September 18, 1873—In an increasingly globalized economy, a major financial institution, long driven by overoptimism, suddenly came a cropper, sending shivers through Wall Street. A Republican U.S. President, unwilling to withdraw troops in an occupied region even after a number of years, was blamed for misplaced priorities. But it’s not just 2008—this all happened in the Panic of 1873, too.
This major economic setback began at 11 am in the fifth year of the Grant administration, as H.C. Fahnestock, the New York partner of Jay Cooke, cleared his throat and informed dumbfounded observers that the office was closed.
Though this week’s bankrupt financial institution, Lehman Bros., might be more familiar to Americans, Jay Cooke & Co. might in its time have cut a longer shadow, as the financier of the Union Army during the Civil War and as underwriter of construction of the Northern Pacific Railroad. It was Cooke’s attempt to back a second transcontinental railroad, at a time when the demand didn’t exist, that effectively ruined the firm and threatened to bring others down with it.
By day’s end, 37 other banks and two brokerage houses would, like Cooke, close their doors. Suddenly European lenders began to call in their loans (for an idea of the foreign version of speculative mania, see Anthony Trollope’s masterful The Way We Live Now).
The economic effects of this massive bubble and its correction have been much remarked upon over the years—notably the tension building between management and labor that flared up in earnest for the next 60 years.
But I learned of an equally significant consequence in Columbia University historian Eric Foner’s Reconstruction: America’s Unfinished Revolution: the unraveling of the Northern attempt to create a more equitable, racially just South.
The nation’s economic pain came at a particularly bad time for Ulysses S. Grant. In a lecture I saw him deliver at the Chautauqua Institution several years ago, Foner referred to the Ku Klux Klan as an agent of “domestic terrorism.” Grant ordered the arrest of hundreds of Klansmen, but it was an uphill battle to make the indictments stick. In the North, support was eroding for an open-ended commitment to keeping federal troops in the South, where they were still viewed as the enemy.
In the South, the “Bourbon Democrats” or “Redeemers” were looking for a way to undercut activist government. The Panic gave them a perfect excuse. The results were, to say the least, all they could ask for:
1) A clamor rose to cut state budgets and lower tax rates;
2) Private contractors leased convicts—the beginning of the “Chain gang” system;
3) Racially integrated state legislatures had, for the first time in the South’s history, funded public schools—but now aid for those schools, and particularly anything associated with blacks, was cut.
As part of the deal to end the impasse over the election of 1876, Democrats allowed the Republican Rutherford B. Hayes to win on condition that federal troops be withdrawn from the South’s capital cities. Reconstruction finally received its coup de grace from the Supreme Court’s in Plessy v. Ferguson. But the Panic of 1873 laid the necessary groundwork for all of this.
This major economic setback began at 11 am in the fifth year of the Grant administration, as H.C. Fahnestock, the New York partner of Jay Cooke, cleared his throat and informed dumbfounded observers that the office was closed.
Though this week’s bankrupt financial institution, Lehman Bros., might be more familiar to Americans, Jay Cooke & Co. might in its time have cut a longer shadow, as the financier of the Union Army during the Civil War and as underwriter of construction of the Northern Pacific Railroad. It was Cooke’s attempt to back a second transcontinental railroad, at a time when the demand didn’t exist, that effectively ruined the firm and threatened to bring others down with it.
By day’s end, 37 other banks and two brokerage houses would, like Cooke, close their doors. Suddenly European lenders began to call in their loans (for an idea of the foreign version of speculative mania, see Anthony Trollope’s masterful The Way We Live Now).
The economic effects of this massive bubble and its correction have been much remarked upon over the years—notably the tension building between management and labor that flared up in earnest for the next 60 years.
But I learned of an equally significant consequence in Columbia University historian Eric Foner’s Reconstruction: America’s Unfinished Revolution: the unraveling of the Northern attempt to create a more equitable, racially just South.
The nation’s economic pain came at a particularly bad time for Ulysses S. Grant. In a lecture I saw him deliver at the Chautauqua Institution several years ago, Foner referred to the Ku Klux Klan as an agent of “domestic terrorism.” Grant ordered the arrest of hundreds of Klansmen, but it was an uphill battle to make the indictments stick. In the North, support was eroding for an open-ended commitment to keeping federal troops in the South, where they were still viewed as the enemy.
In the South, the “Bourbon Democrats” or “Redeemers” were looking for a way to undercut activist government. The Panic gave them a perfect excuse. The results were, to say the least, all they could ask for:
1) A clamor rose to cut state budgets and lower tax rates;
2) Private contractors leased convicts—the beginning of the “Chain gang” system;
3) Racially integrated state legislatures had, for the first time in the South’s history, funded public schools—but now aid for those schools, and particularly anything associated with blacks, was cut.
As part of the deal to end the impasse over the election of 1876, Democrats allowed the Republican Rutherford B. Hayes to win on condition that federal troops be withdrawn from the South’s capital cities. Reconstruction finally received its coup de grace from the Supreme Court’s in Plessy v. Ferguson. But the Panic of 1873 laid the necessary groundwork for all of this.
Great piece Mike!
ReplyDeleteIt shows the more things change,
the more they stay the same.
(quote from my Mother!)