This essay considers two Panics of 1873: one discussed by American historians now and another by European historians until about twenty years ago. I want to suggest some ways of bringing those historiographical traditions together—to explore some troubling similarities between the 2008 financial crisis and the transnational crisis of 1873, and to end with a brief jeremiad.

Historiography of an International Crisis

The Panic of 1873 is a perennial topic for American historians, in part because it serves as one of the boundary lines for what historians think of as modern America. It is the beginning of the end of Reconstruction; it is the explanation for the so-called Great Strike of 1877; it has stood as a convenient starting point for industrial histories of Andrew Carnegie, John D. Rockefeller, and Cyrus McCormick. The trouble with this story is that it begins in September of 1873 and credits the entire thing to the failure of Jay Cooke and his speculative railroad venture, the Northern Pacific Railroad. How this worldwide panic could have started in the United States and somehow spread to Europe is seldom discussed. As an Americanist who has written about railways, I have always been uncomfortable with that argument and had a sense that there was a missing international dimension. After all, in the 1870s there was a lot of European capital—British, Prussian, and Dutch—in the U.S. bond market. This was in fact the distinction between stocks and bonds going back to the 1820s: Stocks were owned by Americans, bonds mostly by Europeans.

Until the 1980s Europeanists saw a very different Panic of 1873. For Alexander Gerschenkron, Hans Rosenberg, and others scholars of the mid-twentieth century, the panic started in Austria in May of 1873 and spread west. They argue that because Jews had received civil rights only recently and were in many cases unable to own real estate, they were visible in banking and commodity markets when the crisis struck. When some Jewish investors appeared to get out in time, and others were suspected of getting out, Jews collectively became the panic's scapegoats. Gerschenkron and Rosenberg made the Panic of 1873 a huge turning point. They credited it with the rise of a modern kind of anti-Semitism in Central Europe, the reemergence of high tariffs, and the end of free trade.Footnote ¹

In the 1980s German historians, particularly David Blackbourn and Geoff Eley, but also Kenneth Barkin, became suspicious of this argument. They connected the story of the economic crisis with an argument about the so-called Sonderweg, a deterministic argument about Germany's special path: High tariffs cemented a marriage of iron and rye, uniting industrialists to Junkers, crushing the German bourgeoisie. This special path, with the hypothesis of a weak bourgeoisie, provided a simple teleological explanation that thundered from the panic to the failure of the Weimar Republic to the triumph of the Nazis. It may seem ironic for Marxist historians to criticize liberal historians for economic determinism, but that is precisely what Blackbourn and Eley did. They held the field; Gerschenkron and Rosenberg were largely discredited. While Blackbourn and Eley performed a service in exposing a simplistic historical narrative, the crushing of the older argument about the consequence of 1873 has had some unfortunate historiographic results. In particular, 1873 largely disappeared from many German historians' discussion of the late-nineteenth century.Footnote ²

The Crisis

So I will suggest a method of transmission for this crisis that tells the European and American stories together, demonstrates the transmission mechanism, and explores the common results. It bears a rather shocking resemblance to the crisis of 2008.

The problems had emerged around 1870, starting in Europe.Footnote ³ In the Austro-Hungarian Empire formed in 1867, in the states unified by Prussia into the German empire, and in Second Empire France before its collapse in 1870, three emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and of course Paris under Prefect Georges-Eugène Haussmann. Medieval walls were leveled, streets were widened, 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 this so-called founder period.Footnote ⁴

However, economic fundamentals were shaky, particularly in Russia. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The nineteenth-century version of containers filled with goods manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene was undermining rapeseed prices (canola oil). Canned American beef was replacing cattle on the hoof from Budapest. The crash came in Central Europe in May of 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.Footnote ⁵

As continental banks tumbled, the Bank of England raised the interbank lending rate, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank reached impossibly high proportions. This banking crisis came back to hit the United States in the fall of 1873.Footnote ⁶ Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing.)

The bonds had sold well in the 1860s, but as investors began to doubt their value after 1871 prices weakened, many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. Finance bankers tried to hold onto bonds until the price cleared. To do so, however, they needed to borrow on short-term money markets while they waited to sell off these bonds. In the aftermath bankers insisted that they would never again do this, but this is precisely what the structured investment vehicles of Bank of America, NationsBank, and others were doing in the 2000s with their collateralized debt obligations. When railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September 1873, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers, who was young in 1873, later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers—many former Civil War soldiers—became transients. “Tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25 percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated to demand public work in Boston, Chicago, and New York in the winter of 1873–74. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including those organized by the secret labor group known as the Molly Maguires in Pennsylvania's coalfields in 1875, where masked workmen exchanged gunfire with the Coal and Iron Police, a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Maryland.Footnote ⁷

In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian Czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and the Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.Footnote ⁸

The echoes of the past in present-day problems with residential mortgages should be troubling to all of us. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable-rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-default swap, which risk managers imagined would protect their investments. More than two million foreclosure filings—default notices, auction-sale notices, and bank repossessions—were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks and fund managers hoarded cash. Banks that hoard cash do not make short-term loans. Businesses large and small now faced a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

The long-term effects of the Panic of 1873 in the United States were perverse, and this is part of why we Americanists see the birth of modern American history in the bowl of this panic. For the largest manufacturing companies in the United States—those with guaranteed contracts and rebate deals with the railroads—the panic years were golden. Andrew Carnegie, for one, introduced the Bessemer process and continuous processing for steel. Cyrus McCormick had just developed the combine—a combination of a reaper to cut wheat and a thresher to pull the grain out. John D. Rockefeller also had enough capital reserves in the first couple of years of the panic to finance his own continuing growth. He focused on the refining process, using fractional distillation of crude oil into kerosene. Most interesting is Philip Armour who perfected the assembly line—actually a disassembly line—for the conversion of pork into canned meat. In each of these cases in 1873, they had their own internal sources of capital (no need for troubled banks) and international footprint, if not quite a market. Each turned toward continuous year-round processing that evened out seasonal cycles.Footnote ⁹ For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

Again in the 2000s, the post-panic winners, even after the bailout, might be those firms—financial and otherwise—that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of 2008 of the World Trade Organization talks begun in Doha seven years earlier suggests a new wave of protectionism may be on the way.

A Return to an Old Historiographic Insight

I should not criticize Germanists too much without a comprehensive knowledge of that country's historiography related to political economy. I will pick on Americanists, though. American historians who have looked back on 1873 have missed the international dimensions of the 1873 panic, including its beginning in Central Europe, American dependence on the Bank of England for backstop liquidity, and the destabilizing effect of new American exports on the international balance of trade. They have also missed the irony that the rapid movement of people from Central and Eastern Europe into the United States after this panic is the peculiar result of a panic caused by cheap midwestern food. Finally, American labor, social, and business historians have been overly obsessed with Carnegie and imagined that steel and national markets were the key ingredients in American financial success. They have overemphasized capital goods and misunderstood the shape of American exports. This mistake was also true of the Prussian state, Herbert Hoover, and Nikolai Lenin: an obsession with steel statistics. We see it in the Prussian emphasis on Ruhr valley steel statistics, Russian Five-Year Plans, and Mao's call for backyard furnaces. After 1873 U.S. steel exports actually increased very slowly. The United States did have a countercyclical industry (an industry that did poorly when others did well): manufactured food. This included wheat ground and refined by the so-called Hungarian milling method; it made Pillsbury and built Minneapolis. Packaged meat made the fortunes of Armour and Swift and helped make Chicago. Packaged tobacco built Winston-Salem and Durham. This manufactured food increased drastically in the aftermath of the panic, only tapering by the turn of the century.

Any discussion of panics should end with a jeremiad. Here is mine. A common scheme was at work before 1873 and 2008, and both were exposed when the crisis broke. In the 1860s bond marketers called their scheme reaching the widows and orphans: gulling European trustees who represented clients with small capital into buying their speculative bonds. More recently, the golden calves were the cash-rich insurance company, the city government, and the pension fund. Such institutions were restricted by statute to investing in AAA bonds, and they had trillions to invest. In the 1860s the way to sell bonds to widows and orphans was to advertise them in Christian newspapers. In the 2000s, the touts were Moody's and Standard & Poors. Bond ratings by these agencies were supposed to prevent banks from issuing bonds that did not cover actual assets. In the ten years or so before the 2008 panic, the sell side of Wall Street began offering higher fees to rating agencies to rate banks' incomprehensible collateralized debt obligations. It turned the widows and orphans into unknowing speculators again.

This was the criminal part of the recent crisis: not banks in general, but a tiny number of New York banks that made use of the socialized savings that insurance companies, city governments, and pension funds represented. Parties to the crime were Moody's and Standard & Poors, both formally approved by Securities and Exchange Commission seals but almost entirely unregulated. When the products of those opaque institutions came under suspicion, the crisis can be said to have begun. What is a crisis?: a moment of symbolic doubt, when the real seems unreal. Capital owners look at a bond and no longer trust it. Those with cash go back to the mattresses—putting their capital in gold, treasuries, or hard assets. Capital, of all sorts, big and small, remains suspicious. The flow of currency, goods, and services grinds to a halt. This was the crisis of 2008–09. It was also the crisis that gripped Europe and the United States in 1873.