Railroads in America’s Post–Civil War Economy
America’s post–Civil War economy was driven by a boom in railroad construction. Between 1866 and 1873, 35,000 miles of new track were laid, and railroads trailed only agriculture in their importance to the economic well-being of the country.
For many Americans with a little money to invest, railroads seemed like a can’t-miss proposition. Their enthusiasm drove up stock prices far beyond what the stocks were really worth. One such deal involved a major New York-based bank called Jay Cooke & Company.
Cooke, who had become wealthy marketing Union bonds during the war and was known as the nation’s financier, was trying to build a second transcontinental railroad and was seeking investors to pay for it. Sadly for Cooke (and more sadly for his bank’s customers), his efforts coincided with a confluence of unfortunate events.
One was that banks in Great Britain raised interest rates, which meant fewer Brits were borrowing to invest in U.S. railroad schemes. At the same time, Congress decided to henceforth back U.S. currency with gold only. The U.S. Treasury quit buying silver; silver coins and paper greenbacks were devalued; the money supply shrank, and interest rates in America rose.
The economy’s tailspin meant Cooke’s bank couldn’t attract enough cash to keep its vast railroad scheme going. On September 18, 1873, the bank went under. (The bank’s collapse was so stunning that a newsboy in Philadelphia was arrested by a disbelieving cop for shouting out the news on a street corner.)
The failure triggered a flood of panic selling on the New York Stock Exchange, which actually closed down for ten days.
The stock market collapse, in turn, touched off a deep economic recession that lasted into 1879. Scores of other banks failed, about a quarter of all U.S. railroads went belly up, thousands of auxiliary businesses closed, and unemployment rose to 14 percent by 1876.