Ludwig von Mises Institute

Panic of 1873

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The Crisis of 1873 closely resembled prior crises. Expansion was initiated in the United States due to the high costs involved in the Civil War. The railroad network was dramatically enlarged and the iron and steel industries underwent intensive development. Expansion spread to the rest of the world and in Europe there was tremendous stock market speculation in which industrial sector securities soared. Crisis hit first on the Continent in May of 1873 and following the summer in the United States, when recession had become obvious and one of the great American banks, Jay Cook & Co., failed. Notably, France, having abstained from the prior credit expansion, escaped this panic and the serious depression which followed.[1] On 19th September came "Black Friday" on the New York Stock Exchange, which had to remain closed for ten days. In the space of one year there were 5000 bankruptcies.[2]

The national banking system was ensconced after the Civil War. The number of banks, national bank notes, and deposits all pyramided upward, and after 1870 state banks began to boom as deposit-creating institutions. With lower requirements and fewer restrictions than the national banks, they could pyramid on top of national banks. The number of national banks increased from 1,294 in 1865 to 1,968 in 1873, while the number of state banks rose from 349 to 1,330 in the same period. Total state and national bank notes and deposits rose from $835 million in 1865 to $1.964 billion in 1873, an increase of 135.2 percent or an increase of 16.9 percent per year. The following year, the supply of bank money leveled off as the panic of 1873 struck and caused numerous bankruptcies.

Jay Cooke, one of the creators of the national banking system, was the monopoly underwriter of U.S. government bonds for every year except one from 1862 to 1873. In 1866, he favored contraction of the greenbacks and early resumption because he feared that inflation would destroy the value of government bonds. By the late 1860s, however, the House of Cooke was expanding everywhere, and in particular, had gotten control of the new Northern Pacific Railroad. Northern Pacific had been the recipient of the biggest federal largesse to railroads during the 1860s: a land grant of no less than 47 million acres. In 1869 Cooke wrote in keeping with his enlarged sphere of activity that the 'miserable "hard coin" theories' were 'the musty theories of a by gone age' and that the 'great growing west would grow twice as fast if it was not cramped for the means necessary to build RailRoads and improve farms and convey the produce to market.'

In 1873, a remarkable example of poetic justice struck Jay Cooke. The overbuilt Northern Pacific was crumbling, and a Cooke government bond operation provided a failure. So the mighty House of Cooke crashed and went bankrupt, touching off the panic of 1873.[3]

The Myth of the Long Depression[edit]

Main article: Long Depression

Some economic historians have complained about the "great depression" (later renamed to Long Depression) that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. However, this "depression" saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, and real per capita income. As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged "monetary contraction" never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

The myth was brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. In the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers. The analogous "great depression" in England in this period was also a myth for the same reasons.[3]


  1. Jesús Huerta de Soto. "Money, Bank Credit, and Economic Cycles", Second English edition 2009, p.485-486. Referenced 2011-01-15.
  2. Wilhelm Röpke. "Crises and Cycles", 1936, p.44. Referenced 2011-01-15.
  3. 3.0 3.1 Murray N. Rothbard. "A History of Money and Banking in the United States: The Colonial Era to World War II" (pdf), The War of 1812 and its Aftermath, p.145, 153-156. Referenced 2011-01-15.


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