Panic of 1873
The Panic of 1873 was a financial crisis that triggered an economic depression in Europe and North America that lasted from 1873 to 1877, continuing until 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the "Long Depression" that weakened the country's economic leadership. In the United States, the Panic was known as the "Great Depression" until the events of 1929 and the early 1930s set a new standard.
The Panic of 1873 and the subsequent depression had several underlying causes, of which economic historians debate the relative importance. American inflation, rampant speculative investments, the demonetization of silver in Germany and the United States, ripples from economic dislocation in Europe resulting from the Franco-Prussian War, and major property losses in the Great Chicago Fire and the Great Boston Fire all contributed to a massive strain on bank reserves, which, in New York City, plummeted from $50 million to $17 million between September and October 1873.
The first symptoms of the crisis were financial failures in Vienna, the capital of Austria-Hungary, which spread to most of Europe and to North America by 1873.
Europe
Germany and Austria-Hungary
A similar process of over-expansion took place in Germany and Austria-Hungary, where the period from German unification in 1870 and 1871 to the crash in 1873 came to be called the Gründerzeit. A liberalized incorporation law in Germany gave impetus to the foundation of new enterprises, such as Deutsche Bank, and the incorporation of established ones. Euphoria over the military victory against France in 1871 and the influx of capital from the payment by France of war reparations fueled stock market speculation in railways, factories, docks, and steamships, the same industrial branches that expanded unsustainably in the United States. In the immediate aftermath of his victory against France, Bismarck 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 newly united Reich, replacing the silver coins of all constituent lands. Germany was now on the gold standard. Demonetization of silver was thus a common element in the crises on both sides of the Atlantic Ocean.On 9 May 1873, the Vienna Stock Exchange crashed because it was unable to sustain the bubble of false expansion, insolvencies, and dishonest manipulations. A series of Viennese bank failures ensued, 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, a relative of Gábor Keglevich, who had been the master of the royal treasury and in 1845 had co-founded a financial association to fund the expansion of Hungarian industry and to protect the loan repayments, similar to the 1870 Kreditschutzverband, an Austrian association for the protection of creditors and the interests of its members in cases of bankruptcy. That made it possible for a number of new Austrian banks to be established in 1873 after the Vienna Stock Exchange crash.
In Berlin, the railway empire of Bethel Henry Strousberg crashed after a ruinous settlement with the government of Romania, 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. Two years after the foundation of the German Empire, the panic came and became known as the Gründerkrach or "Founders' Crash". In 1865, Keglevich and Strousberg had come into direct competition in a project in what is now Slovakia. In 1870 the Hungarian government, and in 1872 the Emperor-King Franz Joseph of Austria, resolved the question of the competing projects.
Although the collapse of the foreign loan financing had been predicted, the events of that year were in themselves comparatively unimportant. Buda, the old capital of Hungary, and Óbuda were officially united with Pest, 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 flowed into Austria and Russia, but the indemnity payments aggravated the crisis in Austria, which had benefited by the accumulation of capital not only in Germany but also in England, the Netherlands, Belgium, France, and Russia.
Recovery from the crash occurred much more quickly in Europe than in the United States. Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations. There was an anti-Semitic component to the economic recovery in Germany and Austria, as small investors blamed Jews for their losses in the crash. The Neuer Sozial-Demokrat newspaper of the ADAV published several articles blaming Gerson von Bleichröder for the stock market crash. An October 29 article called Bleichröder "Bismarck's Jew".
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, making it possible to go by tram from there to Opatija. The strong increase of port traffic generated a permanent demand for expansion. The Suez Canal was opened in 1869. 1875–1890 became "the golden years" of Giovanni de Ciotta in Rijeka.
The crash is central in the 1877 novel The Breaking of the Storm by the German writer Friedrich Spielhagen. A portrayal of German business life in the 1870s, the literary scholar Jeffrey L. Sammons has described it as "the major fictional treatment of the financial crash of the 1870s as a harbinger of the predatory but erratic capitalism that was to become characteristic of the Reich".
Britain
The opening of the Suez Canal in 1869 was one of the causes of the Panic of 1873 because goods from the Far East had previously been carried in sailing vessels around the Cape of Good Hope and had been stored in British warehouses. As sailing vessels were not adaptable for use through the Suez Canal, the British entrepôt trade suffered.When the crisis came, the Bank of England raised interest rates to 9 percent. Despite this, Britain did not experience the scale of financial mayhem seen in America and Central Europe, perhaps forestalled by an expectation that the liquidity-constraining provisions of the Bank Charter Act 1844 would be suspended as they had been in the crises of 1847, 1857, and 1866. The ensuing economic downturn in Britain seems to have been muted – "stagnant" but without a "decline in aggregate output". However, there was heavy unemployment in the basic industries of coal, iron and steel, engineering, and shipbuilding, especially in 1873, 1886, and 1893.
Comparison with Germany
From 1873 to 1896, a period sometimes referred to as the Long Depression, most European countries experienced a drastic fall in prices. Still, many corporations were able to reduce production costs and achieve better productivity rates with industrial production increasing by 40% in Britain and by over 100% in Germany. A comparison of capital formation rates in both 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%, but the German ratio rose from 10.6% to 15.9%. During the depression, Britain took the course of static supply adjustment, but Germany stimulated effective demand and expanded industrial supply capacity by increasing and adjusting capital formation. For example, Germany dramatically increased investment of social overhead capital, such as in the management of electric power transmission lines, roads, and railroads, thereby stimulating industrial demand in that country, but similar investment stagnated or decreased in Britain. 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.India
The discovery of large quantities of silver in the United States and several European colonies caused the panic of 1873 and thus a decline in the value of silver relative to gold, devaluing India's standard currency.South Africa
In the Cape Colony, the panic caused bankruptcies, rising unemployment, a pause in public works, and a major trade slump that lasted until the discovery of gold in 1886.Ottoman Empire
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 Long Depression than the later period.Latin Monetary Union
The general demonetization and cheapening of silver caused the Latin Monetary Union in 1873 to suspend the conversion of silver to coins.United States
Factors
The American Civil War was followed by a boom in railroad construction. of new track were laid across the country between 1868 and 1873, with much of the craze in railroad investment being driven by government land grants and subsidies to the railroads. The railroad industry was the largest employer outside of agriculture in the U.S. and involved large amounts of money and risk. A large infusion of cash from speculators caused spectacular growth in the industry and in the construction of docks, factories, and ancillary facilities. Most capital was involved in projects offering no immediate or early returns.Coinage Act of 1873
A period of economic overexpansion arose from the northern railroad boom before a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, an outbreak of equine influenza and the Boston fire of 1872, and the demonetization of silver in 1873.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, which, in turn, affected the U.S. since much of the supply of silver was mined there. As a result, the U.S. Congress passed the Coinage Act of 1873, which changed the national silver policy.
Before the Act, the U.S. had backed its currency with both gold and silver and 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, but it would still mint silver dollars for export in the form of trade dollars.
The Act had the immediate effect of depressing silver prices, hurting Western mining interests, who labeled the Act "The Crime of '73", but its effect was offset somewhat by the introduction of a silver trade dollar for use in Asia and the discovery of new silver deposits at Virginia City, Nevada, that resulted in new investment in mining activity. The Act also reduced the domestic money supply, raising interest rates and hurting farmers and others who normally carried heavy debt loads. The resulting outcry raised serious questions about how long the new policy would last. The perception of U.S. instability in its 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 then in its later stages.
In September 1873, the U.S. economy entered a crisis.