This week in history: The panic of 1873

A stock-market bubble built on railway stocks came to a spectacular end in September 1873.

A US stock-market boom, spurred by land speculation and a bubble in railway stocks, came to a spectacular halt in September 1873. The trigger was the collapse of Jay Cooke & Company, a Philadelphia bank. A decision to get involved in the Northern Pacific railroad, at a time when overexpansion was starting to drive down freight rates, meant the bank became dangerously overleveraged. After creditors and depositors started demanding their money back, it had to declare bankruptcy, which had a domino effect on several other financial institutions.

The government bought $13m worth of bonds to inject money into markets (a prototype quantitative easing), but the stock market kept falling. On 20 September, two days after Cooke & Company's failure, the New York Stock Exchange closed for ten days to let the panic subside. Yet even after the remaining banks and merchant houses pooled their resources to stabilise the markets, it took over another month before they started to function normally. By then many banks had collapsed.

The long-term impact was even more serious. Farmers and miners, already hit by falling commodity prices, found it impossible to get loans. Factories were forced to shut down: the unemployment rate in large cities, such as Chicago and New York, rose to well above 20%, though westwards migration provided a partial safety valve.

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According to the National Bureau of Economic Research, the economy kept shrinking until 1879 making the downturn longer even than during the Great Depression of the 1930s.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri