Panic of 1873

Source: Wikipedia, the free encyclopedia.

Frank Leslie's Illustrated Newspaper
, 4 October 1873

The Panic of 1873 was a

economic depression in Europe and North America that lasted from 1873 to 1877 or 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the "Long Depression" that weakened the country's economic leadership.[1] In the United States, the Panic was known as the "Great Depression" until the events of 1929 and the early 1930s set a new standard.[2]

The Panic of 1873 and the subsequent depression had several underlying causes for which

railroads), the demonetization of silver in Germany and the United States, ripples from economic dislocation in Europe resulting from the Franco-Prussian War (1870–1871), and major property losses in the Great Chicago Fire (1871) and the Great Boston Fire (1872) helped to place massive strain on bank reserves, which, in New York City
, plummeted from $50 million to $17 million between September and October 1873.

The first symptoms of the crisis were financial failures in Vienna, the capital of Austria-Hungary, which spread to most of Europe and to North America by 1873.

Europe

The panic and depression hit all of the industrial nations.

Germany and Austria-Hungary

Black Friday, 9 May 1873, Vienna Stock Exchange

A similar process of overexpansion took place in Germany and Austria-Hungary, where the period from

gold mark on 9 July 1873 as the currency for the newly united Reich, replacing the silver coins of all constituent lands. Germany was now on the gold standard.[4] Demonetization of silver was thus a common element in the crises on both sides of the Atlantic Ocean
.

On 9 May 1873, the

Keglevich of Vienna, a relative of Gábor Keglevich, who had been the master of the royal treasury (1842–1848) and in 1845 had cofounded a financial association to fund the expansion of Hungarian industry and to protect the loan repayments, similar to the 1870 Kreditschutzverband, an Austrian association for the protection of creditors and the interests of its members in cases of bankruptcy. That made it possible for a number of new Austrian banks to be established in 1873 after the Vienna Stock Exchange crash.[5]

In Berlin, the railway empire of Bethel Henry Strousberg crashed after a ruinous settlement with the government of Romania, bursting the speculation bubble in Germany. The contraction of the German economy was exacerbated by the conclusion of war reparations payments to Germany by France in September 1873. Two years after the foundation of the German Empire, the panic came and became known as the Gründerkrach or "Founders' Crash".[6][7][8] In 1865, Keglevich and Strousberg had come into direct competition in a project in what is now Slovakia. In 1870 the Hungarian government, and in 1872 the Emperor-King Franz Joseph I of Austria, resolved the question of the competing projects.[9][10]

Although the collapse of the foreign loan financing had been predicted, the events of that year were in themselves comparatively unimportant. Buda, the old capital of Hungary, and Óbuda were officially united with Pest,[11] thus creating the new metropolis of Budapest in 1873. The difference in stability between Vienna and Berlin had the effect that the French indemnity to Germany flowed into Austria and Russia, but the indemnity payments aggravated the crisis in Austria, which had benefited by the accumulation of capital not only in Germany but also in England, the Netherlands, Belgium, France, and Russia.[12]

Recovery from the crash occurred much more quickly in Europe than in the United States.

ADAV published several articles blaming Gerson von Bleichröder for the stock market crash. An October 29 article called Bleichröder "Bismarck's Jew".[17]

Soon, more luxury hotels and villas were built in Opatija, and a new railway line was extended in 1873 from the Vienna–Trieste line to Rijeka (Fiume), making it possible to go by tram from there to Opatija. The strong increase of port traffic generated a permanent demand for expansion.[18] The Suez Canal was opened in 1869.[19] 1875–1890 became "the golden years" of Giovanni de Ciotta in Rijeka.

Britain

The opening of the Suez Canal in 1869 was one of the causes of the Panic of 1873 because goods from the Far East had been carried in sailing vessels around the Cape of Good Hope and were stored in British warehouses. As sailing vessels were not adaptable for use through the Suez Canal (because the prevailing winds of the Mediterranean Sea blow from west to east), the British entrepôt trade suffered.[20]

When the crisis came, the

Bank Charter Act of 1844 would be suspended as they had been in the crises of 1847, 1857, and 1866. The ensuing economic downturn in Britain seems to have been muted – "stagnant" but without a "decline in aggregate output".[21] However, there was heavy unemployment in the basic industries of coal, iron and steel, engineering, and shipbuilding, especially in 1873, 1886, and 1893.[1]

Comparison with Germany

From 1873 to 1896, a period sometimes referred to as the

social overhead capital, such as in the management of electric power transmission lines, roads, and railroads, thereby stimulating industrial demand in that country, but similar investment stagnated or decreased in Britain. The resulting difference in capital formation accounts for the divergent levels of industrial production in the two countries and the different growth rates during and after the depression.[22]

India

The discovery of large quantities of silver in the United States and several European colonies caused the panic of 1873 and thus a decline in the value of silver relative to gold, devaluing India's standard currency. This event was known as "the fall of the rupee".

South Africa

In the Cape Colony, the panic caused bankruptcies, rising unemployment, a pause in public works, and a major trade slump that lasted until the discovery of gold in 1886.[23]

Ottoman Empire

In the periphery, the Ottoman Empire's economy also suffered. Rates of growth of foreign trade dropped, external terms of trade deteriorated, declining wheat prices affected peasant producers, and the establishment of European control over Ottoman finances led to large debt payments abroad. The growth rates of agricultural and aggregate production were also lower during the Long Depression than the later period.[24]

Latin Monetary Union

The general demonetization and cheapening of silver caused the Latin Monetary Union in 1873 to suspend the conversion of silver to coins.[25][26]

United States

Factors

The

new track were laid across the country between 1868 and 1873,[27] with much of the craze in railroad investment being driven by government land grants and subsidies to the railroads.[28] The railroad industry was the largest employer outside agriculture in the US and involved large amounts of money and risk. A large infusion of cash from speculators caused spectacular growth in the industry and in the construction of docks, factories, and ancillary facilities. Most capital was involved in projects offering no immediate or early returns.[29]

Coinage Act of 1873

A period of economic overexpansion arose from the northern railroad boom before a series of economic setbacks: the

Boston fire of 1872, and the demonetization of silver in 1873
.

The decision of the German Empire to cease minting silver

US Congress passed the Coinage Act of 1873
, which changed the national silver policy.

Before the Act, the US had backed its currency with both gold and silver and minted both types of coins. The Act moved the United States to a de facto

trade dollars.[30]

The Act had the immediate effect of depressing silver prices, hurting Western mining interests, who labeled the Act "The Crime of '73", but its effect was offset somewhat by the introduction of a silver trade dollar for use in Asia and the discovery of new silver deposits at Virginia City, Nevada, that resulted in new investment in mining activity.[31] The Act also reduced the domestic money supply, raising interest rates and hurting farmers and others who normally carried heavy debt loads. The resulting outcry raised serious questions about how long the new policy would last.[32] The perception of US instability in its monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was then in its later stages.

In September 1873, the

US economy
entered a crisis.

Jay Cooke & Company fails

In September 1873, Jay Cooke & Company, a major component of the country's banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Jay Cooke's firm, like many others, had invested heavily in the railroads. Some investment banks were then anxious for more capital for their enterprises, US President Ulysses S. Grant's monetary policy of contracting the money supply and thus raising interest rates made matters worse for those in debt. Businesses were expanding, but the money they needed to finance that growth was becoming scarcer.

Cooke and other entrepreneurs had planned to build the second transcontinental railroad, the Northern Pacific Railway. Cooke's firm provided the financing, and ground for the line was broken near

Credit Mobilier scandal.[34] Due to the financial crises in Europe, Cooke could not sell the securities abroad.[33] Just as Cooke was about to swing a $300 million government loan in September 1873, reports circulated that his firm's credit had become nearly worthless. On 18 September, the firm declared bankruptcy.[33][35]

Insurance industry

Many US insurance companies went out of business, as the deteriorating financial conditions created solvency problems for life insurers. The common factor of the surviving companies was that all marketed

tontines.[36]

Effects

Tompkins Square Park
, 1874

The failure of Jay Cooke's bank and soon afterward of Henry Clews' set off a chain reaction of bank failures and temporarily closed the New York Stock Exchange. Factories began to lay off workers as the country slipped into depression. The effects of the panic were quickly felt in New York (where 25% of workers became unemployed) and more slowly in Chicago, Virginia City, Nevada (where silver mining was active), and San Francisco.[34][37][38] In New Hampshire, state coffers were so depleted by lost tax revenue the state government turned to private interests including tea and gunpowder manufacturer D. Ralph Lolbert for financial support.

The New York Stock Exchange closed for ten days starting on 20 September.[39] By November 1873, some 55 of the nation's railroads had failed, and another 60 had gone bankrupt by the first anniversary of the crisis.[40] Construction of new rail lines, formerly one of the backbones of the economy, plummeted from 7,500 miles (12,100 km) of track in 1872 to just 1,600 miles (2,600 km) in 1875,[40] and 18,000 businesses failed between 1873 and 1875. Unemployment peaked in 1878 at 8.25%.[41] Building construction was halted, wages were cut, real estate values fell, and corporate profits vanished.[42]

In 1874, Congress passed "the

Specie Resumption Act of 1875, which would back United States currency with gold.[44] Backing American currency with gold helped curb inflation and stabilize the dollar.[44]

Railroad strike

The

railroad industry in the United States had seen major growth in the decades before 1873, driven in part by strong European interest in bonds issued by railroad companies.[45][46]
The failure of Jay Cooke & Co., heavily invested in railroad bonds, triggered a crisis in the railroad industry.

In 1877, steep wage cuts led American railroad workers to launch the series of protests and riots later dubbed

West Virginia Governor Henry M. Mathews sent the militia, under Colonel Charles J. Faulkner, to restore order but was unsuccessful, largely because the militia sympathized with the workers. The governor called on US President Rutherford B. Hayes for federal assistance, and Hayes dispatched federal troops. That restored peace to Martinsburg but proved controversial, with many newspapers[specify] critical of Mathews' characterization of the strikes as an "insurrection", rather than an act of desperation and frustration. One notable paper[specify
] recorded a striking worker's perspective that he "had might as well die by the bullet as to starve to death by inches".

Within a week, similar protests had erupted in other cities.

Camden Yards
.

In New York, striking workers began pelting arriving trains with thrown objects, prompting a response from local police.

Chicago, Illinois, striking workers brought freight and passenger trains to a standstill, leading to an order from judge Thomas Drummond that such actions were illegal.[53] The United States Marshals Service responded by arresting dozens of strikers. In Missouri, strikers also brought rail traffic to a halt, and at least 18 people died in conflicts.[54]

In July 1877, the market for lumber crashed, leading several Michigan lumber companies to go bankrupt.[55] Within a year, the effects of this second business slump reached all the way to California.[56]

Aftermath in the United States

The depression ended in the spring of 1879, but tension between workers and the leaders of banking and manufacturing interests lingered on.

Poor economic conditions also caused voters to turn against the

Democratic Party assumed control of the House for the first time since the Civil War.[57]

Public opinion made it difficult for the

Reconstruction. With the depression, ambitious railroad building programs crashed across the South, leaving most states deep in debt and burdened with heavy taxes. Retrenchment was a common response of the South to state debts during the depression. One by one, each state fell to the Democrats in the South, and the Republicans
lost power.

The end of the crisis coincided with the beginning of the great wave of immigration to the United States, which lasted until the early 1920s.

Global protectionism

After the 1873 depression, agricultural and industrial groups lobbied for

protectionist.[62][63]

See also

References

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  2. ^ "What history teaches us about the welfare state". The Washington Post. 29 August 2011. Retrieved 10 September 2011.
  3. ^ Masur, pp. 63–65.
  4. ^ Charles Savoie ly- (April 2005). "Monetary Madhouse". Silver-Investor.com. Archived from the original on 27 February 2012. Retrieved 10 September 2011.
  5. ^ Fünfundzwanzig Jahre oesterreichischer Finanzpolitik: (1848 bis 1873) : ein historischer Rückblick, Wilhelm Emil Angerstein, Luckhardt'sche Verlagsbuchhandlung, 1874. (in German)
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  7. ^ Marek, pp. 181–182.
  8. ^ Masur, pp. 64–65.
  9. ^ Technické noviny, číslo 46, rok 1988, ročník 36.
  10. ^ Historické štúdie, Volume 1–2, p. 239, Slovenská akadémia vied, Historický ústav SAV., Československá akademie věd, Vyd-vo Slovenskej akadémie vied, Bratislava 1955.
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  12. ^ Court, W. H. B. (1965) British Economic History, 1870–1914. Cambridge University Press.
  13. ^ Marek, pp. 182–183.
  14. ^ a b Masur, pp. 74–75.
  15. ^ Marek, p. 182.
  16. ^ Masur, pp. 75–76.
  17. ^ Brustein, William L.; Roberts, Louisa (2015). The Scialism of Fools: Leftist Origins of Modern Anti-Semitism. Cambridge University Press. pp. 104–105.
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  19. ^ "Suez Canal | canal, Egypt". Encyclopedia Britannica. Retrieved 24 November 2017.
  20. ^ McGrane, Reginald Charles (1950) The economic development of the American nation. Ginn & Co., Boston. p. 356
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  22. ^ Park, Young Goo (1997). "Depression and capital formation: The United Kingdom and Germany, 1873–96". Journal of European Economic History. 26 (3): 511–534.
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  26. ^ Willis, Henry Parker (1901). A History of the Latin Monetary Union: A Study in International Monetary Action. Chicago: University of Chicago Press. p. 266 – via Internet Archive.
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  32. ^ Silver coinage was resumed under the Bland–Allison Act of 1878.
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  34. ^ a b Crisis Chronicles: The Long Depression and the Panic of 1873
  35. ^ Wheeler (1973), p. 81.
  36. ^ Yang, Tony (2009). The Performance of Life Insurance Companies: 1860–1905 (PDF). p. 5.
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  55. ^ Among the lumbering firms that failed were the Danaher & Melendy Company and Oliver O. Stanchfield of Ludington, Michigan, and Cushman, Calkins & Company and Tyson, Sweet & Company of Manistee, Michigan. History of Manistee, Mason and Oceana Counties, Michigan (1882), "History of Mason County", p. 50, and "History of Manistee County", pp. 52, 53 (separate pagination).
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Cited sources

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