The Long Depression (1873-1878)
By: Michael Barga
Background: Within a decade of the American Civil War, a worldwide trend of prosperity was followed by recession. The conditions related to both trends are complex and multidimensional. Understanding the Long Depression and its effects on social welfare involves a detailed examination of the financial system from which it proceeded. Historians and economists still disagree as to what occurred, why it occurred, and how it changed the social landscape of America.
Introduction: The centennial celebration of the United States came with mixed emotions, as many found themselves jobless or with an inferior standard of living to the previous decade. Social discontent led to the Granger movement, the first national labor strike, and other events significant in the history of the U.S. working class and the labor movement. The economic strains also spurred unrest in the recovering Confederate States and played a factor in the re-establishment of segregation in place of Reconstruction. The eventual dissipation of the Grand Depression is due to both natural developments and the specific interventions of government and its citizens.
Post-Civil War Prosperity: Rapid Innovations and Production
The period following the Civil War in the United States from 1865-1873 is generally considered one of economic prosperity. Northern owners of industry and bankers had become wealthy in the war, while cotton exports in the south within the U.S. and abroad met the growing demands of foreign manufacturing for raw materials. In addition to a developing of manufacturing at home and abroad, technological innovations led to improvements in mining, agriculture, and infrastructure.
Two areas of the economy in particular expanded at a rapid pace. Railroad-building linked the newer regions of the west to the rest of the United States and expanded elsewhere in post-bellum America. The new infrastructure system became the focal point of the booming economy. The railroad development had started before the war, yet the most significant projects occurred from 1865-1873. Roughly 30,000 miles of new track was laid and the total mileage doubled during that time. Between 1865 and 1875, roughly $7.25 million dollars was invested in railroad projects.1
Subsequently, the demand for iron and steel heightened, also increased by the development of telegram lines across the country. A new working class of railroad and factory workers emerged, many of them immigrants and veterans of the war. The Homestead Act and new agricultural technology helped meet the demand for food which these workers required. A series of bad harvests in Europe also produced ready markets for export of agricultural commodities. As production of items increased to meet demand, the success of industry led to some benefits for the working class, mainly lower prices of items which workers purchased, higher wages, and some consideration of lessened hours.
Of the substantial investing in railroad securities and bonds, nearly 1/3 is estimated to have come from England. By 1869, European investors held nearly a billion dollars in American bonds. The increase in capital was partly the result of immigrants who left Europe and created a shortage of available labor to support new investment projects in their home countries. Once internal stability returned after the war, investment in American railroads seemed more promising than spending capital at home in the dull European trade environment at that time.1
Domestically, railroad funding held many advantages for government at all levels. Mainly, it provided the promise of future development through increased access to transportation. Cities and towns made competing offers to have lines go through their location, in hopes of expediting shipping for their local businesses and gaining notoriety.
The federal government gave land grants to many groups, and the Union Pacific Railroad even received direct financial assistance. The development of a national infrastructure was highly valued by the government, and the enthusiasm was paired with high spending by local administrations. Administrators hoped to develop infrastructure within towns and cities to accommodate the growing urban industrial efforts.1
Causes of the Crisis: Corruption, Currency, and Capital
The great majority of railroad company securities and bonds sold in the United States were to banks and financiers. The optimism of these investments has been described as a railroad mania, and it is believed this optimism delayed a depression which would have naturally followed the end of the war and its demand for production.1 Unfortunately, the mania showed its faulty foundation when the transportation expansion increasingly proved to be excessive, with new destinations yielding insufficient profits to pay off the principal of loans.
In fact, the expected prosperity and flurry of investment had brought interest rates up dramatically, and even those banks and financial houses considered the most solid had caught the infectious confidence in railroads. By the beginning of 1873, Brooklyn Trust Company and other smaller financiers had difficulties paying even their interests through new investments, and a few periodicals warned of disturbing signs: We have no hesitation in saying that there is much in the present condition of our banks, much in the expansion of general credits, which urges caution and foretokens danger.1
By fall 1873, those in New York City were having difficulty withdrawing or transferring cash from their banks in large business transactions. Their savings had been invested in the risky railroad endeavors, and the concern reached a panic in mid-September starting with the failure of Jay Cooke and Company, one of the most trusted national financing groups.
Misuse of credit had entrapped even the cautious investors, and the use of large checks was suspended by New York banks. The credit problem showed itself so severe during the crisis that cash was unavailable to finance ordinary trade and commerce, an important feature that led to panic even outside New York City and the surrounding area.
In the midst of the failures, those with positions of power sometimes took advantage by taking out huge sums of cash before doors were closed. During the prosperous days, corruption had taken the more subtle form of price manipulation. In 1869, a group of the wealthiest investors plotted to buy gold, push the price lower, and then purchase more gold at a discount price from those who had been planning to sell. While the scheme narrowly missed success, the incident showed that the actions of a few large players on Wall Street could affect the market.1
Sole blame for the panic could hardly be assigned to wealthy businessmen like Daniel Drew, Jim Fisk, and Jay Gould, who were behind the gold scheme of 1869. U.S. currency was highly inflated and out of sync with the gold standard that had already been adopted by many foreign countries for trade. Paper money had recently been introduced in the American economy in the Civil War, yet the government kept a fixed amount of these Greenbacks circulating afterwards.
The outdated currency system created many problems for an economy that suddenly streamlined production and transportation. Cash would migrate every year to country banks around planting and harvest time, and an unusually early harvest turned out to be an important factor in the reserve failures of the banks during the fall of 1873. Discussion of currency reform had deadlocked on the issue of silver, and other problems with government bonds and notes also played a role.
Another key factor leading to the crisis of 1873 was the conversion of floating capital, or savings, into fixed capital, or assets. Before 1873, the promise of new technology drew many foreign and domestic investors to fixed capital, especially considering the long-term potential of these advances to increase production and profits. As foreign powers became involved in war and domestic floating capital was spent, there was little money left for investing. This shortage in floating capital created an unbalanced situation, and asset-holders of all classes could not find buyers for their assets during the crisis.
New technology was successful in increasing production and brought on the expected profits for a time, especially during the Civil War when demands were endless. After the war concluded, the problem became over-efficiency, although it did not show its ill effects in the American economy until 1873. The U.S. population did not increase fast enough to consume the amount of goods produced, and demand from foreign markets was only a deferment, rather than a solution, to this problem. Simultaneously, there was the problem of unnecessary expenditures by workers whose wages had been raised and had expendable income for possibly the first time.
Panic throughout the United States
Jay Cooke and Company was one of the first groups to propose the financing of railroad expansion by credit and was the name best associated with the railroad mania. When the financial crisis overtook Cooke’s financial house, the public panicked in response. People began to feel that their money was not safe, and a significant number of depositors “had a run on the banks” (rapidly withdrew from the banks).
The government intervened in a timely manner, buying back old war bonds to help reserves. The Secretary of Treasury facilitated a reserve-sharing by any banks that were threatened and also introduced old Greenbacks into the economy which had been scheduled for destruction.
The cash shortage was alleviated within a few months, yet investor confidence domestically and abroad was very low once floating capital became available again. New York City and Northeastern urban areas were the hardest hit, yet even country banks had been linked to the immediate effects of the crisis. Many agricultural financiers had worked with the financial groups of the East like Cooke, and this connection had an effect within a few weeks of the crisis. The cash shortage had significantly disrupted the money flow needed for the fast-paced transactions between those in agriculture and the railroad companies that shipped their goods.
Another immediate effect of the banking crisis was a sudden halt in railroad expansion. Defaulted companies could not pay for standard operating costs, including wages. Projects were left untouched for years after the crisis, and some transportation routes were out of commission, including those used by the agriculture sector.
The halt in railroad construction also affected the steel and iron industry temporarily, whose demand increased. The temporary disturbance of the crisis led to falling values on Wall Street, even for solid stocks of the day like Western Union Telegraph. There was an almost immediate recognition that factories and farms alike had excessively expanded and were well below their perceived worth.
Joblessness, the Granger Movement, and Social Unrest
Railroad workers were the first to be without a job due to the banking crisis. Many employees depended on their employers for housing which left some homeless, especially those who had been constructing track lines in remote locations. Steel and iron remained in demand long-term, but these and many other industries raised expectations for worker efficiency or utilized new technology more effectively to replace workers.
Exact numbers for unemployment are unavailable until later in the depression, but reports of mass numbers of people desperate and out of a job were noted in periodicals at that time. Widespread accounts of unrelieved gloom and demand for explanation by economists throughout the Long Depression suggest the severity of suffering by many, despite the lack of strong statistical evidence. It appears that factories in urban centers and southern cotton producers alike had to dismiss workers based on the standstill in investing and realization of the over-production problem.
Workers who were no longer receiving wages or became underpaid found their purchasing power debilitated. This led to lower demand for goods, and the high price of everyday items, which had initially increased due to the struggles of Wall Street, was exacerbated further. Profits shrunk also since means of production was sold at higher prices by manufacturing industries who felt the effects of the depression. Farmers were especially affected by the price changes, including many homesteaders and new small-property owners.
One of the social responses of the 1873 crisis was the Granger movement. Even in times of prosperity, many farmers believed the railroad owners held too much power in the shipping industry. Investigations into the Credit Mobiliere, a stockholder organization of the Union Pacific Railroad Company, showed almost bribe-like relationships between businessmen and politicians at the start of 1873, to the dismay of those outside of Washington, D.C.
This type of corruption was duplicated in similar organizations of the railroads located in the Northeast, and farmer resentment only increased once the banking crisis of 1873 occurred, considering its initial onset in New York City and the Northeast region. Many small farms went out of business, and disgruntled Homesteaders demanded change. The Grange and similar advocacy groups hoped to gain state legislation to regulate the shipping practices of the railroads, taking advantage of the existing scrutiny of these corporations.
Those resettled in the era of prosperity following the war, including veterans and immigrants, were the hardest hit by the depression. The public’s distaste for monopolies entered the political realm, and many campaigners made the elimination of corruption a prominent issue. In the process, other political groups like the Tweed Ring in NYC were exposed, who had manipulatively used municipal funds. Throughout the country, many cities had continued deficit wartime spending for public works in hopes of facilitating business and had to cut expenditures once the economy went sour and tax revenues dipped.
Corruption Revealed and the Confederate States
Those in the abolitionist contingency of Union supporters in the Civil War hoped for a moral transformation on the issue of race relations in the post-war period. Republicans were the party of abolition, and President Grant was to preside over the transformations during this critical period, now commonly referred to as the Reconstruction era. At first, the legal rights of blacks to vote and take part in government seemed ensured, and many offices previously held by white segregationists, who were mostly Democrats at that time, fell to Republicans and black politicians.
Unfortunately, the depression and corruption shifted the focus away from civil rights and the moral elements of the war: the flaw was that Northern support for Reconstruction did not exist in isolation… and was tied to other issues and the personal popularity of U. S. Grant.2 The President and Republican legislators held the credibility of Reconstruction in balance, and the investigations like the one into the Credit Mobiliere showed widespread corruption. Southerners accused outsiders from the North of manipulating the black vote for their own financial gain, labeling them “carpetbaggers.” As reports spread to Northern newspapers, media increasingly questioned the legitimacy of the Reconstruction efforts, which only spurred on confidence of segregationist whites.
In the initial post-war period, segregationists feared the backlash of federal troops, who had remained in Southern areas to ensure protection of newly freed blacks. In some states, this proved to be a bigger challenge than others. The Ku Klux Klan had intimidated blacks from the ballot even before the depression in Louisiana, and it was decided for the 1872 election that a special board would validate the state’s results. Oppositionists challenged the board’s judgments claiming their own candidates had won and physically secured some of the votes, effectively obscuring the election’s legitimacy. Grant even admitted privately that the declaration of Republican winners was a fraud. Such problems for an administration that had set out to ensure democracy in the South hurt the credibility of Grant and fellow Republicans.
Once the depression hit, southern discontent grew as it did in other parts of the country. The price of cotton dropped almost a third, and the new system of tenant farming and greater black freedom was commonly blamed for the hard times, in addition to corporate-connected Republicans. Many black freedmen who had taken government positions were generally the least corrupt public officials at that time, but White Leagues developed which threatened them through violence and other tactics. Sheriff Peter Crosby of Vicksburg, Mississippi had his office overtaken by whites forcing him to appeal to the governor. His reinstatement resulted in a violent racial incident where many blacks were killed and the stability of Reconstruction efforts was discredited further.
In Arkansas, the incredulity of a Republican-monitored democracy met rising militia violence in a display that again led to the deaths of many blacks and further problems for Reconstruction. When candidates Baxter and Brooks became involved in another disputed election result in 1872, Radical Republican Baxter attempted to appease his opponent by allowing disenfranchisement of blacks in future elections. In 1874, liberal Republican Brooks won a lower court decision for his legitimacy as governor two years later and deposed Baxter and his staff by militia force. Blacks fought for both Baxter and Brooks, while the end result was federal intervention.
In 1874, the depression was in full force and undoubtedly one of the biggest political issues. The congressional elections showed a Democratic landslide, setting up the climax of democracy’s problems during the Reconstruction era. In the election of 1876, the recent misgivings about accuracy of Southern elections took the national stage in one of the closest U.S. presidential elections.
Republican candidate Hayes ensured election victory only by agreeing to pull out the last of Union troops from the South, essentially conceding issues related to protection of blacks’ civil rights. Democratic congressional power had nearly guaranteed defunding of federal troops in the south anyhow. The failure of Reconstruction has many contributing factors of which the depression and related corruption played a part, especially in relation to the railroad mania.
The Labor Movement, the First National Strike, and Organized Charity
When the 1873 depression hit unexpectedly, workers and corporations alike became disorganized. Many who lost jobs, like railroad workers, were transient. Some labor leaders, like Mother Jones, reported seeing masses of destitute families in urban environments even before the panic. According to the paucity of evidence available, trade unions of all kinds numerically declined during the depression. Still, the difficult times for workers in the early 1870’s led many, including Jones, to take interest in a renewed labor movement during the second half of the decade.
For some workers, improved conditions seemed secured during the prosperous times. The National Labor Union had won victories of an eight hour day, higher wages, and other favorable conditions in some cases, but the standards were reversed once the depression hit. Many of those in the gloomy reports of the times were likely immigrants and workers in urban centers, those considered strangers by families with older roots in the cities.
The bureau of labor in Pennsylvania reported that probably never in the history of the country has there been a time, when so many of the working classes, skilled and unskilled, have been moving from place to place seeking employment that was not to be had.3 Other state bureaus of labor reported an increase in child labor in families and produced varied estimates of unemployment from two hundred thousand to three million. The Pennsylvania bureau suggested one third of the state’s workers were unemployed for an extended period of time.
The only official unemployment numbers were collected in 1878 by the Massachusetts Bureau of Labor, which suggested a low national number of about half a million and 29,000 wanting work in Massachusetts specifically. Some in the labor movement at the time, like shoemaker Charles Litchman, disputed the statistics as politically motivated in favor of capitalists.
On the other hand, statistical reports produced by the newly created bureaus and organizations were also sometimes criticized for having radical conclusions. In Pennsylvania, the Bureau of Labor Statistics suggested that the weight on labor was growing heavier, the natural resources of the many were being enjoyed by a few, and attempts to secure the benefits when progress was made brought on charges of conspiracy, of brutal violence, [and] of agrarian murders.3 Many saw such declarations as an unruly challenge to existing social structure and called for discontinuation of the bureau’s work.
The great risk for even the most virtuous hard-working families to fall into pauperism and end up at the charity of the community was another observation of the depression. The New York Society for Improving the Condition of the Poor found this to be true in New York City, seeing an increase from 5,000 families on relief in1873 to 24,000 in 1874, and to an average of more than 20,000 families during the later 1870’s.4
Newspapers consistently reported the increased use of soup kitchens, which became the brunt of jokes and scorn. The perception that basic relief efforts were enabling an increasingly vagrant group especially grew in large cities like Boston, where idle workers had demonstrated and demanded the city to employ them in public works. By 1879, it became criminal to ask for food at a dwelling, and the Labor Standard believed the public sentiment was ferocity and oppression against a class of unfortunates who, without a fault of their own, are out of work.2
The culminating labor event of the depression was the great railroad strike of 1877. Wage cuts and localized strikes had occurred throughout the depression, although documentation was difficult since owners generally won these battles. In spring of 1877, a number of railroad companies decided, in a coordinated strategy, to decrease wages by 10 percent and increase stockholder dividends by 10 percent.
Starting in Baltimore and spreading to the West coast, workers walked off the job, destroyed company property, and halted business on the lines. An estimated 100,000 workers were involved at the height of the strike, and the event led a small-but-growing Knights of Labor, with Terence V. Powderly at the helm, to lift a long-held ban on political discussion to increase membership.
The greater suspicion of charity-receivers which seemed to erupt during the depression appears to have a connection to the scientific charity movement that developed soon after. As previously mentioned, many lost faith in the credibility of traditional charity and its ability to avoid enabling the unemployed. Especially among the rich, the urgency for a reformed effort likely grew in response to this attitude. In some cases, the government corruption that had been exposed during the depression was also an impetus to scientific charity; for example, the Philadelphia Society for Organizing Charitable Relief and Repressing Mendicancy hoped to take over dysfunctional government administrative activities.
Business Perspectives on the Crisis
The crisis proved a challenging obstacle to the economic and social well-being of the nation and led to an academic study on depressions. One famous witness testimony to Congress was given by Professor William Sumner of Yale University. Of the Social Darwinist school of thought, he believed the suffering of the depression was unavoidable, but the solution lay in limiting production. Others made similar proposals which likely promoted a newfound awareness of the issue by business owners.
Exact causes for the economic recovery that took place at the end of 1870’s are difficult to identify, yet a number of factors are considered by economists to have helped. First, the nation implemented currency reform which intended to meet the modernized financial system. Second, greater regulation of railroads and new taxes on foreign capital led to a more sober approach on expansion. The confidence of individuals and corporations made a cautious return with the implementation of these interventions.
Third, the idea of “village reform” was an alternative to vagrancy laws during the depression, where those with expendable cash employed local idle workers to do small projects. Such safe short-term investments rarely yielded great profits but were encouraged through the organization of “village improvement societies.” Fourth, population growth over the time period helped balance production and consumption. Fifth, the demand for cotton and other products abroad increased, especially helping the Southern states.
“A Short History of the international Economy since 1850” by William Ashworth, which did not appear to consider the depression significant, included a single line on the event: one government after another was instituting enquiries as to what had gone wrong – enquiries which produced the most varied and often unconvincing explanations.5 One source suggests the currency reform and change to the gold standard actually hurt the recovery, while another strongly disagrees. Statistics of the Gross National Product show a slowed increase, rather than extreme downturn, in the economy; subsequently, some suggest the depression of the 1870’s was not as severe as reported.
One of the most significant debates regarding the U.S. economy in the 19th century is whether the Long Depression fits into a larger recession between 1873 and 1896. Some believe the period may have been particularly difficult but was not far outside the realm of normal economic cycles, where innovations and subsequent prosperity saturate economic equilibrium and lead to recession and depression.
Others suggest the specific circumstances of the late 19th century, including the greedy, corrupt, and irresponsible actions of individuals and corporations during the prosperous times, led to the downturn. They believe the Long Depression was a unique experience attached to the longer recession which should not be considered part of a normal cycle.
Interestingly enough, in some literature the term Great Depression was used for the period of 1873-1896. The term is now used to describe the downturn in the early 20th century which shares some similarities. The most striking similarity is the onset of both depressions immediately after a period of prosperity that involved misuse of credit. Each downturn also had a particular day when the stock market plummeted followed by an initial panic at the banks. Finally, the Long Depression and Great Depression both saw an increase in social unrest and a reconsideration of how relief should be distributed.
Two of the key differences between the two eras are the severity of unemployment and the problems of the agricultural sector. Unlike the Great Depression, unemployment numbers and severity are somewhat unknown from 1873-1878. It is hard to judge in which era it was more difficult to find work once becoming unemployed. More significantly, the Dust Bowl of the Great Depression stands in distinction to the agricultural problems in the Long Depression. The extreme conditions of high winds, blowing soil, and destroyed crops were an ecological disaster unmatched by anything that occurred during the Long Depression.
Continuing Discussions from the Long Depression
The policy discussions of the Long Depression era are recurrent in social welfare. The following themes were present during the 1870’s and continue to be relevant: federal government intervention on Wall Street, corruption and credit misuse by the most trusted financial houses, regulation and healthy growth in industry, immigration policy, high unemployment, tax increases and cutbacks, the disparity between wealthy and poor, consumer and investor confidence, and the relationship between distributing charity and promoting personal responsibility.
Factors considered to be solvent in ending the Long Depression proved pertinent in later downturns. An idea similar to that proposed by the activist workers in Boston and village reformers took shape in the form of the Works Progress Administration in the 1930’s; the major difference was that the federal government hired idle workers for beautification and improvement projects rather than local governments or wealthy individuals hiring idle workers as they did in Long Depression.
Another factor credited as a solution was raising taxes on foreign investments, and a similar discussion continues today on how financial arrangements with other countries can create economic hazards. Also, there is a similarity to the Greenback difficulties and the U.S. government’s later adjustments of interest rates to alter the direction of the economy and monitoring of currency. Finally, the monitoring of corporations for the public interest was considered a solution by Sumner in his testimony about the Long Depression, which has occurred in response to a number of national economic crises.
Conclusion: The Long Depression had serious short-term and long-term effects in the United States. While one writer from the 1930’s suggested it would be surprising if there were a repetition of the same cause-and-effect phenomena [as the Long Depression] in the future, the similarity in analyses made about the 1870’s and other downturns is notable.6
The Long Depression also demonstrates the different nature of financial struggles in a modern economy, where many complicated and debatable factors hurt the well-being of ordinary families. Such struggles are different than those of an agrarian society, where bad weather or more concrete elements may clearly be identified as the culprit of hard times. Instead, a loss of income occurs in the context of a corporate employer, and the result can be greater class distinctions, increased interest in social justice, and displays of agitation and unrest.
1. “Crisis of 1873” by E. Ray McCartney. Dissertation of Kansas State University, 1935: 11-12 (Railroad mileage and total investing), 43-44 (European investing), 17 (Government and Railroads), 62 (Atkinson quoted about railroad mania), 64 (excessive transportation and other causes of crisis), 87 (interest rates high), 73 (Chronicle on growing danger), 93 (fraud activity in failure), 47 (gold price scheme), 15 (Credit Mobiliere), 55 (Labor Movement).
2. “Splendid Failure” by Michael W. Fitzgerald. Chicago: Ivan R. Dee, 2007: 172.
3. “American Labor in the Long Depression, 1873-1878” by Samuel Bernstein. Science & Society 20(1), (Winter, 1956): 60, 74, 77.
4. “Distress, Relief and Discontent in the United States during the Depression of 1873-1878” by Samuel Rezneck. Journal of Political Economy LVIII, (1950): 498.
5. “A Short history of the International Economy since 1850” by William Ashworth. London: Longmans, Green and Company, 1952: 212.
6. “The Long-Wave Depression, 1873-97” by Rendigs Fels. The Review of Economics and Statistics (The MIT Press) 31(1), (1949): 73.
“Banking Panics of the Guilded Age” by Elmis Wicker. Cambridge: Cambridge University Press, 2000.
“Myth of Great Depression” by S.B. Saul. London: The Macmillan Press, 1969.
“Using Primary Sources to Teach the Rail Strike of 1877” by Bruce Lesh. OAH Magazine of History 13(4), 4, (Summer, 1999), pp. 38-47.
Bessemer Process – http://www.davistownmuseum.org/TDMtoolHistory.htm
Castle Garden – Public Domain
The Gilded Age – http://www.senate.gov/reference/reference_item/gilded_age.htm
Northern Industry – https://www.nps.gov/civilwar/industry-and-economic.htm
A Run on the Banks – http://www.historytoday.com/blog/2012/02/long-depression-0
Tweed Ring – Public Domain
The First Vote – http://mlkcommission.dls.virginia.gov/lincoln/african_americans.html
National Colored Labor Union – Public Domain
Pittsburgh Railroad Depot – http://explorepahistory.com/displayimage.php?imgId=1-2-1B29
Greenback – http://www.michaeljournal.org/lesson7.htm
The Effects of 1873 – http://columbia.francissmith.info/?tag=harpers-weekly
Jay Cooke and Company – http://american-business.org/2644-panic-of-1873.html
For More Information: See “Crisis of 1873” by E. Ray McCartney. Dissertation of Kansas State University, 1935.
How to Cite this Article (APA Format): Barga, M. (2013). The Long Depression (1873-1878). Retrieved [date accessed] from /?p=8220.