In the late-19th century, the world experienced something never seen before or since: a continuous fall in prices across the globe. The slide began with the financial crash of 1873 and lasted for nearly a quarter-century. Before the 1930s, this period of deflation, bankruptcies and instability was known simply as the ‘Great Depression’.
It was, however, a peculiar depression. Within a few years, trade was expanding, technology was advancing rapidly and real wages were generally rising. Falling prices for food and fuel actually improved living standards. Yet inequality soared to levels not surpassed until recent decades. Millions felt left behind, and the resentment generated during the long recovery would shape politics for generations.
That forgotten story is the subject of Liaquat Ahamed’s 1873: The First Great Depression and the Making of the Modern World, a racy account of a financial crisis whose effects stretched from Wall Street and Vienna to Cairo, Constantinople and the American South. Ahamed is a Pulitzer Prize winner for his previous work, Lords of Finance about the central bankers’ role during the period that led up to the 1929 Great Depression. He was an economist at the World Bank and has come out with another page-turner, 1873.
The ‘Crisis of 1873’ is important to explore, says Ahamed, because of “The real estate bubble, stock market mania, careless lending, cascade of defaults, financial disruptions ricocheting across the ocean, drastic austerity programs and ensuing social unrest carry a familiar ring.” The tumultuous economic events of 1873, as always happens, were preceded by an extraordinary real estate and stock market boom and were inevitably followed by a crash, economic instability and political and social upheaval. As journalist Ferdinand Kürnberger observed after the Vienna crash: “A thief is once again a thief and no longer a baron.”
So, Ahamed begins with the great movements of money that preceded the crash: the California gold rush of 1848, the railway boom of the 1850s and 1860s, the debts accumulated during the American Civil War and the French reparations paid to newly unified Germany after the Franco-Prussian War. The resulting flood of money encouraged investors to venture into foreign stock markets. International lending exploded. Governments, particularly in the Middle East, borrowed cheap money for ambitious projects. Financial bubbles inflated in Vienna, Berlin and New York until, inevitably, they burst.
But the financial crash was not the cause of the depression, it was a spectacular but small factor. What made matters worse was one action of the financial authorities. Before 1870, both gold and silver were part of the monetary base, called bimetallism. Then major European economic powers abandoned silver as a foundation of their monetary system while the United States suspended the use of silver as a form of money. They decided that gold would remain the only precious metal linked to currency. Suddenly, half the world’s monetary reserves came under uncertainty. Ahamed calls this “a precipitous and totally unnecessary reordering of the global currency system.”
With less money circulating, prices fell, producing what he describes as a giant redistribution of wealth from debtors to creditors. Farmers around the Great Lakes were devastated by falling wheat prices; Central European aristocrats discovered that inheritances had been squandered. Ahamed captures the absurdity of the period with the image of a Victorian economy “like a car being driven with one foot on the accelerator and the other on the brake.” The political consequences were equally dramatic. The Ottoman empire lost control of its finances and, in 1876, its deposed Sultan Abdülaziz slit his wrists. Egypt, unable to repay London bankers, was occupied by Britain, which forced it to sell its control of the Suez Canal.
In America, president Ulysses S Grant vetoed a monetary stimulus bill, helping fracture the Republican Party. His administration was already drowning in scandals involving his cabinet and family, leaving it in what Ahamed calls a 'miasma of corruption.' The fraudulent and chaotic election of 1876 ended with Rutherford B Hayes becoming president. The bargain that secured Southern electoral votes also ended federal military occupation of the South, clearing the way for Jim Crow.
Interwoven in this is the fascinating story of the Rothschild banking family. The Rothschilds were the pre-eminent global financiers then. Smart and well-connected across the financial capitals of the world, they avoided reckless bets everywhere from Cairo to Constantinople to Vienna to Berlin, as the speculative mania swept up everyone. As markets teetered, the family often tried to restore stability by moving reserves of precious metal across the Atlantic. Their successful navigation through the crisis helped fuel the myth that 'Jewish bankers' were responsible for the scarcity of money. Antisemitism, already strong across Europe, became a political force in Austria and Germany. Otto von Bismarck relied on Rothschild for financial support, then turned to antisemitism when it was politically expedient. In the 1890s, American populist William Jennings Bryan, opposing a Rothschild loan that would eventually help stabilise the US economy, had the House clerk read aloud from The Merchant of Venice.
Almost everyone in Ahamed’s financial world—bankers, speculators, journalists and politicians—seems some combination of corrupt, greedy, foolish and duplicitous. Their behaviour helped create the very populist and anti-capitalist movements that subsequently attacked the financial elite. When capitalism produces spectacular boom and bust, does the system reform itself? The great deflation ended not through social and political reform but because of new gold discoveries in South Africa which increased the money supply.
This book is a gripping read of a vast array of events and characters (you will come across a list of the names and titles of European royalty with British colonial officers present at an 1870 railway event in ‘Jubbalpore’). But the title promises more than it delivers. What happened after 1873 was neither a depression as economists define it, nor did subsequent events 'make the modern world.' The world as we know it today has been continuously shaped by events since long sea voyages connected the continents in the early 15th century, the Industrial Revolution of the 18th century and the development of sophisticated financial markets and technological changes of the 20th century.
Author: Liaquat Ahamed
Publisher: Penguin Random House
Price: ₹940 (Amazon)
1873: The First Great Depression and the Making of the Modern World
