The Real Great Depression 1873

Did the current financial tsunami will brought us nearer to the last depression in 192o's. Below article written by Mr.Nelson show something more serious, he make the comparison between the great depression in 1873 and 1920. Results, the great depression in 1873 it's much more severe then the 1920. The 1873 depression was caused by unrelented spending and speculating in the commercial and real estate property, sound like what is happening now, read on..........

By SCOTT REYNOLDS NELSONFrom the issue dated October 17, 2008.

As a historian who works on the 19th century, I have been reading mynewspaper with a considerable sense of dread. While many commentators onthe recent mortgage and banking crisis have drawn parallels to the GreatDepression of 1929, that comparison is not particularly apt. Two yearsago, I began research on the Panic of 1873, an event of some interest tomy colleagues in American business and labor history but probablyunknown to everyone else. But as I turn the crank on the microfilmreader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to mosthistorians and economists, that depression had more to do with overlargefactory inventories, a stock-market crash, and Germany’s inability topay back war debts, which then led to continuing strain on British goldreserves. None of those factors is really an issue now. Contemporaryindustries have very sensitive controls for trimming production asconsumption declines; our current stock-market dip followed bankproblems that emerged more than a year ago; and there are no seriousinternational problems with gold reserves, simply because banks nolonger peg their lending to them.

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

The problems had emerged around 1870, starting in Europe. In theAustro-Hungarian Empire, formed in 1867, in the states unified byPrussia into the German empire, and in France, the emperors supported aflowering of new lending institutions that issued mortgages formunicipal and residential construction, especially in the capitals ofVienna, 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 orhalf-built houses as collateral. The most marvelous spots for sightseersin the three cities today are the magisterial buildings erected in theso-called founder period. But the economic fundamentals were shaky. Wheat exporters from Russiaand Central Europe faced a new international competitor who drasticallyundersold them. The 19th-century version of containers manufactured inChina and bound for Wal-Mart consisted of produce from farmers in theAmerican Midwest. They used grain elevators, conveyer belts, and massivesteam ships to export trainloads of wheat to abroad. Britain, thebiggest importer of wheat, shifted to the cheap stuff quite suddenlyaround 1871. By 1872 kerosene and manufactured food were rocketing outof America’s heartland, undermining rapeseed, flour, and beef prices.The crash came in Central Europe in May 1873, as it became clear thatthe region’s assumptions about continual economic growth were toooptimistic. Europeans faced what they came to call the AmericanCommercial Invasion. A new industrial superpower had arrived, one whoselow 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 rate- reached impossibly high rates. This banking crisis hit the UnitedStates in the fall of 1873. Railroad companies tumbled first. They hadcrafted complex financial instruments that promised a fixed return,though few understood the underlying object that was guaranteed toinvestors in case of default. (Answer: nothing). The bonds had sold wellat first, but they had tumbled after 1871 as investors began to doubttheir value, prices weakened, and many railroads took on short-term bankloans to continue laying track. Then, as short-term lending ratesskyrocketed across the Atlantic in 1873, the railroads were in trouble.When the railroad financier Jay Cooke proved unable to pay off hisdebts, the stock market crashed in September, closing hundreds of banksover the next three years. The panic continued for more than four yearsin the United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For thelargest manufacturing companies in the United States - those withguaranteed contracts and the ability to make rebate deals with therailroads - the Panic years were golden. Andrew Carnegie, CyrusMcCormick, and John D. Rockefeller had enough capital reserves tofinance their own continuing growth. For smaller industrial firms thatrelied on seasonal demand and outside capital, the situation was dire.As capital reserves dried up, so did their industries. Carnegie andRockefeller bought out their competitors at fire-sale prices. The GildedAge in the United States, as far as industrial concentration wasconcerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigarmaker named Samuel Gompers who was young in 1873 later recalled thatwith the panic, “economic organization crumbled with some primevalupheaval.” Between 1873 and 1877, as many smaller factories andworkshops shuttered their doors, tens of thousands of workers - manyformer Civil War soldiers - became transients. The terms “tramp” and“bum,” both indirect references to former soldiers, became commonplaceAmerican terms. Relief rolls exploded in major cities, with 25-percentunemployment (100,000 workers) in New York City alone. Unemployedworkers demonstrated in Boston, Chicago, and New York in the winter of1873-74 demanding public work. In New York’s Tompkins Square in 1874,police entered the crowd with clubs and beat up thousands of men andwomen. The most violent strikes in American history followed the panic,including by the secret labor group known as the Molly Maguires inPennsylvania’s coal fields in 1875, when masked workmen exchangedgunfire with the “Coal and Iron Police,” a private force commissioned bythe state. A nationwide railroad strike followed in 1877, in which mobsdestroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many politicalanalysts blamed the crisis on a combination of foreign banks and Jews.Nationalistic political leaders (or agents of the Russian czar) embraceda new, sophisticated brand of anti-Semitism that proved appealing tothousands who had lost their livelihoods in the panic. Anti-Jewishpogroms followed in the 1880s, particularly in Russia and Ukraine.Heartland communities large and small had found a scapegoat: aliens intheir midst.

The echoes of the past in the current problems with residentialmortgages trouble me. Loans after about 2001 were issued to first-timehomebuyers who signed up for adjustable rate mortgages they could likelynever pay off, even in the best of times. Real-estate speculators,hoping to flip properties, overextended themselves, assuming that homeprices would keep climbing. Those debts were wrapped in complexsecurities that mortgage companies and other entrepreneurial banks thensold to other banks; concerned about the stability of those securities,banks then bought a kind of insurance policy called a credit-derivativeswap, which risk managers imagined would protect their investments. Morethan two million foreclosure filings - default notices, auction-salenotices, and bank repossessions - were reported in 2007. By thentrillions of dollars were already invested in this credit-derivativemarket. Were those new financial instruments resilient enough to coverall the risk? (Answer: no.) As in 1873, a complex financial pyramidrested on a pinhead. Banks are hoarding cash. Banks that hoard cash donot make short-term loans. Businesses large and small now face apotential dearth of short-term credit to buy raw materials, ship theirproducts, and keep goods on shelves.

If there are lessons from 1873, they are different from those of 1929.Most important, when banks fall on Wall Street, they stop all thetraffic on Main Street - for a very long time. The protractedreconstruction of banks in the United States and Europe createdwidespread unemployment. Unions (previously illegal in much of theworld) flourished but were then destroyed by corporate institutions thatlearned to operate on the edge of the law. In Europe, politicians foundtheir scapegoats in Jews, on the fringes of the economy. (Americans, onthe other hand, mostly blamed themselves; many began to embrace whatwould 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. Awidespread consolidation of industries may be on the horizon, along witha nationalistic response of high tariff barriers, a decline ininternational trade, and scapegoating of immigrant competitors forscarce jobs. The failure in July of the World Trade Organization talksbegun in Doha seven years ago suggests a new wave of protectionism maybe on the way.

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

Scott Reynolds Nelson is a professor of history at the College ofWilliam and Mary. Among his books is Steel Drivin’ Man: John Henry, theUntold Story of an American legend (Oxford University Press, 2006).