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Financial Panic of 1873: Causes & Summary

Chapter 2 /  Lesson 14   Transcript
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  • 0:01 The Beginning of the…
  • 1:03 The Financial Collapse
  • 2:32 Impact on the United States
  • 3:33 Public Dissent
  • 4:15 Rebuilding the Economy
  • 4:48 Lesson Summary
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Lesson Transcript
Instructor: Adam Richards

Adam has a master's degree in history.

In the United States financial depression came as a result of over-speculation in the railroad industry. Learn about the causes of the Panic of 1873 as well as the impact the event had on the nation.

The Beginning of the Financial Panic of 1873

It is important to point out that the Panic of 1873 in the United States was part of a larger international economic depression. The pain the United States felt financially was matched across the ocean in Europe when the value of silver plummeted to uncontrollable levels. Our focus is going to be on the financial collapse in the United States.

Following the Civil War, the United States experienced a period of economic growth that was unmatched in its brief history. Employment rose substantially thanks to a remarkable business boom. Most of the economic success in the post-war years is attributed to the construction of railroads. Between the end of the war and the beginning of the financial collapse, railroad companies had laid over 30,000 miles of track, which included the major project of linking the Union Pacific and Central Pacific via the transcontinental railroad. When the aforementioned project was completed in 1869, investors began looking for an additional railroad project to invest in. This was the doomed Northern Pacific.

The Financial Collapse

It is safe to use the word unprecedented when discussing the financial collapse of the United States in 1873. There had been a series of economic downturns before (1837, 1857, and 1869), but nothing as far-reaching as this event.

So what happened?

Concisely, most financing firms in the United States invested heavily into the building of the Northern Pacific. Unfortunately, the firms ran out of capital and declared bankruptcy, which crippled the financial system of the United States.

Jay Cooke and Company of Philadelphia was the leading financial firm involved with the building of the Northern Pacific line. This was an organization that recorded great success as a Union bond marketing firm during the Civil War. The federal government rewarded the firm with the second transcontinental railroad for its reputable work. Cooke and Company managed to acquire upward of $100 million in investment bonds from European nations and private investors. Additionally, major banking institutions and public investment firms in the nation poured equity into the endeavor in the hopes of making a major profit. Unfortunately, Cooke and Company did not realize how large of an investment was needed in order to build a rail line (the land needed to be cleared, tracks needed to be laid, etc).

On September 18, 1873, Jay Cooke and Company realized it had exhausted its money as well as the money of its investors. The financial firm closed and immediately filed for bankruptcy. The banks and businesses that invested in the Northern Pacific project also proceeded into bankruptcy. The financial sector of the United States was in serious peril.

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