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Panic of
1873
The Panic of 1873
was a serious downturn in the economy of the United States that
touched off on September 18, 1873, when the Philadelphia banking firm
Jay Cooke and Company closed its doors and declared bankruptcy. It
was one of a series of economic crises in the 19th and early 20th
centuries.
The end of the Civil War
saw a boom in railroad construction, with 35,000 miles of new track
being laid across the country between 1866 and 1873. The railroad
industry, at the time the nation's largest employer outside of
agriculture, involved large amounts of money and risk. A large
infusion of cash from speculators caused abnormal growth in the
industry. Cooke's firm, like many others, was invested heavily in the
railroads.
President Ulysses S.
Grant's monetary policy of contracting the money supply made matters
worse. While business was expanding, the money they needed to finance
it was becoming more scarce. Cooke and other
entrepreneurs had planned to build a second transcontinental railroad,
called the Northern Pacific Railway. Cooke's firm provided the
financing. But on September 18, the firm realized it had become
overextended and declared bankruptcy. The firm's bankruptcy
touched off a domino effect, causing the economy of the United States
to collapse. The
New York Stock Exchange closed for 10 days. Of the country's 364
railroads, 89 went bankrupt. A total of 18,000 businesses failed
between 1873 and 1875. Unemployment reached 14 percent by 1876.
By 1877, wage cuts and poor
working conditions caused workers to strike, preventing the trains
from moving. 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. The tension between
workers and the leaders of banking and manufacturing lingered on well
after the depression itself 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 would last until the early
1920s.
View of the
Austrian school
Some economists of the
Austrian school claim that the "great depression", which is
supposed to have lasted for an unprecedented six years after the Panic
of 1873, is merely a myth brought about by misinterpretation of the
fact that prices in general fell sharply during the entire period.
Murray Rothbard wrote:
"Yet what
sort of "depression" is it which saw an extraordinarily large
expansion of industry, of railroads, of physical output, of net
national product, or real per capita income? As Friedman and Schwartz
admit, the decade from 1869 to 1879 saw a 3-percent-per-annum increase
in money national product, an outstanding real national product growth
of 6.8 percent per year in this period, and a phenomenal rise of 4.5
percent per year in real product per capita. Even the alleged
"monetary contraction" never took place, the money supply increasing
by 2.7 percent per year in this period."
Rothbard surmised that the
major effect of the Panic of 1873 was, not to initiate a great
depression, but to cause bankruptcies in over-inflated banks and in
railroads riding on the tide of vast government subsidy and bank
speculation.
See also
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