Tag: Panic of 1873

Economic crises carry with them hugely devastating results: high rates of unemployment and bankruptcy are emblematic of the more modern ones. Often, a crisis is not precipitated by a flaw in the overall economy but instead a dangerous practice in a sector of that economy. Perhaps that sector has companies or individuals who have undertaken a course of action that threatens the market, and perhaps no authority figure—governmental or otherwise—can curb or stop that dangerous behavior and prevent the damage from being done. By 1873, the American railroad industry had become an industry asking for a crisis: throughout the country—and increasingly in Europe—the American railroad companies had been a popular investment; the lure of high returns was too strong for investors to resist, and the tinderbox for the impending blaze would be the bonds of railroad companies. Those bonds were the sought after investment of the time and had been collateralized—just as a piece of real estate is collateralized for a mortgage—several times over (therefore inflating the value of the bonds, the volume of the railroad bond market, and the risk of the investments). Investors, through their greed, were guaranteeing that when the market did face a disruption—and it inevitably would—that disruption, that spark, would be the beginning of a years-long economic depression.