The Panic of 1873
After the Civil War, the US banking system grew rapidly and seemed to be set on solid ground. But the country was hit by many banking crises. One of the worst happened in 1873 – during the time of the Freedman’s Bank.
The panic started with a problem in Europe, when the stock market crashed. Investors began to sell off the investments they had in American projects, particularly railroads. Back in those days, railroads were a new invention, and companies had been borrowing money to get the cash they needed to build new lines. Railroad companies borrowed using bonds, which were debt securities specifying how much a company was borrowing and how much interest it would pay.
When Europeans started selling their railroad bonds, there were soon more bonds for sale than anyone wanted. Railroad companies could no longer find anyone who would lend them cash. Many railroads went bankrupt.
One of the biggest banks in New York City was Jay Cooke & Company. I had invested a lot of money in the railroads, and when the railroads started having problems, Jay Cooke & Company went bankrupt. When people saw that such a big bank failed, they began to run to their banks, demanding all of their money back.
The panic spread to banks in Washington, DC, Pennsylvania, New York, Virginia and Georgia, as well as to banks in the Midwest, including those in Indiana, Illinois, and Ohio. Nationwide, at least 100 banks failed.