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.
The 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 advocated 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.
Filed under: Uncategorized | Tagged: Crédit Mobilier of America, Franco-Prussian War, graft, Great Depression, Long Depression, Panic 1873, President Grant, railroads, The Coinage Act of 1873, Vienna Stock Exchange |