Custer and the Panic
George Custer. Library of Congress.
For financier and railroad speculator Jay Cooke, the front-page headline could not have come at a worse time.
It was Sept. 6, 1873. Close observers of Wall Street were growing increasingly anxious about conditions in the financial markets – and in particular the perilous condition of the Northern Pacific, the railroad being built by financier Jay Cooke.
Into this combustible environment charged self-aggrandizing Gen. George Armstrong Custer.
Rehabilitated after his military career had seemingly collapsed in disgrace, Custer had been dispatched to the Yellowstone River in the Montana Territory to subdue Sioux and other tribes resisting the westward push of the Northern Pacific.
He intended to make the most of it.
Under the headline “The Yellowstone War,” the New York Tribune reprinted Custer’s official report on his August battles with the Sioux along the Yellowstone and Tongue rivers. It made for vivid – if unsettling — reading.
“The Indians, outnumbering us almost five to one, were enabled to envelop us completely between their lines,” Custer recounted. “Until the Indians were made to taste quite freely of our lead, they displayed unusual boldness, frequently charging up to our line and firing with great deliberation and accuracy.”
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The New York Tribune, Sept. 6, 873
Custer’s report noted that the Sioux were led by Sitting Bull, whose defeat on the second day of fighting moved the general to chortle that “for once he has been taught a lesson he will not soon forget.”
That may well have been true – but probably not in the way he meant.
Less than three years later, over two days in late June, 1876, Sioux and Cheyenne led by Sitting Bull and Crazy Horse wiped out Custer’s forces at the Battle of the Little Big Horn in one of the greatest victories for Native American warriors fighting against the westward encroachment of settlement.
Custer’s vivid, self-serving report on his campaigns in the summer of 1873 proved to be a blunder of a different sort.
“With unerring instinct Custer understated his role, credited subordinates, overstates Indian prowess, magnified dangers, and left the reader with the knowledge – without ever stating it – that victory had been achieved only through exceptional leadership: his,” M. John Lubetkin writes in his excellent history of the Northern Pacific.
Unfortunately, Custer’s gaudy prose not only called attention to himself – it underscored the difficulties faced by Cooke and his backers as they struggled to build a second transcontintental railroad line. Exactly what kind of market would the new railroad be able to serve, investors wondered, if the regions through which it ran were plagued by war?
“Throughout the spring and summer of 1873,” Lubetkin writes, “potential Northern Pacific investors became more skittish, as stories about increased Indian hostilities appears with greater frequency.”
It was yet another headache for Cooke, whose railroad had started with great promise but foundered as investors grew harder to find. On Sept. 18, less than two weeks after the Tribune published Custer’s sensational report, the fading fortunes of Cooke’s railroads caused the collapse of his banking house and precipitated the Panic of 1873.
To modern eyes, accustomed to clinical economic terms like “depression” and “recession,” “panic” seems like an odd way to describe a catastrophic economic event. But in the days that followed the closure of Cooke’s banking, it was all too apt.
The New York Stock Exchange closed for 10 days as investors struggled to regain their bearings. Banks closed in Philadelphia, Chicago and elsewhere across the country. Worried business leaders met in Richmond and professed confidence – an exercise that only demonstrated how uncertain they really were. Depositors rushed to get their money out of New York banks, prompting Mayor William F. Havemeyer to issue a patronizing call for calm that probably did little good.
“The reckless management of an institution cannot be made a just excuse for a run on the savings banks,” he said. “They have to loan the money they have, and of course they cannot pay it over to depositors at any moment.”
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The panic on Wall Street, from Frank Leslie’s Illustrated Newspaper. Library of Congress.
Custer’s report, of course, did not by itself cause the collapse of Cooke’s finances or the panic. But it is illustrative of the combination of forces that led to the financial catastrophe that colored the rest of the 1870s and reverberated for years beyond.
In his magisterial history of the late 19th century, The Republic for Which It Stands, Richard White recounts the macro-economic factors that pushed the American economy to the brink. They included:
The collapse of the Vienna stock exchange and a corresponding interest rate increase by the Bank of England that made itself felt on both sides of the Atlantic;
The rickety financial position of U.S. railroads, which made them vulnerable to rising borrowing costs; and
The contraction of the currency that followed the demonetization of silver in January, 1873 and added to the financial problems faced by railroads.
Decades of speculation and what Alan Greenspan would have called “irrational exuberance” finally caught up with the industry that had transformed the American economy and come to dominate – though means licit and illicit – American politics.
“As they had in good times, the railroads led the way in bad times,” White writes. “By 1876 roughly half of the railroad companies had gone into receivership. Railroad stocks lost 60 percent of their value between 1873 and 1876.”
The day Cooke’s banking house closed “Men and boys raced from office to office” on Wall Street, the Chicago Tribune told its readers the next day. “The telegraph was incessant in its operations, and the excitement grew intense.” The financial district in Philadelphia was “thrown into an uproar” by the news of Cooke’s failure, the newspaper reported.
The New York Herald called it “Cooke’s Crash.”
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The New York Herald, Sept. 19, 1873.
In the days and weeks that followed, President Ulysses S. Grant and his treasury secretary met with jittery New York businessmen in an attempt to calm their fears. The government made limited attempts to respond with bond repurchases and the issuance of $26 million in paper dollars, according to Grant biographer Ron Chernow, but there was only so much Washington was willing to do. When Congress passed an inflation bill in 1874 to stimulate the economy by injecting $64 million in additional currency into circulation, Grant stunned Capitol Hill and the country by vetoing the bill.
As Washington dithered, the economy continued to deteriorate. Unemployment skyrocketed. Coal miners, railroaders and iron workers by the thousands lost their job. An estimated 100,000 workers were jobless in New York.
“Americans,” White writes, “had entered a period of radical economic and political instability that they were ill-prepared to understand.” The crisis would take years to work itself out — and the cavalry was not coming to the rescue.
The Panic of 1873 followed hard on the Credit Mobilier affair, the defining scandal of the Gilded Age. Read about it in Congress and the King of Frauds: Corruption and the Credit Mobilier Scandal at the Dawn of the Gilded Age, now available at amazon.com.
