14—
The Panic of 1873^[*]

The panic of 1873 fits somewhat uneasily into a discussion on crashes in the American stock market. In the first place, the panic was international, as many others including those of 1890, 1929 and 1987, have been. The title of this paper might properly be called "The panics of 1873," since there were panics in Vienna and Berlin, as well as in New York. Secondly, the United States end of the troubles was felt in the bond market, more than that for equities, and even in the market for urban building sites, especially in Chicago. These differences or extensions, do not seem to me to be sufficient reason to abandon the study. The panics of 1873, 1890 and 1929 are of particular interest for their international character and because each was followed by fairly deep depression on a global scale. That of 1873 is thus worth reexamination.

The international connections of the crash are of particular interest. National observers repeatedly insist that financial crises within their borders are of purely local origins and consequences. This has been claimed especially for the Overend, Gurney failure in London, and the corso forzoso (forced circulation or abandonment of the silver standard) in Italy, both of 1866, on the one hand, and for the 1890 Baring crisis and its 1893 aftermath in London, Argentina, Turin, Melbourne, New York, and probably also Johannesburg, on the other. The connections among Vienna, Berlin, Frankfurt and New York in 1873 were more

[*] Paper prepared for a Conference on Financial Panics held on October 19, 1988 at the Salomon Brothers Center for the Study of Financial Institutions, New York University, first published in 1990 in Crashes and Panics in Historical Perspective , a Salomon Brothers Center Book.

readily recognized (except by Emden, 1938, p. 183, who claims the Jay Cooke failure to be independent of the Viennese Krach ). Friedman and Schwartz (1963) insist that the 1920–1 and 1929 stock-market crashes originated solely in the United States, pointing to the gold inflows of the periods as proof. But connections between financial markets and macro-economies extend beyond those running solely through money flows. Booms and busts can both be spread by money movements, to be sure, but also by arbitrage in internationally-traded commodities and securities, through the foreign-trade multiplier connecting incomes in two countries through trade between them, and especially by psychological responses in one or more markets to trouble in another. The market (or markets) that follows marks down its prices along with prices in the originating one, shifting both demand and supply curves, if one needs to think in those terms, without transactions between the markets necessarily taking place. Especially of relevance to 1873, one market may precipitate a recession, a depression and even a crash in another by halting lending to it at a time when the earlier recipient had come to depend on a regular inflow. The events of 1873 provide a striking example of a dictum of R.C.O. Matthews (1954, p. 69), applied by him to 1836–9, in the question whether the trouble started in Britain or in the United States: "It is futile to draw any hard-and-fast rule assigning to either country causal primacy in the cycle as a whole or its individual phases."

I start with a model which is perhaps familiar to those who know my book Manias, Panics and Crashes: A Study of Financial Crises (1989). There is a "displacement" or autonomous event or shock that changes investment opportunities. Some old lines of investment may be closed down, but especially some new are opened up. Prices in the new lines rise. Gains are made. More investment follows. The process can cumulate, accelerate, pick up speed, become euphoric, and verge on irrationality. To quote from the Chicago Tribune of April 13, 1890, on the contemporary land boom:

In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit. (Quoted in Hoyt 1933, p. 165)

A stage of "overtrading" or "overshooting" equilibrium levels may be reached. After a time, expectations of continued price rises in the asset weakens and may even be reversed. The period in which expectations are weakening is known as "distress." The expectations that had led to a crescendo of movement out of liquid assets such as money into long-

term or equity assets reverse themselves, gradually or precipitously. If the reversal is precipitous, there is a crash and perhaps a panic.

In this history of manic episodes followed by market collapse it is often clear what the displacement was. The period leading up to 1873, on the other hand, had a great many, making it difficult to rank them in importance. In chronological order they were:

1. The end of the Civil War in the United States.

2. The Prussian—Austrian war of 1866.

3. The Overend, Gurney crash in Britain, again in 1866.

4. The Wunderharvest in wheat in Austria in 1867, a year when the rest of Europe experienced short crops, that gave a life to Austrian railroad traffic and exports.

5. The opening of the Suez canal in 1869.

6. The Franco-Prussian War of 1870–1.

7. The astounding success of the Thier rentes , issued in 1871 and 1872 to recycle the 5-billion-franc indemnity paid by France to Prussia.

8. The Chicago fire of October 1871.

9. The mistake of German monetary authorities in paying out gold coins minted from a portion of the indemnity payment before the silver coins to be withdrawn had been retired.

10. Relaxation of German banking laws.

There were also a number of lesser but still disturbing events:

11. The Crédit Mobilier scandal in the finance of the Erie and Union Pacific railroads.

12. The US claims against Britain for having outfitted and supported the Confederate naval vessel Alabama that preyed on Northern shipping.

13. The Granger movement in the West with farm groups fighting the expanding railroads regarded as avaricious monopolies by legislating limits on the rates charged for handling, storing, and shipping farm products.

Of particular importance in the relations between Europe and the United States was that different countries in Europe participated in the boom at its height in 1872–3 in varying degrees. France was relatively depressed as it sought to raise a portion of the indemnity through taxation. Britain had already been through a railway mania in 1847, with a moderated reprise in 1857, so that it was not caught up in domestic-investment euphoria in the same way as Germany, Austria and Hungary. Moreover, it had just experienced the Overend, Gurney panic of 1866, largely associated with foreign investment in the Mediterranean, especially Egypt and Greece, and in shipping, and was in consequence

wary of investment excitement. Britain functioned in fact to a degree as a balance wheel between central Europe and the United States, absorbing US government and railroad bonds sold by German investors to acquire funds for investment at home (Simon, 1979, pp. 101, 127, 145), and fine-tuning the short-term capital market as the French indemnity transfer took place to a large extent through sterling bills. It did so by frequent changes of the Bank of England discount rate – 24 in 1873 alone.

Foremost among the displacements in 1871–2 in Europe was the payment of the 5-billion-franc indemnity of France to Prussia which the latter shared with other German states as the Reich was founded. Significant monetary changes followed from the payment of 512 million francs in gold and silver, plus the drawing of gold from London with sterling exchange. This part of the payment was connected with German monetary reform, the adoption of the gold standard, and the expansion of the money supply through the issuance of gold coin before calling in the silver, widely noted as a mistake (Åkerman, 1957, p. 341; Wirth, 1968, pp. 456–8; Zucker, 1975, pp. 68–9). In three years the circulation of thalers, later renamed marks, tripled from 254 millions to 762 million (Wirth, 1968, p. 438).

The bulk of the rest of the indemnity was paid off by September 1873 recycling. The French raised two massive bond issues at home (the Thier rentes ) in June 1871 and July 1872 that were subscribed to by French investors, some of whom sold their European securities to acquire the money to do so, and by investors, banks and speculators all over Europe. The real transfer occurred later as French investors reconstituted their portfolios of foreign securities, and foreign purchasers of the rentes sold them to take their profit and repatriated the funds.

The proceeds of the indemnity in Germany were used to pay off the debts of the German states, debts both at home and abroad. One billion marks of German state securities were estimated to have been held in Austria and the redemption of this amount led to a new boom in Austrian railroads. The Austrian railroad system had already been expanded by 16 percent in mileage and 38 percent in traffic between 1864 and 1867, the latter largely the result of the Wunderharvest . The liquidation of German securities led Austrian investors to a new wave of railroad investment that spread to the related industries of iron and steel and rolling stock, and especially to a major expansion in financial institutions, both general banks and a specialized type, the Maklerbank or broker's bank, which loaned to purchasers of securities.

In Germany itself there was a boom in banking, in railroads, and especially in construction. The formation of the Reich with Berlin as its capital attracted large numbers of people to that city and, in due course,

banks that had originated in other places. Along with mixed banks like the Deutsche Bank, formed in 1872 to compete with London in the finance of German foreign trade but inevitably drawn into domestic lending by the boom, there was created a class of so-called Baubanken , or construction banks, that ostensibly financed building but more than anything else financed speculation in building sites. A class of millionaire peasants developed that sold their farm land in the periphery of cities, especially Berlin, and so-called "tent-cities" were built, along with barracks to accommodate the workers that poured in. Rents in Berlin doubled and trebled in a short time, and calculable reality gave way to fantasy (Pinner, 1937, pp. 202–4). Among the foremost of the Baubanken was one Quistorpische Vereins-Bank of Berlin, with 29 subsidiaries in the field of real estate, construction and transport. Its shares went from 191 marks on April 1, 1873, to 25 1/2 marks the following October 10 (ibid, p. 205; Oelssner, 1953, p. 257). After paying out dividends of 20, 30 or 40 percent per annum in 1872 the prices of Baubanken shares fell after September 1873 to 50, 20, 10 or 5 percent of nominal capital (Pinner, 1937, p. 203). In the early years Berlin was called "Chicago on the [River] Spree" (Stern, 1977, p. 161). (I come later to the 1873 real-estate boom in Chicago, the third of five in a century, which evokes Chicago as the standard of real-estate manias (Hoyt, 1933)).

The period from 1871 to 1873 is called the Gründerzeit . For a time I thought this term derived from the founding of the German Reich, as in Reichgründungszeit (Böhme, 1966). It refers, however, to the founding of companies, companies of all kinds but especially of banks (Good, 1984, p. 164). In Austria 1,005 companies with a nominal capital of 5,560 million gulden were chartered between 1867 and 1873, including 175 banks with a nominal capital of 1.4 billion gulden, and 604 industrial firms with nominal capital of 1,337 millions. Many of these never got started, and only 516 with a nominal capital of 1,555 million gulden survived to 1874. In North Germany 265 companies with a nominal capital of 1.2 billion marks were founded in 1871; in Prussia, which made up most of North Germany, 481 firms with a capital of 1.5 billion marks were chartered in 1872, followed in 1873 by 196 companies with a nominal capital of 166 million thalers (Wirth, 1968, pp. 466–71). The data are partial and incomparable. Detailed data for Prussia in 1872 include 49 "Banks and credit institutions," with 345 million marks in capital, and 61 Baubanken with a capital of 227 million.

The boom in the new Reich and in Austria had the usual characteristics: widespread participation in speculative investments; service of distinguished names — largely of nobility — as members of company boards as shills to engender investor confidence; swindles of all kinds.

Wirth (1968, pp. 502–9) observes that there was an epidemic desire to become rich, and that the easy credibility of the public was never greater in any epoch. To get high returns many people "would throw their money out the window." Edmund Lasker, a member of the Prussian House of Delegates from Magdeburg, called attention in February 1873 to a series of scandals in railroad and financing involving German nobility, most notably the Arnim affair, "the most celebrated scandal of the 1870s," involving a professional ambassador to France at the time of the indemnity who was accused of arranging his negotiations so as to affect the stock market in which he had a position. Lasker also denounced collusion in the manipulation of securities between railroad promoters and officials of the Ministry of Commerce (Stern, 1977, pp. 234–42).

Distress appeared in the late summer and early fall of 1872. Wirth (1968, p. 508) observed that the bow was stretched so taut in the fall of 1872 that it threatened to snap. In Austria trade and speculation had been triumphant in 1871 and most of 1872 but at the first sign of trouble railroad securities receded into the background and more speculative bank, construction and industrial companies moved to the foreground. Already in the second half of 1872 textile firms found themselves in difficulty.

In the fall of 1872 the magic word, according to März (1968, p. 172), was the Weltaustellung (World Exhibition) to open on May 1, 1873, in Vienna to celebrate the twenty-fifth anniversary of the accession to the imperial throne of Francis Joseph. Hotels, cafés and places of amusement were built in abundance for the Exhibition which was expected to attract hundreds of thousands of people from all over Europe and to promote widespread prosperity. These hopes were widely exaggerated.

The Creditanstalt pulled back from participation in the market to ready itself to provide help if it were needed (ibid., pp. 177–8) — an action of a major bank getting ready to serve as a lender of next-to-last resort, and paralleling other action by money-center banks at other times, especially the largest New York banks under the National Bank Act (Sprague, 1968, pp. 15, 95, 147, 153, 230, 236–7, 239, 253, 273–4; summarized in Kindleberger, 1989, pp. 188–90), and the action of the New York banks in the spring of 1929 in cutting down brokers' loans to prepare to fill in for "out-of-town banks" and "others" when they withdrew in crisis (Kindleberger, 1986, Table 9, p. 100). Stock-market near-panic broke out in the fall of 1872, and again on April 10, 1873, but the market held on, waiting for the deus ex machina sought in the opening of the Exhibition (Wirth, 1968, p. 519). This period of distress has been called "a silent moratorium" (ibid., p. 508). On May 1, 1873, the Exhibition duly opened. No brilliant success was evident for the first

week and on May 9 the stock market collapsed, one of a series of Black Fridays.

Berlin hung on until September 1873 when it collapsed simultaneously with the failure of Jay Cooke and Co. in Philadelphia and the closing of the New York Stock Exchange. Baubanken continued to lend; prices to rise. The wholesale price level rose from 107 in 1870 (1880 = 100) to 133 in 1872 and 141 in 1873. For industrial materials alone the price level went from 121 in 1870 to 159 in 1872 and 167 in 1873 (by 1879 the two indexes had fallen to 93 and 95, respectively) (Jacobs and Richter, 1935, p. 81). Wirth (1968, p. 513) observed that the writing on the wall should have been clear to all after the revelation of the scandals of Strousberg in 1872, the failure of the Deschauer Bank in Munich, and the Lasker speech of February 1873, but capital continued to be withdrawn from the solid paper of the Reich to be invested in new ventures. Interest rates tightened. In September the bourse collapsed.

The financial crises in Austria and Germany were primarily asset-market phenomena with little or nothing to do with constriction of the money supply (ibid., p. 515). Money in circulation in Austria rose slightly in the second quarter of 1873 (ibid., p. 537). The course of the money supply in Germany in 1873 is too difficult to pin down. Reichsbank figures for gold reserves and circulation do not begin until 1876 (Deutsche Bundesbank, 1976, Sections A and B.1). In 1870, before the founding of the Reichsbank in 1875, there were 38 banks of issue, with notes in circulation rising from 300 million thaler in that year to 450 million in 1872 (Zucker, 1975, p. 78). As already noted, coins in circulation rose from 250 million to three times that amount between 1870 and September 1873. When the last payment on the French indemnity had been paid on September 5, 1873, it is true, the foreign exchanges turned against Germany and it lost several hundred million marks in a few months, says Wirth (1968, p. 459), because Berlin was the dearest city in the world. How much of this occurred before the stock-market crash of September 15 is not evident, but the accounts place no stress on the gold outflow as a precipitant of the collapse. As in Austria, there was no remarkable internal drain.

The relevance of this negative information is to Anna Schwartz's (1986) attempted distinction between "real" and "pseudo" financial crises, echoed by Michael Bordo (1987, p. 3), who calls the former "true" financial crises. Real or true financial crises have bank panics that produce runs out of ordinary money into high-powered money such as bank notes, or, in the circumstances of the development of banking at the time, gold coin. Pseudo-crises do not have such drains. Both Schwartz and Bordo are convinced monetarists, and seem to need to fit financial crises into a monetarist framework. It is not clear that they get

much support from the central European crisis of 1873. Bordo's (1987, pp. 2–3) agreement with Schwartz seems a little forced since a reduction in the money supply is sixth in his list of ten elements of a financial crisis, following behind, presumably in the order of importance although possibly chronologically, a change in expectations, fear of insolvency of financial institutions, attempts to convert real and/or illiquid assets into money, threats to the solvency of commercial banks and other financial institutions, and bank runs.^[1] The crises in Germany, Austria (and the United States) seemed real to contemporaries, conformed to Bordo's elements and Goldsmith's definition, and produced a depression lasting to 1879, even though on Schwartz's monetarist definition it would have to be scored as a pseudo-crisis.

The theme of my work on the 1930s and on financial crises generally is that when there is no lender of last resort to halt the collapse of banking institutions they lead to extended depression (Kindleberger, 1986, ch. 14; 1989, ch. 10). In 1931 the lenders of last resort, the United States and France, were too little and too late. In the 1890 Baring crisis, the position was belatedly saved by the rapidly-rising production of gold in South Africa, but only after financial crises in Australia and the United States in 1893 and a depression that extended to 1896. In 1873, a feeble effort was made to staunch the wound to the financial system in Austria: a support fund (Aushilfsfond ) of 20 million gulden was established, with the national bank contributing 5 million, the state 3 million and the Creditanstalt 2 million to be lent on solid securities. Suspension of the Bank Act, on the analogy of Bank of England action in 1847, 1857 and 1866, was discussed on Sunday, May 11, 1873, and put into effect the next day, but the limit to the issuance of uncovered gulden notes was set at 100 million, a limit that violated the Bagehot prescription that the lender of last resort should lend freely. März (1968, p. 179) comments that the suspension of the Bank Act was awkward in meeting the needs of the moment because the crisis was due to overproduction, not to a scarcity of money.

Money shrank after Black Friday. In October, following the German crash, it became apparent that the Bodenkreditanstalt and its associated banks were in trouble. This time the government helped on a more generous scale because much of the lending by the group had been on domain lands (owned by the emperor) and was regarded abroad as equivalent to government debt. März (1968, p. 181) hints that the greater governmental energy in saving this banking group may have been the consequence of the felt need to protect highly-placed persons who had gambled with the Bankverein's money (ibid., p. 181). The lender-of-last resort function tends as a rule to raise the insider — outsider problem of who should be saved, an inescapable political aspect.

In a passage that evokes the plight of the thrift institutions in

California and the southwest United States today, März (1968, p. 179) observes that the Creditanstalt tried (in vain) to rescue the Baubanken , including among its tools the device of merging them.

Lender-of-last-resort steps in Germany were virtually excluded by the transitions getting under way from the thirty-odd principalities and free cities to the Reich, from 38 banks of issue — although only one of them, the Prussian National Bank, was of any size — to the Reichsbank which opened its doors in 1876. There was also the clumsily handled transition from bimetalism to the gold standard. Transitions, it is generally recognized, make decisive action in crises difficult. In the great depression in the United States there were three such, from the monetary leadership of the Federal Reserve Bank of New York to that of the Federal Reserve Board in Washington, from the retiring president, Herbert Hoover, to Roosevelt who was elected in November 1932 but took office only six months later, and from the international economic leadership of Britain, which yielded it in the summer of 1932, to that of the United States which picked up the burden piecemeal between 1936 and perhaps the Lend-Lease Act of 1941 or the Marshall Plan of 1947. In addition to the major transitions in Germany, there were financial innovations that confused matters — continuous legislation with regard to coinage, the retirement of small notes and of foreign coins (Borchardt, 1976, pp. 6ff.), and financial deregulation which stimulated the formation of the Baubanken . Innovation in banking tends to be underpriced, according to the Cross Report (Bank for International Settlements, 1986, ch. 10), and to lead to what Adam Smith and the classical economists call "overtrading." The German economy was suffused with vigor partly as a consequence of the founding of the German empire, and eventually pulled itself out of the slump. It is hard to find in the literature, however, a recognition of the role of the lender of last resort.

One tragic aspect of the German depression from 1873 to 1879 is that it turned German public opinion against liberalism (Lambi, 1963, ch. vi). Some observers attribute the shift of Bismarck's trade policy from one of low tariffs to the notorious tariff of rye and iron to this shift. Agriculture, in particular, had not been helped by the boom, except for peasants around cities, and was prepared to desert free trade when its exports gave way to import competition from new lands. In addition, the depression gave rise to a wave of anti-Semitism on the ground that Jewish speculators had been prominent among the beneficiaries on the boom, and among the swindlers (ibid., p. 84; Good, 1984, p. 163).

Connections between economic conditions in Germany and Austria and those in the United States went back to the end of the Civil War in 1865. Central Europe was depressed from 1866 to 1869, partly as a

result of the Prussian war against Austria, and this, combined with recovery in the United States, produced a large-scale movement of capital westward to New York from Cologne, Berlin and especially Frankfurt. Matthew Simon (1979) estimates the total capital inflow into the United States from June 1865 to June 1873 as roughly $1 billion, starting relatively slowly at about $100 million a year, picking up to $175 million in 1869 and reaching a peak of $259 million in 1872, before declining to $114 million in 1873 and $100 million in each of 1874 and 1875 (all fiscal years, ended June 30).

Most of this investment up to 1870 was in US government bonds issued during and after the war, notably the 5-20s (5 percent, 20-year bonds) issued in 1862, 1865 and 1867. Immediately after the war these bonds fell in price to very low levels and were bought speculatively. Later, as the US government ran sizable budget surpluses from 1866 to 1871 and reduced its gross debt from $2.7 billion at the end of fiscal 1865 to $2.3 billion six years later, and the gold agio declined from a high of 185 percent in 1865 to 25 percent in 1869–70 and 11 percent in 1874–5, there were assured opportunities for gain (Simon, 1979, pp. 34, 113). The flow from central Europe slowed down in 1866 with the Prussian attack on Austria, and again in July 1870 at the outbreak of the Franco-Prussian War. Panics such as Overend, Gurney and war scares produce two effects on capital movements, according to Simon (1979, p. 92): capital flight which stimulated the purchase of American securities; and building up cash on hand, "the liquidity motive," to be ready for any eventuality, that leads to selling foreign assets. Which motive dominates in a given situation may depend on other factors. From 1866 to 1869 depression in Europe resulted in a greater outflow than the mobilization of cash (ibid., p. 97). In 1870, however, the liquidity motive prevailed (ibid., p. 101). The rise in the prices of US government bonds and the possibilities of a boom in railroad also played a part in the earlier period, a pull as opposed to a push. In 1870 the disturbed market in Europe meant that the US Treasury's attempt to refinance outstanding debt by issuing $200 million of 10-5s, $300 million of 15-4 1/2s and $1 billion of 30-4s, resulted in failure (ibid., p. 105).

The proceeds of bonds sold by US investors to Europe or redeemed by the US government were largely invested in US railroads, pushing their way west. The railroad network expanded rapidly after the Civil War, from 35,000 miles at the end of 1865 to 53,000 miles five years later, and 70,500 miles at the end of 1873 (Bureau of Census, 1949, p. 200).

Jay Cooke and Co. got its financial start by a major innovation in the marketing of US war bonds in aggressive domestic sales campaigns designed to appeal to mass support rather than merely established

financial circles. His success did not make him a favorite of established bankers like Drexel in Philadelphia and Morgan in New York. Like the Pereire brothers in France who failed in 1868, he was an "active" banker, rather than a passive one like the Drexels, Morgans and Rothschilds in Paris (Gras, 1936, p. xi; Larson, 1936, pp. 86–7, 433). The financial history of the nineteenth century is sometimes written in terms of bankers' quarrels, and the distinction between active and passive bankers is echoed in the current controversy whether bankers lending to the Third World in the 1970s were "loan pushers" or "wall flowers, waiting to be asked to dance" (Darity and Horn, 1988).

Cooke's success in marketing US government bonds at home meant that he was late in moving in two other directions, in selling bonds abroad and in entering the market for railroad bonds. When he did move in the latter direction, the eastern railroads such as the Baltimore and Ohio banked by the Brown Brothers, the Chesapeake and Ohio by Alexander Brown, and the Pennsylvania by Drexel already had established connections, as did some newer lines — the Rock Island (Henry Clews), the Union Pacific (the Ciscos) and the Central Pacific (Fisk and Hatch) (Larson, 1936, pp. 245, 257). In addition the Central Pacific and the Union Pacific had governmental subsidies (ibid., p. 259). Like latecomers in many businesses, Jay Cooke was forced to take what was left over, and palpably more risky in his case, the Northern Pacific. This led westward from Duluth, Minnesota, through sparsely settled country. It was hoped to sell land from the abundant grant as the lines reached further west, though the terms would produce little cash, and to sell more bonds in the United States and in Germany as progress was made. Land offices were opened in Germany, Holland and Scandinavia in the hope of attracting settlers. But selling Northern Pacific bonds proved slow, especially when Missouri Pacific bonds through more settled territory were available at around $90 and Union Pacific at $84. European investors held US railroad bonds in considerable disrepute, especially after the Erie and Union Pacific Crédit Mobilier scandals of 1868 and 1872. Cooke failed to enlist the support in Europe of the Rothschilds or Bleichröder, and was forced to form a connection with a new house, Budge, Schill & Co. of Frankfurt. When the Franco-Prussian war broke out the prospect of selling Northern Pacific bonds in Germany evaporated.

Cooke had many other troubles: an absentee president of the line who incautiously bought supplies with cash well in advance of need rather than inducing suppliers to grant long credits or accept bonds. His brother Henry, who ran the Washington lobbying office, lived high and was a drain. Substantial investments in advertising and support of newspapers in Europe failed to pay off in the light of US railroad

scandals. Bit by bit, Jay Cooke and Co. found itself advancing capital to the Northern Pacific for construction. In the fall of 1872 the London partner, Fahnestock, observed that it was cruel to the depositors to use their money to support Northern Pacific bonds, and that the railroad should go to the market to borrow at any price. The near-panic in the market of September 1872 made this impossible. Both Northern Pacific and Southern Pacific pushed for Congressional subsidy of $40,000 a mile, but the scandals in Erie and the Union Pacific made Congress leery.

The scramble to keep Northern Pacific and Jay Cooke and Co. afloat lasted until September 1873, when the storm broke in the second week. The Granger movement in the West attacked railroad rates. Money was tight as funds were withdrawn from the East to finance an early heavy harvest. The New York Warehouse and Security Company suspended on September 8. Formed to lend on grain and other farm produce, like Jay Cooke it had been induced into lending to the Missouri, Kansas and Texas railroad. On September 13 the banking house Kenyon, Cox & Co. failed as a result of endorsing a note of the Canada Southern railroad for $1.5 million which the latter could not pay. Jay Cooke and Co. closed its doors on September 18, and Fisk and Hatch the next day (Black Friday), followed by the Union Trust Company and the National Bank of the Commonwealth on Saturday, September 20. The stock market was closed that day and remained so for ten days, a move later agreed to have been mistaken in so far as it induced a panic withdrawal of brokers' loans in October 1929 for fear of a closing of the exchange. The Commercial and Financial Chronicle of September 20, 1873, blamed the crash on the excessive tightness of the money market that prevailed without interruption from September 1872 to May 1873, making it impossible for railroad companies to borrow on bonds and leading several banking houses negotiating large railroad loans or intimately connected with the building of the roads to become responsible by endorsement of loans or by borrowing on call loans collateralized by railroad securities. "In this delicate situation, the equilibrium was liable to be violently disturbed" (quoted in Sprague, 1968, p. 36). The newspaper account makes no reference to the decline in foreign lending from Europe, but it is clear that the tightness of money rates in the market from September 1872 to the following May is associated with the decline in foreign funds.

The collapse of the bond and stock market in New York in September 1873 also put paid to the land boom in Chicago. Public participation in land buying, according to Hoyt (1933, p. 100), began about 1868 when many cases of large profits made in land since 1861 became common knowledge. In 1871 one writer claimed that every other man and every

fourth woman had an investment in lots. The Chicago fire of October 8, 1871 destroyed 17,450 of the 60,000 homes in the city, but the fire accentuated rather than slowed down the growth of the city, with a year of "hectic borrowing" from the East, and the spending of $40 million for new construction (ibid., p. 102). Population in a belt within three to five miles of the center grew from 8,000 in 1860 to 55,000 in 1870 and nearly 100,000 in 1873. Land prices went from $500 to $10,000 an acre between 1865 and 1873 in the fashionable residential area of the South Side, and some land near the village of Hyde Park from $100 an acre to $15,000 (ibid., pp. 107–9). The euphoric aspect of the boom and the dangerous position of land speculators in the summer of 1873 is described by Hoyt (1933, p. 117) in terms of

municipal extravagance, excessive outlays on magnificent business blocks built at high cost on borrowed money, lavish expenditure on street improvements in sections where they were not required, overextended subdivision activity, and a disproportionately large amount of real estate purchases on small down payments — all these had been the result of the extreme optimism of the times.

In the summer of 1873, the upward movement of land values stopped as a consequence of limited cash resources of prospective buyers as wages fell. Moreover, Hoyt (1933, ch. XIV) comments, as land values cease to rise the desire to purchase it falls off sharply as expectations of a fall replace those of a rise. There was a lull in activity from May to September 1873 when the Jay Cooke failure was make known, and then a collapse in land values and building prices.

At first on such occasions that occurred in 1837, 1857, 1873, 1893 and 1929, the stock-market crash shatters the hopes of gain, but has no other result. Debts contracted to purchase land or buildings are for a term, not on demand. There has been no short selling, and no forced liquidation. Owners of real estate, indeed, tend to congratulate themselves that they escaped more lightly than the owners of stocks or of defaulted bonds. There follows, however, a process of attrition (ibid., p. 400). The decline of industry lowers prices. Unemployment induces recent arrivals to return to the country. Gross income from rentals declines sharply, but expenses of interest and taxes remain the same. Landholders retain their ownership until the constant attrition of interest charges, taxes and penalties or the inability to renew mortgages brings foreclosures that squeeze out the equities above the mortgage. Hoyt (1933, pp. 119, 124) comments that it takes about four or five years to complete this process and thoroughly to deflate land values. The process often cripples banks. In Chicago in 1933, 163 out of 200 banks suspended, and a footnote (Hoyt, 1933, p. 401) observes that real estate

was the largest single factor in the failure of 4,800 banks in the period 1930–3.

It would be useful to have a comparable study of land values in Berlin and Vienna in the years after the crash of 1873. I call attention to the spread of deflation from the bond and stock market in New York to the market for real estate in Chicago, as it may furnish food for thought about the delayed effects of the October 19, 1987 decline in the stock market on the markets for office buildings, condominia, shopping malls, hotels and the like, including especially luxury housing. There is, of course, the major difference that real estate today has built-in lenders of last resort in the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation, troubled as those institutions are.

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