The Crisis of 1873 in the Middle of a Globalizing World

I had completed the first article of the series, in which I began to analyze the development process of capitalism in order to understand the foundations of the neoliberal movement that the global economy is under the influence of today, with a summary focusing on the 19th century. I had brought the article to the crisis of 1873 and the birth of the Neoclassical School.

The crisis of 1873 is not the first crisis in economic history. However, it has some very important characteristics in the historical process. Therefore, it is an important stop and deserves a separate analysis.

Among the economic developments of the 19th century that I discussed in my previous article, there were crises of varying severity in the years 1819, 1825, 1837, 1847, 1857 and 1866. However, 1873 was first called the Great Depression, and when a more severe crisis occurred in 1929, the names were changed. 1929 was called the Great Depression, and 1873 was called the Long Depression. Thus, the crisis of 1873 lost the name of the Great Depression and transferred this title to 1929.

During the Great Depression that began in 1929, the U.S. economy shrank for 43 consecutive months, while during the Long Depression of 1873, it shrank for 65 consecutive months. The reason for using the term "long" for 1873 was the difference in duration between the two crises.

The 2008 crisis was called the Great Recession because it was the most severe crisis since 1929.

Let's briefly touch on the crises in the 19th century so that we can better understand 1873 and the 20th century. There are detailed studies by expert economists on the history of crises. However, the purpose of this article is not to examine the history of crises. However, there is a need to emphasize the common characteristics of crises. Because, although today's conditions are different from the conditions of history, understanding some common characteristics of the reasons for the emergence of crises is important in order to analyze today well.

The crisis of 1819 occurred during the US's process of creating an independent economy from England. The US implemented its first central bank system with the First Bank of the United States between 1791 and 1811. The second was implemented with the Second Bank of the United States between 1817 and 1836. The Fed, today's central bank, was established in 1913.

In the USA, there were banking systems and formations that performed central bank-like functions with different systems between 1836 and 1913. The crisis of 1819 occurred as a result of the fluctuations created by the central bank monetary policies implemented by the USA.

The start of real estate trading for excessive speculation purposes in economies that were in a deteriorating period and trying to stabilize as a result of the effects of the Napoleonic Wars (1800-1815) was among the factors that triggered the crisis.

The crisis of 1825 occurred when the stock market collapsed in England. It was a crisis that occurred due to the effects of speculative investments made in Latin America on the English economy.

The Napoleonic Wars made England's financial system extremely profitable and created monetary inflation. The monetary inflation played a role in encouraging speculative investments. Thus, a bubble formed in the stock market and risky borrowings emerged. As a result, the bubble and the crisis of 1825 burst.

The crisis of 1837 was a result of speculative lending practices in the western states of the United States. The excessively inflated cotton prices suddenly fell, the bubble in land prices suddenly burst, and then all prices and wages collapsed. In some states, the unemployment rate reached 25%. The period between 1837 and 1844 was a deflationary period for the United States.

The crisis of 1847 occurred in England. It was a relatively minor crisis. However, as in the crises above, this crisis was triggered by a bubble created by the heavy railway investments made in the 1840s.

The crisis was taken over by the USA in 1857. In the 1850s, national economies became more interconnected with each other through foreign trade. When risky international investments made before 1857 started to affect the economies with negative results, the international economy started to decline. However, the domestic economy of the USA grew with the effect of gold extraction from the gold fields in the state of California between 1848-1855. The USA experienced a crisis as a result of the incompatibility between the international economy and its own domestic economy.

In 1866, the last major crisis before 1873 occurred, and this time the address was England. The collapse of the bank Overend, Gurney and Company caused a social frenzy in London. The people called for political reform and revolted in Hyde Park in 1866, resulting in the passing of a series of reforms in 1867. The basis of this crisis was the discontent that arose in the working class due to the financial structure of England.

As can be seen, crises throughout the 19th century have alternated between the US and the UK. The common feature of almost all of them is that demand created for speculative purposes creates an inflated price, followed by a sudden drop or collapse in prices. These common features of almost all crises are striking when we consider the global economic agenda since 2008.

The crisis of 1873 is the most severe and widespread of the crises experienced since the birth of economics as a science. Europe and the USA are the geographical points most heavily affected by the crisis.

The American Civil War occurred between 1861-1865. The period following the American Civil War and 1873 was the period of the second industrial revolution. The second industrial revolution came to life approximately a hundred years after the first. Large-scale production became possible with the invention of electricity. Specialization in production began and the relationships between all elements in production were redefined.

Before going into the details of the 1873 crisis, it is extremely important to understand where the world stood economically in the last quarter of the 19th century.

The period between 1870-1900 was the name of a special period in the USA: the Gilded Age. The USA left the civil war behind and reached a high growth rate with industrialization. Significant advances in technology were adapted to the cycle of the economy. Especially the construction of railways was at the forefront of the important investments of the period. Naturally, it took a long time for these investments to reach the break-even point. Inventions were made in the USA, patents were produced for these inventions. Companies were established one after another and scientific management principles were put into practice. In fact, the concept of Taylorism was a product of this period. Farming was developing especially in rural areas.

The last quarter of the 19th century was a period when the world population increased but the world became smaller, that is, globalized, due to economic and political developments. Goods, products, capital, people and ideas began to change places on a global scale.

In 1880, per capita income in developed countries was twice that of third world countries. The ratio would be three by 1913. The globalization process at the end of the 19th century would sharpen the distinctions between developed and underdeveloped countries, rich and poor, dependent and independent. The economic dependence of underdeveloped countries on developed countries would also increase within a new capitalist phase that emerged with the globalization process.

Capitalism, with its philosophy based on liberalism, expresses the state of being international by definition and nature. In theory, it also recognizes the concept of economic balance in an international or global dimension. However, in practice, it cannot realize global economic balance in line with the purely liberal principles and practices it derives from its definition, facing the concept of nationality. As a matter of fact, it faced a similar situation in the late 19th century, as it does today. Countries that struggled in competitive conditions and could not protect their economic interests had to defend their national economies with protective tariffs in international trade. This situation represents a deviation from capitalism's search for global balance.

At the end of the 19th century, while developments that would change the political and economic balances of the world were taking place, income inequality was emerging and politics was also changing. The rapid transformation experienced in the USA brought with it a moral erosion in politics. The same period was a period when a great wave of migration from Europe to the USA was experienced.

While the world was going through such important developments, how accurate is it to perceive a crisis that emerged in 1873 as a Great Depression, as defined at that time?

Alfred Marshall described the long-term decline in prices, wages, profits and interest rates as alarming in 1888. The written texts of Alfred Marshall's advice to the British government in parliamentary committees in the late 19th century were collected by J. M. Keynes under the title "Official Papers". Alfred Marshall's opinion is included in these texts.

The fundamental problem of the years affected by the crisis of 1873 was not the inability to produce, but the decline in profits, that is, the diminishing return on capital.

The point where the loss of returns caused by the 1873 crisis was most intense was the agricultural sector. Agricultural production recorded significant increases in the decades before 1873. However, due to the impact of the crisis, the price level of wheat in 1894, for example, fell to 1/3 of its level in 1867. In England, the general price level fell by 40% between 1873 and 1896. The price of iron ore, which began to be used intensively in production, fell by 50% from 1871 to 1894.

The crisis of 1873 arose as a result of speculative efforts by British and continental European investors to make large-scale investments in the United States and Latin America, led by railway investments, and as a result of the use of war reparations paid to Germany by France after the Franco-Prussian War of 1870-1871 for speculative real estate investments in Germany and Austria.

When the real estate bubble in Germany and Austria burst, the Vienna and then Amsterdam and Zurich stock exchanges crashed. The crisis in Europe spread to the United States as European investors sought to liquidate their assets related to their investments in the United States.

In the USA, when an investment banker named Jay Cooke could not find a buyer to sell the assets issued to finance the construction of the Northern Pacific Railroad, both Jay Cooke and the railroad company went bankrupt. Thus, Wall Street also collapsed. The collapse of Wall Street negatively affected the European stock markets. Thus, developed countries entered a long-term deflationary period. After a while, economic negativities began to turn into political negativities and street protests came to the agenda.

In my previous article , I mentioned that Germany switched to the gold standard in 1873. This transition was one of the important reasons for the crisis of 1873. With Germany's transition from the silver currency system to the gold currency system, silver prices collapsed. Consequently, the currencies of countries that had their currencies indexed to the price of silver also experienced sudden devaluations. Therefore, the transition to the gold standard was inevitable for many countries.

Source: https://en.wikipedia.org/wiki/Panic_of_1873

The 1873 crisis, which is considered the first global crisis, had an impact on the Ottoman Empire, the establishment of the Public Debt Administration. The increase in the Ottoman Empire's trade with Europe parallel to the development of capitalism in Europe coincided with the second half of the 19th century. The Ottoman Empire began to borrow from abroad in 1854. Due to the decreasing trade losses with the 1873 crisis, it became unable to pay its debts, and in 1881, the Public Debt Administration was established to manage all foreign debts.

The last quarter of the 19th century was marked by the emergence of the global economic order with the 2nd industrial revolution. A global crisis occurred within this environment and developments. The crisis was a result of the bursting of bubbles and inflated prices driven by speculation, and the other crises mentioned above also share the same common characteristics. Doesn’t it sound familiar when we think of 2008?

As we see in the quote I made from Eric Hobsbawm, it is interesting how the developments that marked the last 25-30 years of the 1800s and the crisis of 1873 could occur together. The perspective brought by Alfred Marshall to the subject is important and is positioned at a crucial point in the analysis perspective of economists. There are also approaches by researchers from different social science disciplines that do not attach as much importance to the crisis of 1873 as economists do.

The next article is again from the last quarter of the 19th century: the Neoclassical School. This economic movement had a significant impact on the neoliberal views of the 1980s.