I mentioned in my last non-fiction book review the two types of histories that I am reading. This one, 1873, is one of the second kind, focussed on a specific event or set of events and was written by Liaquat Ahamed about the market and economic crashes that occurred around that time in several developed countries. It is a well-written book that I got through quickly. It gives a detailed description of events but also a good explanation of the possible economic and human factors involved. The human ones of course deserve the most study, as hopefully we humans might learn from the past, but of course we don’t seem to, but collectively and individually make the same mistakes time after time. The book also discusses the role of the Rothschilds, the pre-eminent European banking firm at the time.
Since roughly the 1500s, human population has grown rapidly and along with that growth came an explosion in innovation, which created phenomenal economic and standard of living gains for the entire population. But the growth in income and wealth and innovation also created opportunities for misdirection of financing and excessive amounts of investment, whether by stock purchases or from loans. Following the civil war in the United States and several periods of unrest in Europe, there was an economic boom in the late 1860s and early 1870s. Railroads and real estate were a large portion of this boom, as was trade. Many people in professions had money to invest for the first time.
There are always unscrupulous people in any business and finance, because of the amount of money involved, attracts more than its share. So in an atmosphere of economic good times, when all businesses of a certain type seem to be doing wonderfully, people can get carried away and they did. People in all walks of life were investing savings in stocks, with little knowledge of the businesses they were investing in. And banks, supposedly run by experts, did also, making truly stupid loans to sketchy projects. Crooks got people to invest in fake businesses. In any event, when you get overinvestment in businesses that will never make the profits needed to generate a return on the investment or even pay back loans, inevitably people panic when they become aware that they won’t get their money back. Stock markets crash and when companies don’t pay back loans, undercapitalized banks fail and depositors lose some or all of their money.
And that is what happened in 1873. This was exacerbated by excessive borrowing by countries like Turkey and Eygpt, who ultimately defaulted on very large loans and by inconsistent monetary policies relating largely to use of the gold and/or silver standards to back currency issuance. When the market fell, economic activity declined somewhat, but more importantly, there was extensive deflation, which hurts debtors, farmers and manufacturers. Government policies, especially in the US, were inadequate or ill-informed. And of course their were political consequences.
The bankers arranging all this financing generally did very well, until their banks failed. Many were run by Jews, and the anti-semitism which had been present for centuries ramped up in several countries, most notably Austria and Germany, laying the groundwork for the future even more barbaric treatment of Jews in the early 20th century. One firm, the Rothschilds, managed to avoid this, and while blamed by some, had nothing to do with either the shady stock offerings or bad loans. In fact the firm constantly issued warnings about the over-exuberance and the likelihood of poor returns or non-repayment. They were ignored.
If we look at our own time, we see much of the same behavior, as though people have learned nothing from the past, not being cautious about any new investment. And bankers continue to make the same ill-advised loans to companies with dubious prospects. The 2008/2009 mortgage debacle is a prime example, or should I say sub-prime one. AI today has some similar characteristics and a lot of debt is being taken on by companies involved in this sector. All I can do is advise everyone to be cautious and to especially not be swept up in faddish investments.
