I picked up this book for two reasons. First, 1873: The Rothschilds, the First Great Depression, and the Making of the Modern World is written by Liaquat Ahamed, who is the author of the well-acclaimed Lords of Finance, an instant classic on the lead-up period of the Great Depression. Second, I had an impression that the 1873 financial crisis was largely a crisis surrounding US railway bonds and wanted to learn more about it.
Ahamed is unquestionably an excellent writer. He managed to pack four decades of history about the Western financial system into 300 pages in an insightful and convincing manner. My first motivation was more than fulfilled by the book.
Regarding the second reason: the railway bond boom and bust, I thought, carry significant modern-day implications as they are often considered the closest historical comparison to the current AI boom. A better understanding of the 1873 bond crisis can help prepare me for the future of this AI craze, I thought.
What surprised me was that 1873 is not only a book about the railway bond crisis.
1873, as Ahamed argued, was the “first truly international financial crisis,” and it was so much bigger than the railroad industry in the US. The crisis was “international” as not only was New York hit; Berlin and Vienna also suffered greatly in the financial turmoil.
A railway crisis built on subsidies, shell companies, and shaky bonds
The government-subsidies-filled railway boom in the US was relatively easy to comprehend. America was the fastest-growing economy in the 1850s, expanding by 60% over the decade, with outsized demand for capital investment and expansion. Railroads were one of the most distinctive examples.
However, the railway industry was also affected by corruption as insiders set up shell companies to inflate costs to benefit themselves. By 1873, the boom turned into a bust. US railway stocks fell 50% between 1873 and 1877. Between 1874 and 1876, a third of US railway bonds went into receivership, making it the worst three-year period of corporate defaults in US history, even worse than the Great Depression.
Franco-Prussian War indemnity inflated Berlin and Vienna markets
Little did I know, however, that the Franco-Prussian War, a chapter in my high-school history class that introduced me to the famous Otto von Bismarck, also played a major role in generating an economic boom in the later-formed Germany.
The substantial sum of indemnity France paid to Prussia created an outsized economic stimulus for the German economy; equity and property markets entered a period of what we would now call “irrational exuberance.”
The euphoria finally turned into a financial slump in Berlin and Vienna. It compounded with the financial bust in the US, via the newly established undersea telegraph cable; this marked the first time a financial crisis jumped across the Atlantic within days instead of months.
The trigger: the West’s switch to gold
But the most fascinating story of this book, even more enticing than all the Rothschild family tales, is Ahamed’s detailed explanation of how the major Western economies’ switch to the gold standard from bimetallism triggered the crisis.
As the major powers one-by-one abandoned silver as part of their money supply at a time when gold production stagnated, the governments and central banks failed to provide the much-needed liquidity injection to tackle the 1873 financial crisis.
This crisis then turned into a prolonged period of international deflation. Even though in terms of economic growth, the period was far from disastrous, deflation hurt industrialists and farmers dearly, creating a decade-long period of economic gloom—possibly the first-ever “vibesession.”
A familiar-sounding aftermath
Ahamed also devotes detailed coverage to the aftermath of the 1873 crisis. The keywords of this period were strangely relevant to modern-day readers: the rise of antisemitism, “fake news” and conspiracy theories; political shake-up in the US, featuring a presidential election filled with fraud and vote-stealing claims; the financial industry benefiting from the economic downturn while the working class suffered.
This is a truly thought-provoking book. I am now even more curious about this: the problems we are observing around the world right now actually rhyme with history, don’t they?
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EconReporter’s Rating on 1873:
Note:
- All comments are based on a review copy obtained through NetGalley.
- 1873 will be available in the US on June 2.
