140 Years Ago Today, The Great Panic Of 1873 Led To The First Market Closure

With enough real and electronic ink spilled over the past two weeks to describe every nuance of the Lehman crisis (as if anyone can ever forget those vivid days) that nearly 3 months worth of Treasury issuance could be monetized, we decided to go further back, some 140 years back in fact, to this day in 1873 which just happens to be day the first Great market Panic gripped the US, and resulted in the first ever shutdown of the New York Stock Exchange. Granted, these days the NYSE or N-ICE as it is currently known, and the NASDARK shut down on a daily basis courtesy of a billion collocated vacuum tubes and the rigged casino formerly known as the stock market, on a virtually daily basis. But back then, when the general population was still largely clueless just how broken and corrupt the ideal of market efficiency would become when commingled with political and corporate interests, it was quite a shock.

Here is Art Cashin with the full details.

On this day in 1873, the New York Stock Exchange set a record, although it was one they would be ambivalent about for the next 140 years, Founded in 1792, the Exchange had survived early volatility (1794), a challenge from competitors (1802), a merger and a new name (1825), a punishing diet (records indicate that, circa 1810, lunch was a double jigger of dark rum and a wedge of dried codfish.....please note....we no longer serve codfish).

But on Saturday, September 20, 1873, for the first time in its history, the NYSE closed in response to a panic. (The word circuit breaker had not been invented yet....er.....neither had circuits.)

A week or more before, one of the most renowned firms in American finance and especially U.S. Treasury auctions came under a cloud of suspicion. The firm was Jay Cooke & Company. And, on most continents it was seen as a key player. After all, its aggressive style had made it the key underwriter for the billions of Treasury bonds issued during and after the Civil War. (Contemporary competitors had shied back fearing that deficit spending had gotten out of control.)

Anyway, the concern about in this key brokerage firm only confused the market at first. But as this day approached, there were hints that the problems would spread to other brokers. On the 18th, liquidation of equities showed up at the "first call."

For most of its first century of existence the NYSE was a “call market”. The chairman, or other senior officer, would call out the name of one of the listed issues. Brokers who had an interest in that “issue” would arise from their “seats” and begin to bargain with any other brokers arisen from their “seats”. When transactions ended in that issue (assuming they were not all buyers), brokers returned to their “seats” and the chairman called the next issue on the roll. When the last issue was called, the session officially ended. There were two sessions each day.

If that sounds silly to you, you may not have noted the vocal handful of critics praising electronic “single priced auctions”. That’s the old call market without the “seats” and frock coats, but with plugs, servers and batteries. The more things change…..but let’s get back to our story…..

So, here they were. Rumors surfaced that, perhaps some other brokers were involved and the first call on the 18th turned soft. The second call turned soggy. Prices were down and with no on-going after market; all you could do (as the banks did) is await the next call.

The morning call on the 19th was messy and the afternoon call was just a disaster. Outside, in a heavy rain, crowds gathered on Wall Street to withdraw securities and money from brokers. By the morning of the 20th anyone who was in the phone book (if there had been one at the time) was rumored to have been impacted by the problem.

So, naturally the morning call on Saturday the 20th was a disaster. So much so that the Exchange opted to close until the crisis calmed (skipping the P.M. call).

Close they did and for a lot more than one "call." But, but perhaps because banks and investors naturally needed some means of evaluating holdings, they reopened about ten days later. However, the rumors would not go away and liquidations and defaults continued. The history books call it the Panic of 1873.

And, it put the American economy in a tailspin for years. (Nearly 10,000 businesses failed.)

To celebrate, don't panic, just go to a Pub called Cookie's and bond with someone you treasure. Tell everyone within earshot that rumors don't affect markets anymore. (Hint -Try whispering - You'll get more people to listen.)

The Anniversary of the Panic of 1873 and the fact that it was triggered by the failure of one firm, followed by a “domino effect” collapse, is not lost on traders. The chaos that followed the fall of Lehman left many deep scars that have not fully healed. And, the spectacle of European banks and governments playing “hot potato” with shaky sovereign debt, remains a cautionary memory.

There was no panic on Wall Street yesterday as the market paused to consolidate some of the recent rally.