Panic of 1873
- See also: Great Strike of 1877
In the U.S., the economic crisis began when the banking house of Jay Cooke & Co. suspended specie payments on September 18, 1973, and closed. While there had been other bank failures earlier in 1873, notably some Vienna banks in May and smaller New York banks in the weeks before the closing of Cooke, it was the closing of Cooke, the firm that had financed the American Civil War and that was one of largest U.S. banks, that shocked many in the U.S.
Cooke had become a major holder of Northern Pacific Railroad debt (probably close to 70% of NP bonded debt was held by Cooke). Cooke was seen, then and since, as a scrupulous banker. His wealth came during the Civil War as a broker for the Union's bonds. His great innovation was to sell bonds in small denominations so that average Americans could buy. He even took smaller commissions despite suspicions that he was mismanaging or stealing moneys. He made his wealth on his salesmanship and on the volume of sales and not through deceit or corruption. After the war, Cooke sought to turn his sales talents to the marketing of railroad bonds, in particular those of the Northern Pacific.
Like all banking panics of the industrial era where financial systems are built on debt, when creditors become fearful of the debtor's ability to repay, creditors seek to get their money back as soon as possible. And so it was with Cooke. Realizing that the Northern Pacific (a railroad that Cornelius Vanderbilt derisively called a "railroad built from nowhere to nowhere") would not be making good on its bonds, he knew he would be unable himself to make payments. His only alternative was to close up.
The ripple effects were large. Other banks closed within days. Stocks began to plummet. The New York Stock Exchange suspended operations on September 20 and stay closed for the next ten trading days. In this panic environment the New York clearinghouse banks immediately took steps to support each others' ability to make specie payments. They pooled their specie reserves and issued "clearinghouse certificates" to banks perilously close to insolvency. In this way, through emergency, short-term lending between banks, the financial institutions averted a complete collapse of the currency. Within months, the banks had repaid these short-term loans and the panic was over.
What is more difficult to explain is the economic depression that started in the autumn of 1873 and lasted, by some accounts, for nearly two decades — a recession that came to be called the "Great Depression" years before the economic collapse of the 1930s usurped the title.