The Imaginary Realms of
Gilbert M. Stack

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Today in History: The Original Great Depression

Posted by Gilbert Stack on September 19, 2015 at 7:20 AM

On this day (September 18) the original “Great Depression”, the Panic of 1873, began. The Panic was sparked in part by the decision of the German government to stop minting silver thalers in 1871 and is a lesson in the Law of Unintended Consequences. Germany’s decision caused a sharp reduction in the price of silver, much of which was mined in the United States. The reduction in the price of silver cost the U.S. government lots of money because by statute it maintained both silver and gold currencies and purchased silver at a set (and now grossly inflated) price. To reduce this cost, the U.S. passed the Coinage Act of 1873 which put the country on a de facto gold standard.

 

The U.S. economy had been enjoying an investment boom after the civil war with the majority of that investment going into railroads. The sudden devaluing of U.S. silver mines somewhat destabilized the U.S. economy encouraging investors to pull back on long term investments like railroads. The timing couldn’t have been worse for Jay Cooke and Company which was in the final stages of securing a $300 million dollar loan to build the Northern Pacific Railway (billed as a Second Transcontinental Railroad) when suddenly it had trouble meeting its obligations. The loan fell through and Cooke was forced to declare bankruptcy. This set off a chain reaction of bank failures that quickly spread around the world.

 

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