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The Great Depression (Part 1 of 2)

“Panic, as a health officer, sweeping the garbage out of Wall Street.” - NY Daily Graphic, 1873

“Panic, as a health officer, sweeping the garbage out of Wall Street.” - NY Daily Graphic, 1873

No, not the 1930s Great Depression. That was the SECOND Great Depression. The first Great Depression was 1873–1896, also known as The Long Depression. It was worse than the 1930s Great Depression.

The Crédit Mobilier of America Scandal of 1872, some say, involved the Union Pacific Railroad and the Crédit Mobilier of America construction company, in 1867, Dr. William Coles Keeter was replaced as head of the firm by Congressman Oakes Ames.

You can see where this is going, can’t you.

Ames allowed members of Congress to purchase shares at face rather than market value, the same people who voted the government funds to cover the inflated charges of Crédit Mobilier. Ames’ actions became one of the best-known examples of graft in American history.

The story broke during the Presidential election campaign of 1872 by the New York Sun, which was against the re-election of Ulysses S. Grant. Henry Simpson McComb, a future executive of the Illinois Central Railroad and an associate of Ames, leaked compromising letters following a disagreement with Ames. It was claimed that the $72 million in contracts had been given to Crédit Mobilier for building a rail only worth $53 million. Union Pacific and other investors were left nearly bankrupt.

When all was said and done, however, it really started with the Panic of 1873 and the failure of Jay Cooke and Co., the US’s preeminent investment banking concern. Cooke was the principal backer of the Northern Pacific Railroad and handled most of the government’s wartime loans.

1873c1The New York Stock Exchange was closed for 10 days. Credit dried up. Foreclosures encompassed the entire nation. Banks failed. Factories closed their doors, laying off (not a common term then because they sure didn’t get compensation!) thousands of workers. Destitute people overwhelmed charities. Most of the major railroads failed.

The public blamed President Grant and Congress for mishandling the economy. (Sound familiar?) As always, it’s easy to blame someone else, but the causes were much broader. The postwar Civil War period was one of frenzied, unregulated growth, and the government didn’t bother to curb abuses. More than any other single event, the extreme overbuilding of the nation’s railroad system laid the groundwork of the Panic and the Depression that followed.

Recovery was not realized until 1878.

In addition to the ruined fortunes of many Americans, a bitter antagonism grew between workers and the leaders of banking and manufacturing. This tension would erupt into the labor unrest that marked the following decades and the eventual creation of unions.

That was just in America.

The problem really began in Europe and is literally the forbearer of the 1930s Great Depression in its globalness. Probably hit Asia, too, but records aren’t very good for those countries, so we’ll stick with Europe and North America.

The primary cause was a shortage of available money to facilitate trade. It began with the collapse of the Vienna Stock Exchange (The Wiener Börse AG) on May 9, 1873. Others argue the problems began even earlier with the 1870 Franco-Prussian War which crippled the French economy and, under the 1871 Treaty of Frankfurt, forced them to make large war reparations to Germany.

The price of silver fell, causing considerable losses of asset values. Governments depegged (where a currency’s value is matched to the value of another single currency, or to a basket of other currencies, or to another measure of value such as gold) their currencies to save money. The Coinage Act of 1873 in America was met with opposition by farmers and miners since silver was seen as more of a monetary benefit to rural areas than to banks in big cities. Americans 1873a1advocated the continuance of government-issued fiat money (can refer to paper money that has no fixed asset backing like gold; kind of like our currency now) to avoid deflation and promote trade. The western US states were outraged–Nevada, Colorado, and Idaho were huge silver producers with productive mines and for a few years mining abated. The resumption of the US government buying silver was enacted in 1890 with the Sherman Silver Purchase Act.

Monetarists believe The Long Depression was caused by shortages of gold that undermined the gold standard, and that the 1848 California Gold Rush, 1886 Witwatersrand Gold Rush in South Africa, and the 1898-99 Klondike Gold Rush helped alleviate such crises. Other analyses theorize that the Second Industrial Revolution was causing large shifts in the economies of many states, imposing transition costs, which may also have played a role in causing the depression.

Next time: Reactions to the crisis and the Market Crash of 1893.

Further Reading:

http://www.nationmaster.com/encyclopedia/Long-Depression
http://seriesofhopes.wordpress.com/category/the-long-depression-1873-1896/
http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
http://en.wikipedia.org/wiki/Long_Depression

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15 Responses

  1. Interesting! I didn’t know they’d had a depression just after the Civil War.

  2. Great blog and so informative at this time in our crisis with the economy. Sort seems like we are making some not so good history at this time.

  3. Wow, I had no idea! Eerie how history seems to repeat itself, isn’t it?

  4. I agree it’s all a big repeat. And I’d never heard of it! OK, I heard of the Panic of 1873 but not that it lasted so long! I think it’s because there are people still alive who lived through the 1930s Depression, and the History Channel has a new big show on it, but this sounds far more fascinating to me!

  5. If you just replace some of the actual names, this is almost EXACTLY the same perfect storm of events – right down to the abandonment of the gold standard and printing money to create inflation. WTF? Seems a shame to have to go through it all again because no one remembers it. I’d rather not wait 5 years to fix it – or my face is going to look like that street sweeper!

  6. I have read that the panic caused lines at the telegraph offices all day long, and people brought chairs from home to sit out financially critical moments. I will look forward to reading part 2.

  7. Oh yeah, I was shocked to see how many financial panics which befell America between the end of the Civil War to the final 1907 Panic. Yet incredibly, we got back up and kept swinging. Makes me wonder if there’s a bit of credibility to historians positing that the 2nd Great Depression lasted as long as it did because of FDR’s New Deal.

  8. Was that the last panic, 1907 or was that the last time they referred to things like that as Panics and begin calling them Recessions? Seems semantical to me.

    I was going to post part 2 tomorrow but that’s Christmas Eve so part 2 will be out in January.

  9. […] on January 14, 2009 by Isabel Roman The worst depression in American History: 1873–1896. In Part Iof this depressing blog (pun intended) I posted some suddenly familiar happenings in 1873 that began […]

  10. The similarities between all of the financial crashes are interesting as well as worrisome.
    Not sure how the economy can ever be regulated.
    Looking forward to your next blog on this. Good to know!
    Jeanmarie

  11. The problems started surfacing around 1870 in Europe. In France, lending institutions issued mortgages freely under the support of the emperors and construction boomed in Paris, Vienna and Berlin. As land values rocketed, borrowers assumed more credit and soon the very basis of the economy became shaky. When America finally entered the European wheat markets with its conveyor belts and massive cargo ships, a new super power had arrived on the scene. With low costs and an increase in competition, European trade was threatened. Banks soon collapsed and the lending rates shot up. As I read up about the Great Depression at Shmoop.com, the similarities in the past two depressions and the current situation today seems too dam similar for it not to be taken seriously. What do you think?

  12. […] The Great Victorian Depression began with the collapse of the Vienna Stock Market on May 9, 1873 (the Panic of 1873) and rapidly […]

  13. […] Slip into Something Victorian Thanks for linking to: 10 Lessons the Panama Canal Teaches Us About the Human Future in Space […]

  14. This a great article !!

  15. […] panic. Post-window panics tend to develop into much longer, more devastating recessions (e.g., the Victorian Depression, the Great Depression) than pre-Window panics do partly because they occur at a time when the […]

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