The end of the Civil War saw a boom in railroad construction, with 35,000 miles of new track being laid across the country between 1866 and 1873. The railroad industry, at the time the nation's largest employer outside of agriculture, involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry. Cooke's firm, like many others, was invested heavily in the railroads.
President Ulysses S. Grant's monetary policy of contracting the money supply made matters worse. While business was expanding, the money they needed to finance it was becoming more scarce.
Cooke and other entrepreneurs had planned to build a second transcontinental railroad, called the Northern Pacific. Cooke's firm provided the financing. But on September 18, the firm realized it had become overextended and declared bankruptcy.
The firm's bankruptcy touched off a domino effect, causing the economy of the United States to collapse. The New York Stock Exchange closed for 10 days. Of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14 percent by 1876.
By 1877, wage cuts and poor working conditions caused workers to strike, preventing the trains from moving. President Rutherford B. Hayes sent in federal troops in an attempt to stop the strikes. Fights between strikers and troops killed more than 100 and left many more injured. The tension between workers and the leaders of banking and manufacturing lingered on well after the depression itself lifted in 1879.