The Financial Crisis of 1873 and 19th Century American Corporate Governance

The crisis of 1873 was one of the most severe financial crises in the history of the U.S. The 1873 crisis was associated with banking crises; stock market crashes in a number of countries (Bordo, 1986) and with abrupt reversals in capital flows from England (and the other core European countries) to the countries of new settlement, including the U.S. In this paper we focus on a different aspect of the crisis of 1873 - the connection between the crisis and failures of corporate governance. We argue that tunneling and looting of firms by their executives and directors exacerbated the financial panic and led to an economic depression. The 1873 financial provides evidence that is consistent with the emerging markets crisis of 1997-1998 and exemplifies the importance of corporate governance and investor protection.