But it was on Wednesday , September 18 , 1873 , that the hithertofore unimaginable was realized : the collapse of Philadelphia banking titan Jay Cooke & Company . At the time , both the firm and its namesake founder were legendary institutions in American finance . Cooke , through his firm , had successfully sold hundreds of millions of dollars ’ worth of US government bonds to finance the Union ’ s Civil War effort . But financing the Northern Pacific Railway proved an overreach even for the most accomplished and capable bond retailer of that era .
[ The firm ’ s sudden ] failure shocked observers … [ F ] ormerly a stronghold of stability [ the collapse ] triggered [ a ] stock market crash in New York . Mistrust and panic subsequently spread to the overall financial sector and rattled customers and investors , causing heavy runs on banks . Countless financial houses suspended operations over the next few years , severely damaging the availability of credit in the economy .
Stocks plummeted 25 %, with scores of railroads and their financial backers going belly-up practically overnight . The New York Stock Exchange closed for 10 days . But this was only the beginning : the Panic of 1873 kicked off the Long Depression , which surpassed the length of the Great Depression by nearly two years . Unemployment and insolvencies skyrocketed over the remainder of the decade , and the nascent American railroad industry did not see appreciable expansion or new investment until 1879 .
The US Railroad Boom
To some extent , the railroad boom which came to a crescendo in the Panic of 1873 began far from US shores . The Railway Mania in England , which began a generation earlier than its American counterpart ( from the late 1830s to a peak in the early 1840s ), saw the organization of numerous railway and track laying firms . Early public sentiment regarding the promise of trains , however , was none too optimistic . As cited in Bruce Mazlish ’ s The Railroad and the Space Program :
[ T ] he British magazine Quarterly Review , in 1825 , wrote : ‘ Can anything be more palpably ridiculous than
Portrait of Philadelphia banking titan Jay Cooke , by William Merritt Chase . The collapse of Jay Cooke & Company on September 18 , 1873 sparked widespread panic .
the prospect held out of locomotives traveling twice as fast as stagecoaches ? We should as soon expect the people of Woolwich to suffer themselves to be fired off upon one of Congreve ’ s rockets as trust themselves to the mercy of such a machine going at such a rate .’ A booklet of 1827 dismissed the possibility of locomotives traveling at 60 miles an hour as ‘ the pure effulgence of an untaught mind and of limited talent .’
Yet the combination of initial commercial success , expanding use-cases and effective promotion led to increased investment in railways . But as frequently occurs , increasingly speculative ventures and overwrought expectations of the young industry led to a bubble and , ultimately , its implosion . British advances in railway construction and locomotive engineering nevertheless found their way into early American projects , and a number of British railway engineers brought their experience to US-based ventures .
Public Finance
Beginning in the early 1860s , the US government provided significant financial assistance to private interests seeking to build railroads . Some of that aid took the form of loans , while other interests received land grants .
US Department of the Treasury
When the US Civil War ended , the railroad boom accelerated . The need to rebuild , as well as to link economically ascendent regions of the expanding nation , grew pressing . With increasing American industrial heft came the need to move resources and know-how quickly and cost-effectively to where they were most needed .
Technological advances , aided by the network effects of standardization and the feedback effects of trial-and-error , additionally factored into the rapidity of railroad development . Capital flowed into fledgling railway enterprises from sources both domestic and international . And promulgated under the various Railroad Acts , the First Transcontinental Railroad project was completed in May 1869 , linking San Francisco and Omaha . Its realization undoubtedly fueled enthusiasm for the next stage of railroad expansion , ratcheting up both entrepreneurial zeal and speculative fervor in the process .
Black Swans or Dragon King ?
Later in his writing about periodic breaks in financial markets , Matthew Hale Smith cited their capricious yet — on occasion — tantalizingly allusive character .
The financial barometer is the most subtle thing in the land . Nothing is so sensitive . Old Probabilities cannot predict , with half the accuracy , the coming storm . There is something in the very air which men of forecast feel … While everything was running in the usual channel , the sky clear and the sea smooth , and no storm [ on ] the horizon , certain shrewd men saw specks of trouble here and there .
In his recent book Chaos Kings ( 2023 ), Wall Street Journal reporter and author Scott Patterson chronicles the coalescence of disparate groups specializing in financial strategies seeking to capitalize upon financial Armageddons . Not just run-ofthe-mill market hiccups , but the true , winnowing meltdowns that happen a mere handful of times every century . A major divide between the two is whether profound tailspins in financial markets are Black Swans ( an idea pioneered by Nassim N . Taleb , among others ) or Dragon Kings ( a term coined by French physicist Didier Sornette ). A Black Swan event , as Taleb describes , has three primary attributes .
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