“ tipping point” came on September 18 with the failure of banker Jay Cooke. To understand how Cooke failed, note that he was the government’ s bond salesman during the Civil War. After the war ended, he was“ in search of new business opportunities,” which meant railroads given their scope. Due to globalization, Cooke could seek both foreign and domestic investors facilitated, in part, by his governmental connections and therefore he committed to finance the massive Northern Pacific Railroad even though he was“ a late comer to railroad finance.” Unfortunately, the economy was slowing-to-distressed at the time and Cooke was unable to place / sell significant amounts of the Northern’ s bonds, which at a minimum contributed to his failure. The resulting panic“ was soon to engulf the entire country and spread across the Atlantic.” The impact on the financial markets was acute: annual call money rates spiked to 14.25 % from 8.34 % the year before, a 70.9 % increase and the period high. Monthly call money rates ranged from a low of 3.8 % to a high of 61.23 % with an“ extreme quotation” of 360 %!
Pleas for the government to help by inflating the currency occurred immediately.“ As in the previous decade, the industry’ s trade organizations and trade publications spearheaded the soft-money drive.” Grant was therefore under pressure to“ do something” as industry and media barons have long donated money to, and attempted to influence, politicians. For example, on September 19, 1873— the day after Cooke’ s failure— Senator Oliver Norton wrote to Grant claiming an“ imminent danger of [ a ] General national bank panic tomorrow( Saturday) unless” the government released its $ 44 million US notes reserve. Grant refused stating in his reply of the same date,“ All assistance of the govt. seems to go to people who do not need it but who avail themselves of the present depressed state of the stock market to buy dividend paying securities, thus absorbing all assistance without meeting the real wants of the country at large.” Note the distinction between people in need( the real economy) and those using governmental money to fund their investment activity( the financial economy). Nevertheless, later the same day Treasury Secretary William Richardson allocated $ 10 million of the reserve to buy government bonds stating he would,“ limit the amount to about $ 12 million and
The New York Clearing House( NYCH) Association building on Cedar Street in New York City. NYCH was created in 1853 by larger commercial banks to provide central bank-like services for its members. It was effective in that role as relatively few commercial banks failed during the Panic of 1873.
stop there; and if all the banks suspend by agreement, I would stop at once. I don’ t think it is well to undertake to furnish from the Treasury all the money that frenzied people may call for.”
One constant of financial panics is that excessive leverage magnifies losses, which means adverse events can suddenly manifest, which occurred here for the next day— September 20, 1873— the stock market“ closed until further notice.” The following week, the markets remained distressed and thus $ 14 million of the US notes reserve was allocated to bond purchases with Grant observing on that date,“ no Government efforts will avail without the active co-operation of the banks and moneyed corporations of the country.” This was significant for as soon as the panic began, the New York Clearing House( NYCH) responded just as it responded to“ the banking disturbances in 1860 and 1861, that is, by authorizing the issue of loan certificates and the equalization of reserves among the member banks.”
By way of background, the NYCH was created in 1853 by larger commercial banks to provide central bank-like services for its members. It was effective in that role as relatively few commercial banks failed during the Panic of 1873. Most of the failures and suspensions were“ among private banks or brokerage houses,” which funded speculation in the call money market. A key reason for the relative lack of bank failures was the equalization of reserves by the NYCH, which“ enabled the seven large New York banks that held the bankers’ balances to continue to pay out cash freely to interior banks.” Therefore, through its actions the NYCH enabled“ the ultra-liberal policy of continuing to pay out cash to the interior, which we do not observe in future panics,” and which mitigated the effects of the Panic of 1873. Consequently, it may be asked: What did President Grant do?
First, he monitored developments intensely via his broad financial information network, which enabled him to take measured action at the margin to help mitigate financial distress. Thus,“ By October 1 [ 1873 ],” which was the day after the stock market reopened,“ the net addition to the currency by clearing-house certificates, use of government money, and other expedients was estimated at $ 50,000,000.” The government’ s marginal portion of this ranged from 1.1 % of the monetary base in 1872-to-1873 to 3 % in 1873-to-1874. In today’ s terms, one might say that Grant“ learned by doing” during the panic, but he did so only at the margin to mitigate the impact his actions would have on the real economy.
Second, Grant kept pressure on the banking community to mitigate their
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36 FINANCIAL HISTORY | Summer 2025 | www. MoAF. org