The Panic of 1873
The Panic of 1873 was a financial crisis that occurred in the United States in the Fall of 1873, lasting until the spring of 1879. The crisis was caused by a variety of factors, including overproduction, overbuilding, and speculation in the railroad and other industries, as well as a decrease in the supply of gold. The railroad industry, being the second largest employer at the time, was in full expansion mode, and rich tycoons were vying for rail traffic and playing a zero-sum game amongst themselves in an attempt to try to monopolize traffic and routes.
One could liken the Panic to the cryptocurrency crash of 2022 in the sense of the intense speculation and over-leveraging of companies, but the Panic of 1873 lasted much longer and had a much more profound impact on the global economy.
During the Reconstruction Era following the Civil War, the United States experienced a period of rapid industrialization and economic growth. This growth was fueled in part by the construction of the Transcontinental Railroad and the expansion of the railroads into other parts of the country. The railroads were a major source of investment and were seen as a sure way to make money. As a result, many people poured their savings into railroads and other industries, leading to a speculative bubble.
At the same time, there was a tremendous amount of construction and expansion occurring in other industries, such as steel and iron, as well as in real estate. Factories and mills were being built at a rapid pace, and new housing developments were popping up all over the country. All of this activity required a large amount of capital, and many people took on debt in order to finance it.
However, as the economy began to slow down in the early 1870s, it became clear that there was more capacity than demand for many of the goods being produced. This led to a decline in prices and a reduction in profits, which in turn made it difficult for businesses to pay their debts. As a result, many businesses and banks began to fail, leading to a loss of confidence in the economy and a panic among investors.
The Great Financial Panic of 1873 - Closing the door of the Stock Exchange on its members, Saturday, Sept. 20th. (Library of Congress)
The panic was triggered by the failure of the investment firm of Jay Cooke & Company, which had invested heavily in the Northern Pacific Railroad. The firm's failure caused a chain reaction of failures among other banks and financial institutions, which further eroded confidence in the economy. The panic was exacerbated by the fact that the supply of gold, which was used as a means of payment at the time, had decreased, leading to a tightening of credit and further economic contraction.
|"The President of the New York Stock Exchange Announcing the Suspension of Jay Cooke and Co. McCabe, James Dabney; Martin, Edward Winslow, pseud. History of the Grange Movement; or, The Farmer's War Against Monopolies. Philadelphia: National Publishing Company, 1873. (NIU Digital Library)
As the railroad industry was the second largest employer at the time behind the agricultural industry, the Panic of 1873 had widespread consequences for the economy and led to a severe recession that lasted for several years. Many businesses and banks went bankrupt, and unemployment rose to high levels. The crisis also had a significant impact on the construction and railroads industries, which had been major drivers of economic growth in the years leading up to the panic.
This caused numerous railroad proposals and in the early stages of construction to go bankrupt before their completion, and since the industry would mature about 40 years after the Panic had subsided, many of the unbuilt railroads in the US can be attributed, in part or in whole, to the 1873 Panic.
|At the point in red, the unbuilt Plymouth Kankakee & Pacific would have passed the also-unbuilt Decatur & State Line Railway. (Library of Congress Map)
In response to the crisis, the government took a number of steps to try to stabilize the economy. One of the main measures was the establishment of the Specie Payment Resumption Act of 1875, which required that all government payments be made in gold, rather than paper money. The act was designed to restore confidence in the value of the currency and to reduce inflation.
The Specie Payment Resumption Act was controversial and was opposed by many, including farmers and workers who were struggling to make ends meet during the economic downturn. Critics argued that the act would lead to a further contraction of credit and make it even harder for people to borrow money. Despite these concerns, the act was passed and went into effect in 1879.
In the years following the Panic of 1873, the economy slowly began to recover. The construction and railroads industries, which had been hit hard by the crisis, began to bounce back, and the overall economy began to grow again. However, the recovery was slow and uneven, and it was not until the late 1870s that the economy returned to its pre-panic levels.
The Panic of 1873 also had significant political consequences. The economic downturn and the failure of many businesses and banks contributed to a sense of discontent among the population, which was reflected in the elections of the 1870s. In 1876, the presidential election was extremely close and was ultimately decided by a controversial decision of the Electoral Commission. The winner of the election, Rutherford B. Hayes, was seen by many as a compromise candidate who would be able to heal the divisions that had been exacerbated by the economic crisis, but this compromise would also end Reconstruction in the Southern US.
The Panic of 1873 also played a role in the passage of the Sherman Silver Purchase Act of 1890, which was an attempt to address the ongoing economic problems of the time. The act required the government to purchase a large amount of silver, which was hoped to increase the money supply and stimulate the economy. However, the act had the opposite effect and led to a further contraction of credit, as well as an increase in inflation. The act was eventually repealed in 1893, but it had contributed to further economic instability and contributed to the Panic of 1893, which itself also had roots in the railroad industry, namely the Philadelphia & Reading Railroad.
YouTube Video on the Panic from NIU Library Digital Lab:
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