The optimism that had been driving soaring stock prices in central Europe had reached its limits and the fears of a bubble culminated in Vienna in late April of 1873. The actual collapse of the Vienna Stock Exchange began on May 8, 1873 and continued until May 10, when the exchange was closed. It was reopened three days later, the panic seemed to have faded or was at least confined to Austria-Hungary.
Financial panic arrived in the United states several months later in September. The banking house of Jay Cooke and Company declared bankruptcy over the Northern Pacific Railway business. Cooke usually raised great sums through bond sales, but individual banks, including smaller institutions, also made large investments in railroads.
After the completion of the transcontinental Union Pacific Railroad in 1869, businessmen and politicians immediately requested another, to be called the Northern Pacific. Jay Cooke's banking house intended to raise money for this project, but weakened economic conditions proved The Northern Pacific less attractive to investors. Many railroads were overbuilt, setting the stage for ruinous competition for freight traffic.
Speculation dominated in railroad securities, as well as in market in general. The Northern Pacific railway had been given 40 million acres (160,000 km2) of public land in the West and Jay Cooke sought $100,000,000 in capital for the company. The bank failed when the bond issue proved unsalable, and was shortly followed by several other major banks which followed the same investment pattern.
The stock market panic begins
The announcements of The Times in the morning prepared the public in a certain degree for the trouble which was to ensue, and many parties were enabled to go in the market early in the morning and protect themselves from loss. While many did this, thus saving themselves from ruin, the majority of the people thought that the trouble was solely brought by the machinations of the bears resulting in a short panic.
Of course, greed made them expect a sudden rebound in prices which didn't happen. The first intimation which came into the Stock Exchange of any change in the program was contained in a brief notice, which said authoritatively that Jay Cooke & Co. had suspended payment. The brokers stood perfectly thunderstruck for a moment, and there was a general run to notify the different houses in Wall Street of the failure.
The news of the panic spread in every direction down-town, and hundreds of people who had been carrying stocks in expectation of a rise, rushed into the offices of their brokers and left orders that their holdings should be immediately sold out. In this way prices fell off so the wall. Men went about the street with blanched faces, and requested piteously of their brokers that their stocks should not be sold out as more margin would be obtained in the morning; but self-preservation seemed to be the first law of nature with every one, so the accounts of the customers were closed out, and the losses became a fixed fact. The New York Stock Exchange closed for ten days on September 20 in an attempt to keep the panic to a minimum.
The Long Depression effects in Europe
The financial problems returned to Europe, causing a second panic in Vienna and further failures in continental Europe before receding. The Long Depression affected different countries at different times at different rates. In Hungary, the panic of 1873 terminated a mania of railroad-building. Italian economy suffered greatly as the foreign investors pulled out their funds. A ten-year tariff war broke out between France and Italy after 1887, damaging Franco-Italian relations. As France was Italy's biggest investor, the liquidation of French assets in the country was especially damaging.
The United Kingdom, which had previously experienced crises every decade since the 1820s, was unusually unaffected by financial crisis, even though the Bank of England kept interest rates as high as 9 percent in the 1870.
France experienced the worst effects of the crisis. Having been defeated in the Franco-Prussian War, the country was required to pay £200 million in reparations to the Germans and was already reeling when the 1873 crash occurred. The French adopted a policy of deliberate deflation while paying off the reparations. The Paris Bourse crash of 1882 sent France further into depression that was enhanced by diseases impacting the wine and silk industries. The Union Générale, a French bank, failed in 1882, prompting the French to withdraw three million pounds from the Bank of England and triggering a collapse in French stock prices.