After the Civil War, the railroads would have such an immense influence on the American economy that “some historians have dubbed the post-Civil War era the Railway Age.” While bulk goods that were measured by the ton may still have had a cheaper alternative for shipping via boat, the railroads “provided a service so superior in quality that it more than compensated for its higher price.” Among the benefits were “direct routes, reduced transshipment, greater speed and safety and year-round service.” It also opened the American West to greater settlement.[1] Beyond that, their development would require an immense amount of labor to construct and engineer as they began to crisscross the continent toward the end of the 19^th century. With this seemingly abundant economic potential, it is curious that their construction coincided with lengthy periods of negative economic growth. Interestingly, Christophe Nitschke and Robert Higgs offer advice to historians as they attempt to better understand the causes of this, and similar, periods of negative growth.

Railroads opened the American interior and its “apparently inexhaustible area of fertile land” to agriculturalists.[2] It would produce a market that one would think would have made railroads the perfect business partners for western farmers. The farmers could use the railroads to push further west and into the expansive availability of land. That increasing demand and production would further the demand for railroad construction, thereby creating a formula that would seemingly make both profitable ventures. Instead, a series of sharp economic declines would send the United States into a series of crises between the Civil War and 1900.

One of those was initiated by the Panic of 1873.  Contemporary newspapers “spoke of ‘years of gloom,’…(and) ‘thousands and hundreds of thousands of able-bodied men to stalk the land, hunting for work.’” This was combined with the shock of Jay Cooke’s bankruptcy, which dubbed some to refer to the Panic of 1873 as the “Jay Cooke Panic.” This was potentially due to Cooke’s inspiring “mistrust and panic” that would “spread to the overall financial sector.”[3] Prior to the crisis, “a massive influx of European credit (which) had fueled the investment boom in railroad bonds and shares after the Civil War.” Between 1869-1874 “their bonded debt exploded from $416 million…to $2.23 billion.”[4]

While maintaining that the contraction of European credit was primarily the cause for the Panic of 1873, Nitschke cited five other events that contributed to the cycle that initiated the economic crisis. The first was the ability for European capital to invest in German infrastructure following the Franco-Prussian War in 1871. The difficulty in obtaining information from the U.S. was making European investors more skittish about investing in the U.S. The American railroad industry had an increasing number of “defaults on  interest payments by railroad companies.” Europeans were increasingly skeptical that they would realize the returns on their investments that they had hoped for. After a series of financial panics occurred around the same time in Europe, European capital began drying up in the U.S.[5]

This was occurring at a time that Jay Cooke was attempting to raise funds to construct the transcontinental Northern Pacific railroad. The Franco-Prussian War started to slow their investments. Cooke’s bank had underwritten the project “for the huge sum of $100 million.” When the railroad owed his bank $7 million, he asked “his brother Henry, director of the Freedman’s Savings Bank, to invest his depositors’ hard-earned money into the Northern Pacific.” Cooke was not the only banker that was searching for liquidity, but when his “failure was announced (on) September 18…(it turned) into ‘black Thursday,…the worst disaster since the Black Death.’” Cooke’s branches closing led to panic as “men rushed to and fro trying to get rid of their property.”[6]

The demand for railroads was not only providing a surprisingly difficult financial circumstance for the banking sector. An availability for land and the means of transporting goods to populated markets did not mean that it was a simple marriage between agriculture and railroads. Farmers complained that the rates that they were charged to use the railroads were “too high”.[7] The question of whether railroad rates had been falling throughout the Gilded Age has been probed by historians, but the author insisted that they had been pushing down the wrong rabbit hole. While shipping rates had fallen, historians needed to ask “whether railroad rates fell faster or slower than the prices farmers received for their products.” The greatest factor that influenced the farmers ability to easily pay rail rates was the prices that they were able to secure for their crops. This varied annually and could go further upward the further west or into a rural setting a farmer grew. Regardless, it was universally understood amongst farmers that the further construction of railways had them recognizing “no recent improvement with respect to railroad rates” by 1900.[8]

As a response to the banking crisis, President Ulysses Grant opted to allow for the investing houses to deal with their issues independent of government intervention. He was committed to a currency that was backed by specie, and was resistant to inflating the currency.[9] This is especially interesting in light of Nitschke’s surmising that “behavioral economists” have helped to direct attention away from data sets as they have helped to shape the narrative toward a belief that “financial crises should be seen, first and foremost, as crises of confidence.”[10] From the farmers’ perspective, this influx of inflated currency may have not only provided the banking sector with needed confidence, but also have better helped them pay their shipping rates. The combination of their crops’ inability to maintain a price that would keep up with shipping rates, combined with the influence that European capital had on the effort to finance American infrastructure demonstrates Nitschke’s exhortation to historians “to explore the economic mechanisms that lie at the heart of capitalism” while studying the economic panic within their expertise.[11]

Bibliography

Higgs, Robert. The Transformation of the American Economy, 1865-1914: An Essay in Interpretation. Seattle: University of Washington, 1971.

Nitschke, Christoph. “Theory and History of Financial Crises: Explaining the Panic of 1873.” The Journal of the Gilded Age and Progressive Era Vol. 17, Issue 2 (2018).

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[1] Robert Higgs, Transformation of the American Economy, 1865-1914, (Seattle: University of Washington, 1971), 44 .

[2] Ibid, 51.

[3] Christoph Nitschke, “Theory and History of Financial Crises: Explaining the Panic of 1873,” The Journal of the Gilded Age and Progressive Era Vol. 17, Issue 2 (April 2018), 223.

[4] Ibid, 224.

[5] Ibid, 225-6.

[6] Ibid, 226-7.

[7] Robert Higgs, Transformation of the American Economy, 1865-1914, (Seattle: University of Washington, 1971), 86.

[8] Ibid, 87-89.

[9] Christoph Nitschke, “Theory and History of Financial Crises: Explaining the Panic of 1873,” The Journal of the Gilded Age and Progressive Era Vol. 17, Issue 2 (April 2018), 229.

[10] Ibid, 222.

[11] Ibid, 221.