This is the nineteenth in my series of posts about the five businessmen the History Channel profiled in a terribly inaccurate and un-historical TV miniseries titled The Men Who Built America. I’m writing these posts in response to several comments and e-mails from TV viewers who have expressed interest in a more accurate version of the story. (Click here to see all Al’s columns on the program and its subjects.)

Post #19: The Financial Panic of 1873

 The 1870’s were a  turbulent time for American businesses and workers. A financial panic that started late in 1873 precipitated a depression that sent dozens of banks and railroads into bankruptcy, and started an economic depression.

In the years after the Civil War American railroad companies built new roads at a manic pace. The race to lay down tracks was fueled by a desire to dominate the map, and financed, to a large extent, with borrowed money. By the early 1870’s eighty percent of the value of the US stock market was in railroad stocks. Bank portfolios consisted largely of debts owed to the banks by railroads.

On September 18 of 1873 the banking firm of Jay Cooke and Company defaulted on its debts, done in by a series of bad loans to the ill-fated Northern Pacific RR. The failure of Cooke’s company initiated a cascade of debt defaults that sent the nation into a financial panic and drove other banking companies into insolvency and bankruptcy. Two days after Cooke’s admission the New York Stock Exchange closed on a business day for the first time in its history.

The resulting short term slowdown in business drove dozens of heavily leveraged railroad companies into bankruptcy, brought track construction to a halt all over the country, and put thousands of men out of work.

One investment banker who managed to survive the panic in good financial shape was JP Morgan. Blessed with excellent judgement and foresight, Morgan had prepared his company for a panic. In the months leading up to the Jay Cooke default Morgan called in most of the outstanding debts for which he had that option, and built up the company’s cash reserves. When the crash came, Morgan’s company was holding very little bad paper.

Jay Gould took advantage of the panic to seize control of the Union Pacific, the nation’s first trans-continental railroad. Rockefeller used his cash reserves to buy out rival refiners. Carnegie, as described in last week’s post, used the depression’s downward pressure on worker’s wages to build his first steel mill at a discounted price.

Different sources offer dramatically different portrayals of the length and depth of the 1870’s economic depression.  Encyclopaedia Britannica describes a full recovery by the end of 1877, four years after the crash. Historian Charles R. Morris takes a rosier view in his book The Tycoons. He argues that the economy had returned to healthy growth and rapid job creation by the end of 1875.

The Wikipedia page on the subject is somewhat self-contradictory; a common problem with Wikipedia pages. It quotes National Bureau of Economic Research figures to suggest that the depression lasted six full years, but quotes other sources who describe strong economic growth throughout most of the 1870’s.

I’ve got nine different college freshman history textbooks in my library, and most of them only devote a sentence or two to the 1870’s depression.  (By contrast, all of them devote multiple pages to the Great Depression of the 1930’s.) The concensus seems to be that the financial troubles of the 1870’s were fairly brief although severe. But one textbook (Making a Nation by Boydston, Cullather, Lewis, McGerr, and Oakes) grimly describes a “long depression” that supposedly had the nation on its knees from 1873 through 1896!

So was it two years, or four, or six, or twenty-three? The reason for all the disagreement is the difficulty in defining  the word “depression” in the context of the unusual economic conditions of 1870’s America. The two biggest issues complicating the debate are deflation and an extremely heavy volume of immigration.

Americans, or at least those of us who are under a hundred-and-twenty years of age, are not used to the idea of deflation, where prices steadily go down over time. We understand the opposite concept, inflation, well enough; we’re used to to the idea of “inflation adjusted dollars.” But to understand late nineteenth century economics it is necessary to wrap one’s mind around the idea that wages and prices can continue to decline year after year.

Rapid technological progress during the late nineteenth century greatly increased efficiencies in the production and transportation of virtually everything from potatoes to steam engines, making products cheaper and cheaper over time. At the same time, the government pursued a “sound money” policy very different from the policies of the twentieth and twenty-first centuries. The government didn’t create inflation by printing ever-increasing quantities of paper money as it does today.

Between 1865 and 1895 wages and prices went down so much that the real buying power of a US dollar increased by eighty-one percent. Between 1873 and 1879, the period Wikipedia describes as the depression years, the value of a dollar increased twenty-four percent. The good news for workers of that era is that prices went down faster than wages. Even though wages expressed in dollars per hour went down during the 1870’s, real wages, the buying power that workers earned through their labor, went up.

And per capita figures on things like Gross National Product are somewhat skewed when a nation’s economic infrastructure has to generate enough growth not just for the current population, but for the flood of new immigrants who arrive each year.

Growth in the per capita Gross National Product during the 1870’s looks weak until the figures are adjusted to account for the effects of deflation, but “real” or deflation adjusted growth was a different picture. Despite the influx of low skilled European immigrants and the correspondingly rapid increase in the nation’s population, real per capita GDP only declined for two years before starting to rise sharply.

In his book, Charles R. Morris cites economists who have studied industrial output during the decade, and despite the troubles of ’74 and ’75, the overall picture is extremely positive.

Railroad construction slowed dramatically, of course, especially in the middle of the decade, but virtually every other measure of physical output, including railroad freight loadings, was up strongly…fuel consumption doubled, metals consumption tripled, oil production was up fivefold, and the real value of manufacturing output increased by two-thirds.

The economy also started to create new jobs at a rapid rate after the two ugly years that followed the initial panic. The employment opportunities drew 2,800,000 immigrants to the US in the 1870’s, more than in any preceding decade. The nation’s population increased by thirty percent between 1870 and 1880, yet unemployment remained at levels only slightly higher than the nation’s historic average; levels the current White House administration would kill for.

In terms of job creation and economic growth, any four year period in the 1870’s looks far better than what the nation has seen over the four years since President Obama first took office.

The decade was certainly good to the the nation’s leading businessmen. In his book Morris describes how the business interests of Carnegie, Rockefeller, Morgan, and Jay Gould were all prospering again by 1876, after a turbulent ’74 and ’75. Biographies of the four men by various different authors all confirm Morris’ take on that.

Next week’s post will be about the race between Elisha Gray, Alexander Graham Bell, and Thomas Edison to invent and patent a telephone.

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