11.1 Panic of 1873
10 min read•august 21, 2024
The was a pivotal moment in American business history, exposing weaknesses in the post-Civil War economy. Triggered by railroad overexpansion and financial , it led to widespread , , and a prolonged known as the .
This crisis reshaped American capitalism, spurring and new financial regulations. It also fueled political debates on monetary policy and labor rights, setting the stage for populist movements and increased government economic intervention in the decades that followed.
Causes of the panic
- Panic of 1873 marked a significant turning point in American business history, highlighting vulnerabilities in the rapidly expanding economy
- Economic instability following the Civil War created a fragile financial environment, setting the stage for the panic
- Overreliance on speculative investments, particularly in railroads, contributed to the economic bubble that ultimately burst
Overexpansion of railroads
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- Rapid construction of railroads outpaced actual demand, leading to overcapacity
- Speculative investments in railroad bonds created a financial bubble
- Railroad companies took on excessive debt to fund expansion projects
- Land grants and government subsidies encouraged overbuilding of rail lines
Post-Civil War economic instability
- Reconstruction efforts strained government resources and created economic uncertainty
- Inflated wartime currency led to price instability and speculation
- Uneven economic recovery across different regions of the country
- Transition from wartime to peacetime economy caused disruptions in production and employment
Demonetization of silver
- removed silver as legal tender, shifting to a gold standard
- Reduced money supply led to deflation and economic contraction
- Farmers and debtors faced increased financial pressure due to stronger currency
- Controversy over "" fueled political debates on monetary policy
European financial crisis
- Vienna Stock Exchange crash in May 1873 triggered a global financial panic
- European investors withdrew funds from American markets, causing liquidity shortages
- Interconnected global financial system spread economic instability across borders
- Decline in European demand for American exports exacerbated economic downturn
Key events and timeline
- Panic of 1873 unfolded as a series of cascading financial failures, revealing weaknesses in the American banking system
- Events of the panic highlighted the interconnectedness of financial institutions and the broader economy
- Timeline of the crisis demonstrates how quickly economic instability can spread and intensify
Jay Cooke & Company failure
- September 18, 1873: & Company, a major investment bank, declares bankruptcy
- Failure triggered by overextension in railroad investments, particularly
- Collapse of Cooke's firm shook investor confidence and led to a chain reaction of bank failures
- Symbolized the end of the post-Civil War economic boom and speculative frenzy
New York Stock Exchange closure
- September 20, 1873: suspends trading for 10 days
- Unprecedented closure aimed to prevent further panic selling and market collapse
- Shutdown highlighted the severity of the financial crisis and its impact on Wall Street
- Reopening on September 30 saw continued market volatility and economic uncertainty
Bank runs and failures
- Depositors rushed to withdraw funds, causing liquidity crises for many banks
- Trust companies and savings banks particularly vulnerable to runs due to long-term investments
- Suspension of cash payments by some banks further eroded public confidence
- Wave of bank failures spread from New York to other major cities across the country
Railroad bankruptcies
- 89 railroads declared bankruptcy between 1873 and 1875
- Northern Pacific Railway, a major project of Jay Cooke, suspended operations
- Bankruptcies led to widespread among railroad workers
- Collapse of railroad stocks and bonds affected investors and financial institutions nationwide
Economic impacts
- Panic of 1873 ushered in a prolonged period of economic stagnation known as the Long Depression
- Effects of the crisis reshaped American business practices and economic policies
- Panic exposed structural weaknesses in the American economy and financial system
Long-term depression
- Economic contraction lasted from 1873 to 1879, with effects felt into the 1890s
- Gross National Product declined by 5.5% between 1873 and 1874
- Slow recovery characterized by periods of growth followed by recessions
- Persistent deflationary pressures hindered economic recovery and growth
Deflation and price collapse
- General price level fell by 30% between 1873 and 1896
- Deflation increased real debt burdens for farmers and businesses
- plummeted, leading to rural economic distress
- Falling prices discouraged investment and consumer spending, prolonging the depression
Unemployment and wage reductions
- Unemployment rate reached 14% by 1876, highest in U.S. history up to that point
- Wage cuts across industries, with some workers experiencing 25-50% reductions
- Long-term unemployment led to and increased labor activism
- Migration of unemployed workers to urban areas exacerbated social problems
Business failures and consolidations
- Over 18,000 businesses failed between 1873 and 1875
- Wave of bankruptcies led to industrial consolidation and formation of trusts
- Surviving companies gained market share, leading to increased economic concentration
- Shift towards and economies of scale in American industry
Political consequences
- Panic of 1873 had far-reaching effects on American politics and policy-making
- Economic crisis fueled debates over monetary policy, labor rights, and government's role in the economy
- Political landscape shifted as new movements emerged in response to economic hardships
Labor unrest and strikes
- marked first major nationwide labor action in U.S. history
- Increased union activity and demands for better working conditions and wages
- Violent clashes between workers and authorities in several cities
- Rise of Knights of Labor and other labor organizations in response to economic conditions
Rise of populist movements
- Farmers' alliances formed to address agricultural economic distress
- advocated for inflation to relieve debt burdens
- Populist Party (People's Party) emerged in 1890s, calling for monetary and economic reforms
- Increased support for silver coinage and bimetallism as solution to economic woes
Shift in monetary policy
- Debates over gold standard versus bimetallism intensified
- required limited silver purchases by the government
- increased government silver purchases
- Ongoing controversy over monetary policy culminated in William Jennings Bryan's "Cross of Gold" speech in 1896
Government economic intervention
- Increased calls for government regulation of railroads and other industries
- of 1887 established federal regulation of railroads
- aimed to curb monopolistic practices
- Gradual shift towards more active government role in managing economic crises
International repercussions
- Panic of 1873 demonstrated the interconnectedness of global
- Crisis had significant impacts on international trade and investment patterns
- Event influenced economic policies and development strategies in multiple countries
Global trade disruptions
- Decline in American imports and exports affected trading partners worldwide
- Reduced demand for raw materials impacted commodity-exporting countries
- Protectionist policies implemented by some nations in response to economic downturn
- Shift in global trade patterns as countries sought new markets and economic strategies
European market reactions
- Vienna Stock Exchange crash in May 1873 preceded and contributed to American panic
- British and German investors suffered losses from American railroad bond defaults
- European banks tightened credit, exacerbating global economic contraction
- Crisis led to reassessment of international investment strategies and risk management
Impact on foreign investments
- Reduced flow of European capital to American markets for several years
- Increased scrutiny of foreign investments, particularly in railroad and infrastructure projects
- Shift in investment patterns towards more established and stable industries
- Some foreign investors benefited from acquiring distressed American assets at low prices
Recovery and reforms
- Gradual economic recovery process involved various policy measures and market adjustments
- Crisis led to significant changes in banking practices and industrial organization
- Recovery period set the stage for the of American capitalism
Resumption Act of 1875
- Mandated return to gold standard and redemption of greenbacks for gold by 1879
- Aimed to restore confidence in U.S. currency and stabilize monetary system
- Contributed to deflationary pressures but increased international confidence in U.S. economy
- Sparked ongoing debates over monetary policy and its effects on different economic sectors
Banking system changes
- Increased emphasis on maintaining adequate reserves and liquidity
- Development of clearinghouse loan certificates to provide emergency liquidity
- Gradual consolidation of banking sector, with stronger institutions absorbing weaker ones
- Calls for banking reform eventually led to the Federal Reserve Act of 1913
Industrial consolidation trends
- Formation of trusts and holding companies to achieve economies of scale
- Vertical integration strategies adopted by major corporations (Standard Oil, Carnegie Steel)
- Increased market concentration in key industries (railroads, steel, oil)
- Emergence of modern corporate management structures and practices
Economic diversification efforts
- Expansion of manufacturing sector to reduce reliance on agriculture and raw materials
- Development of new industries (electrical equipment, chemicals) spurred by technological innovations
- Increased focus on domestic market development and import substitution
- Regional economic diversification, particularly in the American West and South
Legacy and historical significance
- Panic of 1873 left a lasting imprint on American economic and business history
- Event shaped economic policies, business practices, and public attitudes towards capitalism
- Crisis provided important lessons for understanding and managing future economic downturns
Long Depression vs Great Depression
- Similarities in causes (speculation, overexpansion) and effects (deflation, unemployment)
- Differences in government response and policy interventions
- Long Depression's global nature prefigured interconnectedness of modern economic crises
- Debate over which crisis had more severe or long-lasting economic impacts
Evolution of financial regulations
- Panic highlighted need for better oversight of banking and financial markets
- Contributed to gradual development of federal regulatory framework for economy
- Influenced later reforms such as the Federal Reserve System and Securities and Exchange Commission
- Shaped debates over government's role in preventing and managing economic crises
Lessons for future economic crises
- Importance of maintaining stable monetary policy and financial system
- Dangers of speculative bubbles and overleveraged investments
- Need for diversified economic base to withstand sector-specific shocks
- Value of international cooperation in addressing global economic challenges
Impact on American capitalism
- Accelerated trend towards industrial consolidation and corporate capitalism
- Influenced development of American school of economics and business practices
- Shaped public perceptions of free market system and its vulnerabilities
- Contributed to ongoing debates over balancing economic growth with financial stability
Key figures and institutions
- Panic of 1873 involved numerous influential individuals and organizations
- Actions and decisions of key players had significant impacts on the course of the crisis
- Understanding these figures provides insight into the economic and political dynamics of the era
Jay Cooke
- Prominent investment banker known as the "financier of the Civil War"
- Failure of his firm, Jay Cooke & Company, triggered the Panic of 1873
- Overextended investments in Northern Pacific Railway led to bankruptcy
- Career exemplified the speculative nature of post-Civil War finance and its risks
President Ulysses S. Grant
- Served as U.S. President during the Panic of 1873 and its immediate aftermath
- Administration's response to crisis criticized as inadequate by some historians
- Vetoed "inflation bill" in 1874, maintaining commitment to hard money policies
- Presidency marked by economic turmoil and corruption scandals ()
New York Stock Exchange
- Central institution in American financial markets, deeply affected by the panic
- Unprecedented 10-day closure in September 1873 highlighted severity of crisis
- Actions during and after panic influenced development of stock market regulations
- Served as barometer of economic conditions and investor sentiment throughout crisis
Major railroad companies
- Central focus of speculative investment leading up to the panic
- Companies like Northern Pacific Railway and Union Pacific faced bankruptcies or financial distress
- Railroad failures had ripple effects throughout economy, affecting workers, investors, and related industries
- Crisis led to consolidation and reorganization of American
Theoretical perspectives
- Panic of 1873 and subsequent Long Depression sparked debates among economists and policymakers
- Event challenged existing economic theories and contributed to development of new approaches
- Understanding different theoretical perspectives helps contextualize policy responses and economic debates
Classical economics vs Keynesian views
- Classical economists emphasized market self-correction and limited government intervention
- Keynesian approach (developed later) would have advocated for more active government response
- Debate over causes of prolonged depression: supply-side factors vs demand deficiency
- Crisis influenced later development of macroeconomic theories and policy prescriptions
Monetary policy debates
- Controversy over gold standard vs bimetallism as basis for monetary system
- Quantity theory of money applied to understand deflationary pressures
- Debates over role of money supply in causing and prolonging economic downturns
- Influenced later development of monetarist school of economic thought
Business cycle theories
- Panic of 1873 contributed to understanding of boom-bust cycles in capitalist economies
- Theories of overproduction and underconsumption developed to explain economic fluctuations
- Influence on later business cycle theories (Kondratiev waves, Schumpeterian creative destruction)
- Debates over exogenous vs endogenous factors in causing economic crises
Historiographical debates
- Historians and economists continue to debate various aspects of the Panic of 1873
- Differing interpretations reflect broader debates in economic history and theory
- Ongoing research provides new insights into the causes, effects, and significance of the crisis
Causes: domestic vs international
- Debate over relative importance of domestic factors (railroad overexpansion, monetary policy) vs international factors (European financial crisis)
- Role of globalization and international capital flows in transmitting economic shocks
- Significance of Coinage Act of 1873 ("Crime of '73") in precipitating the crisis
- Influence of post-Civil War economic conditions on vulnerability to financial panic
Severity and duration controversies
- Disagreements over extent and length of economic contraction following 1873
- Debates over accuracy and reliability of 19th-century economic data
- Comparisons with other major economic crises (Panic of 1893, Great Depression)
- Regional variations in severity and duration of economic downturn
Long-term economic effects
- Debates over impact of Panic of 1873 on long-term U.S. economic growth trajectory
- Role of crisis in shaping American industrial development and corporate capitalism
- Effects on income distribution and social mobility in late 19th century America
- Influence on development of American economic institutions and policies
Key Terms to Review (35)
Agricultural Commodity Prices: Agricultural commodity prices refer to the market value assigned to raw agricultural products like grains, livestock, and dairy. These prices are influenced by various factors such as supply and demand dynamics, weather conditions, and global economic trends. Understanding agricultural commodity prices is crucial because they directly impact farmers' income, food prices, and overall economic stability.
Bank failures: Bank failures occur when financial institutions are unable to meet their obligations to depositors or creditors, leading to insolvency and closure. This situation often arises during economic downturns and can trigger widespread panic in the financial system, resulting in loss of savings and a decrease in public confidence in banks.
Bank runs: Bank runs occur when a large number of customers withdraw their deposits from a bank simultaneously, usually due to fears that the bank may become insolvent. This can create a self-fulfilling prophecy, as the sudden demand for cash can deplete a bank's reserves, leading to actual insolvency. Bank runs are often fueled by public panic and distrust in the banking system, making them particularly relevant during economic crises.
Banking crisis: A banking crisis refers to a situation in which a significant number of banks experience insolvency or severe liquidity problems, leading to a loss of confidence among depositors and investors. This often results in bank runs, where customers withdraw their deposits en masse, further exacerbating the financial instability. Such crises can trigger widespread economic downturns and are often tied to larger economic issues like speculative bubbles or poor regulatory practices.
Bland-Allison Act of 1878: The Bland-Allison Act of 1878 was a U.S. federal law that mandated the U.S. Treasury to purchase and coin silver bullion, effectively reintroducing silver as a form of currency alongside gold. This act emerged in response to the economic turmoil following the Panic of 1873, which led to deflation and a demand for an increase in the money supply to stimulate economic growth and support struggling farmers and laborers.
Coinage Act of 1873: The Coinage Act of 1873 was a U.S. federal law that established the gold standard as the sole basis for redeeming paper currency, effectively discontinuing the minting of silver dollars and leading to a shift away from bimetallism. This act was significant because it reflected the economic policies of the time, favoring banks and creditors while putting pressure on farmers and debtors who preferred inflationary measures to ease their financial burdens.
Credit Mobilier: Credit Mobilier was a financial company established in the 1860s that played a significant role in the construction of the Union Pacific Railroad, known for its involvement in one of the largest corruption scandals in U.S. history. This company became infamous for its deceptive practices, including overcharging the government for railroad construction and bribing politicians to protect its interests, ultimately contributing to a loss of public trust in the government and financial institutions during the Panic of 1873.
Crime of '73: The 'crime of '73' refers to the Coinage Act of 1873, which effectively ended the minting of silver dollars and established the gold standard in the United States. This act ignited a fierce debate over monetary policy, as many people, especially farmers and debtors, felt that the move favored the wealthy elite by limiting the money supply and creating deflationary pressures, which they argued harmed the economy.
Deflation: Deflation is the decrease in the general price level of goods and services in an economy over a period of time. This phenomenon often results from a reduction in the supply of money or credit, leading to increased purchasing power of money. It can also occur during periods of economic downturns, creating a cycle where consumers delay spending in anticipation of lower prices, further contracting economic activity.
Economic downturn: An economic downturn is a period of declining economic performance, often characterized by reduced consumer spending, decreased production, and rising unemployment. This decline can have widespread effects on businesses, individuals, and the overall economy, leading to financial instability and challenges for recovery. Understanding the factors that contribute to an economic downturn helps in analyzing historical events and their impacts on society.
Financial markets: Financial markets are platforms or systems where buyers and sellers can trade financial assets, such as stocks, bonds, currencies, and derivatives. These markets play a crucial role in the economy by facilitating the flow of capital, providing liquidity, and enabling price discovery for various financial instruments. The functioning of financial markets is closely tied to economic stability and growth, impacting investment decisions and overall market confidence.
Gilded Age: The Gilded Age refers to the period in American history from the 1870s to about 1900, marked by rapid economic growth, industrialization, and significant social change. This era was characterized by the rise of powerful industrial tycoons, major labor disputes, and economic instability, alongside widespread corruption in politics. The term 'gilded' suggests a glittering surface concealing underlying issues such as inequality and social strife.
Great Railroad Strike of 1877: The Great Railroad Strike of 1877 was a major nationwide labor uprising in the United States that began on July 14, 1877, in response to wage cuts and poor working conditions within the railroad industry. This strike marked the first significant instance of nationwide labor unrest, highlighting tensions between workers and management during a period characterized by rapid industrial growth and economic challenges. The strike's violent outbreaks and subsequent government intervention underscored the need for organized labor movements and set the stage for future collective bargaining efforts.
Greenback Party: The Greenback Party was a political party in the United States formed in the late 19th century that advocated for the issuance of paper money, known as greenbacks, to combat deflation and support economic growth. This party emerged during a time of financial turmoil, aiming to address the economic struggles faced by farmers and laborers due to monetary policy decisions linked to the Panic of 1873. Their platform was rooted in the belief that increasing the money supply would help alleviate debt burdens and stimulate the economy.
Industrial Consolidation: Industrial consolidation refers to the process in which multiple companies or firms in a particular industry merge or are acquired, leading to a concentration of resources, production capabilities, and market power. This phenomenon often occurs during periods of economic turmoil or structural change, as businesses seek to enhance efficiency, reduce competition, and gain greater control over their market environments. The aftermath of significant events can accelerate this trend, leading to shifts in industrial landscapes and economic power dynamics.
Interstate Commerce Act: The Interstate Commerce Act of 1887 was a landmark piece of legislation that aimed to regulate the railroad industry and its monopolistic practices, ensuring fair rates for shipping goods across state lines. It marked the first federal effort to regulate private industry, driven by widespread public demand for government intervention against unfair railroad practices that were prevalent during the rapid expansion of transportation technologies.
J.P. Morgan: J.P. Morgan was a prominent American banker and financier in the late 19th and early 20th centuries, known for his significant influence in the financial sector and his role in consolidating various industries. He played a critical role in shaping the modern corporate landscape by reorganizing struggling companies and creating powerful trusts and holding companies, especially in the steel industry. His financial strategies contributed to the stability and growth of the stock market during turbulent economic times.
Jay Cooke: Jay Cooke was a prominent American banker and financier in the 19th century, best known for his role in financing the Union during the Civil War and later for his involvement in railroad investments. He became a key figure in early American entrepreneurship, exemplifying the spirit of innovation and financial risk-taking, while also playing a significant part in the economic turmoil that led to the Panic of 1873.
Keynesian Perspective: The Keynesian perspective is an economic theory based on the ideas of John Maynard Keynes, which emphasizes the role of government intervention in stabilizing the economy during periods of recession or economic downturns. This viewpoint argues that active fiscal policy, such as increased government spending and tax cuts, can help stimulate demand, boost employment, and promote economic growth, especially in times of financial crisis.
Long depression: The long depression refers to a prolonged period of economic stagnation that began in the United States and Europe following the Panic of 1873, lasting until the late 19th century. This era was marked by deflation, high unemployment, and significant social unrest, as economies struggled to recover from financial collapse and adapt to industrialization.
Monetarist theory: Monetarist theory is an economic framework that emphasizes the role of government in controlling the amount of money in circulation as a means to regulate economic activity. It suggests that changes in the money supply have significant effects on inflation and overall economic performance. This theory gained prominence in the late 20th century, highlighting the importance of monetary policy over fiscal policy in managing economic stability.
National Bank Act: The National Bank Act, enacted in 1863, was a significant piece of legislation that established a system of national banks in the United States and created a uniform national currency. This act aimed to stabilize the banking system, particularly in the wake of financial chaos during the Civil War, by providing federal charters for banks and establishing the Office of the Comptroller of the Currency to regulate them.
New York Stock Exchange: The New York Stock Exchange (NYSE) is one of the largest and most prestigious stock exchanges in the world, located on Wall Street in New York City. It plays a critical role in stock market development by facilitating the buying and selling of shares of publicly traded companies, which helps to provide capital for businesses and investment opportunities for individuals. As a symbol of financial power and economic growth, the NYSE was significantly impacted by events like the Panic of 1873, which revealed vulnerabilities in the financial system and led to widespread economic turmoil.
Northern Pacific Railway: The Northern Pacific Railway was a major railroad project that connected the Great Lakes region to the Pacific Northwest, officially completed in 1883. It played a critical role in the economic development of the American West, facilitating trade and settlement while also contributing to the financial turmoil experienced during the Panic of 1873, as its construction led to over-speculation and financial instability in the railroad industry.
Over-leveraging: Over-leveraging refers to a situation where an individual or organization borrows too much money relative to their assets or equity, leading to a higher risk of financial distress or insolvency. This financial practice can magnify profits in good times but can quickly spiral into disaster during economic downturns, as seen in historical financial crises. Understanding the implications of over-leveraging is crucial in analyzing the financial stability and decision-making processes of businesses during periods of economic instability.
Panic of 1873: The Panic of 1873 was a severe economic crisis that began with the collapse of the banking firm Jay Cooke & Company, leading to a widespread financial panic and a prolonged economic depression in the United States and Europe. This event marked a significant turning point in American economic history, as it exposed the vulnerabilities in the banking system and resulted in high unemployment, business failures, and social unrest.
Railroad industry: The railroad industry refers to the network of railways and companies that transport goods and passengers using trains. This industry was a crucial driver of economic growth in the United States during the 19th and early 20th centuries, facilitating trade, expansion into new territories, and the rise of influential business leaders. The railroad industry also played a pivotal role during times of economic turmoil, influencing events like financial panics and shaping the country's infrastructure and labor landscape.
Recession: A recession is a significant decline in economic activity across the economy that lasts for an extended period, usually visible in real GDP, income, employment, industrial production, and wholesale-retail sales. It often leads to increased unemployment and reduced consumer spending. Understanding recession helps to analyze historical economic downturns, such as those in the 19th century, where financial instability created widespread economic challenges.
Resumption Act of 1875: The Resumption Act of 1875 was a piece of legislation aimed at restoring the U.S. government's commitment to redeeming paper money in gold, effectively reinstating the gold standard. This act marked a significant shift in monetary policy following the economic turmoil caused by the Panic of 1873, as it was part of a broader effort to stabilize the economy and reassure investors and creditors about the value of U.S. currency.
Sherman Antitrust Act of 1890: The Sherman Antitrust Act of 1890 is a landmark federal statute in the United States that outlawed monopolistic business practices and aimed to promote competition. This act was a response to growing concerns about the concentration of economic power in large corporations, particularly after the Panic of 1873, which highlighted the dangers of unregulated capitalism and financial instability. By prohibiting contracts, combinations, or conspiracies that restrained trade, the act laid the groundwork for antitrust law in America.
Sherman Silver Purchase Act of 1890: The Sherman Silver Purchase Act of 1890 was a U.S. federal law that mandated the government to purchase silver and issue currency in exchange for it. This act aimed to increase the money supply and was a response to economic distress, particularly following the Panic of 1873, where deflationary pressures made it difficult for farmers and laborers to repay debts. By increasing silver purchases, the act sought to aid the economy and was part of the broader debate over bimetallism versus the gold standard.
Social unrest: Social unrest refers to a situation in which a group of people express dissatisfaction and agitation regarding social, economic, or political conditions. It often manifests through protests, strikes, or riots, as communities mobilize to demand change or address grievances. The Panic of 1873 was a significant catalyst for social unrest in the United States, as economic turmoil led to widespread job loss and instability, fueling discontent among various social classes.
Speculation: Speculation refers to the act of buying assets, such as stocks or real estate, with the hope of making a profit based on future price movements rather than intrinsic value. This practice often involves a high level of risk as speculators bet on market trends and economic indicators, which can lead to significant financial gains or devastating losses. During periods of economic uncertainty, such as financial panics, speculation can exacerbate market volatility and contribute to economic downturns.
Unemployment: Unemployment refers to the state of being without a job while actively seeking employment. It is a significant economic indicator that reflects the health of an economy and can have far-reaching social and political implications. When unemployment rates rise, it often signals economic distress, leading to lower consumer spending and decreased production, which can further exacerbate economic downturns.
Vertical Integration: Vertical integration is a business strategy where a company expands its operations by taking control of multiple stages of production or distribution within the same industry. This approach allows companies to reduce costs, improve efficiency, and gain greater control over their supply chains, which can lead to increased market power and profitability.