San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Depression of 1873-1879

The Depression of 1873-1879 was precipitated by the bankruptcy of the railroad investment firm of Jay Cooke and Co. but the deeper cause was the restrictive monetary policy of the Federal Government. The U.S. was on the Gold Standard but the increments in gold holdings was not sufficient to keep up with the demand for money resulting from the growth of the economy. Consequently there was deflation. This meant that even if the nominal interest rate were zero the real interest rate would be positive.

The U.S. had experienced a great boom in railroad building that had maintained high levels of demand for the iron and steel industries. When the profit rate for railroad building dropped below the real rate of interest the railroad building stopped and the production of iron and steel had to drop drastically as well. Jay Cooke and Co. was just the first of about ninety railroads that went bankrupt.

(To be continued.)

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