1873

Liaquat Ahamed examines the Crisis of 1873, the first truly significant global financial crisis, and the cascading economic, political, and social consequences it unleashed over two decades. Ahamed uses the Rothschild banking dynasty, then the wealthiest family in the world, as a connective thread through the narrative.

The book opens by establishing the extraordinary global boom that preceded the crash. Between 1848 and 1873, the combined GDP of Britain, the United States, France, and Germany nearly doubled, world trade expanded fivefold, and the global bond market quintupled in size. Three iconic infrastructure projects completed in 1869–1870, the first U.S. transcontinental railroad, the Suez Canal, and the trans-Indian railway, symbolized this prosperity, all financed through bonds sold on the exchanges of London, Paris, and New York. The Rothschild family stood at the center of this financial system. Founded by Mayer Amschel Rothschild in Frankfurt, the dynasty rose to prominence during the Napoleonic Wars, with five brothers stationed across Europe creating a virtual monopoly over government bond underwriting. Under James de Rothschild, who led the Paris branch until his death in 1867, the family diversified into railroads, mining, and industrial finance, quadrupling the bank's capital to $150 million.

The Rothschilds never established a full branch in the United States. European bankers viewed America with suspicion after widespread state-bond defaults in the late 1830s, and the family's relationship with their New York agent, August Belmont, a Frankfurt-born financier who had established himself as their unauthorized American representative during the 1837 panic, was marked by mutual distrust. The closest American parallel to the Rothschilds was Jay Cooke, a Philadelphia banker who raised over $1 billion in Union bonds during the Civil War through mass-marketing campaigns. After the war, Cooke took on the Northern Pacific Railroad, lured by enormous fees. His excessive optimism about this venture would prove fateful.

The Franco-Prussian War of 1870 shattered the economic tranquility. After France's swift defeat, Chancellor Otto von Bismarck imposed a $1 billion indemnity designed to cripple the country for a generation. Alphonse de Rothschild, James's eldest son and head of the Paris branch, organized two unprecedented international bond issues to finance the payments. Both were massively oversubscribed, France paid ahead of schedule, and Alphonse was hailed as a national savior.

The indemnity money destabilized Germany. Roughly half of the $1 billion flooded individual states with cash, sparking a speculative mania. Nearly 850 new companies were incorporated during the so-called Gründerzeit, or Founders' Era. The mania spread to Vienna, already in a construction boom, where land prices reached 15 times pre-boom levels. Mayer Carl von Rothschild, head of the Frankfurt branch, warned the speculation would end in catastrophe, while Anselm von Rothschild, head of the Vienna branch, similarly refused to participate.

Easy credit fueled parallel bubbles elsewhere. In New York, $1.5 billion poured into railroad bonds, much of it for ill-conceived lines in sparsely populated Western states. The two largest developing-country borrowers, Ottoman Turkey and Egypt, accumulated enormous debts. Sultan Abdülaziz owed roughly $1.1 billion, while Khedive Ismail, Egypt's Ottoman-appointed ruler, owed $500 million. Both squandered borrowed funds on extravagant palaces and vanity projects, yet the Rothschilds and Baring Brothers, the two most prestigious lending firms, deemed both countries too risky to underwrite.

The crash began in Vienna on May 9, 1873. After stock values had risen 300 percent over three years, bank stocks fell 45 percent in a single day. Within a few years, 40 percent of start-ups and three-quarters of newly created banks had disappeared, wiping out the equivalent of 30 percent of Austria's GDP. Four months later, Jay Cooke & Co. collapsed after failing to sell Northern Pacific bonds, triggering a panic that shut the New York Stock Exchange for 10 days. The contagion ricocheted back to Europe, though London and Paris remained largely unscathed.

Ahamed argues that the crisis's immediate economic impact was surprisingly modest. What transformed it into a generation-defining calamity was a simultaneous, uncoordinated reordering of the global currency system. For centuries, bimetallism, in which countries maintained currencies backed by both gold and silver, had stabilized international trade. In July 1871, Germany unilaterally shifted to gold. Within two years, most of Western Europe followed, and the U.S. Congress passed the Coinage Act of 1873, removing the standard silver dollar from production, a measure later dubbed "the Crime of 1873." The combined effect triggered a worldwide scramble for gold and a dramatic contraction in global liquidity. Deflation persisted for two decades, with total price declines of one-third for consumer goods and one-half for wholesale goods by the mid-1890s. The prolonged decline redistributed wealth from debtors to creditors: Farmers, businessmen, and artisans suffered while bankers and bondholders profited, fueling populist resentment and prompting governments across Europe to abandon free trade in favor of protective tariffs.

The political consequences were far-reaching. In the United States, President Ulysses S. Grant vetoed the 1874 Inflation Bill, a modest measure to expand the currency supply, fracturing the Republican coalition. The party lost 96 House seats in the 1874 midterms. The 1876 presidential election ended in a corrupt deal: Republican-controlled election boards in three Southern states disqualified enough Democratic votes to swing 19 disputed Electoral College votes to Rutherford B. Hayes. Under the Compromise of 1877, Hayes received the presidency in exchange for withdrawing federal troops from the South, ending Reconstruction and enabling the rise of Jim Crow laws that enforced racial segregation for nearly a century.

In central Europe, ruined investors sought scapegoats. A wave of antisemitism swept Germany and Austria, fueled by pamphleteers like Otto Glagau, a Berlin journalist who falsely claimed that 90 percent of stockbrokers were Jewish, and Wilhelm Marr, a Hamburg journalist who coined the term "antisemitism" in his 1879 pamphlet. The Rothschilds largely escaped direct attack because they had avoided the speculative boom, but Bismarck's personal banker, Gerson von Bleichröder, the first Jewish person ennobled without converting to Christianity, became a primary target. The movement spread to France after the 1882 collapse of the Union Générale, a Catholic investment bank whose founder blamed a Jewish conspiracy for his ruin. Journalist Édouard Drumont amplified this narrative in his 1886 bestseller La France juive, which attacked the Rothschilds by name.

The debt defaults reshaped the Middle East. Sultan Abdülaziz was deposed in 1876 and found dead days later. His ultimate successor, Abdülhamid II, negotiated for five years until creditors wrote off half the empire's debt, though the Ottoman Public Debt Administration, controlled by foreign representatives, assumed charge of nearly one-fifth of state revenues. In Egypt, the Rothschilds arranged the British government's 1875 purchase of the khedive's shares in the Suez Canal Company, in which Egypt held a 44 percent ownership stake. Khedive Ismail was deposed in 1879 after the Rothschilds used their diplomatic connections to pressure the Ottoman sultan. When an Egyptian military revolt erupted in 1881, Prime Minister William Gladstone authorized intervention despite professing support for Egyptian self-rule; Gladstone himself held significant investments in Egyptian bonds. Britain occupied Egypt after the 1882 Battle of Tel-el-Kebir, running it as a colony in all but name for decades.

The book concludes by tracing the crisis's long aftermath. By the early 1880s, economies had resumed growing, but prices kept falling. The Rothschilds maintained annual profits of approximately $7 million and continued to dominate global bond underwriting. At the failed 1892 Brussels International Monetary Conference, Alfred de Rothschild of the London branch proposed a modest plan for European silver purchases that every delegation rejected. Gold drained from the U.S. Treasury, and by early 1895, President Grover Cleveland arranged a $65 million private bond issue through J. Pierpont Morgan, the nation's leading investment banker, and the Rothschilds. William Jennings Bryan captured the 1896 Democratic nomination with his "Cross of Gold" speech but lost to Republican William McKinley. The two-decade deflation ended not through policy but through geology: Prospectors had discovered the world's largest goldfield in South Africa's Witwatersrand in 1886, and by the mid-1890s, worldwide gold production had jumped 50 percent, finally reversing the great price decline.