Lessons from the Panic of 1873

Imagine a world where Tesla declares bankruptcy, the NYSE shuts down for weeks, and one in five Americans lose their jobs in a year.

Welcome to 1873.

In the annals of American economic history, few events have been as impactful yet as overlooked as the Panic of 1873^[1]. This financial crisis reshaped the nation's economy and offers striking parallels to our modern economic challenges. Let's dive into this pivotal moment and explore what it can teach us about navigating today's financial landscape.

A Gilded Mirage

Post-Civil War America was riding the wave of its first tech boom. The revolutionary technology wasn’t in silicon chips or software—it was in steel tracks. Railroads became the lifeblood of commerce, linking communities and forging new markets. These ‘iron horses’ didn’t just move people and goods; they redrew the economic map.

These iron horses weren't mere transportation. They rewired the nation's economic circuitry, linking isolated communities and birthing new markets. Yet, much like today's tech stocks, railroad shares became the 19th-century equivalent of cryptocurrency—volatile, alluring, and irresistible to speculators^[2]. The railroad barons of the era, such as Jay Gould and Cornelius Vanderbilt, wielded power dwarfing that of Elon Musk or Jeff Bezos.

At the heart of this frenzy was Jay Cooke & Company, the 19th-century counterpart to today’s Goldman Sachs. Cooke, having orchestrated Union bond sales during the Civil War, now bet everything on railroads. His crown jewel? The Northern Pacific Railway, promising to stitch the Great Lakes to the Pacific Northwest.^[3]

The numbers dazzled. In five years, Americans laid 33,000 miles of track—enough to girdle the Earth. Progress seemed inexorable.^[4] However, this gilded age of prosperity was built on a shaky foundation, and the cracks soon became chasms.

The Implosion and Aftermath

On September 18, 1873, the facade crumbled. Jay Cooke & Company, overextended and unable to market its railroad bonds, imploded.

The result was a bloodbath on Wall Street. The New York Stock Exchange closed for ten days, a financial freeze not seen again until the 2019 pandemic. When the market reopened, stocks plunged by 23%. ^[5]

What followed transcended a mere recession. It was America's first Great Depression—including, among other things, significant GDP contraction—a protracted economic winter that would fundamentally alter the landscape of American capitalism.

• Unemployment tripled, surging from 5% to 14% within a year, peaking at a staggering 20%. ^[6]
• 18,000 businesses disappeared in just two years.^[7]
• By 1876, half of the nation’s iron furnaces had gone cold.^[8]
• Annual railroad construction plummeted from 7,500 miles to just 1,600 miles by 1875.^[9]

Behind these economic indicators were real people and real pain. Wages plummeted by 25% or more, plunging families into poverty. Cities transformed as entire communities found themselves living in makeshift camps. The term "Molly Maguires" entered the national lexicon, referring to these impromptu settlements that proliferated in cities everywhere.

The economic pressure cooker finally erupted in the Great Railroad Strike of 1877—the first nationwide labor uprising in U.S. history—a turning point in American labor relations, setting the stage for decades of struggle between workers and industrialists.^[10]

While the immediate effects of the Panic were felt keenly in America, this economic tsunami soon overwhelmed economies the world over.

Global Change

The Panic of 1873 wasn’t confined to America. Its shockwaves spread globally, catalyzing what became known in Britain as the ‘Long Depression’, two decades of economic stagnation that shook the world’s largest empire.^[11]

The Panic of 1873 rippled across Europe, halting industrial progress in several large economies:

• Germany: The newly unified nation saw a stock market crash and a halt to its industrial boom.
• Austria-Hungary: Suffered a severe stock market crash in Vienna, leading to widespread bank failures.
• France: Experienced a milder downturn, partly due to war reparations from Germany cushioning the blow.

In the United States, significant change followed in the years after 1873.

1. Corporate Titans Emerged: As smaller firms went under, larger companies consolidated power, laying the groundwork for the industrial titans that would dominate the 20th century.^[12]

2. Monetary Policy Battleground: The crisis sparked fierce debates over the gold standard, which echo today in conversations about cryptocurrency and central bank digital currencies.^[13]

3. Labor's Awakening: The severe economic conditions planted the seeds for organized labor, shaping the foundations of modern worker rights.^[14]

4. Government's Economic Role Redefined: Laissez-faire capitalism came under scrutiny as policymakers debated the role of government in stabilizing the economy, a debate that persists today.^[15]

History as Illumination

As we navigate an era of unprecedented technological change and economic uncertainty, the echoes of 1873 grow more distinct.

Look no further than the 2008 financial crisis, with the collapse of Lehman Brothers bearing striking similarities to the fall of Jay Cooke & Company. Both events triggered widespread panic and revealed the fragility of the financial system. The government's response—massive bailouts and new regulations—echoes the debates that followed the 1873 crisis about the proper role of government in the economy.

In particular, the Panic of 1873 offers a sobering reminder of how speculative excess, debt, and lack of regulation can bring an economy to its knees.

1. Speculative Cycles Persist: From railroads to cryptocurrencies, boom-bust cycles are a constant in economic history. By recognizing these patterns, we can better anticipate and mitigate economic risks. For instance, the speculative frenzy around railroads in the 1870s bears striking similarities to the recent cryptocurrency boom and bust cycles.^[16]

2. Debt's Dual Nature: Leverage amplifies both gains and losses. The Panic of 1873 and the 2008 financial crisis share this underlying flaw—excessive, unsustainable debt.^[17]

3. Interconnected Fragility: In a globalized economy, financial tremors spread with unprecedented speed and reach. The Panic of 1873 demonstrated this interconnectedness even in the 19th century, as its effects rippled from the U.S. to Europe, particularly impacting Britain's economy. Today, this interconnectedness is exponentially magnified. The 2008 financial crisis, originating in the U.S. subprime mortgage market, quickly became a global economic meltdown. More recently, the 2021 collapse of Archegos Capital Management, a relatively small family office, caused billions in losses across multiple global banks. These examples underscore how a single failure can trigger a cascading effect across borders, industries, and financial instruments. As our financial systems become increasingly complex and intertwined, understanding and managing this systemic risk becomes crucial for maintaining global economic stability.^[18]

4. Crisis as Accelerant: Economic downturns don't just destroy; they accelerate transformation. The Panic of 1873 reshaped America's economic terrain, forcing rapid industrialization and corporate consolidation. Similarly, the 2008 financial crisis accelerated the digital transformation of the economy, boosting e-commerce and remote work. The COVID-19 pandemic further amplified these trends, demonstrating how crises can compress years of change into months. As we face future economic challenges, we must be prepared for similarly rapid transformations.^[19]

5. Policy's Long Shadow: The policy responses to the Panic of 1873 influenced economic thought for decades. Similarly, our reactions to today’s crises will shape the future of global economics for generations.^[20]

6. Economic and Social Interplay: Financial crises breed social and political unrest. The labor strikes and populist movements born in the wake of the Panic have modern parallels in today’s political landscape.^[21]

7. Regulatory Imperative: The Panic of 1873 starkly exposed the vulnerabilities of an unregulated financial system—a lesson that we seem destined to relearn with each new crisis. In the wake of the panic, calls for increased regulation were largely ignored, setting the stage for future boom-bust cycles. Fast forward to the 21st century, and we see this pattern repeating. The deregulation of the financial industry in the 1990s contributed significantly to the 2008 financial crisis, leading to the Dodd-Frank Wall Street Reform Act. Yet, even this legislation has faced rollback attempts. The recent collapse of Silicon Valley Bank in 2023 has once again highlighted potential regulatory gaps, particularly in regional banking oversight. This cyclical pattern raises critical questions: How do we strike the right balance between fostering innovation and ensuring system-wide stability? How can regulations keep pace with rapidly evolving financial technologies and practices? As we face new challenges like regulating cryptocurrencies and fintech, the lessons of 1873 remind us that effective, adaptive regulation is not just beneficial, but essential for long-term economic health and stability.^[22]

The echoes of 1873 reverberate strongly in our current economic landscape, offering both warnings and guidance.

As we approach the 2024 presidential election, the lessons of 1873 resonate more than ever. Today’s debates around cryptocurrency and central bank digital currencies echo the monetary policy battles of the 1870s but raise new challenges in an increasingly digital economy.

The economic history of America, including the often overlooked Panic of 1873, holds valuable lessons as we approach the 2024 presidential election. This history serves as a reminder that significant economic change—rise of new industries, shifts in government policies, and social movements—leads to unexpected political transformation.