Republicans had banked on economic growth to underpin their ambitious program, but their hopes were dashed in 1873 by the sudden onset of a severe worldwide depression. In the United States, the initial panic was triggered by the bankruptcy of the Northern Pacific Railroad, backed by leading financier Jay Cooke. Cooke’s supervision of Union finances during the Civil War had made him a national hero; his downfall was a shock, and since Cooke was so well connected in Washington, it raised suspicions that Republican financial manipulation had caused the depression. Officials in the Grant administration deepened public resentment toward their party when they rejected pleas to increase the money supply and provide relief from debt and unemployment.

The impact of the depression varied in different parts of the United States. Farmers suffered a terrible plight as crop prices plunged, while industrial workers faced layoffs and sharp wage reductions. Within a year, 50 percent of American iron manufacturing had stopped. By 1877, half the nation’s railroad companies had filed for bankruptcy. Rail construction halted. With hundreds of thousands thrown out of work, people took to the road. Wandering “tramps,” who camped by railroad tracks and knocked on doors to beg for work and food, terrified prosperous Americans.

In addition to discrediting Republicans, the depression directly undercut their policies, most dramatically in the South. The ex-Confederacy was still recovering from the ravages of war, and its new economic and social order remained fragile. The bold policies of southern Republicans — for education, public health, and grants to railroad builders — cost a great deal of money. Federal support, through programs like the Freedmen’s Bureau, had begun to fade even before 1873. Republicans had banked on major infusions of northern and foreign investment capital; for the most part, these failed to materialize. Investors who had sunk money into Confederate bonds, only to have those repudiated, were especially wary. The South’s economy grew more slowly than Republicans had hoped, and after 1873, growth screeched to a halt. State debts mounted rapidly, and as crushing interest on bonds fell due, public credit collapsed.

Not only had Republican officials failed to anticipate a severe depression; during the era of generous spending, considerable funds had also been wasted or had ended up in the pockets of corrupt officials. Two swindlers in North Carolina, one of them a former Union general, were found to have distributed more than $200,000 in bribes and loans to legislators to gain millions in state funds for rail construction. Instead of building railroads, they used the money to travel to Europe and speculate in stocks and bonds. Not only Republicans were on the take. “You are mistaken,” wrote one southern Democrat to a northern friend, “if you suppose that all the evils…result from the carpetbaggers and negroes. The Democrats are leagued with them when anything is proposed that promises to pay.” In South Carolina, when African American congressman Robert Smalls was convicted of taking a bribe, the Democratic governor pardoned him — in exchange for an agreement that federal officials would drop an investigation of Democratic election frauds.

One of the depression’s most tragic results was the failure of the Freedman’s Savings and Trust Company. This private bank, founded in 1865, had worked closely with the Freedmen’s Bureau and Union army across the South. Former slaves associated it with the party of Lincoln, and thousands responded to northerners’ call for thrift and savings by bringing their small deposits to the nearest branch. African American farmers, entrepreneurs, churches, and charitable groups opened accounts at the bank. But in the early 1870s, the bank’s directors sank their money into risky loans and speculative investments. In June 1874, the bank failed.

Some Republicans believed that, because the bank had been so closely associated with the U.S. Army and federal agencies, Congress had a duty to step in. Even one southern Democrat argued that the government was “morally bound to see to it that not a dollar is lost.” But in the end, Congress refused to compensate the 61,000 depositors. About half recovered small amounts — averaging $18.51 — but the others received nothing. The party of Reconstruction was losing its moral gloss.

The Disillusioned Liberals As a result of the depression and rising criticism of postwar activist government, a revolt emerged in the Republican Party. It was led by influential intellectuals, journalists, and businessmen who believed in classical liberalism: free trade, small government, low property taxes, and limitation of voting rights to men of education and property. Liberals responded to the massive increase in federal power, during the Civil War and Reconstruction, by urging a policy of laissez faire, in which government “let alone” business and the economy. In the postwar decades, laissez faire advocates never succeeded in ending federal policies such as the protective tariff and national banking system, but their arguments helped roll back Reconstruction. Unable to block Grant’s renomination for the presidency in 1872, the dissidents broke away and formed a new party under the name Liberal Republican. Their candidate was Horace Greeley, longtime publisher of the New York Tribune and veteran reformer and abolitionist. The Democrats, still in disarray, also nominated Greeley, notwithstanding his editorial diatribes against them. A poor campaigner, Greeley was assailed so severely that, as he said, “I hardly knew whether I was running for the Presidency or the penitentiary.”

Grant won reelection overwhelmingly, capturing 56 percent of the popular vote and every electoral vote. Yet Liberal Republicans had shifted the terms of debate. The agenda they advanced — smaller government, restricted voting rights, and reconciliation with ex-Confederates — resonated with Democrats, who had long advocated limited government and were working to reclaim their status as a legitimate national party. Liberalism thus crossed party lines, uniting disillusioned conservative Republicans with Democrats who denounced government activism. E. L. Godkin of The Nation and other classical liberal editors played key roles in turning northern public opinion against Reconstruction. With unabashed elitism, Godkin and others claimed that freedmen were unfit to vote. They denounced universal suffrage, which “can only mean in plain English the government of ignorance and vice.”

The second Grant administration gave liberals plenty of ammunition. The most notorious scandal involved Crédit Mobilier, a sham corporation set up by shareholders in the Union Pacific Railroad to secure government grants at an enormous profit. Organizers of the scheme protected it from investigation by providing gifts of Crédit Mobilier stock to powerful members of Congress. Another scandal involved the Whiskey Ring, a network of liquor distillers and treasury agents who defrauded the government of millions of dollars of excise taxes on whiskey. The ringleader was Grant’s private secretary, Orville Babcock. Others went to prison, but Grant stood by Babcock, possibly perjuring himself to save his secretary from jail. The stench of scandal permeated the White House.