Causes and Effects of The Panic of 1873

One of the most significant downsides of poorly regulated economies is the cycle of booms and busts. These were more rampant in the nineteenth century than later on due to lack of legislation and a more volatile American expansion economy. Thus, minor issues could create considerable economic turmoil for the United States. One such period of chaos was the Panic of 1873. 

What caused the Panic of 1873 was simple economics gone out of control. The effects of the Panic of 1873 helped shape the rest of the Gilded Age, tarnished the Grant Administration, and helped solidify the power of bankers in the Republican Party.

What caused the panic of 1873

What caused the Panic of 1873?

The leading cause of the Panic of 1873 was rampant speculation and corruption inherent in America’s explosive railroad construction. Following the Civil War, railroads expanded at a critical rate across the nation. As noted here, between 1866 and 1873, the United States laid 35,000 miles of new track.

The Railroad companies were the largest non-agricultural employer, and banks and other industries were quickly putting their money into railroads. When a heavily invested banking firm, Jay Cooke and Company, closed its doors on September 18, 1873, panic swept the nation.

The Jay Cooke firm was a major financier for the Union during the Civil War, and they continued their government support through the railroad industry. Investors could make it big in the railroad industry, and the business became notorious for how corrupt and crooked it could become. The AMC series Hell on Wheels provides an overly dramatic but not inherently fictional depiction of such events.

With the completion of the First Transcontinental Railroad in 1869, firms started building funds to construct a second such railroad. It wasn’t just American companies investing, either. European groups had begun investing in American industry as well, and that included railroad expansion.

 The bulk of this investment was not through actual cash but with bonds. These bonds were incredibly speculative and not very well regulated. Thus, if something went wrong at any point in the financial chain, it could collapse like a house of cards. As a result, the Panic of 1873 turned out to be the first worldwide economic crisis.

Jay Cooke proved to be the weak link in this regard. Part of the problem was that early economies relied on specie, that is, precious metals, to back their currency. As explained here, starting in the early 1870s, some leading industrial nations made major changes to their national currencies, which would eventually help create the Panic. Germany stopped using the silver standard in 1871, placing the Deutschmark on the “gold standard.” This increased the German currency’s values relative to other currencies, but this also led to an increased worldwide supply of silver 

In one of those economic kerfuffle’s that occurs in an economy that doesn’t entirely understand how economics work, the rise in a silver supply led to decreased dollar values for currencies that still used gold and silver. One such country was, of course, the United States. 

Enter Jay Cooke once again, as they were heavily invested in railroad construction, including the Northern Pacific Railroad. The Northern Pacific Railroad was fueled by massive federal land grants, with over 60 million acres being signed over to Cooke’s firm, which was then used as collateral to take out loans and sell stocks.

The previously cited source further explains that “The contraction of currency dried up investor interest into these speculative lands. Unable to fund its debts, Cooke’s firm folded on September 13, 1873. 

His bankruptcy rippled through the markets, first into private investment houses and banks, then railroad and industrial holdings. The New York Stock Exchange suspended trading for nearly two weeks, yet the panic resumed and spread inland through the tenuous credit links binding the country’s young industrial economy.”

The effects of the Panic of 1873

The Panic of 1873 proved to be the first major economic crisis faced not just by a single country but the world. Before the Great Depression of 1929, this Panic was often called the Great Depression in the United States and the Long Depression in Great Britain. Industrial economies ground to a crawl as factories ceased or reduced production, let staff go, and closed down. A significant side-effect of this was reduced efforts of Reconstruction, the steps to reincorporate the rebellious southern states and their former slaves turned citizens.

As the Panic dragged on, the effects spread across the United States and the globe. For the United States, though, it meant lines in the sand for the Democrats, the party of white farmers and laborers, and the Republicans, the party of blacks and the wealthy. It also turned public opinion against early unionization efforts as they turned violent in their desires for worker’s rights.

The depression was especially severe for southern Blacks. With the falling farm prices, unemployment, wage cuts, and labor strikes, the North became uninterested in addressing Southern Racism. White supremacists groups like the KKK, which earlier administrations had successfully reigned in with legislation from 1868, saw a resurgence. They resumed terrorizing and intimidating southern blacks and Republicans. By the end of the depression in 1879, southern white democrats once again controlled the South. 

The Panic of 1873 altered America’s political landscape, paved the way for a return of white supremacy in the South, and solidified the burgeoning banking firms’ power like Wells Fargo and Chase. The Panic helped bring an end to Reconstruction and bring forth the Gilded Age in the United States and the Edwardian Era in Great Britain. The Panic’s global impact meant many people started to look for a new home and new jobs, and they turned to the nation that welcomed them, at the time at least: America. The Gilded Age had begun.

Alan Behrens
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