‘1873’ by Liaquat Ahamed review

Financial panics are endlessly fascinating. From ‘Tulip Mania’ in the Netherlands in the 17th century to the global financial crisis of 2008, the regular booms and busts of market economies have been analysed, celebrated, or regretted. They have always defied rational explanation, exactly because, in the words of Alan Greenspan of the US Federal Reserve Board, they demonstrate ‘irrational exuberance’. That accurately describes today’s boom in artificial intelligence, with far larger investment in data centres than can possibly be justified. We are in the midst of a boom and everyone is waiting for the bust. As always, the speculators hope that this time is different. It never is.

Liaquat Ahamed, a former investment manager, is the author of the much praised Lords of Finance: The Bankers Who Broke the World and Precipitated the Crash of 1929, for which he won a Pulitzer Prize in 2010. His new book discusses the stock market crash of 1873, which started with a property boom and slump in Vienna which spread to Berlin, New York, Paris, and London. As in his previous book, Ahamed’s focus is on the men who fostered the market’s exuberance, sometimes through fraud, usually from over-optimism, occasionally from an uncanny ability to forecast the future. There are enjoyable pen portraits of many of them and of the rulers and politicians who borrowed their money.

By this means, Ahamed attempts to link together four rather different aspects of the world’s financial system: the stock market crash of 1873, the period of falling prices from the 1870s to 1890s, the adoption by many countries of the gold standard and, rather oddly, the role of the Rothschild banks. It doesn’t really work. The main problem is that there actually wasn’t a ‘great depression’ in this period. As Ahamed himself puts it: ‘The immediate economic impact of all the financial turbulence proved to be relatively modest.’ There was a short-lived slump in growth in the US, but other countries continued to grow throughout the period and their populations benefited from a sustained rise in living standards. It was nothing like what was to come in the 1930s.

Another difficulty is that neither the deflation – falling prices – of the period nor the move to the gold standard can clearly be tied to the actions of the particular individuals Ahamed describes. As he writes, no one really knows why Germany decided in 1871 to tie its currency to gold and the same is true of the other countries which followed suit. There was, in his words, ‘a series of unplanned, uncoordinated and ill-conceived steps to refashion the foundations supporting their currencies’.

Ahamed is reviving, for a modern audience, the controversy which rocked American politics, in particular, in the late 19th century: the issue of bimetallism. Previously, almost all countries used both gold and silver in their currencies. A mark, franc, or dollar was defined as a particular quantity of gold or silver of a particular purity; this meant that the rate at which one currency could be exchanged for another – essential for international trade to take place – was similarly fixed. The physical amount of coinage minted in each country was limited by the amount of gold or silver owned by that country, rising if the country sold more goods to other countries than it purchased, falling if the reverse. If more coins were minted, prices would rise. Economic theory in the 19th century saw this as an automatic mechanism which would correct imbalances in a country’s trade.

The major exception to the use of gold and silver – and it was a big one – was Britain, which since the early 1700s had based the value of pound sterling on gold alone. This was the result of a mistake by Sir Isaac Newton when he was master of the Royal Mint. Britain was still, in the late 1800s, the leading nation in the world economy, supplying manufactured goods to many countries, buying food and raw materials in return, and investing the surplus to construct ports and railways or buy land. Its adherence to gold was seen by some as an explanation for its success, which could be followed by others. But it is likely that Germany and others decided to emulate it primarily to simplify trading.

The move away from a bimetallic system is seen by Ahamed, following the economist Milton Friedman, as the cause of the two decades of falling prices from the 1870s. The Coinage Act of 1873 effectively ended bimetallism in the US (and was later referred to by critics as ‘the Crime of 1873’). This deflation harmed many small food producers in the US and led to campaigns for bimetallism. The argument is that using gold alone reduced the money supply and liquidity in the economic system – and hence prices – since holdings of silver were no longer a basis for the coin issue. Most historians consider that this was a minor effect, since the money supply consists of much more than coins – paper currency and bank advances, for example. As Ahamed acknowledges, prices could have fallen as the result of huge reductions in the cost of ocean shipping together with the building of railways, which opened up new areas of the world to supply food and raw materials. This was also an age of innovation – electricity is the prime example – which improved productivity and reduced the prices of manufactured goods.

Few of these global changes can be attributed to individuals, however colourful their lives. Curiously, Ahamed keeps returning to the Rothschild family, who were undoubtedly the most successful bankers of the 19th and probably the 20th centuries. But the Rothschilds became wealthy, and held their wealth, precisely because most members of the family were careful not to involve themselves in dangerously speculative loans to countries or entrepreneurs whom they considered unsafe. Nor did they play much part in the politics of gold and silver. Their relevance is not clear.

1873 was, in short, neither the start of a great depression nor the making of the modern world. It was one of many booms and busts in free market economies after which people say ‘never again’ – until the next time comes. 

• 1873: The First Great Depression and the Making of the Modern World
  Liaquat Ahamed
  Hutchinson Heinemann, 368pp, £25
  Buy from bookshop.org (affiliate link)

Roderick Floud is the author of An Economic History of the English Garden (Penguin, 2020).