The Panic of 1873
The late 1860s were boom years in Europe and the United States. Then came the Panic of 1873.
Railroad construction went bonkers after the American Civil War: 53,000 km of new track was laid across the country between 1868 and 1873. Considerable craze over rails was infused by government grants and subsidies. By 1873 the railroad industry was 2nd only to agriculture in employment.
An abundance of capital created an oversupply, not only of rail, but also factories, docks, and ancillary facilities. The crunch came with realization that investments had been largely sunk with little prospect of profit.
Meanwhile, in 1871, the German Empire decided to cease minting silver coins. This dropped demand for the metal, depressing silver prices.
At the time, America mined much of the world’s silver supply. In response to the German decision, the US, via the Coinage Act of 1873, abandoned silver as a currency medium, settling solely on gold to back its paper money.
The 1873 Act reduced the domestic money supply, which raised interest rates, thus hurting debt holders, notably farmers. The perception of instability this instilled resulted in investors shying away from long-term obligations, especially bonds.
Beginning in September 1873, the inability of investment banks to market bonds set off a chain reaction of bank failures. The New York stock market closed for a time.
Factories laid off workers. The US slipped into depression.
Europe was already suffering from financial disruption. The Vienna Stock Exchange crashed in May 1873 from a speculative bubble, dishonest manipulations, and insolvencies. Bank failures led to lending contraction which brought businesses down.
Trade fell worldwide. Prices drastically dropped in most European countries as demand slackened.
The 1873 depression sparked cries by agricultural and industrial lobbyists for protective tariffs. This provoked a wave of economic nationalism in the US, Canada, France, Germany, and other countries, further depressing trade and economic vigor. In contrast, Britain, Belgium, The Netherlands, and Denmark remained in the free trade bloc.
The depression that began in 1873 lasted in Europe until 1897. The United States recovered enough to have a repeat financial panic and severe depression in 1893, over several of the same causes that befell the economy in 1873, including railroad overbuilding and subsequent bank failures. This came after having less grievous economic conniptions in 1884 and 1890.