because the exorbitant cost of transporting mass production equipment created excessive startup costs. The problem was compounded by the absence of a skilled and disciplined industrial work force, and Mexican manufacturers were forced to compete with foreign imports for the domestic market. Lewis A. Martin, the U.S. consul for Chihuahua, wrote in 1908:
Nothing is manufactured for export, everything produced being for home
consumption and consisting chiefly of clothes, woolen goods,
candles, matches, brooms, and some products made from iron and steel.
There is one small factory for the manufacture of brass bedsteads. The
price of each of the articles manufactured here is as high as the
prices for those imported from other countries.(28)
Focusing on the domestic market was equally precarious, as Mexico's consumer industries were crippled by their dependence on an impoverished population. Prior to the bank panic, Mexican manufacturers were dependent on a tenuous and fragile consumer base, and thus it did not take a significant decline in employment levels to undermine the foundation of the manufacturing economy. By causing the mining sector to collapse and reducing export levels in Mexico's other export sectors, the bank panic eliminated the primary consumers of Mexican manufacturing products, agricultural and industrial workers. Only elite and middle-class Mexicans had the means to be substantial consumers, and they comprised just 9 percent of the population. The primary consumers of manufactured goods were the roughly 90 percent of the population employed as either agricultural or industrial laborers. The minimum daily wage was $0.19 for agricultural workers and $0.23 for industrial workers. These wages, barely above subsistence levels, limited working-class purchases to non-durable goods such as cigarettes, beer, soap, cotton, cloth, and other inexpensive items, which became the focus of the consumer-oriented industries. In 1909, W. A. Graham Clark described how the depression had affected the Mexican textile industry in a report to the U.S. Senate:
The bulk of the Mexican mills are fitted for only the coarser grades and find
their best customer the peon, and as the purchasing power of the peon
has been seriously curtailed of late the mills felt the
depression severely.(29)
The rest of the Mexican industrial sector manufactured intermediate goods for mining, transportation, oil, and other export-oriented industries. However, this market was more limited than the consumer market and suffered from the same weakness, dependence on the export markets: The employees of the export industries were the primary consumers of non-durable products while the mines and other related industries were the primary customers of the intermediate manufacturers.(30)
As Consular officer Charles Freeman reported in 1908:
When it is understood that nearly all new industries requiring capital are
started and financed by foreigners, principally Americans, it will be
seen that a large amount of the usual money of circulation was cut
off. Moreover, the sharp decline in the price of silver closed a number
of mines and reduced the number of laborers employed in others ....
The Mexican people as a whole are good spenders, but the fact that
their income was cut one-half (a conservative estimate) naturally
lessened importation.(31)
In 1908, the value of consumer imports declined by $3,591,746, a 22 percent drop from 1907 (see Table 3). Because foreign products were a luxury most lower class Mexicans could not afford, this decline is representative of upper-class purchasing power. Since the lower class was more vulnerable to the effects of the depression, the purchasing power of the lower class must have declined even more. Consumer imports declined another 11 percent in 1909 before rising dramatically the following year.(32)
Table 3. Mexican Imports from the United States
1907 1908
Agricultural
equipment 498,174 439,260
Animals 2,005,921 1,289,471
Consumer goods 15,973,674 12,381,928
Iron & steel 7,825,345 6,959,301
Machinery 11,312,319 10,038,989
Explosives l,152,965 832,939
Industrial supplies 12,604,256 11,107,645
Scientific instruments 1,349,858 853,038
Railroad supplies 5,465,980 3,696,806
Building supplies 5,898,837 5,754,278
All other articles 1,461,716 1,531,885
Total Imports 65,549,045 54,885,540
1909 1910
Agricultural
equipment 384,904 442,934
Animals 754,018 694,489
Consumer goods 11,067,298 16,027,405
Iron & steel 5,768,489 7,325,982
Machinery 7,516,368 8,558,464
Explosives 778,261 906,961
Industrial supplies 12,657,889 12,300,904
Scientific instruments 823,634 1,549,114
Railroad supplies 3,982,078 3,303,807
Building supplies 4,022,793 4,780,081
All other articles 1,361,335 1,455,408
Total Imports 49,117,067 57,345,549
A better illustration of the influence of the bank panic on the manufacturing sector is the decline in industrial supplies, iron and steel products, and machinery. In 1908, manufacturers imported 12 percent less in industrial supplies and 11 percent less iron and steel products than the previous year, an indication of declining production. Importation of bituminous coal, coke, steel, glass, and copper declined by 17 percent, 20 percent, 23 percent, 12 percent, and 11 percent respectively. While industrial imports increased in 1909, suggesting that manufacturers had resumed production, the importation of machinery continued to decline; 1909 imports were 34 percent below 1907 levels. Imports in 1910 improved but remained 24 percent below pre-depression values.(33)
The curtailment in industrial production caused a decline in wages and the dismissal of thousands of workers. This in turn reduced the customer base of the nation's retail sector. However, the full impact of the depression was delayed until 1909 as the 1908 total imports from the United States declined 16 percent. In the following year, total imports from the United States declined by 25 percent from 1907 levels. This decline in imports of American goods in 1908 caused many mercantile establishments to go bankrupt. The economic downturn produced grave difficulties for the railway industry as the decline of imports and exports reduced freight traffic.(34)
Although the export economy recovered in 1910--exports exceeded pre-depression levels by more than $3,000,000--other sectors of the economy remained stagnant. Mexican import levels remained $8,203,496 below 1907 levels, illustrating the continued impotence of consumer purchasing power. More serious was the enduring effect the depression had on Mexican manufacturers' confidence in the Mexican economy. Manufacturing was a risky long-term proposition as it took years to recover the original investment. Native and foreign financiers took this risk so long as they believed the government could maintain prosperity. The depression of 1908 caused the relatively small group of financiers who controlled much of Mexico's economy to lose faith in both the economy and Porfirio Diaz. Though the immediate crisis passed, manufacturers refrained from reinvesting in their factories and stopped building new ones. The 1911 imports of machinery was 17 percent below 1907 levels.(35)
The 1907 bank panic produced a brief but acute depression in the United States by causing a temporary collapse of the nation's credit structure. The shortage of currency obstructed trade, reduced employment, and forced most manufacturers to reduce or temporarily cease production. The panic also deprived Mexico of her principal sources of foreign capital, leading to the collapse of several Mexican banks and producing widespread credit stringency. In addition, the collapse of the U.S. market led to a significant reduction in the export economy, which prompted the dismissal of thousands of miners. Rising unemployment further reduced the already weak purchasing power of Mexican consumers and forced many manufacturers into bankruptcy. Those manufacturers who were able to survive lost their faith in the Porfirian economy and curtailed their investments.
Clearly, scholars are correct in assuming the U.S. bank panic precipitated the severe depression that afflicted Mexico in 1908 and 1909. The validity of this assumption is critical because the economic paralysis caused by the 1908 depression was one of the catalysts of the Mexican Revolution. The economic stagnation actuated by the U.S. bank panic and the subsequent depression in Mexico produced discontent with the Porfirian regime in every level of Mexican society. Workers, peasants, Indians, hacendados, and industrialists believed that the government was responsible for their economic misfortune. Many of the malcontents united, forming a loose coalition that precipitated the 1910 insurrection that toppled Porfirio Diaz.
(1) Friedrich Katz, Secret War In Mexico: Europe, the United States and the Mexican Revolution (Chicago, 1981), 10; Ramon Eduardo Ruiz, The Great Rebellion: Mexico 1905-1924 (New York, 1980), 126-30; John M. Hart, Revolutionary Mexico: The Coming and Process of the Mexican Revolution (Berkeley, 1987), 185.
(2) O. M. w. Sprague, "The Crisis of 1907" in History of Crises Under the National Banking System, ed. O. M. W. Sprague (Washington, 1910), 247; Richard T. McCulley, Banks and Politics During the Progressive Era: the Origins of the Federal Reserve System, 1897-1913 (New York and London, 1992), 145.
(3) Sprague, "The Crisis of 1907" 249-51; McCulley, Banks and Politics, 146; Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, (Princeton, 1963), 156-68; Gary Gorton, "Clearinghouses and the Origins of Central Banking in the United States," Journal of Economic History 45 (1985): 277-83; Jon Moen and Ellis W. Tallman, "The Bank Panic of 1907: The Role of the Trust Companies" Journal of Economic History 52 (1992): 616-28.
(4) Sprague, "The Crisis of 1907," 257-259; McCulley, Banks and Politics, 146-47; A. Piatt Andrew, "Substitutes For Cash in the Panic of 1907," in History of Crises Under the National Banking System, 458; The Commercial and Financial Chronicle (hereafter CFC) 85 (2 November 1907): 1118-21; "Retrospect of 1908," CFC 88 (2 January 1909): 6-8; "Failures in 1907," CFC 86 (2 January 1908): 137-38; O. M. W. Sprague, "The American Crisis of 1907," The Economic Journal 18 (1907): 361-63.
(5) Andrew, "Substitutes for Cash," 453; Sprague, "The Crisis of 1907," 286; James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (Ithaca and London, 1986), 43.
(6) Gorton, "Clearinghouses and the Origins of Central Banking" 280-84; Andrew, "Substitutes for Cash," 448-58.
(7) Sprague, "The American Crisism," 365-68.
(8) Jeffrey A. Miron and Christina D. Romer, "A New Monthly Index of Industrial Production, 1884-1940" Journal of Economic History 50 (1990): 321-37; Sprague, "The Crisis of 1907," 297-303, 368; Livingston, Origins of the Federal Reserve System, 173; Department of Commerce and Labor, Bureau of Statistics (hereafter DCLBS), "Imports and Exports of Merchandise by Months" Monthly Summary of Commerce and Finance of the United States (hereafter Monthly Summary), December 1910 (Washington, 1909), 1111; "Retrospect of 1908" CFC (2 January 1909), 5-8; Alfred Noyes, "A Year After the Panic of 1907" Quarterly Journal of Economics 23 (1909): 209-10; U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970, vol. 1 (Washington, 1975), 135; "Retrospect of 1908" CFC (2 January 1909), 5.
(9) Stephen Haber, Industry and Underdevelopment: The Industrialization of Mexico (Stanford, 1989), 64-65; Charles Conant, "The Banking System of Mexico" Senate Documents, vol. 19, 61st Cong., 2d sess., 1909-1910 (Washington, 1910), 100-2; Stephen Haber, "Industrial Concentration and Capital Markets: A Comparative Study of Brazil, Mexico and the United States" Journal of Economic History 51 (1991): 568.
(10) Haber, "Industrial Concentration and Capital Markets" 566; Haber, Industry and Underdevelopment, 64-65; "Financial: Banks and Banking in Mexico," Monthly Consular and Trade Reports, June 1908, no. 333 (Washington, 1908), 157.
(11) Ruiz, The Great Rebellion, 127-29.
(12) Marvin D. Bernstein, The Mexican Mining Industry, 1880-1950 (Albany, 1965), 75; Friedrich Katz, "Mexico Restored Republic and Porfiriato, 1867-1910" 29; Leslie Bethell, ed., Cambridge History of Latin America, vol. 5 (Cambridge, 1984), 29.
(13) David Pletcher, Rails, Mines, and Progress: Seven American Promoters in Mexico, 1867-1911 (Ithaca, 1958), 219-25; Ruiz, The People of Sonora and Yankee Capitalists (Tucson, 1988), 44-45.
(14) Hart, Revolutionary Mexico 158-59; Clark W. Reynolds, The Mexican Economy: Twentieth Century Structure and Growth (New Haven, 1970), 21; Michael Meyer and William Sherman, The Course of Mexican History, 4th ed. (New York, 1991), 458.
(15) Haber, Industry and Underdevelopment, 16-20; Fernando Rozenweig, "La Industria," in Historia Moderna de Mexico: El Porfiriato, Vida Economica, ed. Daniel Cosio Villegas, vol. 1 (Mexico City, 1965), 409.
(16) Haber, Industry and Underdevelopment, 44-82.
(17) Conant, "The Banking System of Mexico" 87-89; Jan Bazant, A Concise History of Mexico: From Hidalgo to Cardenas, 1805-1940 (Cambridge, 1977), 119.
(18) "Financial: Banks and Banking in Mexico" Monthly Consular and Trade Reports (Washington, 1908), 155-59; "Mexico: Presentation of Bank's Condition by the Minister of Finance" Monthly Consular and Trade Reports (Washington, 1909), 158-59); Ruiz, The Great Rebellion, 129.
(19) Ibid.
(20) Conant, "The Banking System of Mexico," 87-89; Bazant, A Concise History of Mexico, 119; Ruiz, The Great Rebellion, 129-30; Department of Commerce and Labor, Bureau of Manufacturing, Commercial Relations of the United States With Foreign Countries (hereafter CRUS, followed by year) During the Year 1908 (Washington, 1909), 143-44.
(21) DCLBS, "Total Value of Imports and Exports Into and From the United States," The Foreign Commerce and Navigation of the United States (hereafter FCN, followed by year) for the Year Ending June 30, 1910 (Washington, 1911), 1111; "Imports and Exports of Merchandise, 1906-1910," FCN, 1910, 123033; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise" Monthly Summary, July-September, 1907 (Washington, 1908), 56, 253, 451; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, October-December, 1907 (Washington, 1908), 647, 854, 1043; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, January-March 1908 (Washington, 1909), 1291, 1475, 1665; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, April-June, 1908 (Washington, 1909), 1853, 2047, 2239; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise" Monthly Summary, July-August, 1908 (Washington, 1909), 556, 246, 441; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, January-March, 1909 (Washington, 1910), 1286, 1468, 1650; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, April-June, 1909 (Washington, 1910), 1835, 2025, 2219; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, July-September, 1909 (Washington, 1910), 56, 246, 436; DCLBS, "Imports and Exports of Domestic and Foreign Merchandise," Monthly Summary, October-December, 1909 (Washington, 1910), 628, 822, 1016.
(22) "Imports and Exports of Merchandise, 1906-1910" FCN, 1910, 1230-33; "Imports and Exports of Gold and Silver Year Ending June 30 1907" FCN, 1907, 78; "Imports and Exports of Gold and Silver Year Ending June 30 1908," FCN, 1908, 78; "Imports and Exports of Gold and Silver Year Ending June 30 1909" FCN, 1909, 84; "Imports and Exports of Gold and Silver Year Ending June 30 1910," FCN, 1910, 84.
(23) FCN, 1910, 1230-31.
(24) Ibid., 1230-31.
(25) CRUS, 1908, 135-205; CRUS, 1909, 509-70; CRUS, 1908, 158.
(26) CRUS, 1908, 135-205; CRUS, 1909, 509-70; FCN, 1910, 1230-33.
(27) FCN, 1910, 1230-33; DCLBS, FCN, June 30, 1911 (Washington, 1912), 1099.
(28) Haber, Industry and Underdevelopment, 31-38; CRUS, 1908, 148.
(29) Haber, Industry and Underdevelopment, 29-34; W. A. Graham Clark, "Cotton Goods in Latin America: Cuba, Mexico, and Central America" part 1, Department of Commerce and Labor, Bureau of Manufacturing, Special Agent Series (Washington, 1909), 19.
(30) Haber, Industry and Underdevelopment, 29-34.
(31) CRUS, 1908, 154; FCN, 1910, 1230-33.
(32) FCN, 1910, 1230-33.
(33) Ibid., 1230-33.
(34) Ibid., 1230-31.
(35) Haber, Industry and Underdevelopment, 194; FCN, 1910, 1230-33; Monthly Summary, July-September, 1907, 395; Monthly Summary July-September, 1909, 378.
Kevin J. Cahill is a Ph.D. candidate at West Virginia University and adjunct instructor at York College of Pennsylvania.
 Printer friendly
 Cite/link
 Email
 Feedback
| |
| Author: | Cahill, Kevin J. |
|---|---|
| Publication: | The Historian |
| Date: | Jun 22, 1998 |
| Words: | 7140 |
| Previous Article: | Arturo Bocchini and the secret political police in fascist Italy. |
| Next Article: | An American railroad man east of the Urals, 1918-1922. |
| Topics: | |