THE PANIC OF 1873
"Are not all the great communities of the Western World growing more
corrupt as they grow in wealth?" asked a critical and thoughtful
journalist, Edwin L. Godkin, in 1868, as he considered the relations of
business and politics. He answered himself in the affirmative and found
comrades in his pessimism throughout that intellectual class in whose
achievements America has taken conscious pride. For at least ten years
they despaired of the return of honesty. James Russell Lowell, decorated
with the D.C.L. of Oxford, and honored everywhere in the world of
letters, was filled with doubt and dismay as late as 1876, at "the
degradation of the moral tone. Is it, or is it not," he asked, "a result
of democracy? Is ours a 'government of the people by the people for the
people,' or ... for the benefit of knaves at the cost of fools?"
It was not without reason that serious men were fearful in the years in
which military heroes dominated in politics, and in which commerce
struggled with its revolution. Had they foreseen the course of the next
generation, noted the progress of new ideas in government, the extension
of philanthropy and social relief, and the passion for education that
swept the country, they need not have despaired. Godkin, himself, could
not have made a living from his _Nation_, with its high ideals, its
criticism, and its despondency, in a land that was wholly rotten. The
young college presidents of the period could not have found a livelihood
in a country that was not fundamentally sound. At Harvard, Charles
William Eliot broke down the old technique of culture and enlarged its
range; at Michigan, James Burrill Angell proved it possible to maintain
sound, scholarly, and non-political education, in a public institution
supported by taxation; in a new university a private benefactor, Johns
Hopkins, gave to Daniel Coit Gilman a chance to show that creative
scholarship can flourish in a democracy. But the essential soundness of
the Republic was as much obscured in 1868 as its wealth had been in
1861, and for the present the objects on the surface, brought there by
violent convulsion, represented its less creditable part.
The years of Grant's Presidency were filled with unsightly episodes,
that were scandalous then and have been discouraging always. In his
first year of office, Jay Gould and James Fisk, tempted by the premium
on gold, tried to corner the market, and Grant's public association with
the speculators brought upon him fair reproach. Tweed, exposed and
jailed after a long fight, revealed the close alliance between crooked
politics and business in the cities, and became a national disgrace.
Less prominent than these but far from proper were Schenck and Fremont.
The latter was arrested in France, charged with promoting a railroad on
the strength of land grants that did not exist. He had been close to
the old Republican organization, and the figurehead of the radicals in
1864, so that his notoriety was great. Schenck, while Minister in
London, posed as director of a mining company, and borrowed from the
promoters of the scheme the money with which he bought his shares. When
the company proved insolvent, and perhaps fraudulent, Grant was forced
to recall him. Critics who saw dishonesty or low ethical standards in
these men were ready to see in the carnival of the Reconstruction
Governments wholesale proofs of decadence.
During the campaign of 1872 yet another item was added to the unpleasant
list. Letters were made public showing how Congressmen had taken pay, or
its equivalent, from men behind the Union Pacific Railroad. The scandal
of the Credit Mobilier touched men in all walks of life, beginning with
Schuyler Colfax, Vice-President of the United States, including Blaine,
Allison, and Garfield, Wilson and Dawes, and other men who no longer
held office. Some of these denied the charges and proved their
innocence. But none entirely escaped the suspicion that their sense of
official propriety was low, and their list sampled the Republican party
at all its levels. One of the victims, Colfax, talked freely in 1870 of
gifts received--a carriage from a Congressman and horses from an express
company.
In 1872 the notorious Butler aimed at the governorship of Massachusetts.
He failed to get the Republican nomination, but the strength of his
candidacy showed the uncritical devotion of many voters to success. He
resumed his seat in Congress, unabashed, and put through an act
properly increasing the salaries of Washington officials, but applying
also to the men who voted for it and to the session just ending. Its
makers went home to explain their part in the "salary grab" to their
constituents, and many never returned to Congress.
Other improprieties of the first Administration of Grant came to light
in his second term. His Secretary of War, Belknap, confessed to the sale
of offices. In the Treasury Department were uncovered the whiskey frauds
which tainted even Grant's private secretary. And the Speaker of the
House, Blaine, was shown to have urged a railroad company to recognize
his official aid, promising not to be a "deadhead in the enterprise" in
its future service.
There is no better illustration of the commercial ethics of the sixties
than may be found in the letters of Jay Cooke, philanthropist and
financier. With a lively and sincere piety, and an unrestrained
generosity, he at once extended hospitalities to the political leaders
of the day, carried their private speculations on his books, and
performed official services to the Government. It was impossible to tell
where his public service ended and his private emolument began, but
there was nothing in his life of which he was ashamed. A friend of
General Grant, and liberal patron of his children, Cooke was actually
entertaining the President at his country home just outside of
Philadelphia when the failure of his banking house precipitated the
panic of 1873.
There had been financial uneasiness abroad and in the United States for
several months, but few had anticipated the collapse of credit that
followed the suspension of Jay Cooke and Company, September 18, 1873. If
this house failed, none could be regarded as safe. Jay Cooke had
established his reputation during the Civil War through his ability to
find a market for United States bonds. After the war he had carried his
activity and prestige into railways. In 1869 he had become the financial
agent of the Northern Pacific, and customers, encouraged by their good
bargains in the past, continued to invest through him as he directed.
His personal followers, numerous and confident, had been taught to
believe his credit as sound as that of the Government whose bonds he had
handled. When he collapsed, overloaded with Northern Pacific securities,
in which his confidence was enthusiastic, the panic was so acute that
the New York Stock Exchange closed its doors for ten days, to prevent
the ruinous prices that forced sales might have created. Thirty or more
banking houses were drawn down by the crash within forty-eight hours.
Others followed in all the business centers, while trade stood still
through the paralysis of its banking agents.
The distribution of the panic throughout the United States followed the
usual course. In the first crisis, banking houses broke down, unable to
meet the runs of their depositors or their original obligations. The
depositors next, unable to secure their own funds or to obtain their
usual loans, were driven to insolvency. After the failure of banks came
that of railroads, the wholesale houses, and the factories. As these
last defaulted, the loss was spread over their employees, their
contractors, and their creditors. Confidence was everywhere destroyed.
Investments were lost, or lessened, or put off indefinitely in their
payments. After a few days the acute crisis was over, but the resulting
depression brought stagnation to business. Industries marked time, at
best; expansions were out of the question; new enterprises were not
heard of. From 1873 until 1879 the United States was engaged in recovery
from the injury which the panic had done and from the weakness which it
had revealed.
The panic, followed by five years of economic prostration, was only
occasioned by the failure of Cooke. Its real causes lie throughout the
period of Civil War expansion. Never had the daily necessities of the
United States equaled its production, and the resulting surplus,
available for permanent improvements, was larger than ever in the
sixties because of the growing use of machinery. Funds for investment,
produced at home and increased through the strong foreign credit of the
United States, tempted and aided the speculative development of the
North and West. Yearly greater sums were sunk in municipal improvements
that brought in no return, or in railroads that were slow in paying, or
in errors that were a dead loss. The loss from the Civil War was an
added charge upon the surplus. Great fires in Boston and Chicago
consumed more of it. By 1870 the United States was using surplus at a
rate that threatened soon to exhaust it. When the limit should be
reached, new enterprises must necessarily cease, and all that were not
wisely planned must fall, dragging down others in their ruins. For
months before the failure of Jay Cooke, business had been dangerously
near this margin. His failure, caused by his inability to find a market
for Northern Pacific, merely precipitated the inevitable crash.
The faulty currency, outstanding since the war, and adding to the
business uncertainty, now aggravated the panic when it broke. The
greenbacks were slowly rising in value. They profited by the growing
credit of the United States, and received a special increase because of
the development of business. After 1865 business transactions grew in
number and volume more rapidly than the amount of available money, and
this, driven to greater activity in circulation, rose in value from the
increased demand. As the purchasing value of the dollar increased,
prices, measured by the greenbacks, necessarily fell, while the
equivalent of every debt that had to be paid in a specified number of
dollars as steadily rose. Indeed, so great was the increase of
production from the new farms, reached by the new railroads, and
supplying raw materials for the new factory processes, that prices fell,
even when stated in terms of gold. In a period of falling prices and
appreciating currency, the gap between the poor and the rich was
widened. The debtor carried a growing burden while the creditor
harvested an unearned increase. Persons who lived on fixed salary or
income profited by the fluctuations, but commercial transactions were
made more difficult for the debtor.
The organized Greenback movement had figured in politics during the
campaign of 1868, and made a special appeal to the debtor section
during the hard times after 1873. The Republican Congress had, in 1869,
sealed the professions of the party's platform by passing a resolution
"to strengthen the public credit," in which it declared "that the faith
of the United States is solemnly pledged to the payment in coin or its
equivalent," of the greenbacks, and that the United States would not
take advantage of its creditors by paying off its "lawful-money" bonds
in depreciated paper. All debts created before the war or during its
early years had lost through depreciation, just as the later debts had
gained through the reverse.
Despite this pledge, advocates of greenback inflation, with Butler among
their leaders, became more numerous in both parties after the panic, and
an attempt was made to have Congress reverse itself. Grant's Secretary
of the Treasury gave a new construction to the law by reissuing during
the critical days of the panic some $26,000,000 of greenbacks that had
been called in by McCulloch. He raised the total outstanding to
$382,000,000, and Congress in 1874 passed a law increasing the amount to
$400,000,000, in an act named by its opponents the "Inflation Bill." To
the surprise of many, Grant sharply vetoed the act, adhering to his
views of 1869 on the evils of an irredeemable paper currency. During the
next winter John Sherman, Senator from Ohio, induced Congress to take a
step in fulfillment of the guaranty which Grant had saved. On January
14, 1875, it was provided that the Treasury should resume the payment of
specie on demand on January 1, 1879.
Ultimately Congress was saved from the act of repudiation which the
Greenbackers urged upon it, but while the movement flourished it added
another to the catalogue of troubles with which men like Godkin and
Lowell were distressed. Easterners, in general, had as little
understanding of the West as they had had of the race problem in the
South. They were disposed to attribute to inherent dishonesty the
inflation movement, and to ignore the real economic grievance upon which
it was founded. The suspicions directed against the ethical standards of
the West were increased by the Granger movement, to which the panic gave
volume and importance.
Among the social phenomena of 1873-74 was the sudden emergence in the
Northwest of a semi-secret, ritualistic society, calling itself the
"Patrons of Husbandry," but popularly known as the "Grange." It was
founded locally upon the soil, in farmers' clubs, or granges, at whose
meetings the men talked politics, while their wives prepared a picnic
supper and the children played outdoors. It had had a nominal existence
since 1867, but during the panic it unexpectedly met a new need and grew
rapidly, creating 1000 or more local granges a month, until at its
maximum in 1874 it embraced perhaps 20,000 granges and 1,600,000
persons. In theory the granges were grouped by States, which latter were
consolidated in the National Grange; in fact, the movement was almost
entirely confined to the region north of the Ohio River, and even to the
district northwest of Chicago.
Such a movement as the Grange, revealing a common purpose over a wide
area and in a great number of citizens, could not but affect party
allegiance and the conduct of party leaders. Simultaneously with its
development the legislatures of the Northwest--Illinois, Wisconsin, and
Iowa--became restive under existing conditions, and assumed an attitude
which became characteristic of the Grange,--one of hostility to
railroads and their management. With the approval of the people, these
States passed, between 1871 and 1874, a series of regulative acts
respecting the railways, which were known at the start as the "Granger
Laws," and which became a permanent contribution to American government.
To Eastern opinion the Greenback movement had been barefaced
repudiation; the Granger movement seemed to be confiscation; for every
law provided a means by which public authority should fix the charge
imposed by the railroad upon its customer. Both movements need to be
studied in their local environment, which at least explains the Western
zeal in clamoring for the greenbacks, and shows that in the Granger
movement the West saw farther than it knew.
The Civil War period marks a new era in the history of American
railways. Prior to the panic of 1837, the few lines that were built were
local. Few could foresee that the railway would ever be more than an
adjunct to the turnpike and canal in bringing the city centers closer to
their environs. In the revival of industry after the panic of 1837, the
mileage increased progressively, and before the next panic checked
business in 1857 the tidewater region was well provided, and the
Alleghanies had been crossed by several trunk lines whose heads extended
to the Lakes and to the Mississippi. But in these years the change was
of degree rather than of kind. The lines were built to supplement
existing routes, like the Erie Canal, the Lakes, the Ohio River, or the
Mississippi. They connected communities already well developed and
prosperous, and in undertaking new enterprises promoters had figured
upon capturing the profits of existing trade.
In the new epoch of the sixties there were only new fields to conquer.
The great enterprises were forced to speculate upon the development of
the public domain and to find their profits in the business of
communities to which they themselves gave birth. Natural waterways and
roads extended little west of Chicago. The new fields were entered by
the railroads without prospect of any competition but that of other
railroads. The resulting communities, born and developed between 1857
and 1873, were peculiarly the creatures of, and dependent on, the
railway lines.
This inevitable dependence on railways colored the history of Wisconsin,
Iowa, and Minnesota, and, to a lesser degree, of all the West. While men
were yet prosperous and sanguine and without adequate railway service,
they offered high inducements to promoters of railways. Once the roads
were built and the communities began to pay for them and to maintain
them, the dependence was realized and anti-railway agitation began. The
fact that they were commonly built on money borrowed from the East
threw debtors and creditors into sectional classes injurious to both.
The antagonism to railways was increased because these yet regarded
their trade as private, to be conducted in secrecy, with transportation
to be sold at the best rates that could be got from the individual
customer. The big shipper got the wholesale rate; the small shipper paid
the maximum. Favoritism, discrimination, rebates, were the life of
railway trade, and railway managers objected to them only because they
endangered profits, not because they felt any obligation to maintain
uniformity in charges.
In a community as dependent on the railways as the Northwest was, the
iniquity of discriminatory or extortionate rates was soon seen. The
East, with rival routes and less dependence on staple interests, saw it
less clearly. The charges were paid grumblingly in good times; in bad
times, when the rising greenbacks squeezed the debtor West and the panic
of 1873 stopped business everywhere, the farmers soon made common cause.
They seized upon the skeleton organization of the grange and gave it
life. In 1874 their organized discontent compelled attention.
The Granger Laws were an attempt to establish a new legal doctrine that
railways are quasi-public because of the nature of the service which
they render and the privileges they enjoy. This principle was overlaid
in many cases by the human desire to punish the railroads as the cause
of economic distress, but it was visible in all the laws. It is an old
rule of the common law that the ferryman, the baker, and the innkeeper
are subject to public control, and railways were now classified with
these. In Wisconsin, the "Potter" Law established a schedule with
classified rates, superseding all rate-cards of railroads in that State.
Illinois created a railroad and warehouse commission with power to fix
rates and annul warehouse charters. In Iowa the maximum rates were fixed
by law.
The railroads failed to realize at once what the new laws meant. They
denounced them as confiscatory, and attacked them in court as wrong in
theory and bad in application. Even admitting the principle of
regulation, the laws were so crudely shaped as to be nearly unworkable.
Farmer legislators, chosen on the issue of opposition to railways, were
not likely to show either fairness or scientific knowledge. Coming at
the same time with the panic of 1873, it is impossible to measure the
precise effect of any of these laws, and all were modified before many
years. But the railroads' objection lay beneath the detail, and the
fundamental fight turned on two points--the right of public authority to
regulate a rate at all, and whether state regulation was compatible with
the power of Congress over interstate commerce.
By 1876 the appeals of the railroads against the constitutionality of
these Granger Laws had gone through the highest state courts to the
Supreme Court of the United States. In the spring of 1877 that body
handed down a definitive decision in the case of Munn _vs._ the State of
Illinois in which it recognized that the "controlling fact is the power
to regulate at all." It held that when the institutions in question (in
this case warehouses) established themselves, they did so "from the
beginning subject to the power of the body politic to require them to
conform to such regulations as might be established by the proper
authorities for the common good." It upheld the rate laws, declared that
they were not an infringement upon the powers of Congress, and thus gave
formal sanction to a new doctrine in American law.
The legal consequences of the "Granger Cases" extended through the
ensuing generation. The need for public intervention grew steadily
stronger, and as time went on it became clear that this control could
not be administered by orators or spoilsmen, but called for scientific
training and permanence of policy. It was one of many influences working
to reshape American administrative practice.
The Granger movement had close relations with the panic of 1873,
although it must anyway have appeared in the Northwest at no remote
date. As a political force it soon died out, leaving the principle of
regulation as its memorial. With the gradual recurrence of prosperity
the Northwest found new interests, and as early as 1877, when the
decisions were made, the passion had subsided.
It was, however, a gloomy United States that faced the end of its first
century of independence, in 1876. Pessimism was widely spread among the
best educated in the East. Public life was everywhere discredited by the
conduct of high officials. The South was in the midst of its struggle
for home rule, which it could win only through wholesale force and
fraud. The West was discouraged over finance and still depressed by the
panic. Yet Philadelphia went ahead to celebrate the centennial as though
it were ending the century as hopefully as it had begun.
The Exposition at Philadelphia this year was a revelation to the United
States. Though far surpassed by later "world's fairs," it displayed the
wide resources of the United States and brought home the difference
between American and European civilization. The foreign exhibits first
had a chastening influence upon American exuberance, and then stimulated
the development of higher artistic standards. In ingenuity the American
mind held its own against all competition. But few Americans had
traveled, the cheap processes of illustration were yet unknown, and in
the resulting ignorance the United States had been left to its
assumption of a superiority unjustified by the facts. From the
centennial year may be dated the closer approach of American standards
to those of the better classes of Europe.
In the summer of 1876 the thirty-eighth State, Colorado, was added to
the Union. It had been seventeen years since the miners thronged the
Kansas and Nebraska plains, bound for "Pike's Peak or Bust!" In the
interval the mining camps had become permanent communities. Authorized
in 1864 to form a State, they had declined to accept the responsibility
and had lingered for many years with only a handful of inhabitants. Now
and then entirely isolated from the United States by Indian wars, they
had prayed for the continental railroad, only to be disappointed when
the Union Pacific went through Cheyenne instead of Denver. One of the
branches of the Union Pacific was extended to Denver in 1870, and
thereafter Colorado grew in spite of the panic of 1873. Grant began to
urge its admission in his first Administration, and signed a
proclamation admitting it in 1876. It came in in time to cast three
Republican electoral votes in the most troublesome presidential contest
the United States had seen.
BIBLIOGRAPHICAL NOTE
Among the more valuable books of biography and reminiscence for this
period are R. Ogden, _Life and Letters of Edwin Lawrence Godkin_ (2
vols., 1907); H.E. Scudder, _James Russell Lowell_ (2 vols., 1901); C.E.
Norton, ed., _Letters of J.R. Lowell_ (1894); _Reminiscences of James B.
Angell_ (1912); J. T. Austen, _Moses Coit Tyler, 1835-1900_ (1911); J.G.
Blaine, _Twenty Years of Congress_; E.P. Oberholtzer, _Jay Cooke_; and
A.B. Paine, _Th. Nast_ (1904). The Credit Mobilier may best be studied
in Rhodes, in J.B. Crawford, _Credit Mobilier of America_ (1880), and in
the reports of the committees of Congress that investigated the scandal
(42d Congress, 2d Session, House Report no. 77). J.W. Million, _State
Aid to Railways in Missouri_ (1896), gives a good view of railroad
promotion schemes. F. Carter, _When Railroads were New_ (1909), is a
popular summary. In J.R. Commons (ed.), _Documentary History of American
Industrial Society_ (10 vols., 1910-), are various documents relating to
the Grange, which organization received its classic treatment in E.W.
Martin, _History of the Granger Movement_ (1874; his illustrations
should be compared with those in J.H. Beadle, _Our Undeveloped West_, in
which some of them had originally appeared in 1873). There are numerous
economic discussions of the Grange in the periodicals, which may be
found through Poole's Indexes, the best work having been done by S.J.
Buck. The _Chapters of Erie_ (1869), by C.F. Adams, is a valuable
picture of railroad ethics. Much light is thrown upon financial matters
by the Annual Reports of the Secretary of the Treasury and J.D.
Richardson (ed.), _Messages and Papers of the Presidents_ (10 vols.).