5 Worst Financial Panics in U.S. History


Panic of 1873

When a large bank fails, vast numbers of businesses collapse. It's like a dangerous game of dominoes -- and that cause-effect relationship isn't unique to modern economics. In September 1873, after overextending its resources to support railroad development, banking house Jay Cooke and Company was forced to declare bankruptcy. Following the announcement, a surge of panic shot through Wall Street investors, and the stock exchange took a massive dive. Over the next few years, thousands upon thousands business would fail in turn.

As for Jay Cooke, his name may not be widely remembered, but he had a large impact on the history of the United States. He was instrumental in financing the Union's Civil War effort and lobbied heavily for the National Banking Acts, which laid the foundation for our current Federal Reserve System. The National Banking Acts also led to the pyramid structure of reserves that was the major linchpin of the 1873 panic -- Cooke's bank was a sizeable chunk at the very bottom of the pyramid.