It may lack the depth, rigor and focus of Liaquat Ahamed's previous book Lords of Finance, but 1873 is still a useful read on an old global market crash nobody in the modern era knows anything about.
And I mean nobody. Not even the historians and economists who write about it! In fact, one of the key perceptions a reader takes away from this era is how intractable it feels, how hard it is to tell really what happened, and how modern interpretations of it--including this author's--are muddled and at times even self-contradictory.
It was supposedly a huge global crash, in fact this period was once called "The Great Depression." Yet in the US, the stock market recovered back to pre-crash highs within a year. Economically there seems to have been surprisingly little fallout: industrial production didn't decline at all in Germany and England afterward, and it only declined slightly in the US--and even this decline was probably more artifact than fact, as the US was in an extended period of "good" deflation at this time.
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Even the deflation of that era isn't well understood. The long-term deflation characterizing the last few decades of the 1800s seems to carry with it its own confusions and debate today about what that deflation actually meant--even over whether it was good or bad! If you're a product of modern economic orthodoxy, the mere idea of deflation signifies depressions, crashes and 1930s-era file footage of soup lines. But yet the last few decades of the 1800s, despite being a fully deflationary era, produced tremendous improvements in productivity, wealth, and (most importantly) living standards in the USA.
Rising living standards during a deflation? For a modern, who knows only life in a fiat monetary system, this simply doesn't compute. But back then it was a hard money era. In fact most Americans in those days were still shell-shocked by the USA's temporary foray into fiat money in the 1860s, as both the North and the South printed paper money: the Union printed hated "greenbacks" to fund the Civil War, and the South printed unbacked and soon-to-be-worthless currency. The Union got a severe inflation for its trouble (prices rose some 80% in a few years), the South got a hyperinflation, and everybody had had enough of unbacked paper money.
Today, however, we live in a fully fiat/paper money era that is built on so much underlying debt that the idea of "deflation" brings terror and loathing. And yet much of the "growth" and "wealth" in today's era is obviously illusory: the numbers are only going up due to inflation. Thus the idea of deflation, the very word itself, carries along with it a lot of baggage for moderns, and thus the lens we use to look at it is almost certainly the wrong lens.
Why am I discussing these intractable and difficult-to-understand aspects of the period? Because they aggregate into a significant problem for the author. 1873 gave us a multi-threaded, five-theater market crash (Vienna, Berlin, London, Paris and the US). This crash happened right after a major (albeit brief) war between France and Prussia, which brings its own threads and complexities to the story. The economic data from this era are confused and ill-tracked, and as we've seen the monetary backdrop and the monetary debates of the era are totally foreign to a modern reader. Thus I sympathize with the author as he finds himself not only jumping around from theater to theater, but also finds himself repeatedly forced to interrupt his own multi-thread narrative with long, tangential backfills of prior history and context in an attempt to bring the reader up to speed.
I'll share a couple of examples to illustrate. See for instance Jay Cooke's role in the 1873 crisis, which the author has to set up with an extended discussion of Cooke's history and background, taking up all of Chapter 4. Only then can the reader fully understand why the sudden collapse of his investment bank in 1873 was such a shock to world financial markets. Another example: the author can't really lay down the basics of the aftermath of 1873 without first having an extended (and I mean extended) discussion of the gold/bimetalism debate. Only after this side-trip can the author resume his narrative and make (some) sense of the sudden elimination of silver from most of the world's monetary reserves. Even the author's choice to thread much of his book around the Rothschild family carries a cost, as he has to backfill context on the various generations of the family and the various roles they played in each of 1873's major theaters.
All of this is my own (tangential!) way of saying that in order to properly set up 1873, our author has to weave together quite a lot of varied threads, many of which he weaves quite well.
One more structural criticism. The author depends extensively on secondary research and does not appear to have done much, if any, primary research in writing this book. This is a major difference between this book and Lords of Finance. This can be okay: useful history can emerge when an author digests and relates what's already been written about an era. But perhaps one of the reasons the author struggles to find a common thread though his book, and why he describes the era in occasionally self-contradictory ways, is because he is dependent on others historians' visions. He hasn't fully formed and shaped his own. Once again, one gets the impression that nobody really understands what 1873 was all about, and the author's tangents and conflicting characterizations merely reflect this ambiguity.
I know I've laid down quite a few criticisms of this work, but at the same time I want to thank this author. History rhymes, and stock market history really rhymes, so anything that gives you some sense of the texture and feel of a prior market era's excesses and overexuberances will help us understand the excesses of our own. This author does us a generous favor in reminding us.
[Readers, what follows are my notes and quotes from the text: I include them to help me better remember what I read. As always, feel free to skim or skip.]
Notes:
Translating Sums of Money: Interesting note here about how difficult it is to really "translate" in a contextually helpful way quantities of money from era to era: you don't really have accurate or consistent inflation data (heck, governments lie about it all the time), and the relative size of the economies (the base against which you would divide a sum of money to compare) is also vastly different, since economies have grown gigantically since the 19th century. The author uses 25x as a multiplier to handle inflation: for example comparing a Rothschild mansion worth $5 million in the 1870s to a $25 million mansion today. But when he compares the indemnity imposed on France after the Franco-Prussian War, or the $500 million invested into US railway capex during the 1870s he uses a multiplier of 1,200x, thus the $500 million invested in US railways would be equivalent to $600 billion today, or as the author phrases it, roughly what the major tech companies will spend on capex this year. [I would add here that the gold price has gone up 210x since 1870, and if you include a factor for gold "inflation" (meaning you adjust this multiplier upward by the 1-2% of additional gold mined per year since, thinking of this as a form or dilution or "gold inflation"), you might argue that the apples-to-apples price level has gone up as much as an order of magnitude more.]
Introduction:
xiii On the "collective madness" of the Vienna stock exchange in the years leading up to May 1873, where there was a type of dot-com fever; everyone from shoeshine boys to middle-class doctors and lawyers to archdukes, duchesses and generals "joined in the frenzy of gambling, buying stocks on margin with money they did not possess." There was also a tremendous real estate bubble in Vienna accompanying the stock market bubble, the author claims here the prices for real estate doubled in value every 18 months in the early 1870s. May 9th, 1873 was dubbed "Black Friday" as bank stocks fell 45% in a single day. Note also the footnote here that the phrase "Black Friday" was first named after September 24th, 1869. At first this market crash in Vienna was seen as an isolated event, but some four months later Jay Cooke and his investment banking firm suddenly shut its doors and declared bankruptcy, which shook the foundation of Wall Street, as the New York Stock Exchange "took the unprecedented step" of closing the market for 10 days.
xvff Within five years more than half of the $2.2 billion in railway bonds listed on the New York Stock Exchange would default. The Jay Cooke news caused a wave of panic selling across Europe, in Berlin, Amsterdam, Brussels, and then once again in Vienna; over the next three years the Berlin and Vienna stock markets would fall 40%. Note the author's comment here that the London and Paris stock markets "remained strangely immune." Next came sovereign defaults, where Ottoman Turkey and Egypt defaulted, leading to a coup which deposed the Ottoman Empire's sultan in 1876; two years later Egypt's king was deposed as well.
xvi "The events of 1873 are now largely forgotten. But to the generation growing up in the early 20th century, 1873 loomed as large in the public consciousness is the Great Crash of 1929 does today. And like the Great Crash, it was viewed as having set the stage for a twenty-year period of economic upheaval that in its day even came to be known as the Great Depression."
xviiff On the worldwide boom from 1848 to 1873: the first worldwide economic expansion in Western history fueled by international trade and capital investment, "the first era of globalization." Comments here on how the immediate impact of the 1873 crash was modest: only the US experienced a significant downturn, and it was only a 6% decline in industrial production. On how economic historians now no longer call the aftermath of 1873 a Great Depression.
xviii "In fact, the crisis of 1873 might have easily gone down in history as just one in the long series of minor setbacks that peppered the nineteenth century, leaving little lasting damage, had the governments of the major economic powers not simultaneously blundered, amid all the financial tumult, into a precipitous and totally unnecessary reordering of the global currency system. This proved to be a self-inflicted wound that generated a giant squeeze in the volume of global liquidity, and it had enormous unattended economic, social, and political consequences that would unfold for decades." [What the author is talking about here is Germany, France and the USA's relatively sudden transition from a bimetal-based (gold and silver) based currency exchange system to a gold-only based system. Making this change actually contracted the money supply substantially, leading to an economic contraction and deflation.]
xviiiff Comments here on Germany selling a large portion of its silver reserves to undercut France; but then within a couple of years every country in Europe had abandoned silver is a foundational metal of its monetary system; likewise the US also suspended the use of silver as a form of money in what the author calls "a correspondingly ill-considered move." [Will this author end up being an inflationista? Will he have a dog in this fight? Most people who wanted to abandon silver were hard money supporters in those days, most people who wanted to use silver were soft money inflationistas, more or less the progenitors of today's inflationistas.] The author argues that this triggered a massive deflation in prices which would reverberate for the next quarter century; over the next six years prices would drop 20-25% across the world. [Right away it's probably important to note the work on deflation by Jorg Guido Hulsmann, who argues that deflation is not necessarily the Bad Thing that modern economists are trained to fear and loathe. Today, however, since we have a system based on fully fiat money, built on top of enormous debts, a deflation like the one that happened after 1873 has become essentially inconceivable: the government policy response to any deflation will have to be massive money printing followed by inflation to "reflate" prices.]
xix During this time prices of US wholesale goods plummeted by 35%, and would continue declining until the mid 1890s, by which time wholesale prices by more than 50% and the overall price level fell by a third. [It's almost unimaginable to think of price levels declining like this: the only analogies we moderns have are thinks like semiconductors, storage/data prices or other subdomains of technology where there are declining cost curves]. Comments here on how even Milton Friedman himself blames the single blunder of demonetizing silver for all these deflationary effects. [A quick sidebar to analyze the rhetoric here: one can think of Friedman as the closest thing to a true "hard-money guy" that establishment economics will permit into any debate on monetary policy, so rhetorically he is often used in cases like "Even Milton Friedman saw this as a blunder" which makes it seem so self-evidently like a blunder that no other position is conceivable]. Discussion here of the pros and cons of deflation: peoples' wages dropped, but since prices dropped still more, peoples' buying power and standards of living improved; the deflation rewarded thrifty savers whose value of government bonds and dollar savings went up in real terms. [The problem of course was anyone who had debts had a huge problem because those debts "grew" in real terms as prices and incomes dropped.] "...the ubiquitous fall in prices created a giant redistribution of wealth from debtors to creditors." The author argues here this wealth transfer was largely from businessman and farmers to bankers, financiers and rentiers who had lent to them as the real value of their loans went up significantly; the author cites various classes of overleveraged people who had their wealth "redistributed away" ranging from from Midwestern American farmers to Prussian aristocrats.
xxff We see early hints at the author's possible economic orthodoxy here as he talks about the two-decade deflation following 1873; that it "did more than inflict economic pain" but also resulted in discarding of liberal economic principles. [In today's era maybe this doesn't sound so bad: we've certainly seen the long-term result of liberal economic principles like free trade as they have resulted in the USA's thorough de-industrialization.] Various brief examples here of political ramifications: for example, the fracturing of the Republican party under Grant, resulting in the so-called "corrupt bargain" that "prematurely" ended Reconstruction [interesting that the author uses the adverb "prematurely" to describe the end of Reconstruction when this was 1876, a full 11 years after the end of the Civil War], and led to political stalemate in Washington for the next two decades [again, is this so bad? Stalemate is a good thing, especially when your government tends to be incompetent even on good days...] The author claims other effects here: scapegoating and antisemitism in Germany and Austria ["a wave of antisemitism swept over Europe"], the Ottoman Empire "entered its final death throes" giving up much of its land in return for restructuring its debt; Egypt fared even worse as it was invaded and occupied by Britain. [Again, we are just in the introduction of this book, but I think it would be very interesting to see a less economically orthodox re-narration of this era: after all, there were tremendous technological advancements during the late 19th century, the real value of people's buying power increased significantly, many over-levered people were crunched (and thus the era taught people that it was dangerous to be over-levered), and of course all eras across history inevitably include political convulsions as well as antisemitism... if this is all the author can come up with to describe all the bad things that happened back then, is it possible that it wasn't really all that bad?]
xxii "Nevertheless, is I researched the story of 1873 and its aftereffects, one name kept reappearing: Rothschild. The Rothschilds appear so frequently in the narrative that the family serves as a natural connective thread around which to weave the story of 1873." [If you think about it these guys would have been key financiers lending money everywhere, and thus would be enormously enriched by a major deflation. Note that in instances where a borrower defaults, the lender also usually has a contractual right to seize the assets used collateral for that loan.]
Part One: The Boom: 1867-1871
Chapter 1: In Bonds We Trust
3ff On the iconic completion of the Transcontinental Railroad as well as the Suez Canal in 1869, both viewed as metaphors for the robust health of the world economy. Note also the completion of the Trans-Indian railroad in early 1870.
5ff Comments here on a two decade-long period of GDP growth and rising living standards from the 1850s to the 1870s, accompanied by revolutions in finance that channeled savings from a burgeoning middle class into various investments around the world; the author is careful to characterize these investors as largely from Britain, France and America, and generally cautious and sober-minded because of the influence of the spectacular railway bubble of the 1840s and the crash that followed [thus they were much like 20th century Depression-era investors who were fearful of stocks and thus very conservative with their capital].
7ff The author cites a massive deflation that happened in late 1845 after that era's railway bubble burst; over the next three years railway share prices fell by 60%; also the author notes the 1848 political turmoil that roiled Europe; this made 1848 the worst bear market of the 19th century, where equity prices fell 30%. [That's it? A bear market for ants!] On the publication of Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, the author spends a paragraph summarizing the book and then goes into the Dutch tulip mania. [I recommend this author revisit the so-called Tulipmania period, it was a Calvinist psyop to frighten people about speculation, and the actual economic impact was minor, nowhere near the catastrophe that most people think it was.] Also on the Mississippi bubble, and on the South Sea bubble, which was originally set up to reduce interest costs on British government debt.
9 "There is, in fact, some evidence that McKay may have fabricated or exaggerated some of his tales." [In the case of the Tulipmania absolutely yes, I'm glad the author said this.] "Even so, his book became a bestseller and has never gone out of print. It exerted a profound influence on popular thinking about stock markets, ...reinforcing the perception that the stock market is a place where it's all too easy to be duped or defrauded."
9ff Thus many of the sober-minded investors of this era held mostly bonds and wanted "uneventful investments that delivered a regular stream of income." The author describes how much of these investments were railroad bonds, but also bonds issues by cities and countries all around the world that funded and were backed by ports, water systems, etc.
Chapter 2: The Gods of Our Time
11ff Discussion of the beginnings of the great Rothschild fortune, which came from the Napoleonic wars; first the family built a system to smuggle gold and contraband across the English Channel; later, various Rothschild brothers and family members spread throughout the major capitals of Europe, setting up networks of informants and spies to stay abreast to political developments and military actions; by the end of the Napoleonic wars the family had built a fortune of approximately $10 million. After this they built a business underwriting loans to governments and "were almost single-handedly responsible for creating the international bond market." The family had an effective monopoly on financing nearly every government across Europe. Nathan Rothschild became essentially the head of the family and operated in London; Solomon, the second brother, moved to Vienna and became one of Metternich's most important lenders, even lending enormous sums to him and his entire family privately. [Interestingly, there is absolutely no mention of the Rothschilds--and certainly not Solomon--in all the discussion of Metternich throughout Charles Kingsley Webster's The Congress of Vienna!]
14ff The late 1840s plunged the Rothschild's banking system into deep distress, thanks to the various revolutions across various European cities; there was a financial crisis in London and significant declines in the prices of government securities: "for a few months it seemed as if the Paris and Vienna branches of the bank might actually go under." Also by the 1850s the five brothers of that Rothschild generation had died, leaving James as the sole survivor of his generation; likewise, many of the leaders who provided the Rothschilds with political favor were deposed, see for example the 1848 revolution in France, which led to the ascendance of Napoleon III "who was determined to reduce France's dependence on the Rothschilds." But then under James's leadership the family regained its fortune during a once-in-generation boom in global borrowing during the 1850s and 1860s as the family lent to developed and developing governments as well as to railroad companies around the world, while also investing directly into railroads and mining stocks. By James's death in 1867, "the bank almost quadrupled its capital from $40 million to $150 million, accounting for a third of the capital of the entire European banking system."
18ff The author discusses much "uninformed and hyperbolic speculation" about the family's wealth during that era; the author also describes them as the wealthiest private family in the world, and adjusted for global economies, the richest family in history. [The next few pages here involve a mostly masturbatory discussion about the family's various properties, homes, mansions, chateaus and other unnecessary details, all of which could have been cut.]
22 On James's death and a deep respect shown to him by Parisians, on his moniker "the king of bankers in the banker of kings."
Chapter 3: An American Rothschild?
23ff On the expansion of the House of Rothschild in the 1850s and 60s into Latin America, Mexico City, Havana, Cape Town, Melbourne, Singapore, Shanghai, but the family was conspicuously absent in the United States. Details on the US economy during the 1850s; where it began the decade roughly the size of Germany (but smaller than France and Britain) at $4 billion in GDP but expanded 60% over the course of the 1850s at more than double the rate of Western Europe, with higher wages and higher investment rates than Europe.
25ff On European suspicion of United States businesses; how we had a reputation as a nation of swindlers; how it would cost Americans 8-9% to borrow money versus the 5-6% that European borrowers would typically pay. This suspicion dated back to the 1830s-era boom in canals and early railways caused major losses in the London banking system during and after the 1837 depression. Interesting quote here discussing how nine states, as well as the territory of Florida, all defaulted on their debts, and the US Constitution did not permit London creditors to sue the states directly. [Fascinating! Also: not to be the "akshually" guy, but it was eight states: Arkansas, Illinois, Indiana, Louisiana, Maryland, Michigan, Mississippi, Pennsylvania, along with the territory of Florida that defaulted. Note also that PA, MA, IN and IL ended up restructuring and ultimately repaying their debts, but Arkansas, Mississippi, Michigan and Florida actually repudiated some or all of their debts. It all makes you wonder if today's neo-banana republic era in the USA isn't so new after all!] The Rothschilds experienced significant losses from these defaults such that the family vowed to restrict lending to the United States.
26ff Extended tangent here also on August Belmont, who acted as a (sometimes not-fully trusted) Rothschild agent in New York City at this time. Comments here on how Belmont bought all sorts of assets during the 1837 crisis, making a name for himself and climbing the social ladder in the city, much to the disgust of New York's establishment families like the Rensselaers.
28 Note the author's footnote here saying that August Belmont was supposedly Edith Wharton's model for the banker Julius Beaufort in her book The Age of Innocence. In 1848 Belmont finally managed to marry into an American Protestant elite family, converting to Christianity and marrying the daughter of Commodore Matthew Perry [who at this point had not yet taken his Black ships to Japan].
28ff James Rothschild sends his eldest son Alphonse to various locations in the Americas to investigate whether the family should [re-]establish an American operation; Belmont snubs him and sees him as a threat. Alphonse returns recommending to family set up in office there and Belmont starts making plans to return to Germany, but then according to the author, "nothing happened." Belmont then begins his involvement in US politics, backing James Buchanan and then later backing Stephen A. Douglas's failed presidential bid. [This chapter sort of trails off and leaves the reader with a feeling that little of it is relevant to the book.]
Chapter 4: God's Chosen Instrument
33ff The book now pivots to Jay Cooke: "an improbable titan of banking"; a deeply religious man who built his fortune helping the Union raise funds during the Civil War. He started an investment bank just weeks before South Carolina seceded, sensing the opportunity that was to come; note that he was also close friends with Salmon P. Chase who was Lincoln's Treasury Secretary. Interesting to read here about how during this era the US government used all sorts of methods to raise revenue, but primarily it just borrowed through the banking system; Jay Cooke convinced Chase to directly offer bonds to the public. "While it can be said that the Rothschilds invested the government bond market in the early part of the century, it was Jay Cooke & Co. that democratized this market." On how the company posted handbills all over the country, taking out ads in newspapers, and even hiring thousands of sub-agents to go door-to-door selling US government bonds in units as low as $50. Cooke's bank got one half of 1% of the first 10 million and 3/8 of 1% on amounts above that, which of course made Cooke extraordinarily wealthy.
35ff On Treasury Secretary Salmon P. Chase's fancy tastes; that he was consistently in financial straits and that he wasn't particularly scrupulous about conflicts of interest; note that Jay Cooke & Co. took him on as a private banking client and earned him implausibly high returns, as well as lent money to him as well as his close family friends at favorable interest rates. [Hmmmm, not unlike what Refco did to help Hillary Clinton 100-bag a commodity account in 10 months in the late 70s using cattle futures!] Cooke emerges from period owning the largest investment banking firm in the United States and as one of the three or four richest men in America, and he is also seen as a hero because of his contribution to the Union war effort.
37 On Jake Cooke's brother/agent Henry wheedling his way into Grant's administration, picking up the tab for his wife Julie's extravagant shopping trips for example.
38 After the Civil War, Cooke's firm diversified into railroad bonds, which were often backed by land grants and subsidies from the US government.
39ff Examples here of railroad companies looting their shareholders by various methods, including subcontracting construction to related firms at double or triple the real cost; the author walks through an example with the Union Pacific Railroad using the exotic-sounding dummy corporation Credit Mobilier.
40 On the Northern Pacific Railroad, which had a concession to build a line from the Great Lakes to Puget Sound; Northern Pacific approached Cooke in 1868 with a very juicy fundraising deal, offering 12% commissions per bond plus a 20% stock grant for every $1000 of bonds sold. "And so began Cooke's final and most ambitious venture... His excessive optimism was to have fateful and far-reaching consequences a few short years later." [In Chapter 10 the reader will learn how the Northern Pacific Railroad would essentially annihilate Jay Cooke's investment bank, triggering a spectacular collapse in 1873 and exacerbating the worldwide crash.]
Chapter 5: The Greatest Financial Event in History
41ff The author starts this chapter with a quote from The Economist, typically cynical and pessimistic with their economic outlook, but here in 1870 sounding uncharacteristically bullish about a strong growth and improving productivity. [So the "magazine indicator" has been around for a very long time...] At the time, economies all around the world were booming: railroad construction was booming, wages were increasing, prices were stable, there were a few signs of euphoria or overheating yet, and there was no frantic trading or euphoria at the London stock exchange, although returns had been 18% per year during the prior three years. However, in 1870 Prussia and France began a war that came out of the blue, even catching the Rothschilds off guard; the cause of the war was murky, but putatively it was a disagreement between Prussia and France on who succeeded to the Spanish throne after Queen Isabella II was overthrown.
43 Interesting to read the author's perspective on this conflict, I don't know anything about its origins and need to read about it, but the author frames it as Bismarck was "intent on a military confrontation with France, believing that it would be just the catalyst to forge the German states into a single nation." He then manipulated communications between Wilhelm and Napoleon III such that Napoleon III declared war on Prussia in July of 1870. [It turns out that this is pretty much the vanilla, consensus take on this conflict.]
43ff Note also that this conflict looked like it might divide the Rothschild's family, the author has to do some backfilling here to explain more the history of the Rothschild bank during its third generation after James's death in 1868: the bank then went into the hands of the ten cousins of the next generation, ultimately being dominated by four of them: Anselm in Vienna, Lionel in London, Mayer Carl in Frankfurt and Alphonse in Paris. Note also the cringey and gross side-paragraph here describing how the family intermarried in order to maintain control of the family bank, giving an example where James married his niece, the daughter of his older brother, and in the next generation ten of the eleven grandsons married their first cousins. Then a weird passage about how Anselm and Lionel were brothers-in-law as well as first cousins, while Lionel and Mayer Carl were double brothers-in-law because they had married each other's sisters. The author includes a justificatory footnote here on how common this was among Europeans in the 19th century, citing Darwin, Einstein, Prince Albert and Queen Victoria, as well as other members of European royal families.
45ff Yet "there were early signs that relationships between the cousins had begun to fray." Some of the heirs had larger shares because they were only children: for example, Anselm as an only son had his father's entire share whereas Lionel had only a one quarter share since he was one of four brothers. Also the three houses across the three different countries had vastly different capital levels: Paris was the largest, with $200m, some two-thirds of the family's total capital, Vienna was the smallest with only $16 million, but the profits were distributed equally to all the cousins, including those in Frankfurt and Vienna; Anselm despite being the largest shareholder was running Vienna, the smaller bank branch, and was complaining that his partners were excluding him from major investment decisions.
47ff The Franco-Prussian War created a major rift between the French and German wings of the family. Mayer Carl and Wilhelm Carl, who ran the Frankfurt branch, lined up with Prussia, Alphonse and his brothers in Paris supported France, while Lionel in London, trying to remain neutral, ended up alienating both of the other branches of the family. [Reminds one of the Bible verse: "So then because thou art lukewarm, and neither cold nor hot, I will spew thee out of my mouth."]
48ff The Franco-Prussian War was shockingly brief [this might be one of the reasons everybody assumed the conflict we would eventually call "WWI" would be "brief" too. The 19th century had "cabinet wars" and the idea of a "total war" like WWI didn't exist as a concept]. The fighting lasted just six weeks; the Rothschilds were blindsided by France's declaration of war, Prussia mobilized much more quickly and forced Napoleon III to abdicate within six weeks, and the fighting was largely over. Bismarck was intractable about his terms, wanting Alsace Lorraine, the French naval fleet and $1 billion in war reparations; his goal was to permanently weaken France. Comments here on Bismarck, who by his own admission was "a dilettante in financial matters"; also on Bismarck's deliberately aggressive intractability during these negotiations; on Alphonse Rothschild being invited to participate in the negotiations, but being treated rudely by Bismarck; finally, on France needing to figure out a way to pay Germany war reparations of $1 billion within five years. Alphonse developed a plan to offer a series of gigantic bond issues on international capital markets.
53 Background here on Lionel Rothschild, who had been suddenly made leader of the London Rothschilds in 1836 at age 28 when his father Nathan died suddenly; now in 1870, he is gout-ridden and 62, but remains the family's major figure.
55 Comments here on Lionel being the first Jew elected to the House of Commons in 1847 but who was barred from taking his seat because he wouldn't swear Christian oath on a Christian Bible. Eleven years had to pass before a compromise was reached so Lionel could finally take his seat as MP.
56ff Step one of the French indemnity payment was the Rothschild bank arranging a $400 million bond offering at a relatively high 6% interest rate (compared to a 4% rate available to France before its humiliation and defeat). This was syndicated across two different groups of bankers in Paris and London and ended up being three times oversubscribed. A second offering was promptly launched the next year, again to strong demand--including, ironically, demand from Berlin, Frankfort and Vienna. Basically German investors were scrambling to lend France money to pay its debt to Germany [!]. This success for these bond offerings caused Alphonse to be seen in France as a national savior; the bonds let France pay its identity in under two years, so that Bismarck, as part of the agreement, was forced to withdraw his troops from France early.
Part Two: Euphoria: 1871-1873
Chapter 6: Drunken Cities
61ff The massive French bond issues so successfully underwritten by the Rothschilds allowed France to discharge its indemnity to Germany two years early, but this meant that Germany, with its smallish economy of roughly $4 billion in GDP, then received a $1 billion windfall, a tremendous sum relatively speaking, literally 1.5x the country's amount of actual currency in circulation. This ultimately set off a massive stock market euphoria. [Whenever there's "helicopter money" in an economy, it usually finds itself sent quickly into equity markets. The same thing happened after the COVID stimmies for example in the USA.]
64 "Every segment of society was gripped by the mania." Even the Prussian elite got involved: "a business they once considered squalid and beneath them." [It always helps to read literature on stock market bubbles to get a sense of what a real euphoria feels like. It helps individual investors put into proper context the constant "It's a bubble!" claims the financial media will shovel onto them over the course of their investing careers.]
65 A massive real estate boom followed in Berlin as well; banks competed to finance construction projects; also note here the discussion of Heinrich Quistorp, who built a fortune in real estate development, then founded an investment bank in 1870 that financed construction projects as well as a variety of other businesses. [As we'll see in Chapter 11, his firm blew up spectacularly in 1873.]
66 A parallel boom was happening in Vienna in 1871; see the various liberalization efforts of Emperor Franz Joseph in the 1860s, opening the economy to freer trade agreements with Germany, privatizing the national railways, opening the country to foreign capital; people streamed into Vienna, doubling its size.
67-8 On Franz Joseph's plan to auction to private investors land along the Ringstrasse, a grand boulevard circling the original medieval perimeter of the city. Comments on the Epstein family, reputedly Europe's second wealthiest family after the Rothschilds, who migrated from Bohemia where they operated cotton printing factories to entering banking in the 1840s; then made into Austrian nobility in the 1860s for their financial support of Austria in the Austro-Prussian War. Comments on other wealthy Jewish families that found themselves buying up some of the most valuable land on the Ringstrasse and building ostentation homes: see also the Schey Family and the Ephrussis family and others who were derisively called "Ringstrasse Barons." [A key cheat code for surviving any period of financial or political upheaval is do not be ostentatious. Be invisible!]
68 Tangent here on Vienna hosting the 5th World's Fair in 1870. Much of the detail here on the various buildings and pavilions could be left out.
69ff Discussion here of the knock-on effects that came along with the Vienna real estate boom, distorting the psychology of investors, driving significant expansion in the banking sector as land prices raised collateral values, which drove still more lending, which drove real estate prices up still further. Bank earnings were way above normalized levels, and thus in Vienna the author claims "close to five hundred new banks opened." [This "five hundred banks" statistic is very difficult to swallow: the author doesn't give a time horizon, but it is implied that this was during the 1870 to 1873 boom period. How could it be possible that 500 banks would open just in Vienna over such a short period?]
70 [The author drops a nugget of wisdom here that investors frequently forget during booms as well as busts]: "Markets frequently overshoot because individual investors fail to account for hundreds of others reacting in the same way."
70ff Comments here on Anselm Rothschild, who wanted to rebuild the Rothschild's capital base in Vienna; he stayed out of the Vienna boom, and remained in his original house, although separated from his wife who went back to London; he founds Creditanstalt, a joint stock bank created on the model of the 1850s Credit Mobilier. There's a backstory the author has to fill in here on Credit Mobilier, which raised equity and then leveraged itself by issuing bonds worth 10x the equity to give it much more capital to make loans; note that Credit Mobilier collapsed in 1867 after making poor lending and investment decisions. [Note also that this is not in any way the "Credit Mobilier" mentioned in Chapter 4 that was used to inflate construction costs of the Northern Pacific Railway! The author actually never mentions the naming coincidence, which leaves the reader briefly confused.] Thus the 1860s Anselm decided to launch a similarly-structured venture by floating shares in the stock market rather than exclusively using Rothschild family capital, "and by 1870, Creditanstalt had grown into the single biggest bank in Austria-Hungary."
72 Comments here on the author's surprise at how "the normally staid and sober citizens of Vienna" got caught up in investment euphoria--even moreso than in Berlin--with all of the classic symptoms of overspeculation: trading on margin, stock messenger boys trading on their own accounts, political elites getting caught up in it as well, often lending their names for directorships at significant director pay, etc. Note the author's observation here of how the main newspapers repeatedly warned about the stock market being in a bubble. [Keep in mind, anybody can do a lookback and find these kinds of articles at any time, regardless of whether there's a bull market or not. See for example the permabear Alan Abelson who constantly "warned" about stock market excesses in Barron's. This is why it is typically not predictive to look for warning-type media articles about "whether it's a bubble" when you're trying to navigate your current investment environment.]
Chapter 7: Ingenious Mendacity
75 "It was perhaps predictable that pumping a billion dollars into a $4 billion economy like Germany's within a two-year window would create a financial bubble that spilled over into Central Europe." In addition a lot of hot money left France for the safety of London pouring liquidity into that country as well.
76 "The scale of France's borrowing to fund its indemnity payments logically might have been expected to starve the rest of the world of capital. Instead, through some mysterious process that no one fully understood, and still do not, the astounding success of the two French government Bond issues floated by the Rothschilds and other European bankers seem to pry open a hidden wellspring of untapped savings from around the world. A torrent of capital poured into London and New York, the two financial centers unscathed by the war." Comments on how the euphoria became concentrated into a few sectors, railroads in New York, international bond investments in London. [One way to think about this is to think about the huge French bonds issues that France did to finance its indemnity, and consider it a sort of rehypothecation of the sum of money France owed. It more or less doubled the amount of money owed! Just like if I borrow a hundred dollars from you and spend it right away, there is a temporary (albeit trivially small in this case) sort of "magic increase" in the quantity of money... until I pay you back.]
77ff On Walter Bagehot, then the editor of The Economist, warning everyone about the speculative boom; the author describes him as a consummate insider, one of London's best-connected men; comments here on his "ability to write wittily about the world of money that made him delightfully quotable."
79ff Bagehot's concerns market euphoria was shared by the Rothschilds in the early 1870s as well; the author gives examples of the family members' comments to each other on the topic. Also on author Anthony Trollope, who was taken aback by "the commercial profligacy of the age"; his 1873 novel The Way We Live Now was meant to capture the greed and materialism of London in those years. See also the interesting footnote here on page 81 talking about one of the real life models for Trollope's main character Augustus Melmotte: it was John Sadleir, who committed suicide in 1856 after selling forged shares in a railway company.
81 More (unnecessary) tangents here: on Albert Grant, another swindler who Trollope modeled his main character Augustus Melmotte; Grant actually emerged in the early 1870s floating different companies from faraway countries; on his desperate desire for social acceptance and social recognition; he was ultimately hit by a bunch of lawsuits by 1874 accusing him of paying himself exorbitant director's fees and commissions; he was charged with manipulating a stock price of his companies, also bribing newspapers for positive coverage; he survived these lawsuits but still filed for bankruptcy in 1878; and then he went bankrupt again in 1897 before dying in 1899. [Why the huge sidebar on this guy when he doesn't have anything to do with 1873 itself?]
83ff "The other great mania on the London Stock Exchange was in loans to the developing countries of the world." Starting in 1870 when Japan launched its first bond issue of $10 million, a modest sum compared to the $50 million bond issue by Peru and $60 million issue by Russia that quickly followed. Then, after the two great French bond issues of 1871 and 72, "the flow became a flood" as Argentina, Brazil, Hungary, Spain, Turkey, Liberia, Uruguay all came to the bond market. On Walter Bagehot's criticism of these bond issues, as this was an echo of a speculative bubble in the 1820s of loans to Latin America, nearly all of which defaulted.
85ff The other backtracks here to the widely-publicized grand tour of European capitals by the Ottoman Sultan Abdulaziz, with the underlying motive of raising money to replenish the country's stressed treasury; It was the first time in the 400 year history of the Ottoman Empire that the sultan had ever traveled to Western Europe; comments here on how the Europeans were taken with him, although Mark Twain saw him as "weak, stupid, ignorant." Also note the comment on Bagehot's 1867 editorial in The Economist [with the extremely cancelable title!] "The Danger of Lending to Semi-Civilised Countries."
Chapter 8: Blind Capital
87ff Comments here on Turkey and Egypt; since the Crimean War and over the course of the 19th century the Ottoman empire was growing its military spending beyond their ability to collect taxes; they would habitually borrow from local lenders, then delay paying soldiers, and then whenever there was any risk of mutiny they would print paper money and depreciate the currency. [This is your metaphor/analogy for what happens in any war-type situation with almost any country, especially in the fiat era, some form of moneyprinting to try to maintain stability for as long as you can get away with it. Usually it works for longer than you'd think.] On Alphonse Rothschild's trip to Constantinople in 1857, recognizing that era's influx of foreign money which just drove the Ottoman government into a giant spending spree, as Abdulaziz's predecessor Abdulmecid I built a gigantic palace to house his harem; allegedly it cost a third of the state's annual revenues to build. When Abdulmecid died of tuberculosis at age 39, the country's public accounts were in total shambles and it turned out that soldiers had not been paid for months.
Same as the old boss
91ff Abdulmecid was succeeded by his 31-year-old half-brother Abdulaziz in 1861 who cut back on some of his brother's extravagances and re-established some confidence with European lenders. However, quickly "he succumbed to the same temptations as his brother," squandering money on huge construction projects, palaces, etc and accumulated another gigantic debt load, some $500m by 1867, which was more than the debt of the entire US railroad system.
92 Note this nuance on the various tax sources that were supposed to pay off Ottoman debt: one was the Egyptian tithe to its suzerain in Constantinople, which was paid directly to the Bank of England, thus it could be automatically sequestered to pay bondholders. [Possession is four-fifths of the law!]
92ff By 1867 interest on the debt was some 40% of the entire Turkish budget [By comparison the USA's interest expense, at ~$1T a year, is roughly 15% of $7.5T federal budget], but in 1868 his enormously successful tour of Europe enabled a $100 million bond issue sold largely to French investors followed up by another $100 million loan sold to German and Austrian investors. Abdulaziz took this money and used it to build a navy. [!] Later, his harem grew even larger than his predecessor's, and then he began displaying signs of the same mental instability that ran through the entire dynasty.
95ff On Egypt's ruler, Pasha Khedive Ismail, with his finances in only marginally better shape than the Ottoman Empire's; Ismail Pasha gained the throne after a series of unforeseen deaths of his father, older brother and uncle, and he became Egypt's ruler in 1863 at age 33. He was a sharp businessman who had amassed a fortune in shipping and agriculture so his leadership was welcomed by foreign lenders.
96ff Interesting comments here on the plutocracy of landowners running Egypt: most of them were Turks, very few were native Egyptians [sounds like British Columbia!]. The author takes time here to describe some of the conflicts of interest Ismail had: he was one of the country's largest landowners, but large estates paid very little in tax, most of the tax burden fell on small peasant cultivators, many of the country's major infrastructure products were designed to benefit his personal estates, etc. Egypt had been flush with tax revenues thanks to a boom in cotton prices during the American Civil War, but after 1865 cotton prices collapsed and tax revenues likewise collapsed too, right when many of his large spending commitments loomed. By 1867 "his need for cash was acute." Interestingly European financiers literally lined up to lend him money at this point, and all this easy money caused him to lose all sense of financial discipline--just like with the Ottoman sultan.
98ff Note the [likely innumerate] comments here on a huge influx of foreigners to Egypt, many of whom wanted to participate in the spoils Egypt was spending on public works contracts; the statistics the author gives here are shocking: in 1854 there were 25,000 Europeans out of 380,000 people in Egypt's two major cities, but by the late 1860s the author claims some 150,000 European foreigners, plus another 80,000 nationals from various Neareast countries were living there. [These numbers make no sense: how is it possible that the immigrant influx--just from Europeans alone--could go from 25k to 150k in fifteen years on a two-city population base of only 380k?]
100 On the Rothschilds and also the Barings Brothers, the two main firms dominating developing country bonds in those days; backgrounder here on Barings Bank emerging into enormous importance during the Napoleonic Wars, as it arranged financing for the US purchase of the Louisiana territory from Napoleon, and then arranged the financing the $120 million loan enabling France to pay indemnities after the Battle of Waterloo. Comments on how the Barings family sons didn't really take to banking, in fact quite a number of the descendants were gambling addicts; another son became ill while working in China for the East India Company and died early; another son lost a fortune speculating an opium and then later went bankrupt from extravagant living; the following generation likewise had the same "tendency to recklessness" as the author phrases it.
103 Interesting comments here on the degree of leverage at the Rothschild's bank versus Barings Bank: the author argues that Barings paid out much of its earnings to the family (which they spent) whereas the Rothschilds tended to retain more of their earnings. But with Barings' smaller capital base (some $5 million in capital in 1850 at the start of the boom) compared to Rothschilds $40 million, Barings just levered up more, holding only 15 cents of capital for each dollar of assets, while Rothschild's very prudently maintain a capital cushion of 40 cents for each dollar of commitments. [These numbers are shocking to an observer of modern banking: today's Basel III banking rules require a mininum of Tier 1 capital of only 8-9% if I remember the numbers correctly. Barings Bank would be massively overcapitalized under today's rules! It's unfortunate that the author doesn't comment a bit here on to what extent we can compare capital levels back then to today's modern banking capital rules.]
104ff Final comments here on a sort of developing two-tiered lending market: those developing country bonds that received the backing of Rothschilds or Barings... and those that didn't. This didn't seem to make much difference in the early years of the boom but once markets faltered the two-tiered system became obvious to all, and by the early 1870s Turkey and Egypt "were conspicuously absent" from the list of countries Rothschilds or Barings were lending to. Also note the footnote here on page 104 citing that of the 41 issues underwritten by the Rothschilds between 1860 and 1885, not one defaulted. [!]
Part 3: The Bust: 1873-1876
Chapter 9: The Desolate Home of the Ruined Gamester
109ff Comments on Karl Marx's book Capital which was published in 1867 but the first 5,000 copies in the first printing run didn't sell out until 1873, note the comment here about Friedrich Engels submitting fake hostile reviews to German newspapers to try to drum up interest; Marx was living in London after being expelled by the governments of Prussia, France and Belgium [!]; in London he barely scrapes together a living as a journalist [oddly enough, he was the London correspondent for the New York Daily Tribune of all publications], and relied on handouts from his friend Engels who was the son of a prosperous textile mill owner. [!!! WTH? I didn't know this. Ironic.] Continued and unnecessary discussion of Marx's poor health, his boils, carbuncles and hemorrhoids. [This entire section is another example of tangential material that could be cut from the book.]
111ff Comments on Engels' criticism of the excerpts from the manuscript of Capital that Marx sent him; that it was too theoretical and abstract. The author himself describes the book here as "a slog to read" and "it read like a German philosophical tract," but "a reader patient enough to plow through the initial pages of indigestible and muddled economic theorizing would encounter fascinating material on working conditions and factory life in nineteenth-century Britain, or a brilliant sweeping history of the transition from feudalism to capitalism in Europe, all laced with Marx's wonderfully biting and contemptuous sarcasm. But few readers made the effort." [This is actually a very fair description of the book. It is a much better read than you would think, and much more worth reading than you would think. Also the most profitable way to read it is to view Capital as part of the literature of the FIRE movement, and see it as a sort of unintended roadmap for escaping the W-2 laboring class and entering the rentier/investor class via aggressive savings.]
112 Marx's earnings from Capital "did not even cover the cost of the cigars he had puffed while writing it."
112ff Comments on Mark's suddenly finding himself in the public eye under circumstances that "bordered on the farcical," as in 1871 a right-wing French newspaper ran a story about how the Communards [this was during the time of the Paris Commune, an extremely short-lived pseudo-government that briefly took power in Paris right after France's defeat in the Franco-Prussion War] were under the direction of a so-called "Red Doctor"--meaning Karl Marx, this allegation was based on forged documents and was untrue; Neither Marx nor his organization The International Working Men's Association had anything to do with the Paris Commune uprising. But this report was picked up at the British press and "Marx found himself briefly famous across Europe." [The author uses an interesting phrase here, describing it as a "catchpenny of a story."] This also coincided with Marx's publication of a pamphlet called The Civil War in France; the author compliments Marx here on his "talents for invective," giving some highly amusing examples from this pamphlet. The pamphlet then became a bestseller, the most widely read of his publications during his lifetime. This then led to a second printing of Capital, and in an afterward to that edition of the book, Marx predicted the Western economies were on the verge of a "universal crisis." [One rather capitalist takeaway here is to make sure you always have a back catalog of published works you can sell to the public just in case you get famous.]
114-5 Comments here on how Marx had a history of forecasting crises that never happened, and his fellow exiles in London took pleasure poking fun at him for it. [Permabears gotta permabear, they can't help it. Plus, one of those bearish calls might actually happen, making you famous. People forget the highly asymmetric payoff of being a permabear!] The author writes here that "Marx proved to be half right": within six months Vienna's stock market crashed and within nine months US railroads began defaulting, and the US would fall into a recession lasting almost until the end of the decade.
115ff Some of the first signs of the 1873 crash arrived when several officials of a major Austrian railway were arrested for fraud.
116 Note this very interesting (and epistemically arrogant) quote from the author here: "It does not actually take enormous presence to spot when a market has entered bubble territory--what is difficult is predicting when, exactly, it will burst." [It would be very interesting to know how competent an investor--or stock market prognosticator for that matter!--this author actually is, such that he has the epistemic confidence to make a statement like this.]
116ff [Description here of the actual crash sequence of events]: On April 10th, 1873, the Vienna stock market took a tumble but then recovered, then another brief selloff in late April when a report went around saying that Anselm von Rothschild and his bank Creditanstalt had liquidated 20 million guilders worth of equities [the author doesn't translate this monetary value into dollars unfortunately], sparking a sell-off. On May 5th, a Franco-Hungarian bank collapsed and banks began calling loans made to speculators who held large equity positions [they held levered equity positions using stock margin debt is likely what the author means here]. By May 9th several dozen insolvent investors were liquidated, scuffles broke out on the floor of the exchange, and that afternoon prices crashed; outside the bourse "a miserable crowd had assembled" of "representatives of all classes and callings." Exchange authorities, in the face of broker after broker becoming insolvent, declared a moratorium on margin payments, extended settlement periods, etc., but the price declines in equities were too enormous, these measures "merely delayed the inevitable reckoning."
119 "On May 15, when the stock exchange opened once again and began normal operations [Wait: had it been closed by authorities or something? The author doesn't say], over a hundred brokers and speculators were forced into default." Meanwhile Emperor Franz Joseph was presiding over the Vienna Universal Exhibition festival, holding balls, gala dinners, etc. during this exact week.
119ff Following the crash the value of real estate in Vienna cratered too; the building boom in the Ringstrasse periphery of the city ground to a halt; many of the "Ringstrasse Barons" and nouveau rich of the city were driven into bankruptcy as well, although the Rothschilds came through unscathed "thanks to Anselm's caution." Epstein Bank went insolvent as the treasurer had been speculating in stocks with the bank's funds and the treasurer as well as Epstein's nephew both committed suicide, while the bank was closed shortly afterwards. Epstein himself would die a pauper in 1879.
120ff Gradually it became clear that the "victims" of the stock market crash [it's fascinating to me that the author uses the word "victims" in this context: were they actually victims? Or just victims of their own cupidity?] came from all walks of Viennese society; Emperor Franz Joseph himself was shocked to discover how many members of his immediate family had lost much of their fortunes, while other members of the elite became extremely wealthy by selling out before the collapse: see for example Archduke Albrecht one of Austria's top military generals and a cousin of the emperor, sold his land on the Ringstrasse and became one of Austria's richest men. [Wealth is relative and thus stock market booms and busts tend to reshuffle the deck in interesting ways.]
121ff On various people who committed suicide after the crash, as well as comments on how "an odd hodgepodge of luxury goods" suddenly became available at knockdown prices, like gowns and jewelry; apartments came on the market, summer homes were suddenly abandoned, and then the World Expo in Vienna was hit by even more bad luck as the city was struck by a cholera epidemic that killed over 3,000 people, provoking its own panic.
122ff "Everyone seem to have agreed that the market was grossly overvalued and that a crash was bound to come. But each had been convinced that when the music stopped, they would be able to exit... It was a pattern that would be repeated many times over the next decades. When the crash finally came, it was so sudden that no one had time to escape."
Chapter 10: A Financial Thunderbolt
124ff The author shifts perspective to New York now, saying that as Black Friday in 1873 was affecting Vienna barely a stir could be felt in New York. London raised its discount rate to 7%, but no run on London Bank reserves materialized, so it cut the rate back down 3% by September. Sentiment in New York was mixed, with some saying that Austria would have marginal impact on New York, where others thought that it was an ominous warning. Next the author pivots to Jay Gould, in these days still a stock market speculator barely out of his thirties: this was long before he became a famous railroad robber baron. The author backtracking now to Gould's first speculations during the Civil War; note that in 1862 US stock prices jumped 50% followed by another 50% increase in 1863. The author claims that by the end of the Civil War stock prices rose two and a half times, even after accounting for inflation. [! You sure never see these kinds of stats in the history books...]
126ff Backtracking in time yet again here, as the author discusses Gould here and his partner Jim Fisk and their infamous Battle of the Erie Railroad in 1867 pitting Daniel Drew against Cornelius Vanderbilt. [This is all well-discussed in John Steele Gordon's highly entertaining book The Scarlet Woman of Wall Street, it's quite interesting to note that the author doesn't cite this book at all but rather cites another book by John Steele Gordon, The Great Game.]
127ff [The author here clearly subscribes to the "Jay Gould was a bad guy" narrative, a view I suspect is probably less accurate than everyone thinks, but who knows.] Description of Gould's tiny stature, his fidgety and furtive demeanor, etc., contrasting with Fisk who was outgoing and exuberant. Description of their "greatest escapade" in 1869 when they attempted to corner the gold market in the United States, using President Grant's brother-in-law to lobby the Grant to not let the government get involved selling into the market; likewise Fisk and Gould had Treasury officials on their payroll as they acquired gold futures; the scheme unraveled when Gould overreached, allegedly attempting to bribe Grant's personal secretary, who revealed everything to the President. Grant then instructed the Treasury to begin selling gold to break the suspected corner, and this triggered decline in the stock market of 20% over the following week, bankrupting dozens of brokerage houses. Even though Gould and Fisk's plan didn't work out, Gould still walked away $10 million richer, becoming one of the most hated men in America.
129ff Comments on Jim Fisk relishing in the publicity he got over the gold panic, but his private life "proved his undoing" as he began a relationship with the 19-year-old actress divorcee Josie Mansfield, who he set up as his mistress; she later dumps Fisk to date one of Fisk's business associates, Edward Stiles Stokes, and the whole affair devolved into a very public blackmail and fraud trial; Stokes then confronted Fisk at New York's Grand Central Hotel and shot him dead at age 37. [Once again, it isn't clear why these Gould and Fisk stories are included here, it's not really necessary to share all this background, especially about these guys who aren't really even central players in the 1873 crash story.]
131ff The author pivots now to Jay Cooke and his attempts to get financing for the Northern Pacific Railroad, which he hoped would be the second transcontinental railroad; he fails to obtain loans from the Rothschilds who are deeply suspicious of American borrowers, so instead Cooke organizes a syndicate of German and Dutch investors--unfortunately right before France declared war on Prussia, thus the financing fell through. He next tried raising money in London but the British likewise were suspicious, considering US markets there too easily manipulated. [The USA was an emerging market in those days and it sure acted like one.]
134ff Various examples of scandals and typical behavior in the railroad industry in those days, like Jay Cooke setting up a pool to finance grants of stocks and bonds in his new railroad to pay off politicians; news of other scandals broke during this period, like the discovery that the dummy corporation Credit Mobilier has been used as a vehicle to bribe congressman and senators. Stories about these various scandals pretty much killed any chance the Northern Pacific would get financing.
136ff Further discussion here of the Northern Pacific's over-optimism about the logistics and challenges of building a railroad across difficult Western terrain: bridges collapsed, there was resistance from Native American tribes in the region, etc. Without any long term funding available, Cooke resorted to funding the railroad with short-term loans from his own bank.
137 Note this quote, which is the exact same argument critics of the modern AI investment boom are using today: "Skeptics of the railroad boom such as The Nation magazine had since the fall of 1872 begun pointing to the poor profitability of the industry--the $3 billion investment in the railroads was barely earning a return of 5 percent at a time when companies are having to pay 10 percent for capital--a sure symptom of overbuilding. Of the more than 350 real roads in the country whose accounts it could analyze, fewer than 100 were able to pay dividends."
138ff On an outflow of deposits at Jay Cooke's New York bank branch: "The first signs of stock market jitters appeared." Cooke was confident his bank, while having a slight liquidity problem, was perfectly solvent, having earned $2 million over the previous two years; but just a few days later on September 18, 1873, eight of the presidents of the city's largest banks met at Jay Cooke's offices, telling the Harris Fahnestock, Cooke's New York partner, that they couldn't provide any further credit to Jay Cooke & Co., suggesting it should liquidate its assets and suspend withdrawals. Fahnestock closed the bank on his own, "but not before transferring over $100,000 into his wife's name to protect his assets from potential suits by creditors." No one expected what came next; it was a total shock as the stock market immediately fell 10% in less than an hour. Cooke actually learned about this via telegraph wire, and then he ordered his Philadelphia Bank closed as well with "tears streaming down his face." His Washington office also closed later that day.
139-40 [Another very typical thing that you tend to see in stock market history books, especially those about stock market crashes, is all of the stories of alleged pandemonium, panic, etc. See here where the author here quotes various media reports from the period, including descriptions like "a monstrous yell went up and seemed to literally shake the building" or how brokers "tore their hair and ran about as if crazy." As someone who was a teenager during the 1987 crash and who was actually working in the business during the 1999 crash and the 2008 crash, it is hard to really swallow these descriptions--they all seem like second-hand stories that simply grew too much with the telling. It makes you wonder how they'll describe the crashes of my era in another hundred years.]
140ff Various descriptions of different stocks that fell and by how much; and then the next day the directors of the exchange met and decided to shut down the New York Stock Exchange for an indefinite period. Grant learned about the crisis and travels to New York on September 20th to meet with banking representatives. "Financiers who were typically opposed to measures to expand the money supply, especially when it was the fates of others and not their own at stake, now all urged the government to intervene." Note that intervention that they wanted here would be to just shift the Federal government's gold deposits to New York [this is in contrast to today, where our "fully fiat" system lets the central bank instantly, digitally lend money overnight, or even create money and/or cut rates to inject liquidity into the system]. However, the Treasury Secretary didn't think that he had the legal authority to do this, but he bought government bonds on the open market to inject cash into the system and then modestly increased the currency under circulation by $26 million on a temporary basis. [This actually sounds rather modern! I would love to learn more about what was really happening here from the standpoint of the central bank. I probably should put Milton Friedman's A Monetary History of the United States, 1867–1960 on the "To Read" pile, I bet he had a more concrete and comprehensive take on this period.]
141-2 Yet another quote here from the New York newspaper The Nation which reflects either the exaggerated yellow journalism of that era, or it reflects a complete lack of emotional continence among investors in those days: "Anyone who stood on Wall Street, or in the gallery of the Stock Exchange last Thursday, and Friday, and Saturday, and saw the mad terror, we might also say the brute terror...with which great crowds of men rushed to and fro, trying to get rid of their property, almost begging people to take it from them in any price, could hardly avoid feeling that a new plague had been sent among men."
142ff The stock market was closed for ten days; when it reopened on September 30th, the rout had largely spent itself, but stocks kept going lower over the next two months, gradually losing another 20%. Also note this quote--something extremely important for investors to remember: "...stocks would recover half of their losses in the early part of 1874." [It is shocking how many market crashes turn out to be very lucrative for anyone who can stand there and buy... and if necessary, keeping buying all the way down. You usually don't even have to wait that long.]
142ff Comments here on how the stock market was too small at the time to pose a direct threat to the US economy; however, the national banking system had regional banks across the country maintaining significant balances with New York's national banks under a policy established during the Civil War; this system was precarious, as a number of New York banks failed, and this turbulence then extended to other cities throughout the country. "A nationwide bank collapse was narrowly avoided, however, thanks to decisive action by the New York Clearing House, which introduced a form of emergency currency to settle payments among its members, a measure that, in the absence of a central bank, provided liquidity to banks under stress." Basically by October of 1874 the wave of runs sweeping through the nation's banking system subsided and only 100 out of 3,500 banks failed nationwide. [That's it? Recall that this was long before the Federal Reserve system was dreamed up on Jekyll Island... and it does make you wonder whether we actually need a central bank like everyone claims.]
143 Final comments here on Jay Cooke, who had many newsmen on his payroll, but none came to his defense during these days, and he was "villainized" for fleecing thousands of middle-class families.
144ff Finally an appended and completely unnecessary coda here on Mark Twain's co-written novel The Gilded Age that the author himself says "is not a good book." Comments here on how the book's title would return to the lexicon in the 1920s, as the term "Gilded Age" would come to refer to the years after the 1873 crash.
Chapter 11: The Crimes of 1873
146ff News of Jay Cooke & Co.'s failure hit European markets within 48 hours, thanks to the transatlantic cables; the Berlin stock market fell 10% and a high-flying major real estate company Quistorp & Co. defaulted soon after [oddly, the author mentions this company here without any reference to the fact that he already talked about it and its founder in Chapter 6]. The bank of England raised rates to 9%, the highest in a century, and this created still more panic selling in Vienna; note that London Stock market "was spared the sell-off," as was Paris, although Paris's bourse never went up in the first place over the previous three years, largely thanks to France's military defeat to Prussia. More statistics here: New York Berlin and Vienna would all fall a total of 40% from their highs; of the 140 new banks created in Germany during this boom half would go belly up over the next five years; in Austria only eight "of the more than 70 banks formed in Vienna during the bubble survived." [Wait. Recall that the author told us, implausibly, that 500 banks were opened in Vienna back in Chapter 6!]. The author also notes, interestingly, railroad construction, coal production and industrial production actually held up well as well in both Austria and Germany, although real estate construction "came to a grinding halt."
148ff Comments here on Bethel Henry Strousberg, a Prussian railroad magnate/scam artist in Germany; originally from a Jewish middle-class family from East Prussia, this guy got caught embezzling and was imprisoned in London, then ran over to America, reportedly running a brothel, then returned to England in the 1850s, but then had to leave when his criminal past came to light; he then moved to Berlin with capital from some English investors and build a huge vertically integrated conglomerate which ran iron ore mines to blast furnaces to ironworks to railroads; he established this company mostly by bribing public servants and aristocrats for construction rights. Strousberg also used shares in his companies to pay for everything rather than his own capital, basically this paid for everything from bribing journalists to paying outlays to subcontractors, all funded by diluting shareholders. This made his whole financial empire a sort of Ponzi type scheme, while "along the way he acquired a larger-than-life public persona." [Once again, whenever you're investing in a company or trusting your capital with someone, you always have to follow the Marc Cohodes rule and know all about where people came from. Cohodes used this rule to expose Sam Bankman-Fried, asking, famously, "Who the fuck is this guy, and where did he come from?" Once he looked into his background, he knew.]
151ff Discussion of the primary catalyst of Strousberg's collapse, when the 1870 Franco-Prussian War erupted: commercial activity was paralyzed for several months, rail services were suspended while and wagons and locomotives were requisition by the army, etc., thus Strousberg's constant flow of revenue dried up and he had to sell a substantial portion of his Prussian industrial assets to pay debts for a railroad in Romania; after trying to rebuild in 1872, the 1873 Berlin stock market crash tipped over his "giant rickety enterprise." [Yet again the author takes the reader on a tangent that doesn't even really have anything to do with 1873 at all, Strousberg blew up before 1873 even happened--he was just another investor turned into collateral damage by the crash. This is yet another minor character that probably didn't need to be puffed out into a multi-page discussion.]
153ff Discussion f the railroad companies that "bore the brunt of the fall" in the United States: railroad stocks fell 50% from 1873 to 1877, bonds fell almost as much, this was the "worst three-year period of corporate defaults in American history, even worse than the Great Depression." By 1879 more than half of the railway bonds were in default, after this half the iron furnaces shut down because of the interruption in railway buildout. [This analogizes well to the 1990s telecom/internet buildout which ultimately waylaid companies like Corning, which made the fiber optic cable that acted as the "rails" for that era's infrastructure build.] The scale of losses was something like 7% of GDP, although most of the damage was for the investment class, it was "a rich man's panic." Comments here also on musings from the financial and general media about what it was about "the system" that made it prone to these upheavals, since there had been crashes in 1837, 1857 and now 1873; on the commonly held "reason" that it was currency situation that somehow lay at the root of this problem.
155ff The author argues that there should have been a quick rebound just like in the prior crises, but "Instead, in early 1873, all the key Continental European countries, as well as the United States, stumbled into a series of unplanned, uncoordinated, and ill-conceived steps to refashion the foundation supporting their currencies in what would prove to be a giant experiment to radically reshape their monetary system." Once again, the author has to backfill his story here, so he steps back to the 1860s where banks all around the world used both gold and silver bullion to guarantee their note/currency issues, thus gold and silver reserves drove the money supply. And then he takes the reader still further back in history to the discoveries of large, new gold fields in California and Australia, which led to roughly a doubling of the world's gold reserves and an eight-fold surge in annual output; this was what supposedly drove the global economic boom of the 1850s and 1860s. During this period interest rates fell, banks lent more freely, but also prices rose at about a 1% a year inflation rate. [This rate, something inconceivably low today, would be thought of as "high" for the 19th century. Hilariously, in the 1960s, the typical orthodox economist would tell us that "1% inflation" isn't even inflation at all! War is peace, slavery is freedom...]
156ff Comments on the various countries that were gold-based (like Britain, Portugal, Turkey, Brazil) versus those that were silver-based (like Germany, Austria, Scandinavia, Mexico, and much of Asia), and then the bimetal currencies (like France, Switzerland, Italy, Belgium and the United States).
157ff On France's central bank, the Bank of France, which held a fifth of the world's monetary reserves and as a bimetal country acted as a stabilizer: as gold production increased France absorbed the gold, and then as silver production exploded higher in the 1860s it also stabilized the system by absorbing the extra silver production, basically this kept the gold/silver price ratio within a range. Note also that Alfonse Rothschild was then the largest single shareholder of the Bank to France, owning even a larger percentage than the government. [What? One might argue that this is an interesting example of France giving away a major element of its sovereignty by permitting a foreign elite to control its primary monetary institution...] Alphonse's argument was that France, with a dual portfolio of gold and silver, would be a swing country, thus making it a lynchpin of the international monetary system. On how this monetary philosophy was later called "bimetalism." Note also that the Rothschilds controlled Europe's largest metal refineries and thus had a vested interest in maintaining this system as it was.
158 On a group of French technocrats in 1867 conceiving a plan to create a single global currency based only on gold, and built around the 25 franc coin (which was worth roughly the same as the US $5 coin and the one pound gold sovereign). At first nobody paid attention; note also around the same time there was a major assassination attempt on Tsar Alexander I while he and Napoleon III were driving through Paris. This drowned out any discussion of what would have been an esoteric topic in the first place.
158 Note also the brief sidebar here on the 1865 creation of the Latin Monetary Union [not "Latin" in the sense of "Latin America" at all here], in which France, Belgium, Italy and Switzerland had unified their currency into a single currency based on the French franc. This was seen as a way station towards an eventually unified European Union, the brainchild of French civil servant Felix Esquirou de Parieu [fascinating to read about this, one can see it as a sort of proto-model of the current Euro-based monetary union]. In 1867 de Parieu persuaded Napoleon III to convene a conference of the 20 largest Western countries including the US to migrate to a gold only based system, at this point silver was actually increasingly scarce and gold appeared to be plentiful. Note that he had little backing in his own government for this.
159 Note also the author's comment here about how the London government viewed this whole monetary system exercise "with the superciliousness they reserve for all European initiatives on money and made it clear that they were certainly not ready to sign on to a theoretical scheme dreamed up by a French bureaucrat." [Good one. Also, my oh my how history rhymes when you consider England's very savvy decision to retain its own currency when it (briefly) joined the EU. Your country's currency is your country's sovereignty.]
159ff On how this gold-only-based system got no traction with anyone at this point; plus there was no real plan to deal with all the silver anyway; the author cites how all the countries still holding silver as monetary reserves would be facing large losses; and also that there would be a game theory for each country to try to be the first offload all of its silver. The author quotes the Swiss monetary expert Carl Feer-Herzog, who wrote at the time: "The State which demonetizes [silver] first will do so only at a small cost, whereas the one which hesitates and waits will take all the losses resulting from previous demonetizations and pay for everyone else." [I'll mention here that this quote, a good one, is an example of the author's frequent failure to go to primary sources: he pulls this quote out the book written in the modern era by Mark Flandreau, The Glitter of Gold, he doesn't go back to Feer-Herzog's works at all. This is no big deal if it happens infrequently, but it can be a severe failure of scholarship if it is done consistently: it may signal that the author is just re-chewing pre-chewed narratives for us.]
160 "So it came as a surprise when, in July 1871, barely two months after the signing of the Treaty of Frankfurt, ending the Franco-Prussian War, Germany announced that it was unilaterally transitioning to a gold based currency and would no longer accept silver bullion to be coined at the State Mint of Berlin. A few weeks later, the newly created federal government of a united Germany began buying vast quantities of gold on the London market using some of the early proceeds from the French indemnity." The author describes how this set off a chain reaction across Europe, where Holland followed a year later, Scandinavian countries followed in 1873, and then France actually started limiting silver coinage in 1873 too (although it didn't sever its silver link for another three years), and then Belgium, Italy and Switzerland all followed suit that year. What resulted here was an effective demonetization of silver in 1873 across Europe [and a massive contraction of the overall money supply, more on this later], leaving Russia, India and China as the only major countries still using silver.
161 "No one is quite sure why Germany chose the moment of 1871 to risk such a destabilizing move." The author puts out a few theories: that it wanted to link to Gold in order to be viewed as great power on par with Britain or to emulate Britain; or that it was a defensive act in fear of France "beating out" Germany to a gold standard. Also France actually could have absorbed this transition, but it thought Germany was out to get the better of France, and so it struck first with its own response; then silver prices fell by 15% within two years, and then the next two decades silver prices would fall by 50%.
161ff This also coincided with a similar move by the US Congress to suspend silver as the basis for the dollar; the author calls this action even more haphazardly taken than what happened in Europe. The architect here was Ohio senator John Sherman, younger brother of William Tecumseh Sherman; at the time he was Senate Finance Committee chairman, was fully converted to the idea of a gold-based system (he had also attended the 1867 monetary conference in France). In 1868, he introduced legislation setting a $10 limit on the use of silver as legal tender; the bill didn't pass right away, but in 1873 when the Grant Administration submitted an act on coinage, Sherman snuck in language that removed the standard silver dollar off the list of coins that the US mint would produce. Hardly anybody knew that the demonetization of silver was slipped in there, even Grant himself did not realize the real purpose of the Act was to demonetize silver. This ultimately would go down as "The Crime of 1873," few people really understood the implications. and those implications "could not have come at a worse moment." Basically what happened here was because of the crisis the system really needed more liquidity but by demonetizing silver the amount of liquidity in the system dropped significantly, the money supply thus contracted and [an inflationista's worst nightmare!] deflation set in. Wholesale prices fell over the next 6 months from 15 to 25%, and then over the next 20 years prices would fall another 20%. This basically made all of the billions of dollars' worth of bonds were issued during the boom to be a gigantic dead weight in this deflationary situation. [Essentially this took what should have been a survivable credit crisis and magnified it because it imposed an external deflation on the entire system, and this in turn magnified the "real value" of the various loans that were becoming more difficult to repay as prices declined. Basically any business that had debt or even individuals that had debt got mostly crushed over the next few years.] "The persistent and relentless decline in prices would have a profound effect on every part of the world economy, hurting profits, damaging the incentive to invest, and eroding the so-called animal spirits of businesses and entrepreneurs. Most importantly, they would also expose deep political and social fissures in both the United States and many European countries, creating the sort of universal crisis that Marx had augured." [Jorg Guido Hulsmann would like a word with you, Liaquat Ahamed...]
Chapter 12: Chaff Before an Autumnal Gale
165ff Backstory here on monetary debates in the United States as the Union issued unbacked paper currency [the so-called "greenbacks"] during the later years of the Civil War, doubling the money supply and increasing prices by some 80% from 1862 to 1865; the post-war government made the decision to gradually return to the gold standard by running budget surpluses, accumulating gold reserves, and exchanging those reserves for greenbacks to withdraw this paper currency from circulation; unfortunately, this monetary contraction added to the economic pains of the end of the Civil War, exacerbating the slowdown due to the war demobilization. "Despite this, there was a surprisingly widespread consensus that the US would be better off in the long run if it were to return to the gold standard at the prewar parity." ["Surprisingly" because it doesn't fit in with all the fear an loathing we are brainwashed to have about deflation. In fact, quotes like this are shocking when you think through them: if there was a widespread consensus that we should return to a prewar currency value, this implies that everybody was willing to go through an 80% deflation. How could this be if all of our economic elites tell us how horrible deflation is and how it's so awful for everybody? Maybe--just maybe?--it's not the horror everybody tells us it would be? It's taking me a long time but I finally feel like I'm shaking off all the economic orthodoxy I've been brainwashed with my whole career.]
166 The author here cites England's similar dilemma after the Napoleonic Wars, as the government was willing to put itself through unemployment, stagnation and popular discontent to return to a harder money standard. [Note that England did the same after WWI, while other countries like France and Germany didn't return to a hard money standard.]
166ff On the different sides involved in this monetary debate: bankers and investors in the Northeast wanted a fast return to gold; manufacturers and farmers in the south and west who would suffer from lower prices wanted a slower return to gold; the Treasury ultimately sold about enough gold to reduce greenbacks by 20%, but this "caused such a severe business contraction that it provoked a public outcry."
167 At this point in 1869 Ulysses S. Grant took office with an overwhelming majority, but he unfortunately was burdened with his own financial incompetence; he also had added to his cabinet a lot of cronies, he was known to accept gifts and was, in the words of this author, "careless in the company he kept." Most of his wealthy associates preferred a quick return to gold, although Grant actually responded to the pressure from farmers and others by slowing the pace of gold sales and slowing the money supply contraction. The author cites the Public Credit Act of 1869 here that set a 10-year time horizon to reverse the wartime jump in prices. [It's fascinating to see here that there's actually a generally-held mental model of a stable price environment, that people expected to not live in any way with inflation at all, to the point where even after an 80% increase in prices there was a general expectation to actually return to the old prices you had before. Such ideas are practically impossible to conceive of in a post-hard money era.]
168 [Note the political cartoon the author shares here (see photo below) and in particular note the author's comment on Grant's "ineffectual response" to the 1973 turmoil. The subtextual message here, very typical of modernity, is that you have to intervene aggressively. It's fascinating to see this modern "interventionista" mindset used also for the Great Depression too: assuming that Hoover's minimal response was likewise ineffectual, and FDR (somehow?) saved us with all of his weird ideas, which in reality likely extended and worsened the Depression. Note also how the author seems to have forgotten that just fifteen pages ago he tells us that each of the prior panics that happened in the 19th century rebounded quickly with no intervention; he also seems to have forgotten that the de-silvering of global monetary reserves was its own "aggressive response"--is just happened to be a really dumb and bad response. It's just fascinating that, somehow, we just assume that the government should step in and fix everything and that it never screws up, when there are so many examples of 1) things quickly fixing themselves with no response at all, or 2) the government steps in and observably FUBARs everything way, way worse.]
"Grant's ineffectual response"
169ff Context here on the resulting "money shortage": where interest rates spiked massively to as much as 1.25% per day. [I don't know, but this is possibly for credit between brokers, it is highly unlikely that this was some generic "interest rate"... unfortunately the author doesn't clarify precisely what interest rate this is for, but he leaves this unsaid.] Further comments here on with prices falling people held money and deferred spending, creating a "vicious circle of monetary contraction." Then comments on the great national debate in 1873-74 about the currency question, a sort of proto-Keynesian/Austrian debate on whether the gold standard should be migrated to even faster, or that monetary "tightness" was itself the problem, thus we should loosen the tether to gold and issue paper currency to stop deflation. "The whole country came to be split between so-called hard-money men and soft-money men. It was a division that transcended political party." Hard-money Republicans were the northeastern bankers and elites, soft-money Republicans were from the West: farmers, ranchers and raw material producers that sold onto world markets; hard-money Democrats were also New York elites, and soft-money Democrats were Southern farmers and shopkeepers and others with anti-bank/anti-northeastern sentiments dating back to Andrew Jackson's era. Then also some of the railroad barons who were struggling for financial survival wanted soft money as well. [For obvious reasons! Their assets would increase in monetary value and their debts would be easier to pay. By holding large debts they were short a currency that they obviously would like to see inflated away.]
170 Note the interesting flip-flop here of the Illinois Farmers Association: in October 1873 they opposed issuing paper currency arguing that a debased currency is a design of the devil to fleece...farmers" but then by January 1874, according to the author, it had begun clamoring for more greenbacks.
170ff More subtleties and nuances of this debate: for example paper currency was seen as immoral by hard money advocates, that it would lead in the long run to a future of national bankruptcy and "monetary incontinence." Also interesting that all of the major newspapers were hard money supporters.
171ff Comments here on Grant: how he suddenly became paralyzed in this debate and began to flounder, toying with a huge public works product project (which would have been radical in those days) and also considering remonetizing silver all over again even though it had just been demonetized that year. Also there were some 2000 different bills related to currency matters that went through Congress during the winter of 1874. The author singles out a Republican senator from Illinois, John A. Logan for his incompetence, lack of knowledge and inability to grasp basic financial concepts but who "engaged in protracted arguments with adversaries, blissfully unaware that everyone could see that he hadn't the faintest understanding of the subject at hand." [Sounds a little like Elizabeth Warren when she opines on cryptocurrencies...]
173ff Ultimately a compromise of a sort emerged, called the Ferry Bill, which later became known as the Inflation Bill, which added about 8% to the money supply; it wasn't that much of a solution, but when it landed on to Grant's desk he was completely unsure what to do. His cabinet mostly recommend that he sign it, but a couple of his senior cabinet members like Secretary of State Hamilton Fish urged him to veto it; the author argues that Grant suffered from a failure of nerve and vetoed the bill; the author writes here aroud about talk of a total schism in the Republican Party afterwards. Note that the stock market had rebounded by 20% since the November 1873 post-crash lows, but then declined another 40% over the next three years; also commodity prices/the wholesale price index declined 7% over the course of the remainder of the year and would continue falling for the next four years, falling some 40% by 1878. The author claims here that although most of the deflation was global in nature, Grant made the situation worse. [Not to nitpick but it is also worth asking the author to what extent it is an "ineffectual response" to veto a bill that was ineffectual in the first place. Furthermore recall that on page 142 readers are told that "stocks would recover half of their losses in the early part of 1874" (in reality the stock market re-reached the 1873 peak in less than a year!) and also the author already told us that "only 100 out of 3,500 banks failed nationwide." Once again we get the impression that this 1873 Panic was made into something to serve modern inflationista interests, that it is not represented to us in its true nature, but is instead re-narrated to serve the needs of current monetary and economic orthodoxy.]
Chapter 13: Palace Intrigues
177ff On Claude-Joachim Lefevre's 1872 Honduras scandal, borrowing money to make a phony transoceanic railway in Honduras, he used brokers to paint the tape and enter bogus transactions to make it look like demand was strong for the bonds; first bond issue was $35 million wen the Honduran government had revenues of barely $1 million a year; Lefevre then rolled out a new bond to service the debt on this prior loan, this second bond issue failed and the original bonds plummeted 90%; it then became clear that the government of Honduras had been scammed, as it received less than 10% of the original $35 million. Lefevre turned out to have a long history as a scam artist and fled to France as Honduras defaulted.
179ff The next shoe to drop was the drop in commodity prices in late 1873 and into 1874: many developing countries were dependent on raw materials and thus experienced declines large declines in their tax revenues at the same time they had become dependent on a constant flow of new loans from British and French banks. "With the influx of new capital abruptly cut off, one country after another began defaulting on their debts." Colombia, Santo Domingo, Costa Rica, Paraguay, Bolivia, Guatemala, Peru (which at 180 million in debt was the largest foreign debtor in South America), and then Turkey and Egypt finally collapsed after being carried through the 1860s and early 1870s; these last two were able to keep going far along than anyone had expected. The total debt of Turkey and Egypt was $1.3 billion.
180ff Note that the Ottoman government managed to get one more bond issue of some $200 million, issued to the Imperial Ottoman Bank, at a rate of 11.5% in 1874. This bond was actually oversubscribed many times. But the next two years featured horrible winters, droughts, famines and flooding as well as an uprising in the Balkans in 1876 and strife between Christians and Muslims in Bulgaria that involved massacres of Christian civilians by Turkish irregular forces; all of this basically destroyed any popular support that the Ottoman government had from England, its traditional ally. The Turkish government literally ran out of money, stopped paying even its high level civil servants, and this climaxed in April 1876, when the Ottoman government stopped making debt service payments to foreigners among stories of the Sultan's continued extravagance.
183ff A palace coup by a group of high officials deposed Abdulaziz; a few days later he allegedly committed suicide, slashing his wrists with a pair of scissors that he requested to trim his beard. He was replaced by the successor Murad V, his 35 year old nephew: "he had also become an alcoholic" and was clearly unsuited to the sultanate; he was then deposed too and his younger brother Abdulhamid II was chosen as sultan.
185ff At the same time Egypt was "beset by its own melodrama": the pasha had a 44% stake in the Suez Canal Company; the other 56% was owned by French investors. Backgrounder here on the Suez Canal scheme, which seemed at first like a white elephant but actually was completed in 1867; the UK then drove some 80% of canal traffic even though it was majority owned by the French. On Benjamin Disraeli's bold plan to have the British government buy Egypt's share in the Suez Canal; the author relates the "mythical" story of how Disraeli approached Lionel Rothschild for $20 million the following day; Lionel was peeling a grape [!] and asked, "What is your security?" Montague Corey, Disraeli's private secretary answered, "The British government." Lionel decisively replied "You shall have it." There was concern that France would see this as an aggressive move, but actually they thought the injection of capital would stabilize Egypt and was thus in France's interest. The Rothschilds earned a 2.5% commission on the loan, generating some $500,000 on a loan of a few weeks. Also Britain made a savvy investment because by the end of the century the shares had gone up five times.
187-8 Note also the comment here about how Egypt had a long tradition of Coptic accountants who maintained the Ministry of Finance's books using a secret Arabic code holding, thus holding on to a monopoly of control for multiple generations. Finally when England's representative there was able to piece together the country's financial situation it was way worse than anyone had guessed. Egypt defaulted on its debt on April 8th, 1876.
Part 4: The Aftermath 1876-1886
Chapter 14: "The Jews Themselves Are to Blame"
191ff On how it took a long time for the devastation to really sink in in England and America; in 1876 people still believed that Turkey and Egypt would honor their commitments; many railroads fell further, even well into 1875. [Heuristic: crashes offer glorious investment opportunities, but often at levels way lower than you ever imagined: the crash can be way worse than you think.] In Berlin and Vienna however, the catastrophe sank in right away as many lower middle class investors lost money they couldn't afford to lose; the "froth" and "the swiftness with which the illusory gains dissipated" left the German and Austrian people deeply angry, thinking some sort of fix was in, and their rage found a target: Jews.
193ff It's also interesting to note some of the other triggers for public angst here: social problems accompanying Berlin's boom as workers from all sorts of regions had flooded into the city, increasing living costs and crime [This sound like it might rhyme with Berlin and its immigration problems today]; the author cites one particular journalist Otto Glagau, who became extremely disenchanted with the free market policies of the prior decade, the author describes his prose as "hyperbolic"; on his Glagau's "anti-capitalist message" and his "increasingly strident attacks on Jews" much of which "was simply not true." [Note again a long series of quotes and comments here from the author citing only secondary sources, it would be interesting if the author had actually done some primary research and read Glagau's original writings, but the citations here are "as quoted" in secondary sources only, most of which appear to be books about antisemitism.]
195ff More comments on antisemitism, in Germany now, as the author starts out with the quote: "Antisemitism was hardly novel in Germany." On discrimination against Jews until 1848 in Germany, on the liberal ideas that gained traction with the 1848 revolutions, resulting in the lifting of many anti-Jewish restrictions. In 1867 Jews got full emancipation in Prussia, this was extended to all German states after German unification in 1871. Despite lifting formal legal restrictions they were still socially discriminated against. The author comments here that by the 1870s Jews had transformed from poor people on the margins of society into well-established middle-class journalists, lawyers, doctors, bankers, etc. Also the author gives out numbers here on Jewish population growth: the Jewish population of Berlin quadrupled to 40,000 from 1850 to 1873, as Jews grew to to 4% of Berlin's population; in Vienna the Jewish population increased 10x to 40,000 residents; Jews at this point began dominating many professions like doctors and lawyers and were notably conspicuous in business and finance; of the banking houses in 1871 in Berlin a quarter were owned by Jews. [All of this happened in just 20-ish years?]
197 [Fascinating quote here] "Even the Rothschilds, who had escaped the Frankfurt ghetto only two generations earlier and were no strangers to antisemitism, regarded these [other Jewish] newcomers with scorn. Mayer Carl von Rothschild complain to his fellow plutocrat, the Jewish banker Gerson von Bleichroder, that 'the Jews themselves are to blame' for the rise in antisemitic sentiment due to 'their arrogance, vanity, and unspeakable insolence.'"
198 Another interesting quote here as the author describes how the Rothschilds largely escaped criticism in part because they stayed away from the speculative frenzy--and were widely known to have done so--also their banking empire was more remote from the middle-class investors of Vienna and Berlin. "German or Austrian investors who had lost money might have been more enraged--and even more persuaded that the whole system was rigged--had they known the full extent of the Rothschilds' profits during the crisis years... But since Rothschilds was privately held with closely guarded accounts, few could connect the dots."
198 On the most venomous antisemitic attacks which were targeted at Bismarck's personal banker Gerson von Bleichroder; the author quotes [again, second-hand] an "ultraconservative" Berlin newspaper saying Bismarck had fallen under the sway of a cabal of Jewish bankers.
199ff Comments here on the Junkers, an aristocratic but also provincial German subculture; on their insularity and their dominance of Prussian and German military, bureaucracy and diplomatic service; how they were at odds with much of the "liberal ideas taking hold in Germany" at the time. How they had been exposed to the bubble and crash after using their influence to get shares in IPO issues; on Bleichroder as an emblem for everything Prussian Junkers detested as his grandfather came to Berlin in the 1770s as a gravedigger, but his father had become one of Berlin's most prominent bankers, and then Bleichroder himself came into tremendous power as Bismarck's banker, financing among other things the 1866 Austrian war and being an advisor in negotiations over the French indemnity payments in 1871; on Bleichroder's extreme wealth, the fact that was the first Jew to receive a noble title without having converted to Christianity, etc.
201 "Bleichroder's rise to the highest ranks of Prussian society was so meteoric that he was bound to face resentment and envy. He only added to it by his off-putting behavior--displays of vanity, hunger for titles and honors, overweening pride about his high connections. This left him with few defenders. Even the Rothschilds, who had given him that first leg up on his blazing trail to the top, found him insufferable. A member of the English Rothschilds complained, 'There is no doubt that Bleichroder himself is one of the causes of Jewish persecution.'"
202ff Comments here Wilhelm Marr and his 1879 "antisemitic" work The Victory of Judaism over Germanism; on his career as a polemicist on the margins of politics; on how he rubbed people the wrong way--even Marx called him loathsome; on the development of his animus towards Jews, although bizarrely, of his four marriages his first three were to Jewish women. [!] On The Victory of Judaism over Germanism becoming a bestseller; Marr is credited for coining the word "antisemitism" to describe his philosophy; also later in his life Marr would recant his views in a posthumously published pamphlet Testament of an Antisemite, where he "expressed remorse." [I have to criticize this author yet again here for once again failing to quote primary sources but instead defaulting to secondary sources that have predigested the sources for him. See for example how the author quotes Wilhelm Marr solely from secondary sources when even a complete hack like me can find an English translation of this work in the public domain. One would think with the author's extremely extensive bibliography of some 200 books that he would rely far less on pre-chewed secondary sources.]
203 Comments here on Bismarck's difficult position here where he had a "complex" attitude towards Jews, as he was raised in Junker culture and made careless disparaging remarks about Jews, but also was a champion of Jewish emancipation as he was the animus behind many of the laws granting Jews full rights. As Germany's downturn persisted into the late 1870s support for free trade eroded, also Bismarck shifted his political alliances here, abandoning the National Liberals party which support laissez-faire/free trade policies, and switching to the new Conservative majority which included the Catholic Centre Party, thus Bismarck reversed much of his former free-trade economic policies, proposing tariffs on industrial goods and agriculture products. The author then writes here that "the antisemitic wave had already begun to crest... Antisemitism in Germany would lie dormant, festering beneath the surface, only to erupt in even more venomous form during a later time of crisis."
Chapter 15: Stealing the Election
207ff On concern that Grant would run for an unprecedented third term in 1876, after he carried 31 of 37 states in the 1872 election, with a 55.7% of the vote; the author describes this as "the fourth consecutive election in which the Republican Party had captured the popular vote." [I didn't think this sounded right and went down my own rabbit hole to check: Lincoln only got 39% of the popular vote in 1860, and while he got 55% of the popular vote in 1864, this election didn't include any of the rebelling southern states, so it's technically true sort of that it was a majority of the popular vote, but misleading. Grant did win with a 52% majority in 1868.] The Republican party also had control of the house and a supermajority in the Senate in 1872. But then with Grant's veto of the inflation bill in 1874 fractured the original alliance between Northern business and Western farmers, dividing the Republican Party. The midterms in 1874 destroyed their control of the House and Senate, and along with the 1873 crash and all of the other scandals Grant's administration faced, this hamstrung the Republican party. [It's curious here that the author writes how in 1872 "it had been widely assumed" that Grant would seek a third term in 1876, but it seems hard to believe such an unprecedented action would be "widely assumed" by anyone, especially in those days. It was enough of a surprise in FDR's era that the country actually had little trouble passing a constitutional amendment limiting presidential terms to two only, codifying what had been a firm unwritten rule for all presidents since Washington stepped down after two terms. It would be interesting to see on what basis the author makes this claim.]
209 Interesting mention here that all these scandals, a third year of depression, price declines, etc., created a political environment that was perfect for "someone with a demagogic message" but "contrary to every expectation, the country moved in the opposite direction" and both parties nominated establishment figures "who agreed almost entirely with each other." [Here the author is referring to Rutherford B. Hayes (Republican) and Samuel J. Tilden (Democrat).]
210ff Hayes was everybody's second choice because everyone else was discredited by political scandals, he was a bland figure; the Democratic candidate Tilden was from New York as the Democratic party knew it couldn't win the electoral college without a major Northern State even if it locked up all the southern states. On Samuel Tilden as a "fidgety old bachelor" "in desperate need of a good night's sleep." [Heh.] Both were hard-money supporters but they both chose soft-money vice presidential running mates, and neither said anything about currency issues on the campaign trail. [American pseudo-democracy at work right there...!]
211ff Interesting here that the stock market fell some 15% in the summer of 1876, the author makes the clam that regardless of which party won monetary policy would change very little.
212 Comments here on the "unredeemed" southern states of South Carolina, Florida and Louisiana that had yet to fulfill the requirements for readmission to the Union and thus were still administered by Northern-appointed governors in 1876.
212ff Election participation was 82.6% in the 1876 election, the highest rate ever. It was a decisive victory for the Democrats as Tilden had carried the South, but also also New York, Connecticut, New Jersey and Indiana. Hayes went to bed, saying "I think we are defeated." What followed here was a program to disqualify Democratic votes with all kinds of controversies, see for example how in South Carolina the number of votes exceeded the number of adult males in the state. [Hmmm, a lot of this smells like the 2020 election based on what happened in Arizona and Georgia and elsewhere. History really does rhyme...] Also they were dueling slates of electors at the electoral college and the Constitution was ambiguous and how to resolve such a conflict.
215ff On the so-called Compromise of 1877 where Republicans withdrew from the south in return for control of the presidency. Hayes disavowed any foreknowledge of the agreement, which the author calls "an unlikely story." Also note the footnote here that this compromise was also known as the Wormley Agreement, named after the hotel where it was struck, the author writes that it was "an ironic choice, for the Wormley Hotel was owned by the wealthiest black entrepreneur in Washington DC."
217 On Hayes sticking to his promise to serve only one term, then James Garfield winning in 1880, another Republican, but winning with the smallest margin in history, "roughly eight thousand votes out of the nine million cast." [Add this to the (growing) list of numbers this author gets wrong: per Wikipedia it was a less than two thousand vote difference. This is of course a touch foul, but once you get enough of these in the same book it starts to inflict damage to the author's credibility.] The next four elections continued to reveal a very divided nation in which neither party could hold on to the presidency for more than one term, and according to the author, none of these presidents was willing to challenge the nation's financial elites on monetary policy, as they "all refused to offer bold solutions to the economic malaise spawned by prolonged deflation." [Again, this is interventionista thinking right here, note also here now we're talking the late 1800s which was very successful time in American history, there wasn't a continued malaise here, and by the author's own admission the people's standard of living went up enormously during the last two decades of the century... all of this could just as likely be due thanks to a lack of these "bold solutions"!]
Chapter 16: The Bondholders' War
218ff Comments on a transition in the British government to go from letting private investors suffer their own losses in foreign government bonds to a policy of increasing intervention in the situation in Egypt. Also mention here of Major Evelyn Baring, who was the British representative on Egypt's debt commission, he was also a grandson of the founder of the Barings Bank, Sir Francis Baring, although he was also the son of the inveterate gambler Henry Baring; on Evelyn not being the brightest of Henry's 13 children, also his experience as his cousin Thomas's private secretary when Thomas was Viceroy of India, as Evelyn became known for his efficiency and arrogance, and became nicknamed "Evelyn Over-Baring." On Evelyn's skepticism of the Egyptian Pasha, considering him uneducated and unscrupulous; he then forced the Pasha to surrender his palaces and houses and placed him on an allowance; essentially Evelyn made him into a constitutional monarch under a cabinet led by two foreign leaders, one from England and one from France. Then Ismail Pasha attempted to dismiss his cabinet, but he was unceremoniously deposed in 1879, as England and France replaced him with his 27-year-old son Tewfik Pasha.
223ff Egypt then fell under even more foreign control due to its debts to England and France; the new Pasha "meekly submitted" to various austerity measures, reductions in the military, etc. This became a "prescription for armed rebellion."
224ff In the meantime the 1880 general election of England handed Benjamin Disraeli a resounding defeat to the Liberals under William Gladstone ["Liberals" here, as usual, is the 19th century definition of the term, not the modern meaning of the term] who opposed more British involvement in Egyptian affairs. On the 1881 Egyptian armed rebellion, led by Ahmed Urabi, pushing back on European army budget constraints. Gladstone dithered but then ultimately sent an Anglo-French fleet to intimidate the rebels in Egypt, later it became known that Gladstone himself was heavily invested in these European sovereign bonds with about 40% of his capital.
226ff Discussion here of a few different military engagements to follow, including a secret surprise attack to secure the Suez Canal; this mission later resulted in the capture of the rebel Urabi in Cairo; he was found guilty of treason and sent into exile in Ceylon/Sri Lanka. Tewfik Pasha was reinstalled and the British basically "took over Egypt, running it as a colony in all but name." The real power was held by Evelyn Baring from 1883 onward with a mandate to restore Egypt's finances, and with a secondary mandate to get the British out of Egypt, but he ended up never really being able to leave and ended up being the shadow power behind the throne for the next 25 years. [This is the same kind of problem the United States has with all of its engagements everywhere, we can never seem to extract ourselves in any sort of timely manner yet we always overstay our welcome no matter where we go.]
229 Comment here about European imperialism and Gladstone's prediction in 1877 that one consequence of British occupation of Egypt was it would set in a motion a cycle of competition among European powers to acquire colonies all over Africa.
229ff Back to Ottoman Turkey again, which managed to get a better deal on its debts than Egypt; comments here on Russia's 1877 invasion Turkey in support of Balkan Christians, essentially this led to the breakup of the European part of the Ottoman Empire as it lost its most productive provinces in the face of Russian intervention. On the new sultan Abdulhamid II, later be known as a cruel and paranoid despot, although he was amiable and charming in person and unlike his predecessors at ease with foreigners.
230ff Note the interesting irony that the draconian terms imposed by Russia improved Turkey's position to negotiate with the Western powers because they didn't want to break down the Ottoman state any further, which would give Russia still more access to the Mediterranean [as usual, the enemy of my enemy is my friend], and so Abdulhamid II used the threat of debt repudiation to obtain far more favorable lending terms, basically waiting out his creditors, getting half of the empire's debt written off, getting his interest rates capped at 4%, all in return for permitting the creation of a public debt administration institution inside Turkey, controlled by creditor countries that took charge of roughly one-fifth of the state's revenues; over time this entity grew into a state-within-a-state and become a humiliating symbol of foreign domination. "By the early 1880s the public finances of Turkey and Egypt had largely been brought under foreign control and, from the point of view of potential foreign investors, placed on a sounder footing." Finally, on the Rothschilds would actually underwrite certain major Egyptian and Turkish bond issues in Europe between 1885 and the end of the century.
Chapter 17: Le Krach de l'Union Générale [The Crash of the Union Generale]
233 On the [much more limited] growth of antisemitism in France; on the fact that France had a "lost decade" economically speaking during the 1870s, although it "had largely avoided the outbreak of antisemitism plaguing the rest of Europe"; the author notes that Jews were less than one-fourth of one percent of France's population and less than 1% of Paris's population, whereas Jews were 4% of Austria-Hungary's population and 7% of Vienna's population, and 1.5% of Germany's population and 5% of Berlin's population.
233 [Fascinating comments here that, unintentionally, give context for the incredible growth of nation-state power and the nation-state's role in modern day-to-day life]: To pay its war indemnity to Germany, "the government of France had to double taxes, raising its revenues from 6 percent to 13 percent of GDP." [Today, these numbers are shockingly low: government revenues are 45% of GDP (!) in France today; in the USA Federal government revenues is roughly 25% of GDP and if you include state tax revenues (which would make it more apples-to-apples), the aggregate government spending is more like 30-33% of GDP. You can see how massively government has grown in the past 150 years, and how today it makes up a gigantic slab of the pie chart compared to a century or more ago.]
234ff France's stock market played catch-up, going up 50% between 1879 and 1882; on the Union Generale, a sort of bank/investment bank led by Paul-Eugene Bontoux; Bontoux took over a moribund investment fund and restructured it as a bank, with the goal of combating capitalist power associated with Jews and Protestants; it expanded rapidly, launching insurance companies, an electric power company, acquiring the bank of Milan, and also acquiring all sorts of investments from Brazilian railroads to Romanian natural gas fields; on allegations that the bank was perilously undercapitalized, that it was using customer funds to speculate in stocks, and that its biggest borrowers were speculating in the bank's own stock on margin; Bontoux himself manipulated the market for the company's shares and was able to corner the market and engineer a short squeeze. Then, in late 1881, the board voted to raise new capital, which spooked everyone, causing the stock to fall by 60%, and this precipitated a run on the bank in January 1882; Bontoux then turned to the Rothschilds for an injection of equity; the Rothschilds turned him down and on January 30th the company closed its doors.
237 Note the author's incomplete commentary here on the forward market for shares on the Paris bourse, where people could buy (presumably) something like call options or warrants for shares by paying only a fraction of the stock price up front. This forward market is the mechanism that Bontoux used to inflate Union Generale share price on the way up [perhaps this would be something like a gamma squeeze like with GameStonk?] while investors who had contracted to buy stocks in a rising market expected to "roll" their positions and continue reaping profits [again the author doesn't walk the reader through this in any precise way but perhaps they had sold warrants/put options to earn premiums, so they were on the other side of the trade?]. Note also the legal ambiguity around these forward shares: they were seen legally as gambling debts on some level and were thus unenforceable under the French civil code, so many investors just abandoned their obligations when the settlement date arrived, which meant that their brokers were forced to shoulder these losses. Note also the blurb here citing Paul Gauguin, who lost his job as a broker during this crash and then devoted himself full-time to painting.
238 [This chapter gives the reader an instance in this book where he wishes the author had included (rather than taken out) a tangential discussion explaining more about the French bourse's forward market (marché a terme). The author doesn't appear to fully understand either, nor do I, but there's a whole rabbit here hole here that's actually quite interesting: Those investors who had shorted the forwards (and who should have been able to cover their short with later-to-be-worthless shares) were instead forced to buy shares at the most recently quoted bourse market price (which was vastly inflated), or they had to go out and find actual physical shares to deliver to cover their short position. Thus because there were more paper claims for shares than shares themselves so this blew up those short the stock, even though the company eventually became worthless anyway. In aggregate this blew up something like 1/4 of the Paris bourse's brokerage firms. The author doesn't go into this at all and doesn't explain any of the mechanics, to the detriment of readers.]
238 Bontoux eventually was jailed, although he escaped and crossed into Spain and remained there in hiding for several years; also note the footnote here of Emile Zola and his novel L'argent in 1891, which was inspired by the rise and fall of the Union Generale.
238ff On Edouard Drummond's book La France juive, a 1200-page rambling half-baked history of France that blamed Jews for all the country's ills, which came out around this same time; it claimed Bontoux was the victim of a plot by a cabal of German Jewish bankers; this book struck a chord with the French public and went on to be one of the four or five most widely read French books of the 19th century according to the author, while Drumont went on to become "France's leading and most aggressive antisemite," founding a muckraking daily paper that broke the story of the Dreyfus espionage case, which was found out to be a smear campaign and coverup by the French government.
Chapter 18: We Don't Need to Make Money
241-2 "By the standards of the 19th century, the industrial depressions following the 1873 financial crises were not especially deep." The author cites US industrial production falling only 6%, while Germany, Britain nor France had no decline at all. The author's point here was that the 1873 crash kept dragging on in the United States, ended up to be the longest downturn in its history up to that time, and by its fifth year "its impact came to be exaggerated in the public mind." [It's interesting to see the author describe aspects of this crash in a range of often self-contradictory ways throughout the book, as he decries various governments and politicians for their non-interventionism, then criticizes non-intervention to undo an intervention (recall the author criticizing "Grant's ineffectual response" to the highly interventionist demonetization of silver back in Chapter 12, indicating that apparently some interventions are more equal than others). And as we see right here on p214-2, the author characterizes the severity of the period in seemingly self-contradictory ways. Further, over the course of the entire book we have crash stories, brokers who "tore their hair," warnings about all the miseries of deflation, and so on, but yet there are other datapoints (like how the US market recovered smartly in 1874 right back to its pre-crash highs, or that standards of living increased significantly in the last part of the 19th century despite steady deflation) that indicate that maybe this entire era simply wasn't as horrific as it is made out to be. One gets the impression that nobody really understands what 1873 was all about, and the author various and sometimes conflicting characterizations merely reflects this ambiguity.]
242ff "The economies of the major powers all hit their lows in 1879" and by 1880 most of the world had turned around and was booming again, and over the next 20 years growth would equal or exceed the pre-1873 boom years. Fascinating to hear the author say that this industrial boom after 1880 continued in spite of the fact that prices continued to go down: prices would fall another 15% in addition to the 15% they'd already fallen since 1873. He also cites global commodity price declines here that were even larger: down 30% by 1879 and down another 20% over the next 15 years. And then, weirdly, he makes yet another contradictory claim that the simultaneous abandonment of silver and reliance on gold "continued to hang over the global economy." [But wait, there was a boom I thought? So was this allegedly awful monetary contraction bad or not? Wouldn't it be nice if something like this would "continue to hang" over our economy today and produce such a boom in industry and living standards!]
243ff Comments here on the dramatic reduction in the cost of shipping thanks to railroads and steamships; the author gives some transport price examples here, like the cost to transport grain from Chicago to New York dropping from 30 cents to 13 cents per bushel. [Unfortunately he doesn't give the denominator, the actual cost of that bushel, so that we can compare whether this transport cost reduction actually moves the needle or not! But a bit of searching indicates that, for example, a bushel of wheat ranged anywhere from 50c to $1.00 over the course of the 1890s, so, yes, this reduction in transport costs was massively significant as a total cost of the underlying commodity]. Also comments on a surge of new technologies and inventions in this era: mechanical reapers, mowing and seeding machines, steam hammers, electrical motors, sewing machines, hydraulic lifts, elevators, the telephone. [Once again, the author uses a lens that declining prices weigh down the global economy somehow, but a critically thinking reader can't help but wonder if this period is proof of the exact opposite] The author concludes this section saying that each of the major economies would spend about a third of the 19th century's final two decades in recession. [Yes, there was a contraction in 1893, and some other panics during that period, but yet the author also characterizes this entire period as having very healthy economic growth and massively rising living standards. So I do wonder whether this recession talk is just mis-framing thanks to modern Keynesian economic paradigm thinking. Maybe we today see that era's price declines and are trapped by thinking in nominal terms, thus the nominal declines "look" like recessionary periods, when actually because the price level dropped everybody was actually doing much better in real terms.]
245ff On extended Congressional hearings on the investigating the causes of the 1873 depression with a wide range of testimony from people of all walks of society; and all sorts of "reasons" emerged from these hearings, which concluded with the expert testimony of the financial journalist Horace White, who blamed the banking industry for unwise lending. The author cites the irony that it was this group that prospered as prices fell and the purchasing power of money soared, while "the rest of society did not fare so well." [This is way oversimplified: as Jorg Guido Hulsmann repeatedly says, there are all sorts of people who benefit from hard money and declining prices, while anyone who is overleveraged will be harmed by deflation, and the author himself cites how living standards increased significantly during the latter 19th century. Deflation (and hard money) actually incentivizes a less overleveraged, less debt-laden civilization because it removes many of the incentives to borrow--which is better for everyone. You have to look at the incentives in an environment of constant monetary expansion (which incentivize more and more debt) versus the incentives of an environment of hard money (which incentivizes less and less). As the saying goes: "Show me the incentives and I'll show you the result."]
247 The author here claims that small-time farmers, those living from the land, were the hardest hit. [There's lots to say here: if such a farmer were overleveraged, yes, but not if he were appropriately leveraged and if his input costs declined along with his output costs, he'd be doing the same. Also note that when food prices decline this is good for all people who eat! Thus this "who was the hardest hit" problem is extremely tangled and difficult to answer.]
247-8 Another group "hardest hit" per the author was the British aristocracy [!] because land prices declined due to deflation; the author then goes into a little tangent here on one in ten British aristocratic marriages were to American heiresses, including Winston Churchill's parents. Next the author talks about how industrialists were also hurt as a class. [Again, the "hardest hit" question simply defies any kind of simplistic narrative.]
248 On how industrial profits stagnated after 1872 and never reached their prior peak until the 1890s. [I wish the author would help us control for the era's declining prices, perhaps by looking at profit margins rather than nominal profit dollars. Note also, recall earlier in the book the author tells us that prices dropped by a full third over this period of two decades, thus if you exceeded the 1872 peak when prices also dropped by a third, that is incredible! That would be genuinely massive actual growth, in total contrast with the BS inflationary/nominal "phantom" growth that we have to subsist on in the modern fiat era.]
249ff The author pivots back to the Rothschild family here, as the third generation begins dying off: Anselm dies in 1874, Lionel dies in 1879 and Mayer Carl in 1886; of the fourth generation only 12 descendants were male and barely a handful showed any interest in banking. The author cites Albert, Anselm's son in Vienna, a born businessman who took over the Vienna branch and "made himself the single most important financial figure in the Austro-Hungarian Empire. Various discussions of other Rothschild cousins and descendants in London and Paris. The author quotes Alphonse Rothschild basically acknowledging the diminished ambition of the family: "We don't need to make money." Despite this, the family bank continued to do well, dominating foreign bond issuance throughout the 1880s and 1890s, as well as diversifying into new ventures like metals and mining and financing the New York City subway system.
Epilogue: Brussels, 1892
253ff Sidebar here on Alfred Rothschild, who was sort of a kook, not that interested in banking, more known for his spending and his passion for acting and non-banking activities, as well as his mistress and her daughter; note that the author says he was "undoubtedly gay"; Alfred played a role at the Bank of England, and was present at the 1892 International Monetary Conference, a follow-up to the 1867 conference, organized this time by President Benjamin Harrison of the United States, to see what could be done about organizing an international currency system; the author defaults again to discussion of "international shortage of gold." [Recall that another, possibly more honest, way to express this would be to say "a surplus of paper money issued by nation-states."] Then, on the near-collapse of Barings Bank, which was caught holding Argentine investments during a period of political instability there; this had nothing to do with the "shortage of gold" but many governments, including Russia, Germany and Austria-Hungary began buying up gold in the open market, putting a strain on England's reserves [the author doesn't explain why this would strain England's reserves or what the mechanism might be].
257ff The author contrasts this backdrop of the 1892 conference with the 1867 monetary conference, which happened during a global boom where free trade, liberal ideas and international capital flows were ideas that were in the ascendancy; the 1892 mood was much more somber, as "the world economy had gone through something of a roller coaster." Note here that the author again contradicts "the little people were hurt the worst" narrative as he writes how by the end of the century the average European was 30% richer than 1867 and the average American 50% wealthier. And again he defaults to modern fiat economist narrative here as he writes: "The singular problem was the unabated decline in prices" and lists "an astonishing array of commodities" including rubber, cotton, grain, pig iron, coffee, copper, etc that experienced price declines of as much at 50% 1867 to 1892. [For the millionth time: this is not necessarily bad! Cell phones and semiconductors would like to have a discussion with you!]
258 "The failure of governments to halt, let alone reverse, the never-ending fallen prices had created a sense of impotence among investors." [This again reveals the author's tendency to adopt the modern fiat/orthodox economist revulsion at deflation.] The author cites the British economist Moreton Frewen, who claimed that the continued decline in prices would cause a mass repudiation of debts across the world. [Once again, you could easily make the contra-argument that in a deflationary era, the level of debt will simply be much lower because people know that the their money won't be debased by the system and instead will actually grow in value over time. Thus the system becomes more robust because people are less debt exposed. Note also that you can always go back and find someone who was a doomsayer in any economic era, this guy was as wrong as any other doomsayer in that era, as there was no mass repudiation of debts across the world.]
259ff Note these comments on the reenactment of tariffs all across the world during this era; and also note this quote about the United States, which "had never embraced the European belief in free trade, maintaining tariffs of forty percent or more on imports of manufactured goods, even during the boom years." [Recall that not too many pages ago our author talked about how Americans became 50% richer over this time period! It's also worth mentioning that modern-era US citizens are seeing what happens when you engage in free trade: you ultimately export your manufacturing and industrial base to other lower cost countries, just as we have done to China, the Far East and Mexico. The United States experienced extraordinary economic growth during the 19th century with its tariff system, much like China is doing today.]
260 "A growing chorus of experts began to argue that the fundamental problem lay in the malfunctioning international monetary system--specifically, in the growing scarcity of international gold reserves." [One important thing to Note here, something the I don't think the author mentions at all anywhere in this book: this also would take care of itself in the coming years, as the mining industry had an incentive to go find more gold--which it did when it developed the cyanide process technique during the 1890s, which increased global gold stocks significantly. As usual, the cure for high prices is high prices!]
260ff On the resumption of the crusade to restore bimetallism, which united US prairie farmers, western miners, German Junker aristocrats, Argentine ranchers, China and India (which were still on a silver standard), as well as British textile factory owners in Manchester and Liverpool who were struggling against Asian competition. [Hmmmmm "struggling against Asian competition..." that sounds very familiar!] Comments here on the "almost theological character" of the debate; on how bimetallists in Britain were a fringe group, mocked like vegetarians; Oscar Wilde love to poke fun at them in his plays: in order to signal that a character was an oddball "he would make them a bimetallist."
262ff Note however that bimetallism did acquire a mass following in the United States, it started with a faction of silver mine owners in the West, but it gathered momentum among farmers as grain prices declined throughout the late 1800s. Also on the birth of the Populist Party in the 1880s, embracing "free silver" which was a far more effective slogan for bimetallism; this party also captured hearts and minds by campaigning against "the money power" and government controlled by Wall Street.
264ff The author also notes that the campaign for free silver got "entangled in a web of absurd conspiracy theories" including that the Coinage Act of 1873 was engineered by a cabal of foreign bankers, government bondholders and treasury officials; the author also cites Sarah E.V. Emery, a populist figure from Lansing, Michigan who in 1887 wrote Seven Financial Conspiracies Which Have Enslaved the American People, claiming that the demonetization of silver was orchestrated by "the money kings of Wall Street" at the behest to the Rothschilds. [Now that I've totally flipped my perspective on conspiracy theories and consider it a modern-era survival strategy to have a few conspiracy theory friends (because they are the only ones who know what's going to be true!), I do wonder how many of these 19th century "conspiracy theories" ended up being true...] "After Emery's book came out, however, the Rothschilds' name began to acquire villainous connotations in the American heartland." The author concludes the section saying that the free silver movement was unnerving to European financiers; they saw a free silver supporters as dangerous radicals from the frontier, "a view that would come to haunt US financial markets over the next few years."
265ff Now back to the Brussels conference of 1892, which "seemed doomed" before anyone took their seats; Harrison had been voted out of office before even the meeting began, and Grover Cleveland, his successor, was a gold hard-money man who left this conference without any US government backing. The author also admits to the idea that had America been willing to stabilize silver prices, the world would exchange silver for gold, thus the USA would have been "quickly denuded" of its gold reserves, which would have effectively shifted the US to a silver standard. This would send the dollar plummeting against major European currencies. [Also note the fascinating footnote here where the author talks about the modern economic system, as it struggles with how to ease credit without causing one's currency to weaken, "the authorities hit upon the solution that later generations will also deploy--arranging for all major countries to collectively ease monetary policy together in a coordinated way." In other words our governments degrade all their currencies together, wicking away that inflationary value at the expense of all the people everywhere.]
267ff As the author's description continues, this conference sounds like a total shitshow, as nobody spoke anybody else's language, they had to use alternate days to wait for transcripts to be come out and be translated, the gold standard countries had no interest in any change and thought the whole conference a pointless exercise. Germany claims that no change was needed with the monetary system, and then finally France torpedoes the whole conference (even though they were one of the world's largest holder of silver reserves), knowing that it would risk its relationship with Germany if it were party to any agreement to stabilize silver prices. "...the conference limped to an indecisive and unsatisfactory close, resolving to reconvene in the spring of the following year--a reunion that would never materialize." [The reader looks up from the pages here and wonders why the author decided to even include this story, much less have it take up so much of the book's final pages.]
269ff On the Panic of 1893, which came as people exchanged US dollar assets for gold, pulling gold out of the US and taking gold reserves dangerously low, which tightened credit in the US; this happened along with the collapse of The National Cordage Company as well as a "surge in the number of bank failures" [the author gives no numbers here], bringing about the 1893 recession, the USA's deepest recession of the 19th century; unemployment spiked to 8% and stayed there for five years; industrial production fell by 15% more than double the decline in 1874. Prices continued to decline and even (pro-gold) Germany then established a commission to consider raising the value of silver; then Germany astonished the world by passing a resolution by a margin of two to one for international monetary reform. In the US during 1894, gold reserve level had fallen to only $41 million, well below the $100 million level considered a bare minimum necessary to maintain the dollar's link to gold. Grover Cleveland then approached the Rothschilds in London about a private US government bond issue; the Rothschilds then brought in J. Pierpont Morgan, who was the USA's leading investment banker, and as US gold reserves dwindled to a mere $9 million, Cleveland agreed to terms of a $65 million private bond issue, led by Morgan, to replace US gold reserves; the bond was massively oversubscribed and sold out within 20 minutes. Note also that the participation of the Rothschilds in this bond deal in Europe enraged the populists in the USA.
273ff The Democrats essentially took the blame for the depression, suffering a huge defeat in the 1894 midterms; then the Democratic Party repudiated Cleveland and his policies and finally embraced free silver and bi-metalism, in 1896 nominating William Jennings Bryan as their candidate, who made the infamous "Cross of Gold" speech at his nomination. McKinley defeated him decisively in the Presidential election of 1896; and then the author cites a final, massive irony here: that ten years before, in 1886, some gold prospectors found a gigantic gold formation in South Africa, and by the time of the 1896 election worldwide gold production had jumped by 50%, with South Africa overtaking the US as the world's largest producer, and as a result prices started rising and would go up for the next decade and a half. "The gold drought that had weighed so heavily on the global economy since 1873, and the great deflation that it had wrought, was finally over." [Ironically there was nothing any government could do about it, nothing they could have done would have accomplished anything, no intervention was going to help. But a simple major gold discovery reversed the entire situation, likely producing yet another set of problems! Man, the irony is thick.]
To Read:
Niall Ferguson: The House of Rothschild (2 vols)
Anthony Trollope: An Autobiography of Anthony Trollope
Anthony Trollope: The Way We Live Now
William Worthington Fowler: Ten Years in Wall Street
John Steele Gordon: The Great Game
Marc Flandreau: The Glitter of Gold: France, Bimetalism, and the Emergence of the International Gold Standard, 1848-1873
Irwin Unger: The Greenback Era: A Social and Political History of American Finance, 1865-1879
***Walter Bagehot: Lombard Street: A Description of the Money Market
Gordon A. Craig: Germany, 1866-1945
Wilhelm Marr: The Victory of Judaism over Germanism [online PDF]
Moshe Zimmermann: Wilhelm Marr: The Patriarch of Anti-Semitism
Roy Morris, Jr.: Fraud of the Century: Rutherford B. Hayes, Samuel Tilden, and the Stolen Election of 1876
Michael F. Holt: By One Vote: The Disputed Presidential Election 1876
*** Sarah E.V. Emery: Seven Financial Conspiracies Which Have Enslaved the American People
Thomas Pakenham: The Scramble for Africa
Alan Palmer: The Decline and Fall of the Ottoman Empire
Harold James: Seven Crashes: The Economic Crises that Shaped Globalization
John D. Hicks: The Populist Revolt: A History of the Farmers' Alliance and the People's Party
Milton Friedman: A Monetary History of the United States, 1867–1960