September 18, 1873: The Panic of 1873

Drawing of a bank run during the Panic

September 18, 1873, 150 years ago: The American stock market begins a tailspin that becomes known as the Panic of 1873. It throws the country into its worst economic conditions to that point, known in hindsight as the Long Depression.

The American Civil War of the early 1860s was followed by a boom in railroad construction. 33,000 miles of new track were laid across the country between 1868 and 1873, with much of the craze in railroad investment being driven by government land grants and subsidies to the railroads. The railroad industry was the largest employer outside agriculture in the U.S., and 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.

A period of economic overexpansion arose from the northern railroad boom before a series of economic setbacks. The Panic of 1869, a.k.a. Black Friday, did not cause a depression, the way the Panics of 1837 and 1857 had. But there were major fires in Chicago in 1871 and Boston in 1872. An outbreak of equine influenza in 1872 devastated American horses, and also pretty much every industry in America, which depended on horses.

The decision of the German Empire to cease minting silver thaler coins soon after its founding in 1871 caused a drop in demand and downward pressure on the value of silver, which, in turn, affected the U.S., since much of the supply of silver was mind there. This also caused a crash in the Vienna Stock Exchange on May 9, affecting the Austrian Empire, with a ripple effect across the continent. France hadn't yet recovered from the Franco-Prussian War of 1870, and Italy was also a newly unified nation, and struggling economically. Europe was a mess.

As a result of what was going on there, the U.S. Congress passed the Coinage Act of 1873, which changed the national silver policy. Before the Act, the U.S. had backed its currency with both gold and silver and minted both types of coins. The Act moved the country to a de facto gold standard, which meant it would no longer buy silver at a statutory price or convert silver from the public into silver coins, but it would still mint silver dollars for export in the form of trade dollars.

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. (Virginia City's role as a silver developer led to Nevada's Statehood in 1864, its nickname "The Silver State," and the 1959-73 TV show Bonanza, where the Cartwright family fortune was based on silver found near Virginia City, then invested in other interested like land, cattle and timber.)

The Act also reduced the domestic money supply, raising interest rates and hurting farmers and others who normally carried heavy debt loads. 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.

Jay Cooke & Company, a major component of the country's banking establishment, found itself unable to market several million dollars in bonds it held in the Northern Pacific Railway, connecting St. Paul, Minnesota with Seattle, Washington.

Cooke, known as the Union's "Great Financier" during the Civil War, and his firm, like many others, had invested heavily in the railroads. Some investment banks were then anxious for more capital for their enterprises. 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.

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

The New York Stock Exchange closed for 10 days, starting on September 20. (It was a Saturday, anyway, but it did not reopen on Monday, September 22.) Many insurance companies went out of business, as the deteriorating financial conditions created solvency problems for life insurers. By November, some 55 of the nation's railroads had failed, and another 60 had gone bankrupt by the first anniversary of the crisis. Construction of new rail lines, formerly one of the backbones of the economy, plummeted from 7,500 miles of track in 1872 to just 1,600 miles in 1875, and 18,000 businesses failed between 1873 and 1875.

Unemployment peaked in 1878, at 8.25 percent -- and that's just what was reported, so it was likely considerably higher. Building construction was halted, wages were cut, real estate values fell, and corporate profits vanished.

In 1874, Congress passed the Ferry Bill, proposed by Senator Thomas Ferry of Michigan, to allow for the printing of currency, increasing inflation and reducing the value of debts. Grant vetoed the bill. The poor economic conditions also caused voters to turn against Grant's Republican Party. In the 1874 Congressional elections, the Democratic Party won control of the House of Representatives for the first time since the Civil War.

The following year, Congress passed the Specie Resumption Act of 1875, which would back U.S. currency with gold. This helped curb inflation and stabilize the dollar. But public opinion made it difficult for the Grant Administration to develop a coherent policy on the Southern States, and the North began to steer away from 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. So, as is usually the case, black people were hurt by a downturn in the American economy more than white people were.

What effect did the depression have on sports? Well, only one team sport was really organized in North America at the time, and that was baseball. According to historian Richard Hershberger:

The effects on the economy on the ground won't happen immediately. It will be the 1875 season that it really affects professional baseball, but it will hit hard. Professional baseball will go into decline, though there are some superficial changes that disguise this.

Early signs of recovery will appear late in the 1880 season. In 1881 baseball will be in full recovery mode, leading to the founding of the AA (the American Association) and a general expansion of the minors. In the meantime, the history of baseball, if you look past just the play on the field, doesn't make a lick of sense from 1875 through 1881 unless you take the depressed economy into account.

The end of the crisis didn't come with any measure of the government. Rather, it came with an influx of labor, with the beginning of the great wave of immigration to the U.S., spurred on by both economic hardship and religious persecution in Europe. This wave of immigration enriched the country and its businesses, if not (in most cases) the immigrants themselves, and lasted until the early 1920s.

By 1880, Jay Cooke had managed to pay off his debts, and his investment in a Nevada silver mine had restored his fortune. He died in 1905, considered not a hero or a villain, but mostly as a relic of an earlier age.

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September 18, 1873 was a Thursday. There were 2 games played in the biggest professional baseball league of the time, the National Association, which is now regarded by most, but not all, history-minded baseball fans as a "major league." Both included teams based in what would now be considered New York City, although Brooklyn did not become a part of the City until 1898; and both played a Philadelphia team.

The New York Mutuals beat the Philadelphia Athletics, 4-2 at the Union Grounds in Brooklyn. The Mutuals had played since 1857, and would become members of the National League in 1876, but folded after that season. The Athletics would also join the NL for 1876 and then drop out after 1 season, and bear no relation to the team of the same name that started in the American League in 1901, and is now located in Oakland.

In the other game, the Brooklyn Atlantics, another survivor of the amateur era, also dating to 1857, lost to the Philadelphia White Stockings, 9-4 at the Jefferson Street Grounds in Philadelphia, which was also the home of the Athletics. Neither of these teams even got as far as the Mutuals or the original A's: They were not invited to join the NL, and the White Stockings then folded, while the Atlantics carried on as independents until 1882.