1873 summary

There was one market of growing importance where the Rothschild’s didn’t have much influence, and that was the US. Throughout the 1850s, the country became the fastest-growing major economy in the world. Yet for many European financiers, this new frontier carried a reputation of unpaid debts and broken promises that overshadowed everything else.

That skepticism had a lot to do with an earlier borrowing spree in the 1830s. Many states in the union had eagerly raised money from European banks and lenders to fund infrastructure projects. When several of them later defaulted on their debts, those European bankers took heavy losses, and none were more frustrated than the Rothschilds. The popular opinion quickly became that lending to the US was simply too risky. This also meant that the New York of the mid-nineteenth century was a surprisingly modest financial center, dwarfed by the established markets of London and Paris.

The first real test of this new global economy came in the summer of 1870. It was during that summer that long simmering tensions between France and Prussia boiled over into war.

While Europe was used to weathering conflicts, this one felt different. France was among the world's largest economies, with Paris a leading hub of international finance and Prussia’s major banking center Frankfurt also in the mix. A prolonged war between these two powers threatened to cause a major disruption.

We’ve now reached the opening months of 1873. As you might suspect, the first cracks appeared in Vienna, where the years of easy money had inflated an enormous stock market and property bubble. Signs of trouble started to stack up in early spring: fraud investigations reached prominent executives, banks tightened credit, buyers for the endless stream of new securities dried up, and share prices stopped climbing. Then a major bank suddenly went under and lenders began demanding repayment from speculators. 

Confidence evaporated into thin air, and on May 9, 1873, panic and chaos engulfed the Vienna Stock Exchange. Investors scrambled to sell as bankruptcies multiplied. Anger spilled out into the street and even members of Europe's most prominent banking families found themselves accosted as the market disintegrated around them.

The panic of 1873 exposed how deeply connected and interdependent the global economy had become. News of Jay Cooke & Company's collapse reached Europe almost immediately, unravelling a vulnerable Berlin that had already had its confidence shaken by Vienna's crash. Hundreds of businesses disappeared entirely, but it was the newly created banks and real-estate companies that were hit hardest. 

In the US, it was the railroads. For years they’d overborrowed and now bond defaults were spreading through the industry on an unprecedented scale. It turned the mid-1870s into one of the worst periods for corporate failures in American history.

The financial crash left behind more than empty bank accounts. It also left millions of people searching for someone to blame. In Germany and Austria, the deepest wounds were not felt by seasoned financiers but by ordinary middle-class investors, many of whom had entered the stock market for the first time. Anger spread quickly. All that was missing was somewhere to direct it.

In December 1874, the popular German magazine Die Gartenlaube began to offer targets for people’s frustrations. In a recurring column written by Otto Glagau, the crash was not the result of fraud, reckless speculation or misguided government policy. Instead, it was dishonest promoters and corrupt financiers. And as Glasgau’s popular column went on, it became increasingly focused on Jewish financiers who were described as having orchestrated the speculative boom.

One of the reasons that the 1873 crisis isn’t so well-remembered these days is because, on paper at least, the economy had largely rebounded by 1880. All the major economies were back to reporting growth. Investment and international lending resumed, and industrial expansion was once again on track.

Yet things had changed in not so subtle ways. Britain was no longer in a commanding position. Instead, the US and Germany were the new economic engines, driven by innovative industries and technologies, along with another great wave of railroad construction.