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Off the Rails: The Real Effects of Railroad Bond Defaults following the Panic of 1873

Although corporate default crises are often quite severe, previous work has found little impact on real macroeconomic variables. This article investigates the relationship between railroad defaults and the balance sheets of local banks following the Panic of 1873. Receivers appointed to run railroads in default lacked the legal tools necessary to fully maintain railroad operations. The results indicate that railroad bond defaults negatively impacted the lending activity of local banks. Affected banks experienced declines in loans and deposits along with increases in excess reserves. These findings point to a disruption of the transportation network attributable to the railroad bond default crisis.