Remember the Crash of 1873!

Deja Vu:
Remember the Crash of 1873!

Could it be that a previous economic crash featured a
mortgage implosion; the US currency outside the Gold
Standard; and a collision of global trading?
Prof. of History, Scott Nelson details the astonishing parallels
between current events and the calamitous 1873 Global Crash.

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The Real Great Depression

The depression of 1929 is the wrong model for the current economic crisis


As a historian who works on the 19th century, I have been reading
my newspaper with a considerable sense of dread. While many
commentators on the recent mortgage and banking crisis have drawn
parallels to the Great Depression of 1929, that comparison is not
particularly apt.

Two years ago, I began research on the Panic of 1873, an event of some
interest to my colleagues in American business and labor history but
probably unknown to everyone else. But as I turn the crank on the
microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most
historians and economists, that depression had more to do with overlarge
factory inventories, a stock-market crash, and Germany’s inability to pay
back war debts, which then led to continuing strain on British gold
reserves. None of those factors is really an issue now. Contemporary
industries have very sensitive controls for trimming production as
consumption declines; our current stock-market dip followed bank
problems that emerged more than a year ago; and there are no serious
international problems with gold reserves, simply because banks no
longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old
grandmother still calls “the real Great Depression.” She pinched pennies
in the 1930s, but she says that times were not nearly so bad as the
depression her grandparents went through. That crash came in 1873 and
lasted more than four years. It looks much more like our current crisis.

The problems had emerged around 1870, starting in Europe. In the
Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia
into the German empire, and in France, the emperors supported a
flowering of new lending institutions that issued mortgages for municipal
and residential construction, especially in the capitals of Vienna, Berlin,
and Paris. Mortgages were easier to obtain than before, and a building
boom commenced. Land values seemed to climb and climb; borrowers
ravenously assumed more and more credit, using unbuilt or half-built
houses as collateral. The most marvelous spots for sightseers in the three
cities today are the magisterial buildings erected in the so-called founder

But the economic fundamentals were shaky. Wheat exporters from Russia
and Central Europe faced a new international competitor who drastically
undersold them. The 19th-century version of containers manufactured in
China and bound for Wal-Mart consisted of produce from farmers in the
American Midwest. They used grain elevators, conveyer belts, and
massive steam ships to export train loads of wheat to abroad. Britain,
the biggest importer of wheat, shifted to the cheap stuff quite suddenly
around 1871. By 1872 kerosene and manufactured food were rocketing
out of America’s heartland, undermining rapeseed, flour, and beef prices.

The crash came in Central Europe in May 1873, as it became clear that
the region’s assumptions about continual economic growth were too
optimistic. Europeans faced what they came to call the American
Commercial Invasion. A new industrial superpower had arrived, one
whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital,
unsure of which institutions were most involved in the mortgage crisis.
The cost to borrow money from another bank — the interbank lending
— reached impossibly high rates. This banking crisis hit the
United States in the fall of 1873. Railroad companies tumbled first. They
had crafted complex financial instruments that promised a fixed return,
though few understood the underlying object that was guaranteed to
investors in case of default. (Answer: nothing). The bonds had sold well at
first, but they had tumbled after 1871 as investors began to doubt their
value, prices weakened, and many railroads took on short-term bank
loans to continue laying track. Then, as short-term lending rates
skyrocketed across the Atlantic in 1873, the railroads were in trouble.

When the railroad financier Jay Cooke proved unable to pay off his debts,
the stock market crashed in September, closing hundreds of banks over
the next three years. The panic continued for more than four years in the
United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For the largest
manufacturing companies in the United States — those with guaranteed
contracts and the ability to make rebate deals with the railroads — the
Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John
D. Rockefeller had enough capital reserves to finance their own
continuing growth. For smaller industrial firms that relied on seasonal
demand and outside capital, the situation was dire. As capital reserves
dried up, so did their industries. Carnegie and Rockefeller bought out
their competitors at fire-sale prices.
The Gilded Age in the United States,
as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar
maker named Samuel Gompers who was young in 1873 later recalled
that with the panic, “economic organization crumbled with some primeval
upheaval.” Between 1873 and 1877, as many smaller factories and
workshops shuttered their doors, tens of thousands of workers — many
former Civil War soldiers — became transients. The terms “tramp” and
bum,” both indirect references to former soldiers, became commonplace
American terms. Relief rolls exploded in major cities, with 25-percent
unemployment (100,000 workers) in New York City alone.

Unemployed workers demonstrated in Boston, Chicago, and New York in
the winter of 1873-74 demanding public work. In New York’s Tompkins
Square in 1874, police entered the crowd with clubs and beat up
thousands of men and women. The most violent strikes in American
history followed the panic, including by the secret labor group known as
the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked
workmen exchanged gunfire with the “Coal and Iron Police,” a private
force commissioned by the state. A nationwide railroad strike followed in
1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and
Cumberland, Md.

In Central and Eastern Europe, times were even harder. Many political
analysts blamed the crisis on a combination of foreign banks and Jews.
Nationalistic political leaders (or agents of the Russian czar) embraced a
new, sophisticated brand of anti-Semitism that proved appealing to
thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms
followed in the 1880s, particularly in Russia and Ukraine. Heartland
communities large and small had found a scapegoat: aliens in their own

The echoes of the past in the current problems with residential mortgages
trouble me. Loans after about 2001 were issued to first-time home buyers
who signed up for adjustable rate mortgages they could likely never pay
off, even in the best of times. Real-estate speculators, hoping to flip
properties, overextended themselves, assuming that home prices would
keep climbing. Those debts were wrapped in complex securities that
mortgage companies and other entrepreneurial banks then sold to other
banks; concerned about the stability of those securities, banks then
bought a kind of insurance policy called a credit-derivative swap, which
risk managers imagined would protect their investments. More than two
million foreclosure filings — default notices, auction-sale notices, and
bank repossessions — were reported in 2007. By then trillions of dollars
were already invested in this credit-derivative market. Were those new
financial instruments resilient enough to cover all the risk? (Answer: no.)

As in 1873, a complex financial pyramid rested on a pinhead. Banks are
hoarding cash. Banks that hoard cash do not make short-term loans.
Businesses large and small now face a potential dearth of short-term
credit to buy raw materials, ship their products, and keep goods on

If there are lessons from 1873, they are different from those of 1929.
Most important, when banks fall on Wall Street, they stop all the traffic on
Main Street — for a very long time. The protracted reconstruction of
banks in the United States and Europe created widespread
unemployment. Unions (previously illegal in much of the world) flourished
but were then destroyed by corporate institutions that learned to operate
on the edge of the law. In Europe, politicians found their scapegoats in
Jews, on the fringes of the economy. (Americans, on the other hand,
mostly blamed themselves; many began to embrace what would later be
called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms —
financial and otherwise — that have substantial cash reserves. A
widespread consolidation of industries may be on the horizon, along with
a nationalistic response of high tariff barriers, a decline in international
trade, and scapegoating of immigrant competitors for scarce jobs. The
failure in July of the World Trade Organization talks begun in Doha seven
years ago suggests a new wave of protectionism may be on the way.

In the end, the Panic of 1873 demonstrated that the center of gravity for
the world’s credit had shifted west — from Central Europe toward the
United States. The current panic suggests a further shift — from the
United States to China and India. Beyond that I would not hazard a
guess. I still have microfilm to read.

Originally published in The Chronicle Review

Blogged with the Flock Browser

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