This article is Volume 4 of a series about the history of international banking crises and the unfortunate, recurring breakdown in trust.
The Panic of 1873 was a financial crisis that triggered an economic depression in Europe and North America that lasted from 1873 to 1877 or 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the “Long Depression” that weakened the country’s economic leadership. In the United States, the Panic was known as the “Great Depression” until the events of 1929 and the early 1930s set a new standard.
The Panic of 1873 and the subsequent depression had several underlying causes for which economic historians debate the relative importance. American inflation, rampant speculative investments (overwhelmingly in railroads), the demonetization of silver in Germany and the United States, ripples from economic dislocation in Europe resulting from the Franco-Prussian War (1870–1871), and major property losses in the Great Chicago Fire (1871) and the Great Boston Fire (1872) helped to place massive strain on bank reserves, which, in New York City, plummeted from $50 million to $17 million between September and October 1873.
The first symptoms of the crisis were financial failures in Vienna, the capital of Austria-Hungary, which spread to most of Europe and to North America by 1873.
The American Civil War (1861-1865) was followed by a boom in railroad construction. 33,000 miles (53,000 km) of new track were laid across the country between 1868 and 1873,  with much of the craze in railroad investment being driven by government land grants and subsidies to the railroads. The railroad industry was the largest employer outside agriculture in the US and involved large amounts of money and risk. A large infusion of cash from speculators caused spectacular growth in the industry and in the construction of docks, factories, and ancillary facilities. Most capital was involved in projects offering no immediate or early returns.
Jay Cooke & Company fails
In September 1873, Jay Cooke & Company, a major component of the country’s banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Jay Cooke’s firm, like many others, had invested heavily in the railroads. Some investment banks were then anxious for more capital for their enterprises, US President Ulysses S. Grant’s monetary policy of contracting the money supply and thus raising interest rates made matters worse for those in debt. Businesses were expanding, but the money they needed to finance that growth was becoming scarcer.
Cooke and other entrepreneurs had planned to build the second transcontinental railroad, the Northern Pacific Railway. Cooke’s firm provided the financing, and ground for the line was broken near Duluth, Minnesota, on 15 February 1870. However, 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 18 September, the firm declared bankruptcy.
Many US insurance companies went out of business, as the deteriorating financial conditions created solvency problems for life insurers. The common factor of the surviving companies was that all marketed tontines.
New York police violently attacking unemployed workers in Tompkins Square Park, 1874
The failure of Jay Cooke’s bank and soon afterward of Henry Clews set off a chain reaction of bank failures and temporarily closed the New York Stock Exchange. Factories began to lay off workers as the country slipped into depression. The effects of the panic were quickly felt in New York and more slowly in Chicago; Virginia City, Nevada, where silver mining was active; and San Francisco.
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**Sources: Wikipedia; historytoday.com
Photo: The Panic – Run on the Fourth National Bank, No. 20 Nassau Street, NYC