The Great Panic of 1873 – Closing the door of the Stock Exchange on its members
Source: Library of Congress
What was the Panic of 1873?
The Panic of 1873 refers to a major financial crisis that ended in a long economic recession across Europe and the U.S. The aftermath of the crisis was actually known as the “Great Depression” before the one in the 1930s widely known today.
The Panic of 1873 occurred due to a number of unfortunate interrelated factors: American inflation, over-speculation in the railroad industry, the demonetization of silver in Germany and the U.S., major property losses due to fires in Chicago and Boston, and disease. In short, the European and North American economies were bombs in close proximity.
We at the Zero Theft Movement are dedicated to eradicating rigged parts of the U.S. economy so that American businesses and citizens can flourish. We can draw from the Panic of 1873 to see just how damaging over-speculative investments can be.
The Expansion of the Railroad Industry
After the American Civil War (1861-1865), the railroad industry boomed. Government land grants and subsidies did much to encourage investment and speculation. The massive infusion of capital enabled the industry to become one of the largest in the U.S., establishing an infrastructure of docks, factories, and other facilities. As evidence of the rapid expansion, railroad workers laid 33,000 miles of new track between 1868-1873.
Source: Atlas of the Historical Geography of the United States via Railroads and the Making of Modern America
Nevertheless, such speculative and quick growth often raises concerns of economic stability. Natural boom and bust cycles have shown how overheating can trigger an economic downturn and recession. An early warning sign was that the railroads, for all the early investment, would not bring any immediate or even early returns. The railroad industry boom would later contribute to the Panic of 1873.
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The Coinage Act of 1873
A series of disasters rendered the economy vulnerable: the Black Friday panic of 1869, the Chicago fire of 1871, an equine influenza outbreak, and the Boston fire of 1872.
Perhaps though, the demonetization of silver through the Coinage Act of 1873 truly set off the Panic of 1873.
In 1871, the German Empire decided to stop minting silver thaler coins, tanking the demand and value of silver. Germany predominantly used silver from U.S. mines, which had suddenly lost a huge customer.
In response to the lack of demand, Congress passed legislation to change the national silver policy known as the Coinage Act. The legislation established a gold standard instead of a gold and silver standard. Prior to the Act, the U.S. had supported its currency with both precious metals, but that would no longer be the case. The nation would not purchase silver at a statutory rate or produce silver coins other than for export purposes.
The Act further depressed silver prices, hurting business for many American mines. But they quickly rebounded when new silver deposits were discovered in Nevada and the silver trade dollar was introduced in Asia. Perhaps more significantly though, the legislation restricted the money supply. Interest rates spike, and business owners who had heavy debt could not keep up. Perceived economic instability led investors to avoid any long-term bonds, in particular. Critics of the legislation dubbed it “The Crime of 1873.”
The railroad boom, the string of disasters, and the Act slowed the flow of investments and commerce, eventually leading to the Panic of 1873.
The Collapse of Jay Cooke & Company
The increased interest rate established by the Coinage Act put further strain on those in debt (i.e. business owners). Furthermore, the money shortage reduced spending, leaving many businesses without recourse.
One of those unfortunates was the major bank Jay Cooke & Company. It had served as the government’s chief financier of the Union during the Civil War. Planning to build the Northern Pacific Railway, the second transcontinental railroad, Jay Cooke & Co. had invested millions into the construction effort.
When capital became scarce, the railroad company informed the bank that they could not pay back the $1.5 million+ it had borrowed. Cooke scrambled to sell the securities in Europe but could not find any borrowers due to the continent’s own financial crises. Investors started to pull out of funding, and other borrowers defaulted on their loans. The Philadelphia banker nearly managed to acquire a $300 million government loan; nevertheless, rumors of the firm’s virtually worthless credit had reached officials before the deal could go through.
On September 18, 1873, the firm declared bankruptcy.
The Panic of 1873
Railroad bond credit ratings dropped to the status of junk bonds. Creditors had little faith in the banks that had funded the expansion of the railroads. Stock markets across Europe collapsed, further hurting the value of the railroad industry. Just two days after Jay Cooke and Co. declared bankruptcy, the New York Stock Exchange (NYSE) attempted to mitigate the collapse by closing for ten days. The NYSE had never shut down previously.
The New York Clearing House drew from member reserves in an attempt to meet demands for capital. It could sustain the effort only up to September 24. Citizens were understandably in a panic and rushed to withdraw their savings from banks. These widespread bank runs created further strain on the financial system, as most financial institutions were illiquid due to the fractional banking system. New York’s central banks stepped in and provided cash to country banks, which could then fulfill withdrawal requests.
Panic, as a health officer, sweeping the garbage out of Wall Street
Source: Library of Congress
The panic of 1873 creeped out of New York, taking over depositors in the East to the Midwest. At least one hundred banks collapsed across the nation. Eventually, the fever subsided around mid-October, though only ruins remained.
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The Depression of 1873-1879
Congress, in 1874, passed a bill sanctioning the printing of currency. This would increase inflation but consequently reduce the value of debts. President Ulysses S. Grant vetoed the legislation. Nevertheless, Congress passed the Specie Payment Resumption Act a year later, which backed up the U.S. dollar with gold. The move mitigated inflation and stabilized the dollar.
According to the University of Virginia, 89 of the country’s 364 railroads had to declare bankruptcy, and 18,000 businesses failed in just two years. Unemployment spiked to a historic 14% by 1876.
Why does the Panic of 1873 Matter Now?
The unfortunate convergence of a number of factors ultimately led to the Panic of 1873. The sudden drop in demand for silver caused the railroad bubble to burst. While it’s easy to say in hindsight, the U.S. could have minimized the destabilizing effects of the demonetization of silver.
However, the over-speculation in the railroad industry should have been curtailed as well. High-risk investment has been a hallmark of many major economic collapses. Just think about the Dotcom Bubble, the subprime mortgage crisis, the S&L crisis, and so on…
While fluctuation is expected, the economy can sustain boom periods as long as market participants do not grow overzealous or profit-hungry. Consistent high-risk behavior ultimately hurts average Americans the most. Economic collapse creates unemployment, deferred retirements, and major setbacks for future generations. All to citizens who had nothing to do with the failures in the first place.
The recession and recovery effort creates a long period where money arguably goes out of millions of peoples’ pockets. Is that fair?
Eliminate the Rigged Economy with the Zero Theft Movement
The Zero Theft Movement, along with our growing community, works to calculate the most accurate estimate for the monetary costs of corruption in the United States. We achieve this collectively through our independent voting platform.
The public investigates potential problem areas, and everyone votes on whether (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Only through hard evidence can we prove where the rigged parts of the economy exist and force Congress to hold all the bad actors accountable.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep. article