On September 18, 1873, the firm of the railroad monopolist and financier Jay Cooke collapsed, sparking the Panic of 1873. This sparked the first global depression in the history of industrial capitalism. It also was a precursor of the long history of upheavals from corrupt capitalism spawning protest movements that eventually shook the nation to its core and finally, after many decades, caused meaningful reforms to help protect workers from economic shocks.
The Civil War created the conditions for the rapid growth of industrial capitalism. But it did not create the corruption that would come to dominate the Gilded Age. Capitalists in the Gilded Age would become famous for their naked graft, but you already see that developing in the 1840s and 1850s. What the Civil War did was to generate the enormous industrial production that would both expand the American economy and make the potential for profits nearly endless, if only one could toy with the law to keep all the money.
Jay Cooke had become wealthy financing the United States’ effort to defeat treason in defense of slavery, a necessary service given the inability of a weak federal government to step into all the new duties it faced during this time. He was crucial to making sure American soldiers actually got paid. Cooke used his connections and his resources to expand his operations after the war. He moved into railroads and found that field both tremendously lucrative and hyper-competitive. Through schemes and scams, Cooke and his investors sought to both build a second transcontinental railroad and skim much of the money off for themselves. The project started in 1870. But already a shaky proposition, Cooke’s firm collapsed in September 1873 when it was discovered that Cooke had overextended himself and his Northern Pacific had no money, right at the same time it was trying to secure a $300 million loan from the Grant administration, always an easy mark for a man like Cooke. Combined with the Coinage Act of 1873 that destroyed the silver market by returning the nation to the gold standard, and the economy was ready to tank. Jay Cooke’s bank closed and the bank of Henry Clews, another leading financier, soon followed. Bank failures piled up around the country. The stock market closed briefly. Fifty-five railroads went bankrupt by November 1873.
The impact was severe for American workers. Unemployment jumped to approximately 8%. Now, that might not seem that high and compared to the Great Depression, it was not. But it had localized, severe impacts in trade-based cities such as New York. San Francisco and Chicago saw severe impacts, as did the silver mining town of Virginia City, Nevada. Moreover, remember that most of the economy was agricultural at this time and much of the rest was small-shop craftsmen who faced less of an impact from events such as this than factory workers. The transition to industrial capitalism was not overnight. But the upheaval the Panic of 1873 caused both spurred workers to action and it spawned a overwrought reaction from politicians, media, and the police. In New York, when workers began to organize to demand employment and marched on City Hall to demand it, the police responded by busting heads. The so-called Tompkins Square Riot of January 1874, where the police violence took placed, did not lead to media condemnation of the police. Rather, it led to overheated rhetoric about the American version of the Paris Commune starting a revolution in America and urging more beatings of workers.
The Panic of 1873 turned into a full-fledged depression. Workers not only in the United States but in Europe were badly impacted by this crisis. Unemployment rose and so did discontent. Its impacts did not alleviate until 1878 and of course there was nothing like a social safety net at this time. Employers in the most affected industries continued to push wages down as a result. That was especially true in the railroad industry, which was not only poorly paid but very dangerous. The railroads that did survive the Panic cut wages significantly. While the Great Railroad Strike began as a response to the second wage cut in a year on one railroad, it spread across the nation and shut down rail traffic thanks to workers in key cities such as Chicago and St. Louis walking off the job. What was most significant about the Great Railroad Strike, other than President Hayes calling in the military to crush it, was that it served as a general target for Americans who did not work for the railroads but were disgusted by the role that railroads and the financial capitalism behind them now played in American life. The large majority of people protesting the railroads in 1877 did not actually work for a railroad. But they were poor, the railroads pumped smoke and noise into the neighborhoods, they blamed the railroads for the high cost of needed goods, and the trains ran down their family members because of the lack of safeguards.
The Panic of 1873, which is really a misnomer because it describes only the brief period that began the longer depression, also hit different parts of the country at the same time. In California, the waves of speculation that had caused the economic collapse in New York didn’t stop until 1876, when the bubble finally burst there. The response among workers was to organize. Unfortunately, as has been so common in American history, they did so not by targeting employers, but rather by targeting their Chinese competition, blaming employers for hiring them but seeking to ban the Chinese rather than work with them. That was especially true of the railroads, which relied on Chinese labor to work cheap. As job seekers flooded into San Francisco, they began targeting their Asian neighbors in acts of violence and in acts of political organizing. This led to the first major legislative victory by the American labor movement: the Chinese Exclusion Act in 1882.
The Panic of 1873 and the following depression also was the nail in the coffin for any chance African-Americans would have political and labor rights in the South. The commitment of northern Republicans to black rights was always tenuous, but the corruption and economic crisis led to Democrats retaking Congress in the 1874 elections, meaning that any enforcement of black rights would not happen. The white South would soon repress both political and labor gains made after the Civil War by the ex-slaves, and unlike our historical memory of Reconstruction that focuses mostly on political rights, the economic issues were just as important as southern planters and landowners desperately wanted to re-institute the plantation labor that defined the cotton and sugar industries. Black workers seeking to organize the rural South would be dealt with through violence for a long time to come.
The economy finally pulled out of the depression by 1878 and while conditions for workers remained horrendous by modern standards, there was work. It was almost at the exact same time that the Panic began that Mark Twain and Charles Dudley Warner published their biting attack on the grotesqueness of the age, The Gilded Age: A Tale of Today, giving the period so dominated by capital and the huge problems that would cause most Americans a name that we remember today.
This is the 237th post in this series. Previous posts are archived here.