THE PANIC OF 1873
THEpanic of 1873 was the natural result of the destruction of capital by war, fire, and unwise investment which had been going on during the previous decade, and of the encouragement given to speculation by a fluctuating paper currency. The money-markets of the world had to reckon not only with the enormous destruction of property during civil war in the United States, but with the similar fruits of two other recent wars: that between Germany and Austria in 1866, which was crowned by the victory of Germany at Sadowa, and the great war between France and Germany in 1870, for which France was compelled to pay to Germany an indemnity of a thousand millions of dollars. The direct cost of the American Civil War, exclusive of pensions, has been estimated at more than $5,500,000,000, and the cost of the Franco-Prussian War at only $2,700,000,000, owing to its shorter duration. An enormous amount of capital also was absorbed in the ten years prior to 1873 in the building of railways. New construction in the United States in 1870 was 5690 miles; in 1871, 7670 miles; in 1872, 6167 miles; and in 1873, including a part of the period of panic, 3948 miles. In Russia a system of 12,000 miles of railway had been almost entirely created since 1868, and in South America nearly $200,000,000 in English capital had been borrowed, mostly for railway enterprises. It was at about this period also that the substitution of Bessemer steel for iron began, as the material for rails, sending thousands of dollars’ worth of old rails to the scrapheap.
The severity of the panic in the United States, as well as in Austria, was heightened by the state of the currency. There had been, up to the climax of the Civil War, an almost uninterrupted decline in the value of the paper money issued by the United States Government, and a corresponding rise in paper prices. With the close of the war, these movements were reversed. A rise in the value of the currency began, and also a decline in prices. This decline in prices spelled ruin to many who had bought real estate or merchandise in the expectation of its rise in value, and it imposed paralysis even upon the more conservative, who had correctly read the downward tendency of values expressed in paper money.
The specific cause usually assigned by economic historians for the panic of 1873 was the failure of the great house of Jay Cooke and Company, as the result of tying up its resources in the Northern Pacific Railway. The incident was, however, only typical of the times; and if Jay Cooke never had lived, the story would have differed chiefly by the substitution of another name for his. The house of Jay Cooke and Company had grown to power and prestige by the clever and original methods employed by Mr. Cooke in borrowing money for the Government during the Civil War. Cooke was a true child of the new America, the first or nearly the first male child born, as he was fond of boasting, in Sandusky, Ohio. Through political and social connections, he entered a Philadelphia banking-house during the period of hazardous financing and State banking before the Civil War, and had made enough money by 1859, while still under forty years of age, to contemplate retiring from active business. But his was not a nature for inactivity. The close relations established by his father and his brother with Salmon P. Chase, the new Secretary of the Treasury, obtained Cooke a hearing in the floating of the early war loans. He was not of the old style of banker, who sat in his office waiting for a customer to come in; he quickly realized that if the Government was to obtain the money necessary to carry on the war, it must be by educating the people to understand the value of the war bonds, and the necessity of taking them as a patriotic duty.
It was a wonderful campaign of advertisement, of canvassing the post-offices, of manipulating the press, and of removing opposition, which Cooke carried on in floating hundreds of millions of the five-twenties, the ten-forties, and the seven-thirties. The later flotations, however, which came after the war, required perhaps as much skill as the earlier ones, because they involved persuading the people to retain their public funds while accepting considerable reductions of interest. Inevitably Cooke’s success drew competitors into the field. When the question of refunding arose, a committee representing other New York banking-houses appeared in Washington to demand a share in the operation. The composition of this committee is of interest because it was virtually the first appearance on the stage of public finance of John Pierpont Morgan, then a young man of thirty-five. He, with Levi P. Morton, who had established the banking-house of Morton, Bliss and Company, and had enlisted the aid of the Rothschilds, appeared in Washington in January, 1873, and demanded and obtained from Secretary Boutwell a share in the new issues. The methods of the syndicate had little of the “go” of the old Cooke methods, and already the tightening of the money-market was making itself felt. Where subscriptions of $600,000,000 had been expected for the new loan, they amounted after several weeks to less than $50,000,000, and the entire operation was ultimately suspended by the outbreak of the panic.
The lack of uninvested capital to subscribe for the government loan was a warning of conditions prevailing in the money-market generally. Jay Cooke, swept along by the great success of his methods in disposing of the war loans, believed it possible to perform the same miracle with the bonds of the Northern Pacific. It was his calculation that he could sell bonds as fast as he was called upon for money for the work of construction, and it was distinctly provided in the contract with the road that the advance in excess of the amounts realized from sales of bonds by the bankers never should exceed $500,000, which itself was secured by the deposit of the company’s bonds at fifty cents on the dollar.
During the summer of 1872, however, with President Grant’s campaign for re-election against Horace Greeley at its height, sales of bonds fell to a few hundred thousand dollars a month, while the drafts of the treasurer of the railway company were running at about $1,000,000 a month. Inevitably, the balance of floating indebtedness by the railroad to the banking house began creeping up, until it stood near the close of August at $1,583,000. Ex-Secretary McCulloch, who had become head of the London connection of Jay Cooke and Company, and other associates of Cooke were quick to realize that the house was getting into deep water, and that further uncovered advances must be stopped. It was much easier to lay down this rule, however, than to carry it out. Already there were complaints along the line of construction that wages were not being paid promptly and that men were being laid off. Smaller railway enterprises in hands less strong were going to the wall from similar causes, and in October, 1872, the coupons were defaulted on the St. Paul and Pacific road, in which a controlling interest was owned by the Northern Pacific.
The year 1873 was thick with omens of disaster for the new railway enterprises. The Boston fire of the previous November, while not so disastrous as that in Chicago the year before, caused a crash in the stock market similar to that which followed the San Francisco fire in 1906. Scandalous frauds were disclosed in the management of the Erie Railroad; General John C. Frémont failed conspicuously in an effort to raise money for the Southern Pacific system in France; and at last grave exposures were made in connection with the Union Pacific Railroad, which resulted in the Crédit Mobilier investigation and its long train of scandals. A traveler in Germany wrote home in August that an American railway bond, “even if signed by an angel in heaven, would not sell.” So desperate was the situation becoming that Henry Cooke, brother of Jay Cooke, put his chief dependence, in a letter to his brother, on “an unfailing confidence in the God in Whom we put our trust.” “I do not believe,” he said, “He will desert us.”
But the Lord did not intervene to prevent the results, which seemed to the profane to be an inevitable outcome of economic laws. Jay Gould was still manipulating a powerful gold pool in the late summer and early autumn, when on September 8, 1873, the first rude blow was given to the card house of the New York money-market. The New York Warehouse and Security Company suspended, followed five days later by a firm with which Daniel Drew was associated. When Jay Cooke reached his Philadelphia office on September 18, he found a despatch announcing that the New York office had been closed by his partners in that city. The news spread like fire on one of the Northern Pacific’s own dry prairies. Other houses fell the same day or the next day; stocks dropped from twenty to forty points; money could hardly be had at any price; and the Stock Exchange Committee closed the exchange, in the language of the vice-chairman, “to save the entire Street from utter ruin.”
While ultimately the assets of the failed house proved to be amply adequate to meet its liabilities, the career of Mr. Cooke as a financier was ended. Facing cheerfully for a time the prospect of extreme poverty, he found his fortune partially recouped six years after the panic by an almost forgotten mining investment. Repurchasing his old home in the suburbs of Philadelphia, he continued to live there, content with the society of his children and grandchildren, his farming and fishing, almost forgotten by the new generation of Americans, until his death in 1905 at the age of eighty-four. In his great cape cloak and his wide-brimmed, gray, soft felt hat, set over a gentle face adorned by a long white beard, his patriarchal figure was long familiar in the streets of Philadelphia, a very different type from the shrewd, grasping men who speculated in their country’s fortunes in the New York gold-room.