Ever heard of the Global Crisis of 1873?

Unlikely. It’s an obscure, rapid breakdown of the world economy barely remembers today, but it’s lessons may be a far better frame of reference for understanding the current crisis than the Great Depression.

It basically goes like this. In the 1860s, the center of the financial world was in the heart of Europe. And the banks of continental Europe started to understand the glories of mortgage-backed lending. This leads to property booms in the cities of Vienna, Berlin, and Paris, where stunning new buildings were built in the mid-19th century. In 1873, defaults on properties started to constrict lending and hit the system hard. This is followed by the Austrian stock market crash, which shocks the sytem, and the continental European banks start to call for repayment of loans from British Banks. These banks in turn begin calling loans from the entrepreneaurs of America.

The biggest clients in the US were the American railroad companies, which at this time were aggressively competing with each other. But they were in a major dilemma — the railroads had built far too much track, and financed it all with debt (both foreign and domestic). As the banks demanded payments and the railroads were unable to pay, they started to run into default. Jay Cooke & Company, a Philidelphia-based institution that was a major backer of railroads, found itself unable to market several million dollars in Northern Pacific Railway bonds, and it went into default. This Lehman (or GE?) style collapse in-turn shocked the US stock markets, which were dominated by railroads. These crash too, and American banks started to fail. In an age before deposit insurance, individuals lost their deposits, businesses lost liquidity, unemployment set in, and before you know it, there was rioting in American cities.

You can read more of the details here. To follow the aftermath, the recession lasted 4 years, but the US recovered its way out of the crisis, and towards being a major superpower, by exporting its way out of the problem with the latest consumer invention: canned food. Canned food, backed by careful branding and keen advertisements, takes the world by storm. And its popularity drives the demand for steel and agriculture. From here, the recession slowly lifted.

Two big differences between then and now: There were no national banks that played a role in stabilizing the system with flows of cash or loans to banks, and the tendency by President Grant was to restrict the money supply, not expand it.

About Curzon

Lord George Nathaniel Curzon (1859 - 1925) entered the British House of Commons as a Conservative MP in 1886, where he served as undersecretary of India and Foreign Affairs. He was appointed Viceroy of India at the turn of the 20th century where he delineated the North West Frontier Province, ordered a military expedition to Tibet, and unsuccessfully tried to partition the province of Bengal during his six-year tenure. Curzon served as Leader of the House of Lords in Prime Minister Lloyd George's War Cabinet and became Foreign Secretary in January 1919, where his most famous act was the drawing of the Curzon Line between a new Polish state and Russia. His publications include Russia in Central Asia (1889) and Persia and the Persian Question (1892). In real life, "Curzon" is a US citizen from the East Coast who has been a financial analyst, freelance translator, and university professor; he is currently on assignment in Tokyo.
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4 Responses to Ever heard of the Global Crisis of 1873?

  1. Alfred Russel Wallace says:

    Thank you. Interesting post, and noteworthy because some attribute the election of Rutherford B Hayes in 1876 to this crash – and that led to the end of efforts for a realistically desegregated South… with its obvious sequelae 100 years later with LBJ… Heaven knows what this crash will lead to… but its unlikely to be liberal…

  2. Joe Jones says:

    How interconnected were the German and American crashes? I don’t think they were nearly as interwoven as the various crashes of 2008 — what we face now is really a global crisis as opposed to a pair of regional ones.

  3. McKellar says:

    Interesting post. I’m guessing all those cans made the railroads and their extra track more useful. What’s our equivalent going to be? It seems to me that part of the problem we have is that the information age as made the old import/export consumption economy somewhat obsolete, and the mortgage crisis has precipitated an over-due restructuring. Anything similar happen in 1873?

    ARW-Reconstruction was barely planned and half-hearted from the beginning, people North and South were more concerned with fighting their Grand Crusade than realistically solving problems…I’d love to hear some guesses as to what we’re messing up today because of the panic.

  4. armchairanalyst says:

    As I understand it the causes of that crisis are the subject of dispute among economic historians…

    Other factors that seem similar in that period and our own are, the economic convergence between “late industrializers” and the northern/western European core; the scramble for overseas markets that occurred in that period of globalization as the results of; chronic overcapacity in key economic sectors and a falling rate of profit (towards normal rate) in core markets; market consolidation and financial innovation; and stiffening geopolitical competition for market share.

    Key differences in the current period include the fact that the U.S. is on the downswing rather than the upswing in its power cycle; the U.S. has run current account deficits since 1971 as opposed to surpluses in the 200 years prior; China is the rising “continental” power attracting vast quantities of foreign investment as it ‘converges’ towards the economic and technological frontier; whereas the U.S. in the late 19th century had a high marginal product of capital (MPK) and a low marginal product of labor (MPL) vis-a-vis Europe, China now has a a high MPK and low MPL relative to the U.S.

    Can the U.S. export its way out of this?