The Long Depression

The recent market situation has a lot of people researching the word "Depression". For most people, the word evokes one era alone but there are perhaps closer links between our current problems and other periods in world history. One that I know about pretty well (but most Americans don't) is the inflationary depression in post WWI Germany. Another that some people are mentioning is the long serious depression of the 1870's. I thought I'd do a post on it because it was also a critical period in the history of Andrew Carnegie and early Pittsburgh. I'd like thoughts and feedback on this from history buffs, historians and people who heard tales from that time.

One thing that seems to come out is that real deep brutal downturns across entire economies seem to linked to fiat money. This was of course very true in Germany's crisis, and most economists now admit the Great Depression's original root cause was in the careless monetary expansion since the creation of the Federal Reserve. That is not to say particular regions and industries cannot suffer downturns in any economy. I also noticed that Depressions often closely follow wars and the debts they leave behind 1873 followed the Civil War and the Franco Prussian War, The Weimar period followed WWI as did the Great Depression.

Anyway here are a bunch of quotes and links to make sense of. Scott Reynold's Nelson places the starting point of the downturn in Europe.

"The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period."

I'm going to make a wild guess from the little I know of Bismark's ideology that the German and likely the Austrian States had some role in this credit promotion. And similar policies were promoted in the U.S. "expressed by railroad speculator Jay Cooke in 1869: "Why," he asked, "should this Grand and Glorious country be stunted and dwarfed--its activities chilled and its very life blood curdled by these miserable 'hard coin' theories--the musty theories of a bygone age." [1]

Of course Jay Cooke appears again at the center of the storm."In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, was invested heavily in the railroads. At a time when investment banks were anxious for more capital for their enterprises, President Ulysses S. Grant's monetary policy of contracting the money supply made matters worse. While businesses were expanding, the money they needed to finance that growth was becoming more scarce.

Cooke and other entrepreneurs had planned to build the nation's second transcontinental railroad, called the Northern Pacific Railway. Cooke's firm provided the financing, and ground was broken near Duluth, Minnesota, for the line on February 15, 1870. But just as Cooke was about to swing a $300 million government loan in September 1873, reports circulated that his firm's credit had become nearly worthless. On September 18, the firm declared bankruptcy.[6][7][8] The Northern Pacific would not be completed until 1883, and then by another financier: Henry Villard.[9][10]

This period also marks the transfer of global power from Europe to America. At the end of it, the few strongly operated firms with cash and little debt were able to buy out their weaker competitors. Carnegie Steel and Standard Oil come to mind.

Next Up --- A comparison to Weimar Germany.