I’ve just been given some keywords like “production, overproduction, markets, and surplus capital” to recall on a later exam, but this doesn’t help me understand what happened. This is a History course at the university of Houston.
Here is a article by Max Wirth from the Journal of Political Economy (Mar. 1893) on the Crisis of 1890. He chronicles the credit expansion fueled boom in businesses at the end of the 1880s, especially in Europe and then the collapse in 1890-91.
As Rothbard points out the agitation in the U.S. for free silver led to passage of the free silver act of 1890 which doubled the Treasury’s production of silver and signaled a return to bimetallism. Foreigners speculated about more monetary inflation began to redeem gold at the Treasury. In June 1892, the Treasury put on the monetary brakes and the money supply fell precipitating the downturn of 1893.
The monetary inflation of the early 1890s led to malinvestments which were then liquidated in the depression. The severity of the downturn was caused, in part, by rising labor union activity. On that point, take a look at Robert Higg’s book, Crisis and Leviathan.
In short, this episode can be explained by the Austrian theory of the boom-bust cycle. Take a look at Tom Woods’ book, Meltdown, for an explanation of the theory.