What is the significance of the panic of 1873

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 U. 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 , the Civil War began. During the U. Mass manufacturers, financial institutions, and especially railroad investors soaked up these funds, producing more goods and employing more people over a broader geographic market.

The good times were predicated on an assumption that consumers and, during the war, this included the U. 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. Beginning in the early s, several leading industrial nations made significant changes to their national currencies which, unknowingly, started the Panic. In , 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.

As a result, other nations felt strong economic pressures to follow Germany's lead. In America, Congress passed the Coinage Act to gradually retire silver currency and to bolster the relative value of the U. Now limited by the amount of gold held in the U. 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 , placing the U.

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.

Like many Panics that presage depressions there was not just one cause to the Panic of but rather a multitude of factors set the stage. First there was the railroad boom that clearly could not be sustained and was built on borrowed money. Huge amounts of money were required to build railroad whose profitability were often far in the future. In addition during the war the US government had issued millions of dollars of what was then called green backs-today we would just call them paper money.

At the time there was a sense that the money supply should be limited and tied, to the physical gold or silver that a country had. Therefore in the US there was an effort to redeem the greenbacks with money backed by silver or gold. Doing this created a currency shortage. The immediate case of the crash began in Europe. There the German government had decided to only use currency backed by gold instead of both gold and silver.

In place of Jeff Bezos, we had John D. As in any bubble, the issue at the time was that railroads had been overbuilt and were leveraged to the hilt, as banks lent freely to the industry in an effort to capitalize on its westward expansion following the completion of the transcontinental railroad in These dynamics left the railroads vulnerable to two things.

First, a rise in borrowing costs would make their debt burdens unmanageable and tip the weakest among them into bankruptcy. Second, a decision by Rockefeller to reduce shipments if freight costs rose in response to higher borrowing costs. The railroads, if you'll excuse a small pun, were caught between a rock and a hard place. I'll tell you what's the matter -- people undertake to do about four times as much business as they can legitimately undertake.

Respectable banking houses in New York, so called, make themselves agents for sale of the bonds of the railroads in question and give a kind of moral guarantee of their genuineness. The first of these weaknesses triggered the panic itself; the second exacerbated its depth and duration. When western farmers started withdrawing funds from banks in the autumn of to cover the costs of harvesting and transporting their crops, money tightened. And when money gets tight, borrowing costs rise.

Cooke's bankruptcy set off an indiscriminate run on the nation's banks, leading to hundreds more failures before the crisis subsided in And the run was intensified by the fact that many New York-based firms relied on that generation's equivalent of hot money -- interest-bearing deposits from correspondent lenders in the country's interior.

What's important to appreciate for our purposes is that banks faced different threats at different stages of the crisis. The first stage was associated with insolvency, stemming from imprudent risk management. That's what brought down Cooke's firm.