Panic of 1873: Railroad Speculation Triggers Economic Collapse

The banking firm Jay Cooke & Company collapses, triggering a devastating financial panic and economic depression lasting until 1879. Cooke’s firm, heavily invested in the Northern Pacific Railroad and backed by over 60 million acres of federal land grants used as collateral, becomes overextended and declares bankruptcy. The failure sparks immediate panic in the stock market, causing bank runs across New York City and forcing the Stock Exchange to suspend trading for the first time on September 20.

The panic exposes rampant speculation in railroad construction fueled by massive government subsidies from the Pacific Railway Acts. Between 1866-1873, companies laid 35,000 miles of new track with construction expenses far outpacing financing. The Credit Mobilier scandal, revealed just months earlier, contributed to market instability by exposing systematic fraud in railroad finance. European investors, already shaken by May and September stock crashes in Vienna, divest American securities particularly railroad bonds, depressing prices and cutting off capital.

The economic devastation proves catastrophic: 89 of 364 railroads crash into bankruptcy, 18,000 businesses fail within two years, and unemployment reaches 14 percent nationally (25 percent in New York City by 1874). The crisis demonstrates the systemic risks of corporate welfare programs and speculation-driven infrastructure development. Railroad companies privatize profits through inflated construction costs and stock manipulation while socializing losses through bankruptcy, leaving workers unemployed and investors ruined while executives escape accountability. This pattern of boom-bust cycles driven by subsidized speculation will repeat throughout American economic history.