Wikipedia Deep Dive

Panic of 1873

12 min read

The Original "Great Depression"

Before the bread lines of the 1930s, before the stock market crash of 1929 became seared into American memory, there was another Great Depression. For decades, when Americans spoke of the worst economic catastrophe in their nation's history, they meant the collapse that began in September 1873.

It took the horrors of the twentieth century to dethrone it.

The Panic of 1873 offers an eerily familiar story: a speculative frenzy in the hottest technology of the era, easy money flowing into ambitious projects with questionable returns, and a sudden, devastating collapse when confidence evaporated. The technology wasn't artificial intelligence or internet startups. It was railroads—the transformative infrastructure that was reshaping the world as profoundly as any innovation before or since.

The Railroad Mania

In the years following the American Civil War, the United States went mad for railroads. Between 1868 and 1873, workers laid thirty-three thousand miles of new track across the country. To put that in perspective, that's roughly the circumference of the Earth, accomplished in just five years with picks, shovels, and human muscle.

The railroad industry had become the largest employer in America outside of farming. It commanded enormous capital and carried enormous risk. Government land grants and subsidies fueled the boom, and speculators poured money into the sector with abandon. The cash didn't just build tracks—it constructed docks, factories, and all the supporting infrastructure that a modern industrial economy required.

There was just one problem. Most of this capital was tied up in projects that offered no immediate returns. A railroad across empty prairie might eventually connect markets and generate profits, but "eventually" doesn't pay the bills today.

Silver and Gold: The Monetary Time Bomb

While Americans were building railroads at a fever pitch, a quieter revolution was reshaping the global monetary system. Understanding this requires a brief detour into how money worked in the nineteenth century.

Most major economies operated on what's called bimetallism—their currencies were backed by both gold and silver. Governments would buy either metal at fixed prices and mint coins from both. This system worked reasonably well as long as the relative values of gold and silver remained stable. But in the early 1870s, two major powers decided to abandon silver.

Germany moved first. In the euphoric aftermath of its crushing military victory over France in 1871, the newly unified German Empire began the process of demonetizing silver. Chancellor Otto von Bismarck started this transition in November 1871, and by July 1873, Germany had fully adopted the gold standard. The silver coins of all the various German states that had just been unified—Bavaria, Prussia, Saxony, and the rest—were replaced by the new gold mark.

The United States followed suit. Congress passed the Coinage Act of 1873, which ended the government's commitment to buying silver at a statutory price. America had effectively joined the gold standard.

Western mining interests were furious. They called it "The Crime of '73." The decision crushed demand for silver precisely when American mines were producing enormous quantities of it. Silver prices collapsed, devastating mining communities throughout the West.

But the effects rippled far beyond mining towns. By reducing the domestic money supply, the shift to gold raised interest rates. This was devastating for farmers, small business owners, and anyone else who typically carried debt. The perception that American monetary policy was unstable made investors increasingly reluctant to commit to long-term obligations. Why buy a thirty-year bond if you weren't sure what the currency would be worth?

The Founders' Years and the Founders' Crash

The speculative fever wasn't uniquely American. In Germany and Austria-Hungary, the years between German unification in 1871 and the crash of 1873 earned their own name: the Gründerjahre, or "Founders' Years."

Germany had liberalized its incorporation laws, making it easier than ever to start new companies. Deutsche Bank—still one of the world's largest financial institutions—was founded during this period. Established businesses rushed to incorporate and raise capital. The euphoria over the victory against France, combined with the massive war reparations that France was forced to pay, sent money flooding into the stock markets.

The investments went into the same sectors booming in America: railways, factories, docks, steamships. The industrial revolution was in full swing, and everyone wanted a piece of it.

Vienna, the glittering capital of the Austro-Hungarian Empire, became a particular hotbed of speculation. The Vienna Stock Exchange saw frenzied trading as investors chased ever-higher returns.

Then, on May 9, 1873, the bubble burst.

The Vienna Stock Exchange crashed. The boom had been built on what one historian called "false expansion, insolvencies, and dishonest manipulations." When confidence finally broke, a cascade of Viennese bank failures followed. Credit dried up almost overnight.

The contagion spread to Berlin, where the railway empire of Bethel Henry Strousberg—one of the era's great entrepreneurs—collapsed after a disastrous settlement with the Romanian government. The German crash earned its own grim name: the Gründerkrach, the "Founders' Crash."

September 1873: America's Turn

By autumn, the crisis had crossed the Atlantic.

Jay Cooke was one of the most powerful bankers in America. His firm, Jay Cooke and Company, had helped finance the Union's victory in the Civil War by pioneering the mass marketing of government bonds to ordinary citizens. He was a titan of American finance, and he had bet everything on railroads.

Cooke was building the Northern Pacific Railway—the second transcontinental railroad, meant to run from Minnesota to the Pacific coast. Ground had been broken near Duluth in February 1870. The project was enormously ambitious and enormously expensive. The railroad had borrowed more than one and a half million dollars from Cooke's firm and had no way to pay it back.

Cooke desperately needed to sell bonds to raise more capital, but the financial chaos in Europe had dried up foreign investment. He was counting on a three hundred million dollar government loan to keep the enterprise afloat. Then, in September 1873, word spread that his firm's credit had become nearly worthless.

On September 18, Jay Cooke and Company declared bankruptcy.

The news hit Wall Street like a bomb. Bank after bank failed in rapid succession. Henry Clews, another prominent banker, went under shortly after. On September 20, the New York Stock Exchange took the unprecedented step of closing its doors. It would remain shut for ten days.

The Long Shadow

The collapse of Jay Cooke's bank had exposed just how fragile the American financial system had become. Factories laid off workers by the thousands. In New York City, a quarter of the workforce found themselves unemployed. The effects spread more slowly to other cities—Chicago, San Francisco, the silver mining towns of Nevada—but they spread inexorably.

By November 1873, fifty-five of the nation's railroads had failed. By the following September, the first anniversary of the panic, another sixty had gone bankrupt. The construction of new rail lines—which had been laying seventy-five hundred miles of track annually—collapsed to just sixteen hundred miles by 1875.

Eighteen thousand businesses failed between 1873 and 1875. Unemployment peaked at over eight percent in 1878. Construction halted. Wages were slashed. Real estate values plummeted. Corporate profits evaporated.

The depression that followed lasted, by various estimates, until 1877 or 1879. Some economic historians extend it even further. In Britain, the period from 1873 to 1896 is sometimes called the Long Depression—more than two decades of stagnation that permanently weakened Britain's position as the world's leading economic power.

Two Paths Through Crisis

One of the most striking aspects of the depression is how differently countries responded—and how those responses shaped their futures.

Britain chose what economists call static supply adjustment. Essentially, British businesses cut back production to match reduced demand. They tightened their belts and waited for better times. The ratio of net national capital formation to net national product—a measure of how much a country is investing in its future productive capacity—fell from 11.5 percent to just 6 percent.

Germany took the opposite approach. Rather than contracting, Germany expanded investment. The government poured money into what economists call social overhead capital: electric power transmission lines, roads, and railroads. This infrastructure spending stimulated demand for industrial goods, which in turn encouraged more private investment. Germany's capital formation ratio actually rose during the depression, from 10.6 percent to 15.9 percent.

The results were dramatic. While British industrial production grew by about 40 percent during this period, German industrial production more than doubled. The depression that began in 1873 marked the beginning of Britain's long relative decline and Germany's rise as an industrial superpower.

The recovery in Central Europe also had a darker side. Small investors who had lost their savings in the crash looked for someone to blame. In both Germany and Austria, anti-Semitism surged. Jewish financiers became convenient scapegoats. The Neuer Sozial-Demokrat, a socialist newspaper, published articles blaming Gerson von Bleichröder—Bismarck's personal banker—for the stock market crash. One article called him "Bismarck's Jew."

The Global Reach of Panic

The crisis didn't stop at the borders of industrialized nations. The depression rippled outward to the periphery of the global economy.

In the Cape Colony—modern-day South Africa—the panic triggered bankruptcies, rising unemployment, and a halt to public works projects. A major trade slump lasted until prospectors discovered gold in 1886, sparking a new boom that would reshape the region's history.

The Ottoman Empire suffered declining trade, falling wheat prices that devastated peasant farmers, and the humiliation of having European powers take control of Ottoman finances to ensure debt payments were made. The empire would limp along for another four decades before its final collapse.

India, whose currency was based on silver, saw its money devalued as silver prices crashed worldwide. The discovery of large silver deposits in the United States and European colonies had glutted the market precisely when major economies were abandoning the metal.

The Latin Monetary Union—an attempt by France, Belgium, Italy, Switzerland, and other countries to standardize their currencies—suspended the conversion of silver to coins entirely. The global monetary system was being transformed, and not everyone would benefit from the new arrangements.

The Suez Factor

There's one cause of the panic that might seem surprising: the Suez Canal.

The canal opened in 1869, cutting the journey from Europe to Asia by thousands of miles. Ships no longer needed to sail around the Cape of Good Hope at the southern tip of Africa. This was, by almost any measure, a tremendous advance for global trade.

But it devastated one particular industry: British warehousing.

Before the canal, goods from the Far East arrived in sailing ships that had spent months rounding Africa. Those goods needed to be stored somewhere while they waited for buyers and onward transportation. British warehouses had dominated this entrepôt trade for generations.

The canal changed everything. Sailing ships couldn't easily use it—the prevailing winds in the Mediterranean blow from west to east, making the passage difficult under sail. The canal was built for steamships, which could make the journey faster and more predictably. The old sailing routes and the warehouses that served them became obsolete almost overnight.

What the Panic Can Teach Us

The Panic of 1873 offers lessons that resonate across the centuries.

The most obvious is about speculative bubbles. The railroad mania of the 1860s and early 1870s shares DNA with every asset bubble since: the dot-com frenzy, the housing boom of the 2000s, and perhaps—as the Substack article that inspired this essay suggests—the current enthusiasm for artificial intelligence. In each case, a genuinely transformative technology attracted so much speculative capital that the investments couldn't possibly generate adequate returns.

Railroads did transform the world. They were the internet of their era, shrinking distances and creating entirely new possibilities for commerce and communication. But that didn't mean every railroad investment was sound, or that the industry could support the valuations that speculators assigned to it. The technology can be revolutionary while the investments in it are catastrophically overpriced.

The panic also illustrates how interconnected the global economy had become even in the nineteenth century. A crash in Vienna triggered failures in Berlin, which combined with domestic problems to bring down Wall Street, which in turn affected silver miners in Nevada and wheat farmers in the Ottoman Empire. No major economy was truly isolated.

Perhaps most importantly, the aftermath shows that policy choices matter enormously. Britain and Germany faced the same crisis, but Germany's decision to invest through the downturn while Britain retrenched set the two countries on divergent paths for decades to come. The depression didn't determine their fates—their responses to it did.

The Forgotten Catastrophe

It's remarkable how thoroughly the Panic of 1873 has faded from popular memory. For more than half a century, it was the defining economic disaster in American history. Parents who lived through it warned their children about the dangers of speculation and debt. The experience shaped policy debates for a generation.

Then came 1929, and everything that followed. The new Great Depression was so much worse—unemployment reaching twenty-five percent, a decade of suffering, a world war to end it—that the previous Great Depression was simply renamed. The Panic of 1873 became a historical footnote, studied by specialists but unknown to most people.

Yet the patterns it revealed—speculative excess, monetary instability, global contagion, the crucial importance of policy responses—recur with disturbing regularity. Each generation seems to learn these lessons anew, usually at great cost.

The railroad magnates of the 1870s were certain they were building the future. They were right about that. They were wrong about how much money they could make doing it, and wrong about how long the good times would last. The wreckage they left behind transformed economies on both sides of the Atlantic.

It's worth remembering their story. We may be living through a similar one.