Yukonomist: How the Yukon saved the economy

During the Klondike gold rush, the prospect of free gold drew more than 100,000 people to leave home, work, friends and family for the arduous trek into the unknowns of the Yukon.

But there wasn’t just a pull. There was also a powerful push. The financial crisis of 1893 had morphed into a severe and prolonged depression. When the S.S. Excelsior arrived in San Francisco in July 1897 with thousands of pounds of gold and just 63 passengers lugging it to the bank, the US economy was just coming off a painful double-dip of the crisis in 1896.

Harvard professors Carmen Reinhart and Kenneth Rogoff have studied more than 100 financial crises over the last 200 years. In US economic history, the only crisis worse than the downturn of 1893 was the Great Depression. Per capita gross domestic product fell a painful 14.2 per cent, and it lasted six years. Our recent 2008-09 crisis saw the economy shrink less than half as much, and rebound sooner.

This explains why Tappan Adney, the Harper’s Weekly writer who recorded his Chilkoot Trail experience in the fall of 1897, found so many greenhorns on the trail. One reason a bank clerk will leave the big city to lead horses through Dead Horse Gulch or steer a home-made boat across Bennett Lake is if his bank just went bankrupt and employment insurance hasn’t been invented yet.

Strangely, the whole thing got started in Argentina. A massive boom involving commodities, rapid immigration and foreign railway investment turned into a bubble that was popped by a crop failure and coup in 1890. London’s powerful Barings Bank was at the centre of the action, and is now a case study for one of the world’s first big banking bailouts.

In the ensuing run for cover, British and European investors pulled money back home. This included investments in the US. Remember that most major countries were on the gold standard at this time, meaning paper money in circulation was backed by gold. People sold investments in the US, got cash, and then used it to withdraw gold from their banks to take back to Europe. This caused a classic credit crunch; basically, a shortage of money.

The tsunami took until 1893 to hit North America. Over 500 banks went under, several of the biggest railways failed, and unemployment spiked over 25 per cent in Pennsylvania, New York and Michigan.

According to the World Gold Council, US gold reserves fell dramatically from 442 tonnes in 1890 to just 169 tonnes in 1895.

In this context, the Klondike stampede was like an economic stimulus program. Seattle, San Francisco, Victoria and Vancouver boomed. Spending on boots, long johns and bacon spiked. Seattle shipyards restarted. Steel mills churned out boilers and rails for the White Pass & Yukon Route. But this was relatively small compared to the total continental economy.

The bigger effect occurred when the gold started coming back. We don’t know exactly how much gold came out of the Klondike. Record keeping was shaky in general, and lots of people saw no good reason to advertise their good fortune. Adney reports an incident where two guys passed backwards over the pass through Skagway on their way Outside carrying 78 pounds of gold. They were careful to tell no one but the doctor (and had him swear not to tell anyone until they were safely on their ship).

In case you’re wondering, 78 pounds of gold would be worth about $2.2 million at today’s prices and exchange rate.

One estimate is that 2.4 million ounces came out of the Klondike in the first three years of the stampede. That’s about 75 tonnes of gold.

Most of that probably went to the US. Around two-thirds of stampeders were American or recent immigrants. Some of this gold went to bank vaults or Fort Knox, and the rest circulated privately. The remainder ended up with Canadian banks or in Ottawa’s vaults, or filtered overseas.

To think about how this boosted the economy in the late 1890s, let’s think about how things would work today. Consider an experiment where you took a few thousand residents of North America and split 75 tonnes of gold among them. They would buy lots of new stuff, and maybe invest in some new businesses. This would boost the economy.

However, they would probably save a lot of it, rather than spending it. Or the people who bought the gold from them would save it. The total amount of money in the economy wouldn’t change much. (This is also the case since our economy is so much bigger now).

However, because of the gold standard, things worked differently in the 1890s. Remember that US gold reserves were just 169 tonnes in 1895. It’s a big deal to add a big share of the Klondike’s 75 tonnes to this mix, especially since that gold would then get multiplied as more paper currency was issued.

This is reversing the vicious cycle that caused the contraction in the first place.

Neither the US nor Canada had official central banks during the 1890s downturn. Instead of economists carefully crafting a quantitative easing program, Klondike miners provided the monetary policy response.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist and received the bronze for Outstanding Columnist in the 2019 Canadian Community Newspaper Awards.

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