1873: A great deflation, not quite the making of the modern world

1873: The First Great Depression and the Making of the Modern World

by Liaquat Ahamed

Published by Penguin 

368 pages ₹1,499

 Fifteen years ago, I was utterly captivated by Liaquat Ahamed’ s Lords of Finance: The Bankers Who Broke the World, which won the Pulitzer prize for history as well as the Financial Times best business book of the year award. It was an enthralling tale of how the central bank governors of the US, UK, France, and Germany made a series of misjudged policy decisions in the decade 1919 to 1929 which helped cause the 1929 Great Crash and the ensuing Great Depression.

 

 

So, my expectations for his new book were set very high. Unfortunately, I have been seriously disappointed. To begin with, there really was no Great Depression in 1873, though contemporary commentators used that nomenclature for a few years. There was indeed a major crash in the financial markets of America and a few European countries but its impact on the real economies was limited. As Ahamad himself points out, the peak to trough drop in industrial output in the US was only 6 per cent, not at all comparable to the 25-30 per cent plunge experienced in 1930-33. And in the major European economies of UK, France, (newly birthed) Germany, and Austro-Hungary, there was hardly any drop at all, only stagnation for a few years.

 

What did happen after 1873 was 20-plus years of deflation in prices, especially of major commodities, such that these prices ruled about 40 per cent lower after this prolonged deflation. So, a more appropriate title for the book might have been “1873: The Great Deflation …”.  However, as the author points out, the financial crash in prices of stocks, bonds and other instruments was a relatively small factor behind the great deflation. The real culprit was quite different: It was the discretionary policy decisions in America and European nations to “demonetise” silver. Prior to 1870, both gold and silver were part of the monetary base (recall the “silver dollar” in America?).  In the years 1870-1873, starting with Germany, most European countries and America decided that gold would remain the only precious metal linked to currency.  The fairly sudden demonetisation of silver was the major cause explaining the “great deflation”. It ended only when the discovery of large deposits of gold in South Africa restored the supply of gold in the international monetary system.

 

My other problem with Ahamed’s title is the inclusion of “Making of the Modern World” in it. It is possible to argue, as he does, that because of the association of members of the far-flung family of Rothschild financiers with large parts of the financial nexus in the 1873 crash, there may have been a marked increase in antisemitism in parts of Europe. Also, Ahamed contends that the 1873 financial crash and the short-lived depression that went with it led to major losses of seats by the Republicans in the mid-term elections of 1874. Furthermore, they only managed to hold on to the presidency in 1876 by the narrowest of margins by making promises to the Southern Democrats.  Sure enough, after the election, federal troops were withdrawn from the southern states, “marking the end of Reconstruction and federal efforts to reshape Southern society”. White supremacist rule and segregation returned in the South for the next 70 years.

 

While these may have been significant consequences of the 1873 financial crash, it hardly constituted a “making of the modern world”.  There were some other significant, adverse consequences of the 1873 crash. The crash originated in the bond markets when the huge loans made to railway companies worldwide and quite a few developing countries, notably Egypt and Ottoman Turkey, came home to roost. Since the loans were made by banks and investment banks in America and Europe, the crash in the bond markets quickly spread to the stock markets. Quite a few banks went bankrupt, railway companies were badly hit, Egypt became a semi-colony of the UK, and Ottoman Turkey lost a part of its sovereignty. But when put together, all this does not add up to “making of the modern world”.

 

Within the narrower canvas of the origins of the 1873 financial crash and its consequences, Ahamed tells a gripping tale, enriched by his extensive research, wonderful ability to make dry finance come alive in fascinating characters, and his enviable integration of economics, politics, history, and human foibles. I just wish he had deployed his prodigous talents on subjects that really made the modern world.

 

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The reviewer is honorary professor at the Indian Council for Research on International Economic Relations (ICRIER), chancellor of the Central University of Andhra Pradesh, and former chief economic adviser to the Government of India