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Panic of 1873

The Panic of 1873 triggered the first 'Great Depression' in the United States and abroad. Lasting from September 1873 until 1878/9, the economic downturn then became known as the Long Depression after the stock market crash of 1929.

This depression was very severe and extended in duration, and, as usual, followed the collapse of a speculative era. In an effort to stabilize industry and business following the Civil VVar the country plunged into an era of feverish activity in the development of its resources, particularly of the great West. The leaders of finance were again the promoters of railroad building, land speculations, and public improvements, which acted as a stimulus to iron, steel, and other allied industries.

But skeptics ask what sort of "depression" is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? The decade 1869 to 1879 saw a 3.0 percent per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.

The population, consisting of about 38,000,000, had swallowed the deceptive bait and entered vigorously into great industrial, financial, and publlc undertakings. Even the most conservative men of finance and old establishments were deceived by visions of large profits and untold wealth and became promoters of almost every sort of enterprise, nonproductive as well as productive.

The Panic of 1873 was a result of the aftermath of the Franco-Prussian War. American farmers suddenly faced less demand for their crops from post-war Europe. With too much supply and no demand, the farmers were unable to meet their financial obligations. Banks across the country consequently turned to foreclosures and experienced significant losses, resulting in a national financial panic.

After the Civil War, the US banking system grew rapidly and seemed to be set on solid ground. But the country was hit by many banking crises. One of the worst happened in 1873 – during the time of the Freedman’s Bank.

The life of Jay Cooke, one of the greatest and most influential bankers of the Civil VVar period, is typical of the trend of the times. Born in Sandusky, Ohio, the son of a lawyer, he started life as a clerk in a store, and at 18 entered the employ of a private banking firm in Philadelphia, where he displayed such ability in business and financial affairs that before the age of 30 he was taken in as a partner.

Later he organized the private banking establishment of Jay Cooke & Co. in Philadelphia, which became one of the most powerful banking institutions in the United States. During the war he became known as the war financier through his successful efforts in floating the Government bond issues. After the war this conservative banker undertook the promotion of the Northern Pacific Railroad. He poured money into this enterprise with a lavish hand, taking its bonds as collateral. Inability to float the bonds abroad forced this great banking house to close its doors.

The panic started with a problem in Europe, when the stock market crashed. Investors began to sell off the investments they had in American projects, particularly railroads. Back in those days, railroads were a new invention, and companies had been borrowing money to get the cash they needed to build new lines. Railroad companies borrowed using bonds, which were debt securities specifying how much a company was borrowing and how much interest it would pay.

When Europeans started selling their railroad bonds, there were soon more bonds for sale than anyone wanted. Railroad companies could no longer find anyone who would lend them cash. Many railroads went bankrupt.

One of the biggest banks in New York City was Jay Cooke & Company. It had invested a lot of money in the railroads, and when the railroads started having problems, Jay Cooke & Company went bankrupt.

The closing of the doors of Jay Cooke & Co. precipitated the panic of 1873. It revealed to the public the hazardous methods used by promoters, bankers, and financiers in the many great development enterprises throughout the country. and caused a loss of confidence in the stability of all financial institutions. The disclosures of the Credit Mobilizer scandal also had a far-reaching effect.

When people saw that such a big bank failed, they began to run to their banks, demanding all of their money back. The panic spread to banks in Washington, DC, Pennsylvania, New York, Virginia and Georgia, as well as to banks in the Midwest, including those in Indiana, Illinois, and Ohio. Nationwide, at least 100 banks failed.

Currency in the nineteenth century was based on specie. Metal money circulated, and banks issued paper banknotes backed by the supply of gold and silver. In the United States, this system began breaking down in the face of financing the Civil War. President Lincoln authorized the printing of paper money, called "Greenbacks," to pay ballooning expenses. Widespread use of fiat External Link money continued into the Reconstruction Era, fueling the rapid expansion of railroads and wild speculation.

The notorious railroad speculator and economic adventurer George Francis Train, called repeatedly for immense issues of greenbacks. "Give us greenbacks we say/' Train thundered in 1867, "and build cities, plant corn, open coal mines, control railways, launch ships, grow cotton, establish factories, open gold and silver mines, erect rolling mills. . . .Carry my resolution and there is sunshine in the sky."

The Panic of 1873 was a severe blow to many overbuilt railroads, and it was railroad men who led in calling for more greenbacks to stem the tide. Thomas Scott, Collis P. Huntington, leader of the Central Pacific Railroad, Russel Sage, and other railroad men joined in the call for greenbacks. So strong was their influence that the Louisville CourierJournal, in April 1874, declared: "The strongest influence at work in Washington upon the currency proceeded from the railroads. . . .The great inflationists after all, are the great trunk railroads."

Banks, especially Jay Cooke and Co., raised millions of dollars through selling bonds to finance construction. Speculators 'bet' on the railroad, gambling on the fact that settlement and opportunities to make money would follow behind the completed railway. However, construction expenses ballooned and outpaced financing. Efforts to raise more funding failed. When they could no longer pay the bills, Jay Cooke and Co. and other banking houses folded. The collapse of the railway financiers sparked high bank withdrawals, the failure of brokerage firms, and railway construction halted. By September 20th, the New York Stock Exchange suspended trading for the first time.

This panic was followed by a general industrial depression extending over several years, the alleged causes of which are as numerous as the economic writers treating of the subject. Among those given are laud grants to corporations, expansion of credits, contraction and inflation of currency, suspension of specie payments, wages falling before the price of goods, extravagance induced by credit, immigration of Chinese, great inventions, inefficiency of labor, too small wages, land and railroad monopolies.

All of these may have played some part, but the panic, followed by the depression, was the result of the collapse of an era of false prosperity - the desire of men to become rich through speculative methods rather than as the result of their own creative efforts.

Money was very tight in the United States in 1873 following the failure of Jay Cooke and the collapse of railroad speculations. The New York Stock Exchange was closed for 10 days. Money became somewhat easier in 1874 and 1875 and was exceedingly easy in 1876, although in the last-mentioned year there was a tremendous decline in railroad-stock prices after April, together with industrial slumps in the spring and autumn. Money continued easy in 1877, but it was not until 1878 that general business conditions showed more than temporary improvement.

While strikes and lockouts, through which labor sought to attain its objects, had previously occurred in various industries with more or less frequency, the first important railroad strike came in 1877 on the Baltimore & Ohio Railroad, followed by a similar strike on the Pennsylvania Railroad, caused primarily by a 10 percent reduction in wages and general dissatisfaction with working hours and methods of reckoning pay. State militia called to the scenes of action failed to restore order and Federal troops had to be employed.

It is interesting to note that the 20-year period prior to this depression saw the formation of the first labor organizations on a nation-wide scale. The demands made by these various organizations were an 8-hour day, land grants to actual settlers, a national labor bureau, immigration restrictions, tariff reduction on the necessaries of life, abolition of prison labor, establishment of mechanics' institutes, reading rooms for workers, and cooperative stores. They pledged aid to women workers and attacked bad housing situations and the banking system.

The panic of '73 and the following depression were paralleled by panics and depressions in England, France, Germany, and Austria.

Wages were not generally affected during this depression. While there were some temporary reductions, wages not only remained constant but were actually higher at the end of the depression than at the beginning.

The "Great Depression" is supposed to have struck the United States in the Panic of 1873 and lasted for an unprecedented six years in 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of "depression" is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade 1869 to 1879 saw a 3.0 percent per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.