By Mark J. Higgins

“ The banking bubbles are breaking … the merchants are crumbling to ruin, the manufactures perishing, Agriculture stagnating, and distress universal in every part of the Country … there seems to be no remedy but time and patience; and the changes of events which time affects.”

— President John Quincy Adams( May 27, 1819)

Financial runs are among the oldest and most destructive forces in US financial history. Although they may seem chaotic and unpredictable in the moment, the underlying mechanisms are remarkably consistent across time. Runs emerge when financial institutions offer liquidity against assets that cannot easily be sold at stated values, especially during periods of stress. Once confidence deteriorates, investors have a rational incentive to withdraw funds before others do, transforming isolated concern into selfreinforcing panic.

Over the past two centuries, financial structures vulnerable to runs have evolved— from 19th-century banks issuing specie-backed bank notes to 20th-century shadow banks funded through short-term wholesale markets. Yet despite the metamorphosis, the underlying dynamics have changed little.

The Panic of 1873

“ In one way, and a very significant one, Jay Cooke and many of his contemporaries made a grave error … They forgot that they were bankers and became promoters. They allowed the assets of their houses— even their deposits— to be frozen in advances to and investments in great concerns which gave no promise of immediate returns.”

— Henrietta M. Larson

On September 18, 1873, residents of New York City awoke to the shocking news that

Library of Congress

Supplement to Frank Leslie’ s Illustrated Newspaper depicting the closing of the door of the New York Stock Exchange on its members during the financial panic, September 20, 1873.

the firm of Jay Cooke & Company had shuttered its doors. Widely regarded as one of the nation’ s most conservative financiers, Cooke’ s failure raised an unsettling question: if Jay Cooke could fail, who was safe? The fear was amplified by the cause of the collapse. Cooke’ s firm was heavily exposed to bonds and private loans to the Northern Pacific Railway— and investments in railroads were hardly unique at the time.

After the Civil War ended in April 1865, domestic and foreign investors were captivated by the economic potential of the nation’ s massive railroad expansion. During the war years( 1861 – 1865), railroad companies added roughly 4,500 miles of new track. Over the seven years that followed, they added nearly 31,000 miles. But as is often the case during speculative booms, early successes attracted waves of imitators, and before long, invested capital far exceeded the supply of economically sound opportunities. Nevertheless, Cooke was convinced that the Northern Pacific would become the crown jewel of his portfolio, and he aggressively overextended the firm’ s capital.

The failure of Jay Cooke & Co. triggered a crisis of confidence at a terrible moment. Earlier that year, a financial panic in Austria-Hungary prompted foreign investors to withdraw capital from US markets. At the same time, the seasonal agricultural financing cycle— which absorbed large amounts of bank reserves at the end of each year— placed additional strain on the banking system. The combination of financial strain and a shock to confidence quickly spread through the financial system. The panic ultimately caused the failure of more than 100 banks and ushered in a painful depression.

The Panic of 1873 demonstrated the relative immaturity of the US financial system in the 19th century. Most notably, the nation lacked a central bank capable of stabilizing liquidity during panics, rendering the banking system vulnerable to repeated panics and runs.

When these characteristics are present, financial structures are vulnerable to runs because investors have a rational incentive to withdraw funds before others do. Once confidence in asset values or liquidity promises deteriorate, investors fear that delayed action may leave them trapped with illiquid assets or losses while early movers escape unharmed.

One of the most difficult characteristics of financial runs is their unpredictability. Triggers vary widely and may include events, such as the failure of a prominent institution, an unexpected economic shock, deteriorating market conditions or the gradual accumulation of financial stress that eventually undermines confidence.

The Panic of 1873 combined the failure of a major financial institution, overinvestment in railroad securities, sudden withdrawal of foreign investors, questionable valuations and the absence of a central bank capable of acting as a lender of last resort. The structure of the system rendered it vulnerable to a run, while the absence of a liquidity backstop allowed the panic to spread far beyond the institutions that were initially impacted.

20 FINANCIAL HISTORY | Fall 2026 | www. MoAF. org