THE PANIC OF 1873

"Are not all the great communities of the Western World growing more corrupt as they grow in wealth?" asked a critical and thoughtful journalist, Edwin L. Godkin, in 1868, as he considered the relations of business and politics. He answered himself in the affirmative and found comrades in his pessimism throughout that intellectual class in whose achievements America has taken conscious pride. For at least ten years they despaired of the return of honesty. James Russell Lowell, decorated with the D.C.L. of Oxford, and honored everywhere in the world of letters, was filled with doubt and dismay as late as 1876, at "the degradation of the moral tone. Is it, or is it not," he asked, "a result of democracy? Is ours a 'government of the people by the people for the people,' or ... for the benefit of knaves at the cost of fools?"

It was not without reason that serious men were fearful in the years in which military heroes dominated in politics, and in which commerce struggled with its revolution. Had they foreseen the course of the next generation, noted the progress of new ideas in government, the extension of philanthropy and social relief, and the passion for education that swept the country, they need not have despaired. Godkin, himself, could not have made a living from his Nation, with its high ideals, its criticism, and its despondency, in a land that was wholly rotten. The young college presidents of the period could not have found a livelihood in a country that was not fundamentally sound. At Harvard, Charles William Eliot broke down the old technique of culture and enlarged its range; at Michigan, James Burrill Angell proved it possible to maintain sound, scholarly, and non-political education, in a public institution supported by taxation; in a new university a private benefactor, Johns Hopkins, gave to Daniel Coit Gilman a chance to show that creative scholarship can flourish in a democracy. But the essential soundness of the Republic was as much obscured in 1868 as its wealth had been in 1861, and for the present the objects on the surface, brought there by violent convulsion, represented its less creditable part.

The years of Grant's Presidency were filled with unsightly episodes, that were scandalous then and have been discouraging always. In his first year of office, Jay Gould and James Fisk, tempted by the premium on gold, tried to corner the market, and Grant's public association with the speculators brought upon him fair reproach. Tweed, exposed and jailed after a long fight, revealed the close alliance between crooked politics and business in the cities, and became a national disgrace. Less prominent than these but far from proper were Schenck and FrÉmont. The latter was arrested in France, charged with promoting a railroad on the strength of land grants that did not exist. He had been close to the old Republican organization, and the figurehead of the radicals in 1864, so that his notoriety was great. Schenck, while Minister in London, posed as director of a mining company, and borrowed from the promoters of the scheme the money with which he bought his shares. When the company proved insolvent, and perhaps fraudulent, Grant was forced to recall him. Critics who saw dishonesty or low ethical standards in these men were ready to see in the carnival of the Reconstruction Governments wholesale proofs of decadence.

During the campaign of 1872 yet another item was added to the unpleasant list. Letters were made public showing how Congressmen had taken pay, or its equivalent, from men behind the Union Pacific Railroad. The scandal of the CrÉdit Mobilier touched men in all walks of life, beginning with Schuyler Colfax, Vice-President of the United States, including Blaine, Allison, and Garfield, Wilson and Dawes, and other men who no longer held office. Some of these denied the charges and proved their innocence. But none entirely escaped the suspicion that their sense of official propriety was low, and their list sampled the Republican party at all its levels. One of the victims, Colfax, talked freely in 1870 of gifts received—a carriage from a Congressman and horses from an express company.

In 1872 the notorious Butler aimed at the governorship of Massachusetts. He failed to get the Republican nomination, but the strength of his candidacy showed the uncritical devotion of many voters to success. He resumed his seat in Congress, unabashed, and put through an act properly increasing the salaries of Washington officials, but applying also to the men who voted for it and to the session just ending. Its makers went home to explain their part in the "salary grab" to their constituents, and many never returned to Congress.

Other improprieties of the first Administration of Grant came to light in his second term. His Secretary of War, Belknap, confessed to the sale of offices. In the Treasury Department were uncovered the whiskey frauds which tainted even Grant's private secretary. And the Speaker of the House, Blaine, was shown to have urged a railroad company to recognize his official aid, promising not to be a "deadhead in the enterprise" in its future service.

There is no better illustration of the commercial ethics of the sixties than may be found in the letters of Jay Cooke, philanthropist and financier. With a lively and sincere piety, and an unrestrained generosity, he at once extended hospitalities to the political leaders of the day, carried their private speculations on his books, and performed official services to the Government. It was impossible to tell where his public service ended and his private emolument began, but there was nothing in his life of which he was ashamed. A friend of General Grant, and liberal patron of his children, Cooke was actually entertaining the President at his country home just outside of Philadelphia when the failure of his banking house precipitated the panic of 1873.

There had been financial uneasiness abroad and in the United States for several months, but few had anticipated the collapse of credit that followed the suspension of Jay Cooke and Company, September 18, 1873. If this house failed, none could be regarded as safe. Jay Cooke had established his reputation during the Civil War through his ability to find a market for United States bonds. After the war he had carried his activity and prestige into railways. In 1869 he had become the financial agent of the Northern Pacific, and customers, encouraged by their good bargains in the past, continued to invest through him as he directed. His personal followers, numerous and confident, had been taught to believe his credit as sound as that of the Government whose bonds he had handled. When he collapsed, overloaded with Northern Pacific securities, in which his confidence was enthusiastic, the panic was so acute that the New York Stock Exchange closed its doors for ten days, to prevent the ruinous prices that forced sales might have created. Thirty or more banking houses were drawn down by the crash within forty-eight hours. Others followed in all the business centers, while trade stood still through the paralysis of its banking agents.

The distribution of the panic throughout the United States followed the usual course. In the first crisis, banking houses broke down, unable to meet the runs of their depositors or their original obligations. The depositors next, unable to secure their own funds or to obtain their usual loans, were driven to insolvency. After the failure of banks came that of railroads, the wholesale houses, and the factories. As these last defaulted, the loss was spread over their employees, their contractors, and their creditors. Confidence was everywhere destroyed. Investments were lost, or lessened, or put off indefinitely in their payments. After a few days the acute crisis was over, but the resulting depression brought stagnation to business. Industries marked time, at best; expansions were out of the question; new enterprises were not heard of. From 1873 until 1879 the United States was engaged in recovery from the injury which the panic had done and from the weakness which it had revealed.

The panic, followed by five years of economic prostration, was only occasioned by the failure of Cooke. Its real causes lie throughout the period of Civil War expansion. Never had the daily necessities of the United States equaled its production, and the resulting surplus, available for permanent improvements, was larger than ever in the sixties because of the growing use of machinery. Funds for investment, produced at home and increased through the strong foreign credit of the United States, tempted and aided the speculative development of the North and West. Yearly greater sums were sunk in municipal improvements that brought in no return, or in railroads that were slow in paying, or in errors that were a dead loss. The loss from the Civil War was an added charge upon the surplus. Great fires in Boston and Chicago consumed more of it. By 1870 the United States was using surplus at a rate that threatened soon to exhaust it. When the limit should be reached, new enterprises must necessarily cease, and all that were not wisely planned must fall, dragging down others in their ruins. For months before the failure of Jay Cooke, business had been dangerously near this margin. His failure, caused by his inability to find a market for Northern Pacific, merely precipitated the inevitable crash.

The faulty currency, outstanding since the war, and adding to the business uncertainty, now aggravated the panic when it broke. The greenbacks were slowly rising in value. They profited by the growing credit of the United States, and received a special increase because of the development of business. After 1865 business transactions grew in number and volume more rapidly than the amount of available money, and this, driven to greater activity in circulation, rose in value from the increased demand. As the purchasing value of the dollar increased, prices, measured by the greenbacks, necessarily fell, while the equivalent of every debt that had to be paid in a specified number of dollars as steadily rose. Indeed, so great was the increase of production from the new farms, reached by the new railroads, and supplying raw materials for the new factory processes, that prices fell, even when stated in terms of gold. In a period of falling prices and appreciating currency, the gap between the poor and the rich was widened. The debtor carried a growing burden while the creditor harvested an unearned increase. Persons who lived on fixed salary or income profited by the fluctuations, but commercial transactions were made more difficult for the debtor.

The organized Greenback movement had figured in politics during the campaign of 1868, and made a special appeal to the debtor section during the hard times after 1873. The Republican Congress had, in 1869, sealed the professions of the party's platform by passing a resolution "to strengthen the public credit," in which it declared "that the faith of the United States is solemnly pledged to the payment in coin or its equivalent," of the greenbacks, and that the United States would not take advantage of its creditors by paying off its "lawful-money" bonds in depreciated paper. All debts created before the war or during its early years had lost through depreciation, just as the later debts had gained through the reverse.

Despite this pledge, advocates of greenback inflation, with Butler among their leaders, became more numerous in both parties after the panic, and an attempt was made to have Congress reverse itself. Grant's Secretary of the Treasury gave a new construction to the law by reissuing during the critical days of the panic some $26,000,000 of greenbacks that had been called in by McCulloch. He raised the total outstanding to $382,000,000, and Congress in 1874 passed a law increasing the amount to $400,000,000, in an act named by its opponents the "Inflation Bill." To the surprise of many, Grant sharply vetoed the act, adhering to his views of 1869 on the evils of an irredeemable paper currency. During the next winter John Sherman, Senator from Ohio, induced Congress to take a step in fulfillment of the guaranty which Grant had saved. On January 14, 1875, it was provided that the Treasury should resume the payment of specie on demand on January 1, 1879.

Ultimately Congress was saved from the act of repudiation which the Greenbackers urged upon it, but while the movement flourished it added another to the catalogue of troubles with which men like Godkin and Lowell were distressed. Easterners, in general, had as little understanding of the West as they had had of the race problem in the South. They were disposed to attribute to inherent dishonesty the inflation movement, and to ignore the real economic grievance upon which it was founded. The suspicions directed against the ethical standards of the West were increased by the Granger movement, to which the panic gave volume and importance.

Among the social phenomena of 1873-74 was the sudden emergence in the Northwest of a semi-secret, ritualistic society, calling itself the "Patrons of Husbandry," but popularly known as the "Grange." It was founded locally upon the soil, in farmers' clubs, or granges, at whose meetings the men talked politics, while their wives prepared a picnic supper and the children played outdoors. It had had a nominal existence since 1867, but during the panic it unexpectedly met a new need and grew rapidly, creating 1000 or more local granges a month, until at its maximum in 1874 it embraced perhaps 20,000 granges and 1,600,000 persons. In theory the granges were grouped by States, which latter were consolidated in the National Grange; in fact, the movement was almost entirely confined to the region north of the Ohio River, and even to the district northwest of Chicago.

Such a movement as the Grange, revealing a common purpose over a wide area and in a great number of citizens, could not but affect party allegiance and the conduct of party leaders. Simultaneously with its development the legislatures of the Northwest—Illinois, Wisconsin, and Iowa—became restive under existing conditions, and assumed an attitude which became characteristic of the Grange,—one of hostility to railroads and their management. With the approval of the people, these States passed, between 1871 and 1874, a series of regulative acts respecting the railways, which were known at the start as the "Granger Laws," and which became a permanent contribution to American government.

To Eastern opinion the Greenback movement had been barefaced repudiation; the Granger movement seemed to be confiscation; for every law provided a means by which public authority should fix the charge imposed by the railroad upon its customer. Both movements need to be studied in their local environment, which at least explains the Western zeal in clamoring for the greenbacks, and shows that in the Granger movement the West saw farther than it knew.

The Civil War period marks a new era in the history of American railways. Prior to the panic of 1837, the few lines that were built were local. Few could foresee that the railway would ever be more than an adjunct to the turnpike and canal in bringing the city centers closer to their environs. In the revival of industry after the panic of 1837, the mileage increased progressively, and before the next panic checked business in 1857 the tidewater region was well provided, and the Alleghanies had been crossed by several trunk lines whose heads extended to the Lakes and to the Mississippi. But in these years the change was of degree rather than of kind. The lines were built to supplement existing routes, like the Erie Canal, the Lakes, the Ohio River, or the Mississippi. They connected communities already well developed and prosperous, and in undertaking new enterprises promoters had figured upon capturing the profits of existing trade.

In the new epoch of the sixties there were only new fields to conquer. The great enterprises were forced to speculate upon the development of the public domain and to find their profits in the business of communities to which they themselves gave birth. Natural waterways and roads extended little west of Chicago. The new fields were entered by the railroads without prospect of any competition but that of other railroads. The resulting communities, born and developed between 1857 and 1873, were peculiarly the creatures of, and dependent on, the railway lines.

This inevitable dependence on railways colored the history of Wisconsin, Iowa, and Minnesota, and, to a lesser degree, of all the West. While men were yet prosperous and sanguine and without adequate railway service, they offered high inducements to promoters of railways. Once the roads were built and the communities began to pay for them and to maintain them, the dependence was realized and anti-railway agitation began. The fact that they were commonly built on money borrowed from the East threw debtors and creditors into sectional classes injurious to both.

The antagonism to railways was increased because these yet regarded their trade as private, to be conducted in secrecy, with transportation to be sold at the best rates that could be got from the individual customer. The big shipper got the wholesale rate; the small shipper paid the maximum. Favoritism, discrimination, rebates, were the life of railway trade, and railway managers objected to them only because they endangered profits, not because they felt any obligation to maintain uniformity in charges.

In a community as dependent on the railways as the Northwest was, the iniquity of discriminatory or extortionate rates was soon seen. The East, with rival routes and less dependence on staple interests, saw it less clearly. The charges were paid grumblingly in good times; in bad times, when the rising greenbacks squeezed the debtor West and the panic of 1873 stopped business everywhere, the farmers soon made common cause. They seized upon the skeleton organization of the grange and gave it life. In 1874 their organized discontent compelled attention.

The Granger Laws were an attempt to establish a new legal doctrine that railways are quasi-public because of the nature of the service which they render and the privileges they enjoy. This principle was overlaid in many cases by the human desire to punish the railroads as the cause of economic distress, but it was visible in all the laws. It is an old rule of the common law that the ferryman, the baker, and the innkeeper are subject to public control, and railways were now classified with these. In Wisconsin, the "Potter" Law established a schedule with classified rates, superseding all rate-cards of railroads in that State. Illinois created a railroad and warehouse commission with power to fix rates and annul warehouse charters. In Iowa the maximum rates were fixed by law.

The railroads failed to realize at once what the new laws meant. They denounced them as confiscatory, and attacked them in court as wrong in theory and bad in application. Even admitting the principle of regulation, the laws were so crudely shaped as to be nearly unworkable. Farmer legislators, chosen on the issue of opposition to railways, were not likely to show either fairness or scientific knowledge. Coming at the same time with the panic of 1873, it is impossible to measure the precise effect of any of these laws, and all were modified before many years. But the railroads' objection lay beneath the detail, and the fundamental fight turned on two points—the right of public authority to regulate a rate at all, and whether state regulation was compatible with the power of Congress over interstate commerce.

By 1876 the appeals of the railroads against the constitutionality of these Granger Laws had gone through the highest state courts to the Supreme Court of the United States. In the spring of 1877 that body handed down a definitive decision in the case of Munn vs. the State of Illinois in which it recognized that the "controlling fact is the power to regulate at all." It held that when the institutions in question (in this case warehouses) established themselves, they did so "from the beginning subject to the power of the body politic to require them to conform to such regulations as might be established by the proper authorities for the common good." It upheld the rate laws, declared that they were not an infringement upon the powers of Congress, and thus gave formal sanction to a new doctrine in American law.

The legal consequences of the "Granger Cases" extended through the ensuing generation. The need for public intervention grew steadily stronger, and as time went on it became clear that this control could not be administered by orators or spoilsmen, but called for scientific training and permanence of policy. It was one of many influences working to reshape American administrative practice.

The Granger movement had close relations with the panic of 1873, although it must anyway have appeared in the Northwest at no remote date. As a political force it soon died out, leaving the principle of regulation as its memorial. With the gradual recurrence of prosperity the Northwest found new interests, and as early as 1877, when the decisions were made, the passion had subsided.

It was, however, a gloomy United States that faced the end of its first century of independence, in 1876. Pessimism was widely spread among the best educated in the East. Public life was everywhere discredited by the conduct of high officials. The South was in the midst of its struggle for home rule, which it could win only through wholesale force and fraud. The West was discouraged over finance and still depressed by the panic. Yet Philadelphia went ahead to celebrate the centennial as though it were ending the century as hopefully as it had begun.

The Exposition at Philadelphia this year was a revelation to the United States. Though far surpassed by later "world's fairs," it displayed the wide resources of the United States and brought home the difference between American and European civilization. The foreign exhibits first had a chastening influence upon American exuberance, and then stimulated the development of higher artistic standards. In ingenuity the American mind held its own against all competition. But few Americans had traveled, the cheap processes of illustration were yet unknown, and in the resulting ignorance the United States had been left to its assumption of a superiority unjustified by the facts. From the centennial year may be dated the closer approach of American standards to those of the better classes of Europe.

In the summer of 1876 the thirty-eighth State, Colorado, was added to the Union. It had been seventeen years since the miners thronged the Kansas and Nebraska plains, bound for "Pike's Peak or Bust!" In the interval the mining camps had become permanent communities. Authorized in 1864 to form a State, they had declined to accept the responsibility and had lingered for many years with only a handful of inhabitants. Now and then entirely isolated from the United States by Indian wars, they had prayed for the continental railroad, only to be disappointed when the Union Pacific went through Cheyenne instead of Denver. One of the branches of the Union Pacific was extended to Denver in 1870, and thereafter Colorado grew in spite of the panic of 1873. Grant began to urge its admission in his first Administration, and signed a proclamation admitting it in 1876. It came in in time to cast three Republican electoral votes in the most troublesome presidential contest the United States had seen.

BIBLIOGRAPHICAL NOTE

Among the more valuable books of biography and reminiscence for this period are R. Ogden, Life and Letters of Edwin Lawrence Godkin (2 vols., 1907); H.E. Scudder, James Russell Lowell (2 vols., 1901); C.E. Norton, ed., Letters of J.R. Lowell (1894); Reminiscences of James B. Angell (1912); J. T. Austen, Moses Coit Tyler, 1835-1900 (1911); J.G. Blaine, Twenty Years of Congress; E.P. Oberholtzer, Jay Cooke; and A.B. Paine, Th. Nast (1904). The CrÉdit Mobilier may best be studied in Rhodes, in J.B. Crawford, CrÉdit Mobilier of America (1880), and in the reports of the committees of Congress that investigated the scandal (42d Congress, 2d Session, House Report no. 77). J.W. Million, State Aid to Railways in Missouri (1896), gives a good view of railroad promotion schemes. F. Carter, When Railroads were New (1909), is a popular summary. In J.R. Commons (ed.), Documentary History of American Industrial Society (10 vols., 1910-), are various documents relating to the Grange, which organization received its classic treatment in E.W. Martin, History of the Granger Movement (1874; his illustrations should be compared with those in J.H. Beadle, Our Undeveloped West, in which some of them had originally appeared in 1873). There are numerous economic discussions of the Grange in the periodicals, which may be found through Poole's Indexes, the best work having been done by S.J. Buck. The Chapters of Erie (1869), by C.F. Adams, is a valuable picture of railroad ethics. Much light is thrown upon financial matters by the Annual Reports of the Secretary of the Treasury and J.D. Richardson (ed.), Messages and Papers of the Presidents (10 vols.).