The Panic of 1873 triggered a severe international economic depression in both Europe and the United States that lasted until 1879, and even longer in some countries. The depression was known as the Great Depression until the 1930s, but is now known as the Long Depression.[1] The panic was caused by the fall in demand for silver internationally, which followed Germany's decision to abandon the silver standard in the wake of the Franco-Prussian war.[2]
In 1871, Otto von Bismarck extracted a large indemnity in gold from France and ceased minting silver thaler coins. The first symptoms of the crisis were financial failures in the Austro-Hungarian capital, Vienna, which spread to most of Europe and North America by 1873. It was one of a series of economic crises in the 19th and early 20th centuries. In Britain, the result was two decades of stagnation known as the "Long Depression", which weakened Britain's economic leadership in the world.[3] In U.S. literature this global event is usually known as the Panic of 1873, while in Europe it is known as the Long Depression or Great Depression.[4]
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The American Civil War was followed by a boom in railroad construction. 56,000 miles (90,000 km) of new track were laid across the country between 1866 and 1873. Much of the craze in railroad investment was driven by government land grants and subsidies to the railroads. At that time, the railroad industry was the nation's largest employer outside of agriculture, and it involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry as well as overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns.[5]
The decision of the German Empire to cease minting silver thaler coins in 1871 caused a drop in demand and downward pressure on the value of silver; this had a knock-on effect in the USA, where much of the supply was then mined. As a result, the Coinage Act of 1873 was introduced and this changed the United States silver policy. Before the Act, the United States had backed its currency with both gold and silver, and it minted both types of coins. The Act moved the United States to a 'de facto' gold standard, which meant it would no longer buy silver at a statutory price or convert silver from the public into silver coins (though it would still mint silver dollars for export in the form of trade dollars)[6]
The Act had the immediate effect of depressing silver prices. This hurt Western mining interests, who labeled the Act "The Crime of '73." Its effect was offset somewhat by the introduction of a silver trade dollar for use in the Orient, and by the discovery of new silver deposits at Virginia City, Nevada, resulting in new investment in mining activity.[7] But the coinage law also reduced the domestic money supply, which raised interest rates, thereby hurting farmers and anyone else who normally carried heavy debt loads. The resulting outcry raised serious questions about how long the new policy would last.[8] This perception of instability in United States monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was in its later stages at the time.
In September 1873, the American economy entered a crisis. This followed a period of post-Civil War economic over-expansion that arose from the Northern railroad boom. It came at the end of a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872, and demonetization of silver in 1873.
In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, was invested heavily in the railroads. At a time when investment banks were anxious for more capital for their enterprises, President Ulysses S. Grant's monetary policy of contracting the money supply (again, also thereby raising interest rates) made matters worse for those in debt. While businesses were expanding, the money they needed to finance that growth was becoming more scarce.
Cooke and other entrepreneurs had planned to build the nation's second transcontinental railroad, called the Northern Pacific Railway. Cooke's firm provided the financing, and ground was broken near Duluth, Minnesota, for the line on February 15, 1870. But just as Cooke was about to swing a $300 million government loan in September 1873, reports circulated that his firm's credit had become nearly worthless. On September 18, the firm declared bankruptcy.[9][10]
The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, and more slowly in Chicago; Virginia City, Nevada; and San Francisco.[11][12]
The New York Stock Exchange closed for ten days starting September 20.[13] Of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876. Construction work halted, wages were cut, real estate values fell and corporate profits vanished.[14]
American railroad unions commenced the Great Railroad Strike of 1877, preventing the trains from moving, especially in Pennsylvania and the great railway hub of Chicago. President Rutherford B. Hayes sent in federal troops in an attempt to stop the strikes. Fights between strikers and troops killed more than 100 and left many more injured. Further trouble came in July 1877 in the form of a crash in the market for lumber, resulting in the bankruptcy of several leading Michigan lumbering concerns.[15] The effects of the resulting second business slump reached California by 1878.[16]
The tension between workers and the leaders of banking and manufacturing interests lingered on well after the depression lifted in the spring of 1879, the end of the crisis coinciding with the beginning of the great wave of immigration into the United States which lasted until the early 1920s.
Poor economic conditions caused voters to turn against the Republican Party. In the 1874 congressional elections, the Democrats assumed control of the House. Public opinion during the period made it difficult for the Grant Administration to develop a coherent policy regarding the Southern states. The North began to steer away from Reconstruction. With the depression, ambitious railroad building programs crashed across the South, leaving most states deep in debt and burdened with heavy taxes. Retrenchment was a common response of southern states to state debts during the depression. One by one each Southern state fell to the Democrats, and the Republicans lost power.
The panic and depression hit all industrial nations.
A similar process of over-expansion was going on in Germany and Austria, where the period from German unification in 1870/71 to the crash in 1873 came to be called the Gründerjahre or "founders' years". A liberalized incorporation law in Germany led to the founding of new enterprises, such as the Deutsche Bank, as well as the incorporation of established ones. Euphoria over the military victory against France in 1871, combined with the influx of capital from the payment by France of war reparations, encouraged stock market speculation in railways, factories, docks, steamships - in short, the same areas of over-expansion as in the United States.[17] It was in the immediate aftermath of Otto von Bismarck's victory against France that he began the process of silver demonetization. The process began on 23 November 1871 and culminated in the introduction of the gold mark on 9 July 1873 as the currency for the new united Reich to replace the silver coins of all the constituent parts. Germany was now on the gold standard.[2] Demonetization of silver was therefore a common element in the crises on both sides of the Atlantic Ocean.
On May 9, 1873, the Vienna Stock Exchange crashed, no longer able to sustain false expansion, insolvency, and dishonest manipulations. A series of Viennese bank failures resulted, causing a contraction of the money available for business lending. One of the more famous private individuals who went bankrupt in 1873 was Stephan Keglevich of Vienna. He was a relative of Gábor Keglevich, who had been the main royal treasurer of Hungary (1842–1848) and who had founded in 1845 with some others a financing association to finance the Hungarian industry and to protect the loan repayments, similar to the Kreditschutzverband von 1870 (Austria's association for the protection of creditors and for the protection of the interests of its members in cases of bankruptcy). Therefore it was possible that a series of Austrian banks were newly established in 1873 after the Vienna Stock Exchange crash.[18] In contrast to Berlin, where the railway empire of Bethel Henry Strousberg crashed after a ruinous settlement with the Romanian government, bursting the speculation bubble in Germany. The contraction of the German economy was exacerbated by the conclusion of war reparations payments to Germany by France in September 1873. Coming two years after the founding of the German Empire, the panic became known as the Gründerkrach or "founders' crash".[19][20][21] Keglevich and Strousberg had come in the year 1865 in direct competition in a project in today's Slovakia, whereupon, in 1870, the Government of Hungary and finally in 1872 the Emperor and King Franz Joseph I of Austria cleared the question of these competing projects.[22][23]
Although the collapse of the foreign loan financing had been foreshadowed, the anticipatory events of that year were in themselves comparatively unimportant. Buda the old capital of Hungary and Óbuda were officially united with Pest,[24] thus creating the new metropolis of Budapest in 1873. The difference in stability between Vienna and Berlin had the effect that the French indemnity to Germany overflowed thence to Austria and Russia, but these indemnity payments aggravated the crisis in Austria, which had been benefited by the accumulation of capital not only in Germany, but also in England, Holland, Belgium, France and Russia.[25]
Recovery from the crash was much quicker in Europe than in the United States.[26][27] Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations at the time.[27] There was an anti-Semitic component to the economic recovery in Germany and Austria as small investors irrationally blamed the Jews for their losses in the crash.[28][29] False expansions have been reconsidered. Monetary distribution issues are first and foremost a question of income distribution between labour economics and capital (economics).[30] Soon more luxury hotels and villas were built in Opatija and a new railway line was extended in 1873 from the Vienna-Trieste line to Rijeka, from where it was possible to go by tram to Opatija. The strong increase of port traffic meant that there was a permanent request for expansion.[31] The Suez Canal was opened in 1869. 1875-1890 became "the golden years" of Giovanni de Ciotta in Fiume (Rijeka).
The construction of the Suez Canal, which opened in 1869, was one of the causes of the Panic of 1873, because the goods from the Far East were carried in sailing vessels around the Cape of Good Hope and were stored in British warehouses, but sailing vessels were not adaptable for use through the Suez Canal, because the prevailing winds of the Mediterranean Sea blow from west to east.[32]
In Britain the long depression resulted in bankruptcies, escalating unemployment, a halt in public works, and a major trade slump that lasted until 1897.[33]
During the depression of 1873–96, most European countries experienced a drastic fall in prices. Still, many corporations were able to reduce production costs and achieve better productivity rates, and, as a result, industrial production increased by 40% in Britain and by over 100% in Germany. A comparison of capital formation rates in the two countries helps to account for the different industrial growth rates. During the depression the British ratio of net national capital formation to net national product fell from 11.5% to 6.0% while Germany's rose from 10.6% to 15.9%. In essence, during the course of the depression, Britain took the course of static supply adjustment while Germany stimulated effective demand and expanded industrial supply capacity by increasing and adjusting capital formation. For example, Germany dramatically increased investment with regard to social overhead capital, such as in the management of electric power transmission lines, roads, and railroads, while this input stagnated or decreased in Britain and the investment helped to stimulate industrial demand in Germany. The resulting difference in capital formation accounts for the divergent levels of industrial production in the two countries and the different growth rates during and after the depression.[34]
In the periphery, the Ottoman Empire's economy also suffered. Rates of growth of foreign trade dropped, external terms of trade deteriorated, declining wheat prices affected peasant producers, and the establishment of European control over Ottoman finances led to large debt payments abroad. The growth rates of agricultural and aggregate production were also lower during the "Great Depression" as compared to the later period.[35]
After the 1873 depression, agricultural and industrial groups lobbied for protective tariffs. The 1879 tariffs protected these interests, stimulated economic revival through state intervention and refurbished political support for the conservative politicians Bismarck and John A. Macdonald (the Canadian prime minister). Chancellor Bismarck gradually veered away from classic liberal economic policies in the 1870s, finally embracing a full conservative program, including tariffs, nationalization of railroads, and compulsory social insurance.[36][37][38] This political and economic nationalism also reduced the fortunes of the German and Canadian Liberal parties, and stimulated the rise of antisemitism in Germany and Austria. France, like Britain, also entered into a prolonged stagnation that extended to 1897. The French also attempted to deal with their economic problems through the implementation of tariffs. New French laws in 1880 and in 1892 imposed stiff tariffs on many agricultural and industrial imports, an attempt at protectionism.[39] The U.S., still in the period after the Civil War, continued to be very protectionist.[40]
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