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Thursday, October 21, 2010

A US History of 'Panic' - Part II : Panic of 1873

 ~ 1874 Tompkins Square Riot, NYC

The purpose of this history lesson into past depressions and economic downturns in the US is to show that these things are not new phenomenon that magically started in 1929.  In addition, the greed and deep Evilness of banks and investors is not something that started with Goldman Sachs.  This has been a part of American history since its inception- its just the baddies get bigger and bigger, and the government does more and more to give aid and comfort to them.

So continuing the history lesson- today's focus:

Panic of 1873

 ~ Black Friday- NYSE shuts down, 1873

The Panic of 1873 surrounded a severe international economic depression in Europe and the US that lasted until 1879, and even longer in some countries. It was triggered by the fall in demand for silver which followed Germany's decision to abandon the silver standard in the wake of the Franco-Prussian war. In 1871, Germany's leader Bismarck extracted a large indemnity in gold from France and ceased minting silver coins. Financial failures began in Vienna, Austria, which spread to most of Europe and North America by 1873. In Britain, the result was two decades of stagnation known as the "Long Depression", which weakened Britain's economic leadership in the world.

The decision of the German Empire to cease minting silver coins caused a downward pressure on the value of silver which had a knock on effect in the US. As a result, the Coinage Act of 1873 was introduced. Prior the US 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.  This depressed silver prices hurting Western mining interests, who labeled the Act "The Crime of '73." 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. This perception of instability caused investors to shy away from long-term obligations, particularly long-term bonds. In September 1873, the American economy entered a crisis.

~ Jay Cooke

Jay Cooke & Co. a major component of the United States banking establishment, found itself unable to market several million dollars in railway bonds. His 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  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.  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. This 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, more slowly in Chicago, Virginia City, Nevada and San Francisco.  The New York Stock Exchange closed for ten days starting September 20. 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.

Here's how different parts of Europe were affected:

~ Black Friday, May 9 1873, Vienna, Austria

Germany & Austria- 

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 reparationsencouraged stock market speculation in railways, factories, docks, steamships - in short, the same areas of over expansion as in the US It was in the immediate aftermath of Bismarck's victory against France that he began the process of silver demonetization. Germany was now on the gold standard.

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. In Berlin, the railway speculation bubble burst.  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".

Britain-

In Britain the long depression resulted in bankruptcies, escalating unemployment, a halt in public works, and a major trade slump that lasted until 1897.  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.

Ottoman Empire-

In the periphery, the Ottoman Empire 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. So the Empire began to tax heavily all non-Muslim subjects.


~  Part III to come in next few days..

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