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.
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