Capitalism’s First Global Depression: The Panic of 1873
By Dr. David Blanke
Joe B. Frantz Associate Professor of History
Texas A&M University-Corpus Christie
The Panic of 1873 stands as the first global depression brought about by industrial capitalism. It began a regular pattern of boom and bust cycles that distinguish our current economic system and which continue to this day. While the first of many such market “corrections,” the effects of the downturn were severe and, in 1873, unexpected. Unlike earlier mercantile capitalism, which is dependent on local markets and periodic shortages of labor or materials, industrial capitalism is controlled by access to venture capital and the productivity of capital investments in stocks, bonds, and large-scale mechanization. Money, not labor or goods, remains the critical factor in economic growth.
In a sense, the money supply acts like oxygen for a fire: too little and the flame dwindles, too much and it rages uncontrolled. In today’s market, currency and stock regulation try to limit rapid swings in value of our nation’s currency. But in 1873 these adjustments were unknown and the ability of national authorities to control the money supply was immature. As a result, the Panic of 1873 led to the longest recorded economic downturn in modern history, spanning from October 1873 to March 1879, according to the National Bureau of Economic Research.
By 1873, most developed nations in Europe and North America had experienced the transition to industrial capitalism. Capitalists could invest their money in international currencies, ownership of individual firms (stock), or as lenders (bonds and loans). Countries backed their currencies using precious metals (both silver and gold, also called specie), making it possible for investors to compare the success of their investment choices in objective terms. While one option might earn 100 U.S. dollars and another 100 English pounds, ultimately the ability to convert those currencies to silver and gold led to an “apples to apples” comparison. In times of national emergency, however, governments often went “off” the precious metal standard. They supplied “easy money” not tied to the value of gold. This was the case in the United States when, in 1861, the Civil War began.
During the U.S. Civil War, the federal government printed over $356 million in paper greenbacks, essentially promissory notes which paid for military procurements, soldiers’ salaries, building a transcontinental railroad, and developing interiors land for commerce and higher education. Mass manufacturers, financial institutions, and especially railroad investors soaked up these funds, producing more goods and employing more people over a broader geographic market. Northern investment bankers like Jay Cooke & Company (who managed the transfer of these funds) made millions (see Primary Source Great Northern Railway Route Map ). The good times were predicated on an assumption that consumers (and, during the war, this included the U.S. government) would continue to have easy access to the capital needed to purchase these modern goods and services.
These cheerful market assumptions also made it easy for corrupt politicians and their local benefactors to artificially inflate the value of their particular interests. While, on any given day, the New York Stock Exchange might rank a railroad stock or corporate bond based on the estimated value at that time, no one knew for certain the value of their land holdings or federal contracts. Unlike “sound money,” backed by specie, the greenbacks’ value reflected only the relative optimism of individual investors.
Gold Standard and Silver
Beginning in the early 1870s, several leading industrial nations made significant changes to their national currencies which, unknowingly, started the Panic. In 1871, Germany ended the use of silver as a monetary metal. While placing the deutschmark on the “gold standard” instantly increased the value of Germany’s money, relative to other currencies, it also meant a rising worldwide supply of silver.
In a classic case of supply-and-demand, more silver meant less value per ounce and less value for those currencies that still allowed an exchange between silver and gold (as in the United States).
The “deflation” of silver-backed currencies cascaded throughout the world. While complicated in theory, the practical problem was obvious. If one could exchange cheap silver for precious gold in countries, like the U.S., that still used both to back their currency, the global value of that currency would rapidly fall. As a result, other nations felt strong economic pressures to follow Germany’s lead.
In America, Congress passed the 1873 Coinage Act to gradually retire silver currency and to bolster the relative value of the U.S. dollar. While the Treasury also released an additional $26 million in greenbacks, the economic effect was a decrease in the amount of capital available to all investors—akin to choking off the oxygen supply to a fire. Now limited by the amount of gold held in the U.S. Treasury, access to currency and credit contracted sharply, interest rates skyrocketed, and investors were forced to pay off their high stakes gambles (made with cheap paper dollars) with hard-earned gold. Congress passed the Specie Resumption Act in 1875, placing the U.S. on the path to a complete gold-standard currency.
Banks and the Panic
As with the Great Depression, the private investment banks felt the change first. Jay Cooke was an influential Wall Street banker who played a vital role in brokering federal bonds during the Civil War (providing credit for the Union and earning millions for Cooke). Jay Cooke & Company was deeply invested in post-war railroad construction, including the Northern Pacific Railroad. Like the more famous Union Pacific line, the Northern was fueled by vast federal land grants (over 60 millions acres were signed over to Cooke’s firm) that he then used as collateral to sell more stock and to secure loans.
The contraction of currency dried up investor interest into these speculative lands. Unable to fund its debts, Cooke’s firm folded on September 13, 1873. His bankruptcy rippled through the markets, first into private investment houses and banks, then railroad and industrial holdings. The New York Stock Exchange suspended trading for nearly two weeks, yet the panic resumed and spread inland through the tenuous credit links binding the country’s young industrial economy.
Numbers fail to convey the depth of the economy distress. Average wages fell by nearly a quarter. Thousands of American companies defaulted on over a billion dollars in debt, nine out of 10 U.S. railroad concerns failed, and the country faced double-digit unemployment for over a decade.
The worst effects of the downturn (unemployment, homelessness, malnutrition) were concentrated in the industrial sectors, but every region suffered and the economy continued to sputter. The long-term effects were quite noticeable from today’s perspective. While the U.S. economy raged like a furnace from 1840 to 1860, averaging over six percent annual growth per year, the country’s economic productivity fell by over 24 percent during the two decades that followed the Panic of 1873.
Textbooks differ in their treatment of the Panic in significant ways. Most tie the depression to the national political controversies surrounding Reconstruction. Northern Republicans, who hoped to transform the South and the status of freedman through market reforms, were blamed for the economic downturn. As noted in Holt, Rinehart, and Winston’s United States History: Beginnings to 1877, the crisis also meant that “Northerners were becoming less concerned about southern racism and more concerned with their financial well-being.”
The result was division in the Republican party over their approach to Reconstruction and whether the U.S. currency should be hard (backed by gold) or easy. More advanced textbooks, such as Wadsworth’s The American Pageant: A History of the American People, do a better job of establishing the long-term political consequences of these currency standards and their influence upon American politics. Too often, textbooks combine the Panic with the political scandals which rocked the Grant administration. While certainly a source of the political crisis facing Republicans in the 1870s, the roots of the Panic run far deeper than merely Grant’s poor political skills.
As with the better known crises of 1929 and 1893, the Panic of 1873 produced some profound changes to American society. Economically, the long downturn further concentrated capital in the hands of fewer and fewer suppliers. An ironic product of most depressions, those who had access to sound capital investments found their money was now more valuable. They could, and did, use this advantage to acquire controlling interests over competitors with less secure footing.
Large, wealthy manufacturers, like Andrew Carnegie, John Rockefeller, and Cyrus McCormick, solidified their hold over their industries and increased their influence in the halls of government as a direct result of the Panic of 1873. George K. Holmes reported that, by 1890, 71 percent of the nation’s wealth belonged to less than 9 percent of the public—an unhealthy and lopsided disparity of wealth distribution that has only been equaled, in this country, in the past 20 years.
End of Reconstruction
The most important social change accelerated by the Panic proved to be the termination of the great experiment in Southern Reconstruction. Fearing increased labor violence, which began with the Great Railroad Strike of 1877, and a political crisis in confidence in the Republican Congress, who took the blame for the downturn, federal troops were redeployed closer to the nation’s industrial center and far from Southern blacks in 1877. Desperation also fueled massive movements of immigrants to the United States and of eastern citizens into the interior and the Far West. It was not by accident that prospectors were willing to enter the dangerous Black Hills, controlled by the formidable Sioux nation, in search of gold in 1875, nor that American troops were called to Little Big Horn the following year.
The Panic also carved deep channels that, over subsequent generations, defined the American political landscape of the Gilded Age. One was a general distrust of aggressive labor organizations. Established in a time of want, unions like the Knights of Labor and the American Federation of Labor lost public support when worker disputes turned violent. Bloodshed involving the Molly Maguires (1874–1875) and during the “Great Railway Strike” grabbed the headlines and undermined the legitimacy of workers’ rights over safety, fair wages, reasonable hours, and the use of child and convict labor.
To others, the Panic exposed the injustice of economic inequality in America—how one’s unique condition (such as race, gender, or geographic location) could determine their relative success far more than their talents and abilities. The urban settlement house movement and social service reforms, for example, both received increased attention following the crisis.
Finally, the Panic shattered the balance of power between the established two-party system. From 1873 to 1896, the country witnessed a series of insurgent third parties driven by a desire to address monetary policy in America (such as the gold standard and the use of greenbacks). William Hope Harvey published a national bestseller, Coin’s Financial School (1893), which politicized the issue of bimetallism in the United States (see Primary Source Coin’s Financial School ). William Jennings Bryan tied the largest of these third-party movements (Populism) to the Democratic Party in 1896, with his famous “Cross of Gold” speech (see Primary Source “Cross of Gold” ). Summarizing both the causes and effects of the Panic of 1873, Bryan suggested that a new style of national activism would soon appear in the United States to address issues first raised by the Panic.
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