The Washington PostDemocracy Dies in Darkness

Presidents who don’t act decisively make financial crises worse

Both the Panic of 1873 and Great Depression were worse because government failed to act

People walk past signs on a Century 21 store in New York. The chain has declared bankruptcy and is closing. (Justin Lane/EPA-EFE/Shutterstock)
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A stock market sails upon a wave of euphoria despite concerns about the underlying weakness of the economy. The wealthy indulge in ostentatious displays amid growing economic inequality. And as the business sector rewards some of its leaders by making them into the richest people in the world, the people turn from hero worship to public condemnation.

This picture may sound as though it’s ripped from today’s headlines. But the examples are drawn from an earlier age — specifically 1873, when the optimism of stock investors yielded suddenly to a market panic, the collapse of some of the country’s most respected banking and investment firms, and a long, crushing economic slump.

Until the economic calamity of the 1930s, the Panic of 1873 and its six-year aftermath was what Americans meant when they referred to the “Great Depression.” It was a classic bubble, born of frenzied growth in the railroad industry, which had funded long-term financial obligations with short-term debt and the issuance of grossly overvalued securities. The six-year downturn, the longest in U.S. history, like its later cousin, would leave a lasting imprint on American industry, society and politics.

No one today is forecasting such a slump. But its lessons are nonetheless relevant, especially given that both the 1870s and our current era are marked by great inequality. Chief among them is that government intervention is crucial in an economic crisis, and only decisive, strong leadership can shorten its duration and lessen its effect.

The railroads were the first American big businesses and their leaders the first business leaders to become popular celebrities. “They have fame, for everyone has heard of their achievements; every newspaper chronicles their movements,” wrote the British diplomat James Bryce. “They have more power — that is, more opportunity of making their personal will prevail — than perhaps anyone in political life.”

Though largely forgotten today, the most influential financier within this flourishing industry was Jay Cooke. The Philadelphia banker had first won fame as a key fundraiser during the Civil War, with a preternatural talent for selling Union bonds. After the war, he became the driving force behind Northern Pacific, one of the transcontinental railroads.

As late as 1872, Cooke seemed to be at high tide. He was sought after for charitable donations of every kind and was appointed chairman of Philadelphia’s Centennial Exposition, which in 1876 would mark the 100th anniversary of the signing of the Declaration of Independence.

Behind the scenes, however, the economy was worsening, along with the prospects of Cooke & Co.

The quietly developing crisis had several causes. One was the hangover of wartime production of crops and steel, which became overproduced as demand evaporated without wartime needs. Farmers and railroad operators alike were left heavily indebted.

In the spring of 1873, financial panics swept through Berlin, Vienna, Paris and London. These not only signaled the dangers of stock market manipulation and of overexpansion in the face of shrinking industrial demand, but hampered the ability of those markets, previously reliable buyers of U.S. farm goods and railroad securities, to absorb the flow of American goods and stock.

All of this contributed to a loss of confidence in the main drivers of the postwar expansion, the railroads. The biggest threat to stability was the condition of Northern Pacific, which had borrowed more than $1.5 million from Cooke & Co., yet had virtually no means of repaying the loan. Cooke’s chances of unloading Northern Pacific securities on investors abroad were shrinking fast, with one German newspaper reporting that an American railroad bond would not sell in Europe “even if signed by an angel of Heaven.”

With the weakness unknown to most investors, however, the ax seemed to fall with stunning swiftness. On Sept. 18, President Ulysses S. Grant, breakfasting at Ogontz, Cooke’s Pennsylvania mansion, spied his host buried under a blizzard of telegrams. But he took from this no hint of impending disaster. That very afternoon, as an oblivious Grant was still making his way home to Washington, Cooke & Co. announced it was closing its doors.

Cooke’s collapse set off a cascade of failures on Wall Street. The consensus about where to place blame focused on the railroads. Cornelius Vanderbilt, the nation’s premier railroad monopolist at age 82, leveled a stern judgment: The American habit of building superfluous railroads, merely to goad existing lines into buying them out and financing them with government grants and largely worthless stock, had to end.

“Building railroads from nowhere to nowhere at public expense is not a legitimate undertaking,” he lectured reporters. “Mistrust will be engendered till we, as a nation, do our business on a more solid basis, and pay as we go.” His prescription may have been appropriate as an answer to the profligate ways of his time, if ultimately out of step with the business and economic principles of the following century.

The crisis exposed the incapacity of the government to manage the economic cycle. As the depression ground into its second year, Grant acknowledged in his annual message to Congress the “prostration in business and industries such as has not been witnessed with us for many years.” He recognized that “the greater part of the burden … falls upon the working man.”

Grant might have alleviated the pain of business owners and working people by vigorously buying government bonds, thus pumping inflationary capital into the economy. But rather than propose such an imaginative and unconservative solution, he restated the federal government’s intention to reduce the money supply to match the supply of gold and silver, in an effort to reduce the government’s Civil War deficit. Grant’s approach was similar to Herbert Hoover’s decision to keep America yoked to the gold standard in the face of economic cataclysm in 1932. In both cases, the choice prolonged the economic misery and produced a political drubbing — in Grant’s case, one suffered by his fellow Republicans in the midterm election in 1874.

More broadly, the result was a depression that lasted until 1879. Over six long years, the economy shrank by nearly a third. Scarcely any economic sector was spared. Bankruptcies doubled from 5,100 in 1873 to more than 10,000 five years later. Bank failures rose from three in 1870 to 140 in 1878. Wheat prices fell by 30 percent. Railroad construction, which had been a driver of industrial growth and wage earnings, ground virtually to a halt.

By distracting Northerners with the immediacy of economic crisis and sowing internal dissension in Grant’s Republican Party, the depression also paved the way for the formal end of Reconstruction following the presidential election of 1876.

Today, we are better positioned to weather a crisis. The Federal Reserve, empowered under Franklin D. Roosevelt to manage the money supply, has offered aggressive economic support. Congress also recognized that providing rank-and-file workers with a deficit-financed economic lifeline was necessary to buoy the economy at large — although partisanship has prevented it from following up with additional support.

But we’re still repeating one mistake from 1873. A strong hand to guide the nation out of crisis was lacking in the 1870s, and again from 1929 to 1933, just as it missing now. In each case, the crisis lasted far longer than it had to; the inability of Congress and the Trump White House to reach agreement on a fourth coronavirus relief bill — thereby forcing austerity on millions of unemployed or underemployed Americans and leaving states and counties gasping for fiscal assistance — is sure to prolong any recovery from the pandemic. As long as such support is withheld, we’ll be hastening to open bars and other gathering places to stave off financial ruin, giving the virus more opportunity to spread.

The economic and social pain today may unfold differently from how it did in those bygone times, but they do offer clues as to what may happen and how to impose our will on events. To cite the adage often attributed (perhaps apocryphally) to Mark Twain, “History doesn’t repeat itself, but it often rhymes.”

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