The financial crisis of the 1870’s has been called The Long Depression. Its effects were still being felt even in the 1890s.
Prof. Scott Reynolds Nelson, who teaches 19th century history at the prestigious College of William and Mary in Virginia, has been quoted in many magazines, such as The Economist, because he thinks that this depression is very similar to today’s credit crisis.
How Did The Long Depression Start?
The depression began with a building boom in Europe, with rapid building construction taking place in Vienna, Paris and Berlin.
Mortgages were easy to get and large British banks happily made loans to developers. Mortgages were also available from new savings banks designed for the middle-classes. Some of these may have been dodgy. People even used half-completed buildings as collateral because credit was so easy to obtain. This created a housing bubble.
The crisis hit when Russia and Central Europe couldn’t compete with American exports of wheat and other crops, including kerosene which undermined the use of rapeseed oil for cooking. Banks no longer wanted to lend so easily. Eventually the stock market in Vienna crashed and the crisis spread to Western Europe.
The Crisis in America
Before this the United States had seen an era of unprecedented prosperity. Housing and construction boomed. Shops were full of customers. Prices of commodities reached new levels.
America became affected when the inter-bank lending rate shot up. The country had seen a boom in railroad construction financed mainly by large banks, such as Jay Cooke & Company. They had created complicated financial instruments little-understood by investors to finance the railroads. Eventually this became impossible to sustain. Railroad companies went broke and large banks failed. Jay Cooke’s inability to pay its debts led to the stock-market crash of 1873, which is often called the Panic of 1873. The stock market closed for ten days as Wall Street attempted to deal with the problems.
The crisis helped end the Austro-Hungarian Empire. It also affected America very severely, even rivalling the Great Depression in its harshness. More than 100,000 businesses failed after the Panic of 1873. Railroad construction was curtailed and building and manufacturing declined. Mass unemployment (unemployment reached 14%), demonstrations, and strikes beset the nation. In 1874 thousands of unemployed demonstrated in New York’s Tomkins Square Park. This was the largest demonstration that had ever occurred in New York. The first general strike in the U.S. started in 1877 when employers at the Baltimore and Ohio Railroad attempted to cut the worker’s wages for the second time in a year. Riots and confrontations with police soon followed and the strike soon spread to the rest of the country.
How Did The Crisis End?
Railroad expansion and an excellent season of good crops helped to slowly bring confidence back. Stocks began rising again in the late 1870’s. Soon another era of prosperity ensued.
Can this recession be compared with the Long Depression? The housing boom, the stock-market crash, the failure of large banks and the rise in the inter-lending rate are certainly similar. Some economists think that it bears a greater resemblance to the Great Depression. Time will soon tell.
- Scott Reynolds Nelson, ‘The Real Great Depression’, The Chronicle Review