Panic of 1873
The Event: Six-year depression caused by economic instability in the wake of growing railroad speculation
Date: Began on September 18, 1873
Place: Eastern, southern, and midwestern regions of the United States
Significance: The Panic of 1873 represented the first great crisis of industrial capitalism in the United States, and it altered the nature of economic enterprise, political ideology, and labor rights. The resulting depression caused widespread tension between laborers and capitalists, dividing the country along class lines.
Jay Cooke and Company’s office during the Panic of 1873. (Library of Congress)
After the end of the U.S. Civil War, the United States experienced a period of economic expansion that arose from a northern railroad boom and the passage of protective tariffs. Between 1866 and 1873, thirty-five thousand miles of track were laid throughout the country, bringing the railroads a great infusion of cash from speculation. The Philadelphia banking firm of Jay Cooke and Company handled most of the government’s loans during the Civil War. It began to invest heavily in the railroads but needed more funds to complete its investment plans. Cooke and other entrepreneurs planned to build a second transcontinental railroad, the Northern Pacific Railway, but by September, 1873, the firm had overextended itself and declared bankruptcy. Cooke was engaged in the dangerous practice of advancing short-term funds for long-term use. This unregulated, speculative credit created a vast overexpansion of the nation’s railroad network. Paper money soon depreciated, and the impact fell on the domestic economy.
From Bad to Worse
The situation worsened when New York banks loaned money to railroads that expected to raise funds for repayment by selling bonds before the notes came due. There was no central national bank to shield the economy from the brunt of the railroads’ collapse, so a chain reaction of bank failures resulted. The stock market plummeted, and the New York Stock Exchange was closed for ten days. Between 1873 and 1878, eighteen thousand businesses failed and the unemployment rate reached 14 percent.
One-quarter of New York City’s labor force was unable to find work in 1874. The panic caused companies to hoard cash receipts rather than depositing them in banks, so payrolls could not be met. In previous decades, workers had concentrated on such issues as greenbacks, cooperatives, and the eight hour workday. Now, they simply sought to maintain their predepression wages or find unemployment relief. Some moved toward socialism.
Worker unrest led to social class tensions and labor demonstrations, especially in northern urban centers. The Work or Bread movement in New York turned violent on January 13, 1874, when police dispersed a crowd of seven thousand demonstrators at Tompkins Square. In 1875, a long strike in Pennsylvania’s anthracite coal fields ended with the defeat of the Workingmen’s Benevolent Association and resulted in the infamous trials of leaders in the Molly Maguires.
President Rutherford B. Hayes had to send in federal troops to quell a railroad strike that left more than one hundred dead in 1877. One year later, fifteen thousand textile workers went on strike for two months in an unsuccessful attempt to halt wage reductions. Farmers encountered falling agricultural prices and land values, and they fell into debt as a result. Small farmers in midwestern states began to join the National Grange of the Patrons of Husbandry, better known as the Granger movement, in larger numbers from 1870 until 1890 to prevent the high freight prices for agricultural products imposed on their group by the railroad industry. The Grange advocated strong railroad regulation, government controls to prevent currency inflation, a return to the gold standard, and putting a stop to high freight rates.
The emergence of the corporation in the United States coincided with the rise of the railroad industry and of organized labor movements to counter the influence of monopolistic practices. Political leaders were reluctant to involve the federal government too heavily in the private sector, but this mentality shifted during the late nineteenth century, when unions began asking the government to intercede on their behalf. Congress finally enacted the Interstate Commerce Act of 1887 to regulate railroads and the Sherman Antitrust Act of 1890 to prevent monopolistic companies from gaining total control in an industry. By the turn of the twentieth century, politicians and Progressive reformers created many of the United States’ modern regulatory agencies; these departments included the Interstate Commerce Commission, the Food and Drug Administration, and the Federal Trade Commission.
The Panic of 1873 represented a shift in political power. Voters reacted to the depression by turning against the party in power and reversing the Republican stranglehold on Congress by the mid-1870’s. It would not be until 1896 that Republicans would gain control of both houses. Northerners began to turn away from Reconstruction policies, and African Americans’ hopes for social reform began to fade, as educational opportunities and social and industrial progress stagnated in the South. The effects of the panic were devastating because of the emerging factory system in the region. Poor whites and African Americans were forced to depend on cotton as the primary cash crop once again, and they became dependent on sharecropping and tenant systems until the mid-twentieth century.
Fels, Rendigs. "American Business Cycles, 1865-1879.” American Economic Review 41, no. 3 (June, 1951): 325-349. Analyzes the causes and effects of the Panic of 1873, contending that businesses undergo cyclical cycles of peak and decline.
_______. "The Long-Wave Depression, 1873-1897.” The Review of Economics and Statistics 31, no. 1 (February, 1949): 69-73. Argues that scholars Alvin Hansen and Joseph Schumpeter are too dependent on comparing the causes of the Great Depression with that of the Panic of 1873. Contends that specific causal factors for the Panic of 1873 must be taken into account and studied within the context of that time period.
Foner, Eric. Reconstruction: America’s Unfinished Revolution, 1863-1877. New York: Harper & Row, 1988. Provides an overview of the Panic of 1873 in the context of the political, social, and economic factors of the Reconstruction era.
Juglar, Clement. A Brief History of Panics and Their Periodical Occurrence in the United States. Reprint. New York: Augustus M. Kelley, 1966. Day-to-day account of the events that took place immediately following September, 1873.
Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000. Major study of post-Civil War banking panics; argues that the suspension of cash payments had the greatest impact on the working class during depressions during the late nineteenth century.