Panic of 1873

Context/Description: Post-Civil War America experienced explosive railroad expansion, with track mileage doubling between 1868-1873. This was financed through bonds and stocks sold to European investors. Simultaneously, Europe was industrializing rapidly, with Germany adopting the gold standard after unification. The Coinage Act of 1873 ("Crime of '73") demonetized silver in the U.S., effectively reducing the money supply just as global silver production was increasing.

Warning Signs:

• Overbuilding: Many railroad lines were unprofitable, serving sparsely populated areas
• Railroad debt exceeded sustainable levels
• European financial stress: Vienna Stock Exchange crashed in May 1873
• Agricultural prices falling due to overproduction
• Tightening credit conditions as money supply contracted

The Problem: Massive overinvestment in railroads created unprofitable lines that couldn't service their debt. Jay Cooke & Company, the most prominent American banking house (which had financed the Union during the Civil War), couldn't sell bonds for the Northern Pacific Railway. European financial contagion from the Vienna crash reduced appetite for American securities.

The Trigger: Jay Cooke & Company declared bankruptcy on September 18, 1873. This shocked the financial world—Cooke was considered unshakeable. Panic immediately spread to other banks and trust companies.

Results/Impacts: The New York Stock Exchange closed for 10 days (unprecedented). The crisis spiraled into what was called the "Long Depression" or "Great Depression" (until the 1930s claimed that title), lasting until 1879:

• U.S. GDP dropped approximately 14%
• Unemployment reached 8.25% officially (likely higher unofficially)
• 18,000 businesses failed over the depression's course
• 89 railroads went bankrupt
• Deflation persisted as the money supply contracted

The depression affected most of the Western world. European economies experienced deflation and stagnation. The crisis accelerated several major trends:

• Rise of labor movements (Great Railroad Strike of 1877)
• Growing antitrust sentiment against monopolistic railroads
• International tensions over trade and currency standards
• Agricultural distress that would persist for decades

The Lesson: Infrastructure booms can create overcapacity and unsustainable debt. International financial contagion was already a reality in the 19th century. Monetary policy (the silver question) can amplify or dampen crises.