Another scandal of the times, not connected to the Grant Administration however, was the New York City Democratic Party's political machine, Tammany Hall, operating under the direction of William "Boss" Tweed. Tammany Hall was originally set up as an organization designed to help immigrants (notably the Irish) get established in America.  Such assistance, of course, came with the expectation that immigrants would then support the organization when it came time for local elections, ensuring Democratic Party control of the city and all its patronage jobs. Boss Tweed, who took over the organization in 1863, served on a number of city and state committees and boards and even on the New York State Senate (1868–1873).  He eventually ended up controlling much of the New York state legislature, New York courts, the city treasury, and the huge cash flow that accompanied his various positions.

He was reported to have helped Jay Gould and Jim Fisk take control (1866–1868) of the Erie Railroad from the equally adventuresome Cornelius Vanderbilt with fake stock (which Boss Tweed was able to get the New York state legislature to authorize), receiving a considerable share of that stock himself plus a position on the company's Board of Directors.

The amount of graft that Boss Tweed acquired is still uncertain, it was so extensive.  He was accused and tried in a series of court cases starting in 1873 for stealing from the New York taxpayers an amount ranging from $25 to $45 million (more recent estimates put that figure at closer to 100 million in 1877 dollars).  He was in and out of prison (at one point he even escaped to Spain) until 1878, when he died in prison at age fifty-five.  But Tammany Hall itself quietly survived Boss Tweed's demise, to conduct business as usual well into the 20th century.

All this corruption, well-covered by press exposés, naturally called forth the need for extensive political reform in the North itself.  Consequently, a new political grouping came into being in advance of the national elections: the Liberals. Taking a broader view of the South than the vengeful Radicals, the Liberals found themselves joined with the Democrats (ironic for such a reformist grouping, since the Democrats were identified closely with Tammany Hall) in calling for a lifting of the heavy-handed Reconstruction program imposed on the South by the North.  In anticipation of the 1872 presidential election they nominated newspaper editor and ardent reformer (also Socialist) Horace Greeley, to run against the Republican Party's candidate, President Grant.

In the election itself Grant won handily the vote of the electoral college (300 to 60), though Greeley won 44 percent of the popular vote.  Thus Grant was going to have four more years in the White House.  But Grant's second term in office would be as troubled as his first term.

The failure of a major brokerage firm, brought down by its heavy involvement in Northern Pacific railroad bonds, set off a financial panic on Wall Street which soon led to the collapse of a number of banks and other investments houses.  The situation became so bad that Wall Street shut down business for ten days to cool down the panic.

Worse, this crisis was timed with the decision by Grant to remove readily available silver as a standard for the dollar, leaving the dollar reliant only on gold as its metallic standard.  While this may have strengthened the dollar, it restricted dramatically the ability of investors and entrepreneurs to gain easy credit for opening up or expanding their business base.  This hit particularly hard the massive farming industry which always relied on bank loans to carry farmers from planting time in the spring until harvest time in the fall, when finally the farmers would see income.

Grant did not understand the severity of the financial crisis that hit the country in 1873, thinking the downturn in the nation's economic activity to be merely a normal fluctuation in the economy – which certainly happens from time to time. But this was no mere fluctuation, the economy going into a stall which lasted five long years (termed at the time the Long Depression) and which saw almost ninety railroad companies go bankrupt.  Grant refused to back down from his tight monetarist strategy, believing that the strong dollar was more important to the nation's economy than the easy-credit strategy that the nation had been pursuing, a strategy leading to the vast corruption that had sullied the reputations of the railroad and banking companies.

But this was a bad time to put additional brakes on the nation's economy, because it would have severe political as well as economic consequences.  As a result of the 1873 Panic, there occurred a major sweep in 1874 of the Republicans out of office everywhere, including the U.S. House of Representatives, where the Democratic Party took control.  This did not bode well for a continuation of the North's Reconstruction program for the South.

In the meantime political tensions had been building in the South, where the Democratic Party was regaining political ground under the leadership of former Confederate officials, termed Bourbon or Redeemer Democrats.  They had been gathering Southern White political support by stoking the Whites' fears of the rising political power that the Blacks had acquired through Congress's Reconstruction policies.  Also the KKK was gathering strength – and vindictiveness.

This in turn brought Congress to pass another round of legislation (1871–1872) designed to protect Black voting rights in the South and curb the behavior of the KKK and other Southern organizations like it.  But this only inspired even greater bullying behavior on the part of those White racist organizations, making life even more difficult for the Southern Black.

One by one these Redeemer Democrats were able to take over the state legislatures of the South and begin the passing of a round of segregationist "Jim Crow" laws. But in addition to playing the race card as their ticket to power, they employed other populist tactics such as calling for the end of the huge indebtedness of their state governments – by simply repudiating those debts – and by calling for the end of government subsidies for businesses (such as the railroads).  It made for great popularity among frustrated White voters, but foolishly undercut the possibility of the South working its way out of its poverty (repudiating debts was a sure way of cutting off any future investments in the Southern economy).  And prolonged economic hard times would only harden the attitudes of a racist South.

Grant's tendency to grant unreserved trust to those he had appointed to office would shake his administration to the core. Worse, he would tend to side with those accused of corruption, seeing them simply as victims of political opportunists.  Indeed, he seemed totally blind to the corruption going on around him, which was rampant.  Payoffs for appointments by officials below him, such as Grant's personal secretary, Orville E. Babcock, were normal procedure during the Grant years.  Within his Treasury Department a tax collector had set up a scheme to overlook owed taxes, until a sufficient amount had accumulated that he could then go in and collect, plus a sizable fine which went into the tax collector's pocket.

Meanwhile a huge Whiskey Ring owing enormous amounts of taxes ($3 million) on their whiskey had been allowed to develop, until finally Grant appointed an honest treasury secretary who went in and cleaned house.  But when Babcock was also implicated in the deal, Grant threw his protection around his personal secretary, and even pardoned a number of leaders of the Whiskey Ring who had been found guilty and imprisoned.

Corruption touched everything from the War Department to the Department of the Interior as Grant appointees used their power to extract bribes and other payoffs for their services, becoming simply part of business as usual when dealing with the federal government.

Grant did appoint reformers empowered to clean out such corruption.  But the corruption was so extensive that his efforts brought little relief from his growing reputation as running a very corrupt Administration.  As a consequence, in 1876 the Republican Party distanced itself from him at the convention called to select a new Republican candidate for the presidency.