Panic of 1873

Run on the Fourth National Bank, No. 20 Nassau Street, New York City, 1873. From Frank Leslie's Illustrated Newspaper, October 4, 1873.

The Panic of 1873 or Depression of 1873^[1] marked a severe international economic depression in Europe and United States that lasted until 1879, and even longer in some countries. It began with financial failures in Vienna (capital of Austria–Hungary then) that spread to most of Europe and overextended American banking in late 1873. It was one of a series of economic crises in the 19th and early 20th centuries. In Britain, the result was two decades of stagnation known as the "Long Depression", during which Britain lost its world economic leadership.^[2] In U.S. literature this global event is usually known as "Panic of 1873", while in Europe it is known as Long Depression or Great Depression.^[3]

Factors in the U.S.

The American Civil War was followed by a boom in railroad construction. Fifty-six thousand miles (90,123 km) of new track were laid across the country between 1866 and 1873. Much of the craze in railroad investment was driven by government land grants and subsidies to the railroads. At that time, the railroad industry was the nation's largest employer outside of agriculture, and it involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry as well as overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns.^[4]

Coinage Act of 1873

The Coinage Act of 1873 changed the United States policy with respect to silver. Before the Act, the United States had backed its currency with both gold and silver, and it minted both types of coins. The Act moved the United States to a 'de facto' gold standard, which meant it would no longer buy silver at a statutory price or convert silver from the public into silver coins (though it would still mint silver dollars in the form of Trade Dollars)^[5]

The Act had the immediate effect of depressing silver prices. This hurt Western mining interests, who labeled the Act "The Crime of '73." Its effect was offset somewhat by the introduction of a silver trade dollar for use in the Orient, and by the discovery of new silver deposits at Virginia City, Nevada, resulting in new investment in mining activity.^[6] But the coinage law also reduced the domestic money supply, which raised interest rates, thereby hurting farmers and anyone else who normally carried heavy debt loads. The resulting outcry raised serious questions about how long the new policy would last.^[7] This perception of instability in United States monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was in its later stages at the time.

In September 1873, the American economy entered a crisis. This followed a period of post- Civil War economic overexpansion that arose from the Northern railroad boom. It came at the end of a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872, and demonetization of silver in 1873.

Jay Cooke & Company fails

In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, was invested heavily in the railroads. At a time when investment banks were anxious for more capital for their enterprises, President Ulysses S. Grant's monetary policy of contracting the money supply (again, also thereby raising interest rates) made matters worse for those in debt. While businesses were expanding, the money they needed to finance that growth was becoming more scarce.

Cooke and other entrepreneurs had planned to build the nation's second transcontinental railroad, called the Northern Pacific Railway. Cooke's firm provided the financing, and ground was broken near Duluth, Minnesota, for the line on February 15, 1870. But just as Cooke was about to swing a $300 million government loan in September 1873, reports circulated that his firm's credit had become nearly worthless. On September 18, the firm declared bankruptcy.^[8][9]

Effects in the U.S.

The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, more slowly in Chicago, Virginia City, Nevada and San Francisco.^[10][11]

The New York Stock Exchange closed for ten days starting September 20. Of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876. Construction work halted, wages were cut, real estate values fell and corporate profits vanished.^[12]

Railroad strike

American railroad unions commenced the Great Railroad Strike of 1877, preventing the trains from moving, especially in Pennsylvania and the great railway hub of Chicago. President Rutherford B. Hayes sent in federal troops in an attempt to stop the strikes. Fights between strikers and troops killed more than 100 and left many more injured. Further trouble came in July 1877 in the form of a crash in the market for lumber, resulting in the bankruptcy of several leading Michigan lumbering concerns.^[13] The effects of the resulting second business slump reached California by 1878.^[14]

The tension between workers and the leaders of banking and manufacturing interests lingered on well after the depression lifted in the spring of 1879, the end of the crisis coinciding with the beginning of the great wave of immigration into the United States which lasted until the early 1920s.

Poor economic conditions caused voters to turn against the Republican Party. In the 1874 congressional elections, the Democrats assumed control of the House. Public opinion during the period made it difficult for the Grant Administration to develop a coherent policy regarding the Southern states. The North began to steer away from Reconstruction. With the depression, ambitious railroad building programs crashed across the South, leaving most states deep in debt and burdened with heavy taxes. Retrenchment was a common response of southern states to state debts during the depression. One by one each Southern state fell to the Democrats, and the blacks and Carpetbaggers lost power.

Europe

The panic and depression hit all industrial nations.

Germany and Austria

A similar process of overexpansion was going on in Germany and Austria, where the period from German unification in 1870-71 to the crash in 1873 came to be called the Gründerjahre or "founders' years". A liberalized incorporation law in Germany led to the founding of new enterprises, such as the Deutsche Bank, as well as the incorporation of established ones. Euphoria over the military victory against France in 1871, combined with the influx of capital from the payment by France of war reparations, encouraged stock market speculation in railways, factories, docks, steamships - in short, the same areas of overexpansion as in the United States.^[15] It was in the immediate aftermath of Bismarck's victory against France that he began the process of silver demonetization. The process began on 23 November 1871 and cumulated in the introduction of the gold mark on 9 July 1873 as the currency for the new united reich to replace the silver coins of all the constituent parts. Germany was now on the gold standard.^[16] Demonetization of silver was therefore a common element in the crises on both sides of the Atlantic Ocean.

On May 9, 1873, the Vienna Stock Exchange crashed, no longer able to sustain false expansion, insolvency, and dishonest manipulations. A series of Viennese bank failures resulted, causing a contraction of the money available for business lending. In Berlin, the railway empire of Bethel Henry Strousberg crashed, bursting the speculation bubble there. The contraction of the German economy was exacerbated by the conclusion of war reparations payments to Germany by France in September 1873. Coming two years after the founding of the German Empire, the panic became known as the Gründerkrach or "founders' crash".^[17][18][19]

Recovery from the crash was much quicker in Europe than in America.^[20][21] Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations at the time.^[21] There was a racial component to the economic recovery in Germany and Austria as small investors irrationally blamed the Jews for their losses in the crash.^[22][23]

Britain

In Britain the long depression resulted in bankruptcies, escalating unemployment, a halt in public works, and a major trade slump that lasted until 1897.

Compared with Germany

During the depression of 1873-96, most European countries experienced a drastic fall in prices. Still, many corporations were able to reduce production costs and achieve better productivity rates, and, as a result, industrial production increased by 40% in Britain and by over 100% in Germany. A comparison of capital formation rates in the two countries helps to account for the different industrial growth rates. During the depression the British ratio of net national capital formation to net national product fell from 11.5% to 6.0% while Germany's rose from 10.6% to 15.9%. In essence, during the course of the depression, Britain took the course of static supply adjustment while Germany stimulated effective demand and expanded industrial supply capacity by increasing and adjusting capital formation. For example, Germany dramatically increased investment with regard to social overhead capital, such as in the management of electric power transmission lines, roads, and railroads, while this input stagnated or decreased in Britain and the investment helped to stimulate industrial demand in Germany. The resulting difference in capital formation accounts for the divergent levels of industrial production in the two countries and the different growth rates during and after the depression.^[24]

Ottoman Empire

In the periphery, the Ottoman Empire also suffered. Rates of growth of foreign trade dropped, external terms of trade deteriorated, declining wheat prices affected peasant producers, and the establishment of European control over Ottoman finances led to large debt payments abroad. The growth rates of agricultural and aggregate production were also lower during the "Great Depression" as compared to the later period.^[25] As a result, the Ottoman Empire began to tax heavily all non-Muslim subjects. ^[26]

Global Protectionism

After the 1873 depression, agricultural and industrial groups lobbied for protective tariffs. The 1879 tariffs protected these interests, stimulated economic revival through state intervention, and refurbished political support for the conservative politicians Bismarck and John A. Macdonald (the Canadian prime minister). Chancellor Bismarck gradually veered away from classic liberal economic policies in the 1870s, finally embracing a full conservative program, including tariffs, nationalization of railroads, and compulsory social insurance.^[27][28][29] This political and economic nationalism also reduced the fortunes of the German and Canadian Liberal parties, and stimulated the rise of antisemitism in Germany and Austria. France, like Britain, also entered into a prolonged stagnation that extended to 1897. One attempted solution was tariffs; French laws in 1880 and in 1892 imposed stiff tariffs on many agricultural and industrial imports, an attempt at protectionism.^[30] The U.S., still in the period after the Civil War, continued to be very protectionist.^[31]

See also

• Gilded Age
• Long Depression
• Panic of 1857
• Panic of 1893
• Presidency of Ulysses S. Grant

Notes

References

• Eyck, Erich (1950), Bismarck and the German Empire.
• Fawcett, W.L. (1877), Gold and Debt; An American Hand-Book of Finance.
• Fels, Rendigs. (1951) "American Business Cycles, 1865-79", The American Economic Review, Vol. 41, Issue 3, pp. 325–349. in JSTOR
• Fels, Rendigs, (1949). "The Long-Wave Depression, 1873-97," Review of Economics and Statistics, Vol. 31, No. 1 (Feb., 1949), pp. 69–73 in JSTOR
• Foner, Eric (1990), A Short History of Reconstruction 1863-1877.
• Glasner, David (1997). "Crisis of 1873". In Glasner, David; Cooley, Thomas F., eds. Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 132–33. ISBN 0824009444. 
• History of Manistee, Mason and Oceana Counties, Michigan (1882).
• Kirkland, Edward Chase (1967), Industry Comes of Age: Business, Labor, and Public Policy 1860-1897.
• Loomis, Noel M. (1968), Wells Fargo.
• Lubetkin, M. John (2006), Jay Cooke’s Gamble: The Northern Pacific Railroad, the Sioux, and the Panic of 1873, focused on construction in the West
• Manchester, William (1968), The Arms of Krupp, 1587-1968.
• Marek, George R. (1974), The Eagles Die: Franz Joseph, Elisabeth, and Their Austria.
• Masur, Gerhard (1970), Imperial Berlin.
• Moseley, Fred (1997). "Depression of 1873–1879". in David Glasner and Thomas F. Cooley, eds. Business cycles and depressions: an encyclopedia. pp. 148–49. ISBN 0-8240-0944-4.
• Musson, A. E. (195) The Great Depression in Britain, 1873-1896: A Reappraisal," Journal of Economic History, Vol. 19, No. 2 (Jun., 1959), pp. 199-228 in JSTOR
• Oberholtzer, Ellis Paxson. (1907) Jay Cooke: financier of the Civil War vol 2 pp 378-430 online edition
• Oberholtzer, Ellis Paxson. (1926) A History of the United States Since the Civil War 3:69-122
• Persons, Warren M.; Tuttle, Pierson M.; Frickey, Edwin (1920), "Business and Financial Conditions Following the Civil War in the United States", Review of Economic Statistics, Vol. 2, Supplement 2, pp. 5–21.
• Rezneck, Samuel. "Distress, Relief, and Discontent in the United States during the Depression of 1873-78," Journal of Political Economy, Vol. 58, No. 6 (Dec., 1950), pp. 494–512 in JSTOR
• Richter, Werner (1962), Bismarck.
• Scott, Jr., Ira O. "A Comparison of Production during the Depressions of 1873 and 1929," American Economic Review, Vol. 42, No. 4 (Sep., 1952), pp. 569–576 in JSTOR
• Sprague, O.M.W. History of crises under the national banking system (1910) online edition, pp 1–107
• Unger, Irwin. The Greenback Era: A Social and Political History of American Finance, 1865-1879(1964) excerpt and text search, pp 213–28
• Wheeler, Keith (1973), The Railroaders. New York: Time-Life Books.

Yearbooks

• Appleton's Annual Cyclopedia...for 1873 (1879) online edition
• Appleton's Annual Cyclopedia...for 1875 (1877)
• Appleton's Annual Cyclopedia ...for 1876 (1885) online edition
• Appleton's Annual Cyclopedia...for 1877 (1878)