Thursday, September 10, 2009

Panic Blogging: 1873

The Panic of 1873, probably the worst economic depression the U.S. had faced to that time (though the Panic of 1837 and the immediate post-Revolutionary period are close) was caused by a combination of shady financial practices surrounding an unregulated market, uncontrolled railroad expansion, and monetary policy. The first two have some relevance for today's financial crisis, the last not so much.

The Gilded Age marked some of the nation's worst financial excesses and thus a series of economic boom and bust cycles. Business basically owned the government during these years, to the point of corporations simply buying state legislatures and creating false companies to pay off highly placed national political figures for their support. The rapid expansion of railroads across the country created conditions that opened the door for bad financial practices during the first decade of the Gilded Age. Widespread speculation in railroad growth created a completely unsustainable bubble that popped in 1873.

The Panic of 1873 was specifically set off by the failure of notorious speculator Jay Gould to move several hundred million dollars in railroad bonds he had purchased in order to build the Northern Pacific Railroad as the nation's second transcontinental line. There was a severe overextension of credit to Gould and other financiers. When the Grant administration refused to back American currency with silver any longer, through the Currency Act of 1873, American currency markets became very tight, helping to restrict credit and bring down Gould and others. When Gould went under, banks around the nation began calling in loans that creditors had no ability to pay. The banks themselves began to collapse and the panic was on.

Like other financial disasters, the Panic of 1873 started with bad decisions made in Washington, shady financial practices, and corruption. Of course, the poor suffered the most. The panic that began with Gould's failure quickly spread across the nation, leading to massive unemployment. Approximately 20% of American railroad companies went bankrupt in the next few years, as most of them had followed Gould's lead and severely overextended their credit lines.

The ensuing depression continued until the end of the 1870s. It helped lead to the nation's first mass workers' movement, the Great Railroad Strike of 1877. Fighting against wage cuts, rail workers shut down the nation's transportation system. The federal response showed just how closely tied the Republican Party had become to large corporations--President Hayes sent in federal troops to break the strike.

The Panic of 1873 also frequently takes the blame for undermining Reconstruction. It's true that the Republican failure to fix the economy led to the Democrats taking over the House in 1874 for the first time since before the Civil War. Certainly those Democrats were not favorable toward Reconstruction measures. But the Republicans were increasingly abandoning Reconstruction at the same time. I seriously doubt that the sordid history of the end of Reconstruction and the rise of Jim Crow would have taken a different course had the Republicans managed to hold on to Congressional majorities past 1874.