Seven Crashes, page 8
The key feature of the post-1873 world was the coexistence of considerable price declines with no really substantial reductions in output. In the United States there was a long-lasting period of downward price adjustment following the Civil War, a repeat of the European deflation process after 1815 and the end of the Napoleonic Wars (see Figure 2.1). The U.S. recession that followed the 1873 financial crisis was mild, with a peak-to-trough decline of industrial output of 10.8 percent, comparable to the 10.5 percent of 1856 to 1858, but much lower than the major recessions of 1892–1897 or 1907–1908.11 There may have been some increased unemployment, but the worst effects of the episode affected indebted farmers whose revenues were falling because of the decline in grain prices. In the UK, France, and Germany there was no fall at all in industrial output, just a small one-year hesitation in 1876 –1877. Measures of agricultural production continued to show dramatic increases. The term often applied to this era, Great Depression, seems like a misnomer. But it did produce some spectacular movements or fluctuations in stock prices.
Figure 2.1. General inflation/deflation 1860 –1880 (percentage rates) (Source: Calculated from Global Financial Data)
The euphoria of the period of company formation (in German, Gründerzeit) ended with major and nearly simultaneous stock market crashes in North America and Central Europe in 1873. The panic started with a collapse in Vienna on May 5, and a renewed shock wave on May 9, with the stock of banks and some speculative railroad companies particularly badly affected. The U.S. crash came after the failure of a major railroad constructor, Jay Cooke, on September 18, 1873. London was barely touched. The Berlin market only crashed in October. In all cases the panic seemed unexpected and wildly contagious. As a contemporary U.S. commentator put it: “A Wall Street panic comes suddenly like thunder from a clear sky. No shrewdness can foresee and no talent avert it. A combination without a moment’s warning can be formed that will sweep away the fortunes of merchants in an hour, shipwreck speculators, ruin widows and orphans, make farmers grow pale, and harm every industrial and mechanical interest in the land.”12
From other financial centers, Vienna appeared a microcosm of the world, in large part because it was promoting itself as just that. In May 1873, the World Exhibition opened in the capital of the Austrian Empire in the Prater amusement park. Back in 1851, the British exhibition at the Crystal Palace had been hailed as a miracle of manufacturing, in a palace of glass and iron that embodied the new age. Vienna was now claiming the industrial mantle. The steel rotunda at the center of the exhibition, designed by the Scottish engineer John Scott Russell and the Austrian architect Karl Freiherr von Hasenauer, was the largest cupola in the world. The whole city was transformed. The old city walls had been torn down and replaced by a magnificent Ringstrasse, with grand new buildings. The new opera house opened in 1869, and the next year the grand Musikverein building was inaugurated. For the 1873 exhibition the grand palace of the prince of Württemberg on the Ringstrasse was turned into one of the world’s most elegant hotels, the Imperial. Prominently displayed at the exposition were railroad adventures from across the globe, including Jay Cooke’s presentation of maps on the reach of the Northern Pacific Railroad.
Vienna’s financial exuberance was enhanced by the opening of the World Exhibition on May 1. The leading Viennese newspaper, the Neue Freie Presse, criticized those “warners against swindles and corruption,” and invited the world to enjoy the city of “comfortable habits, beautiful women and merry song.”13 The fair itself helped to fuel the overexpansion, and the press now turned abruptly to criticism. As the New York Times put it: “Tempted by the bright hopes which were at first held out by the convenience of the Exhibition, and by the belief that thousands of rich foreigners would come here to make purchases as they did at Paris or London, many a firm went far beyond its means in manufacturing articles for exhibition.”14 The New York Tribune devoted a front-page article on May 1 to complaining about the “system of blackmailing and corruption” that prevailed among the U.S. commissioners for the exhibition.15 The event was in part staged as a celebration of the twenty-fifth anniversary of Franz Joseph’s accession to the imperial throne: an inauspicious throwback to the violent circumstances of 1848, which had led the eighteen-year-old to replace his dull and incapable uncle Ferdinand. At the grand opening by Emperor Franz Joseph and Empress Elisabeth, the weather was unfavorable.
On May 5, stock market reports coming into Vienna from Paris and Frankfurt were good, but bad news from Budapest about the Franco-Hungarian bank, followed almost immediately by news of the insolvency of a long-established Vienna bank, Russo & Mayersberg, triggered an abrupt reversal of sentiment. It was a Krach. It was immediately attractive to blame a whole system. “Senseless conduct” on the Vienna exchange, the New York Times opined (as a warning to Americans), must “lead to a disastrous reaction.”16 And on the part of the financial establishment, the immediate impulse was to look for straws to grasp that would generate new confidence. On May 17 the Rothschild bank tried to argue that political developments in France—the move to the right with the collapse of the liberal government of Adolphe Thiers and the installation of Marshal MacMahon as president of the French Republic—would “stabilize international finance.” The Austrian minister of finance intervened “generally with success . . . to maintain firms and undertakings about whose solidity there could be no doubt.”17 But there occurred a wave of suicides—every evening in May and June a few failed speculators allegedly stepped into the Danube canal. At least one was a swindler, appropriately named Modern, who simply used the opportunity to disappear, laying out his clothes by the side of the canal and then swimming away and escaping incognito to Hungary.18 And the crisis was used to draw up a major political indictment of the existing political system. Albert Schäffle, an economist who had briefly been minister of commerce in a short-lived federalist (i.e., opposed to centralizing German liberals) Austrian cabinet of 1871, penned an instant history of the crisis. He complained that the full extent of the disaster had not yet been reached, and lambasted the “communism and robbery conducted by the propertied classes.”19
The financial events of 1873 appear on their face to be less coordinated than the myth would suggest. The initial Vienna report of the New York Times recorded that “Wall Street was very dull yesterday as far as stock speculation was concerned. . . . One of the most important announcements in the street yesterday was that a panic in the Bourse in Vienna was going on, and that the Government had interfered to settle up the financial difficulties.”20 But for a short while it looked as if there was a strong transatlantic linkage. The New York Herald reported on May 13 that Austrian securities had lost $100 million in value, and that U.S. securities had also been affected to the tune of $10 million, but that the really serious losses had been confined to American railroad bonds and “obscure securities of a miscellaneous nature.”21 The German government proposed to use French reparations to buy securities in order to stem the panic.22 Many commentators saw analogies: “Vienna has the same bad reputation as New York, as being the most expensive place for its citizens to be found among civilized cities. A florin [the Austrian currency, generally known as gulden] buys less there than anywhere in Europe. . . . We think it highly probable that this is not all of the disaster. An inflated market like that of Vienna must collapse, and with it will vanish many a financial bubble in Berlin, Hamburg, and Frankfurt. It is not at all unlikely that a period of severe financial depression will begin for the Austrian Empire, and that the value of the depreciated currency will fall much lower.”23 There were some financial links between Vienna and German exchanges in Frankfurt, Hamburg, and Berlin.24 But London held up, with no sign of a crisis at all: “Of course this report had a distressing influence upon speculation, and the probabilities of the Bank of England again raising the rate of discount were regarded as unfavorable. It is a matter of wonder to street operators and financiers that the prices of securities should have held up so well in London, when nearly every other great capital is now in the midst of financial disaster.”25
Where there was a crash, it was a large winnowing-out process: some securities fell dramatically in price, while those considered solid scarcely shifted. This was especially true of railroads, the focus of attention in Vienna in May and in New York and Berlin later in the year. Over the period 1873 –1875, 36 percent of the entire U.S. corporate bond market was in default, but commentators pointed out that some assets were still extremely secure. The New York Times pointed to “the fact is that in times of financial disturbance only old railroad corporations can meet their obligations.” Austrian prices give a striking demonstration of the degree of variation between different qualities. The shares of the Österreichische Nationalbank, which on May 1 cost 947 gulden, were priced at 952 on October 13, and the leading railroad stock, Ferdinandsnordbahn, only moved from 2250 to 2010. By contrast, the Bankverein fell from 356 to 92, the Allgemeine Österreichische Baugesellschaft from 262 to 39.
The differences in the extent of price declines cried out for explanation. Analysts tried to distinguish two groups of actors—the established firms at fixed positions at the stock exchange (Schranken) and the coulisse, the term taken from the Paris Bourse to describe the stock exchange floor where “the mass of shouting and gesticulating speculators” drove markets, an activity which spilled over into neighboring cafes and provincial brokers’ offices, with “Faiseurs” und “Matadore,” those who wanted to play the game, and those who thought that they could fight the bulls.26 Schäffle described the process as a decapitalization, in which “the big ate up the small and the biggest ate up the big.”27
Actually, there was a story that had triggered the euphoria, and then led to a realization that the excitement might be nothing more than a bubble. Railroads and communications were at the center of the frenzy. There was a substantial increase in the number of companies formed and quoted on stock exchanges; and stock prices soared (see Figures 2.2 and 2.3). American bonds had attracted substantial numbers of European investors after the Civil War. When American railroads appeared overheated, those players turned to European securities instead.28 The vulnerability focused on the boldest—or most marginal—of investors: in Europe Bethel Strousberg, in the United States Jay Cooke. Some, but not all, railroads had been puffed up on fraudulent promises, and faced exposure and revulsion.
Figure 2.2. Number of companies quoted on stock exchanges, 1866 –1880 (Source: Calculated from Global Financial Data)
Figure 2.3. Share prices in France, Germany, Great Britain, and the United States, 1871–1880 (1871 = 100) (Source: Calculated from Global Financial Data)
In early 1873, the new German Empire appeared as if it might experience a politicized stock scandal analogous to that which broke in Austria. The leading liberal parliamentarian Eduard Lasker delivered a striking denunciation of the “Strousberg system” of corruption, in which he detailed the involvement of the high aristocracy and leading government figures in a speech of February 7 to the lower house of the Prussian parliament. Strousberg, a relatively successful financial journalist in 1850s Britain who founded a new paper, a more conservative rival to the liberal Economist, had to flee Britain when his fraud of 1847 was exposed, and moved back to his native Germany. He turned into an energetic financier of railroad and other speculative building companies, with a method adapted from his experience of London financing but tailored to the cash-strapped circumstances of mid-nineteenth-century Germany. His companies delegated the construction of a new rail line to a “general entrepreneur” who raised the money needed by selling shares at a price that far exceeded the cost of construction. The operation generated a substantial profit for the entrepreneur and an even greater one for Strousberg, who also founded industrial enterprises to sell the materials—iron, rails, wood—needed for construction. It was a system that invited both speculative and political attacks, which Lasker brilliantly provided. In an initial speech in January, Lasker had stated that he did not know the names of those involved in corruption: “I do not know about the tortuous paths. They are too hard to follow. But this I know for certain: there is trafficking in railroad concessions.”29
Strousberg was a megalomaniac builder, not just of railroads. He commissioned the architect August Orth, who planned the terminus Görlitzer Bahnhof for Strousberg’s main railroad line that would link Berlin to Vienna, to follow up with a whole array of designs. Orth built a new Berlin cattle market, a market hall (which would later be repurposed as the Friedrichstadt-Palast entertainment center), as well as Strousberg’s own palace at the Wilhelmstrasse 70, right at the seat of government (the building later became the British embassy), and an extensive renovation of a medieval castle in Zbirow in Bohemia, the center of a gigantic estate on which the financier hoped to create a large steel and iron plant.
Strousberg’s most problematical engagement had been in Romania. Romania, in particular the fertile fields of the Wallachian bread-basket, looked like an answer to Europe’s food problem, especially after an agrarian reform of 1864 strengthened the position of large wheat-growing estates. Exports surged in the 1860s, together with prices.30 The railroad entrepreneur signed up prominent German aristocrats, including the dukes of Ratibor and Ujest, to form a consortium to build a variety of lines financed through a bond issue that would be guaranteed by the Romanian government. Since Romania had just been put under a German ruler, Prince Karl of Hohenzollern-Sigmaringen, a Catholic remotely related to the Prussian and now German imperial dynasty, it looked as if the scheme had official approval. Unfortunately, the lines were constructed less quickly than those of a rival enterprise established by an Austrian financier, Count Ofenheim, who would also eventually be tried for fraud and deception. When it appeared that the railroad bonds would be defaulted in the middle of the Franco-Prussian War of 1870 –1871, Bismarck stepped in with a rescue package backed by his personal financier, Gerson Bleichröder, and Adolph von Hansemann of the Disconto-Gesellschaft.
Lasker was a close political associate of Hansemann’s. Strousberg later penned an extensive and eloquent defense of his actions while sitting in a Russian prison (in relatively opulent conditions) awaiting trial for bank fraud. The fundamental case against Lasker and Hansemann was whataboutism: the liberals had engaged just as much in security pumping and boosterism as political conservatives like Strousberg. Strousberg began by saying that his name was connected with a caricature of business deceit: “founding fever, share swindles, financial crises, hanky-panky with concessions, destruction of share capital, bad and expensive building. Discrediting of an important branch of the economy, demoralization of the public.”31 He wanted to show that in reality all big banks were engaged in a “base adulation of the golden calf” by using methods that were not illegal or dangerous but which would induce less well situated persons to use what would be called deception: “the bad example, crowned with laurels, is the real seducer.”32
After the financial crisis of 1873, which Strousberg narrowly survived, the attacks continued and the vitriol increased. In the leading popular German magazine Die Gartenlaube, which reached its peak circulation in 1875 (382,000 copies sold), the anti-Semitic journalist Otto Glagau wrote: “Speculation and swindle are the two powers which today sit on the world’s throne, making civilized humanity sigh and groan, and sicken and fade. Speculation and swindle have made an extraordinary catch, with hundreds of thousands and millions in their nets, and society is impoverished and sucked dry—that is what modern economic science calls a crisis, which is sometimes a trade and sometimes a business crisis. Such crises appear over the last quarter century more and more frequently, with a frightening regularity, and the lordly economists think of them as a necessary evil, analyzing them as contemporary sicknesses to which they offer a ‘diagnosis’ and ‘therapeutic means’ to overcome them.”33 Reworking his articles into pamphlets, Glagau presented them as denunciations of a Jewish conspiracy, which united Polish beggars and baptized ministers.34
Fascination with speculators and their downfall characterized the American response to the financial drama of the 1870s. Jay Cooke was the North American equivalent of Strousberg, with a very similar method of financing railroad construction, in this case the Northern Pacific Railroad. And railroads were the center of stock exchange activity: in 1873, 96 percent of corporate bonds traded on the New York Stock Exchange were railroad bonds, and 66 percent of the stock traded.35 Cooke had been a major figure in financing the Union side in the Civil War and used the political contacts he developed to push the railroad across the continent, and into Mexico and Canada. The outrage against Strousberg-style speculators persists powerfully in the American historiographical tradition: for instance, historian Richard White drew up a massive indictment of the railroad barons that drove the new era: “Having helped both to corrupt and to transform the modern political system by creating the modern corporate lobby, which they used to compete against each other, they then found it an expensive and nearly impossible burden to bear.”36 The American West was the equivalent of Strousberg’s Romania in European finance.
