Government land grants and appropriations aided post-Civil War prosperity. Speculators, hoping for big returns, invested heavily in railroads. The railroad industry employed large numbers of workers, and everyone made money. Easy credit and eager markets for stocks and bonds energized the nation’s expansion.
However, changes in global markets created problems for the U.S. economy. European investors in U.S. railroad companies became apprehensive because of railroad scandals and decided to invest in their own countries. Homelessness in Europe caused financial failures in the early 1870s.
In America, overbuilding was extensive in railroad and related industries. Projects often involved long term investments with little or no immediate returns. The Coinage Act of 1873 changed the policy of buying and converting silver, caused lower silver prices which hurt silver mining interests, reduced the amount of money in supply and discouraged investment in long term bonds.
The Panic of 1873 began when Jay Cooke & Company, the largest private bank in the nation, collapsed. The company, which funded the Civil War, financed a project to build a second transcontinental railroad. Ground was broken near Duluth, Minnesota on Feb. 15, 1870. Cooke had applied for a loan of $300 million from the U.S. Treasury, but he was required to share the profits from the loan with a syndicate including House of Rothschild, Bering Brothers and J. P. Morgan. By 1873, investors in Northern Pacific Railway bonds failed to appear, and the company went bankrupt on Sept. 18, 1873.
In Chicago and other cities, more banks failed. Bank reserves fell from $50 million to $17 million. The New York Stock Exchange closed for 10 days, starting on Sept. 20, 1873. By Nov. 1873, 115 railroads were bankrupted. Their workers were left unemployed.
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