Commercial Crises of the Nineteenth Century

H.M. Hyndman

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136585104
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Introduction Chapter 1. The crisis of 1815 Chapter 2. The crisis of 1825 Chapter 3. The crisis of 1836-1839 Chapter 4. The crisis of 1847 Chapter 5. The crisis of 1857 Chapter 6. The crisis of 1866 Chapter 7. The crisis of 1873 Chapter 8. The crisis of 1882 Chapter 9. The crisis of 1890 Chapter 10. Remedies

CHAPTER VII.

THE CRISIS OF 1873

THE time had now arrived when great crises, although they may begin with a sudden panic, have also harmful and enduring effects upon industry which extend over many years, and, in the course of the long series of liquidations which they bring about, spread to every country, touching even those nations that apparently have least direct mercantile connection with the point at which they might chance to originate. With the increasing complexity of international trade and financial relations, alike under Protection and Free Trade, it is clear that stagnation in any one region, or in any particular industry, must make itself felt sooner or later in all others more or less; seeing that, in order to realise profits, exchange, first of commodities for gold and then of gold for other commodities, must go steadily and uninterruptedly forward. Such a country as the United States, with its enormous territory still sparsely peopled and in part wholly unoccupied, with its great variety of climate and unprecedented wealth, alike agricultural and mineral, may endeavour to render itself independent of its neighbours by the imposition of high tariffs. But even in this case the necessity for exporting food and raw material in vast quantities involves its inhabitants more and more in the ups and downs of Europe. Hence the low price of grain at the European centres, due to such a cause as an exceptionally good harvest in India or Russia, has prevented many a Western farmer from re-painting his farmhouse and barns, has thus reduced the demand for paint, and thus, in turn, has lowered the price of lead and caused the shutting down of many of the mines of the Western States. Hence, again, men have been thrown out of work and into distress even in that land of plenty in the best of good seasons. This is but one instance out of many, which is not rendered less sad to those who suffer by the fact that on the return of “good times” prosperity reaches a greater height than ever before.

The crisis of 1873, though it did not begin in the United States, as did the crisis of 1857, was, like that great catastrophe, largely due to the course of development in that country. But, taken in all, it had more various causes, it spread over a wider range and had more disastrous consequences than any of the previous crises. Beginning its career on the Bourse, it successively brought down in sympathy the trade, industry, and eventually the agricultural economy, of the entire West. It commenced first of all in Vienna at the commencement of the month of May, 1873, but the consequences of the crisis endured up to the autumn of 1879, and directly involved the whole of Austria-Hungary, the German Empire, Italy and Switzerland, in the injurious effects of its complications. The crisis broke out with redoubled force in America, and brought the English, Scandinavian, and Russian money-markets as well as the industries of France, specially devoted to the production of luxuries, within its range, though the latter country had been prevented by the misfortunes of the war from indulging in over-speculation. The shocks of the great crash were felt at Belgrade, and Bucharest, at Odessa, Moscow, and Nijni Novgorod, at Alexandria, and in South America.

Here we have the international crisis in its most complete form, and lasting in a more or less injurious shape for upwards of six years, and even then the recovery was shortlived in more than one country. Yet, during the sixteen years from 1857 to 1873, the development of production and trade had again surpassed all anticipations even of the most sanguine. And this experience was not confined to any one or two countries. Exports and imports had more than doubled in the United Kingdom, in the United States, in France, in Austria, and in Belgium. Railways, steamships, telegraphic cables were facilitating transport and rapidity of communication in a progressive ratio; the improvement in the production of iron and steel was so great as to more than meet the increased demands of modern society; while the almost unnoticed application of machinery to agricultural purposes in the United States was working a revolution in the production of food-stuffs, to be compared only with that which had already been brought about in the working up of cotton, wool, etc., at the beginning of the century.

The most terrible wars in America and in Europe had been powerless to arrest the advance more than momentarily, and Great Britain actually benefited so much by the war between France and Germany that Mr. Gladstone, shortly afterwards, used his often-repeated phrase about prosperity advancing “by leaps and bounds.” It is, indeed, needless to enlarge upon the constantly multiplying power of man to produce wealth. The application of science to wealth-creation is now so direct and immediate that the difficulty of at once adopting new inventions and discoveries arises from the fact that in many branches of industry wages are so low that it is cheaper for the employer to proceed with the old methods than to introduce the new. But even this hindrance has only hindered not checked the advance all along the line; and, as each successive period passes and can be compared with the one before, we see clearly that for every person employed in industry the increased production per hour actually worked has again been multiplied many times.

The war of 1870, with its fearful waste of life and material, and the trade losses it had involved to the two greatest continental powers, occasioned an immediate demand on thispowerful economical machinery to fill the gap. Even the tremendous war indemnity, which was intended to crush France, had its effect in stimulating the remarkable rebound of trade which commenced on the conclusion of peace. For France, with a power of recovery wholly unexpected, set to work to pay her vast debt, pile up fresh accumulations, and reorganise her army and navy at one and the same time, with an industry and assiduity which perhaps no other nation in Europe could have rivalled. The Germans on their side used the £200,000,000 of indemnity to replace their material and refill their war chest, but also to pay off the various State debts. This put large amounts of capital at the disposal of private persons who naturally wished to use them to a profit again. It is scarcely too much to say, also, that the moral effects of the astounding victories of the Germans over the French and the reconstitution of the German Empire were such that Germany was filled with a new life, and felt invigorated to an extent never experienced since the wholesale devastations of the Thirty Years’ War. Hence followed a rush into new undertakings, a desire to extend and beautify the principal cities, and to complete the railway connections between the various parts of the new Empire, for but a fraction of which enterprises the French indemnity could provide the funds.

Though, however, some of the chief causes of the crisis lay in the German Empire, Vienna, as already stated, was the first city to feel its effects. Throughout Austria-Hungary the five or six years prior to 1873 had been years of the most extraordinary development of companies. Railways, coal mines, iron and steel works, sugar factories, and banks were constructed, organised, and started one after the other. In Vienna, in the year 1869, the total of such enterprises set on foot reached the amount of upwards of £80,000,000, of which more than half was paid up. In Pesth, no fewer than 91 companies, with a gross capital of not less than £27,000,000, were quoted on the Exchange. In short, the Austro-Hungarian Empire was for the first time gripped completely within the circle of international capitalist finance, and the company form of industry supplanted the old methods in every direction. As an example of the apparent prosperity which followed, the output of the great breweries increased in five years from 2,978,464 firkins to 5,433,904. According to official returns, State concessions were granted for the formation of 1005 companies, with a nominal capital of about £300,000,000, most of which were supported by foreign capital, and for their mere foundation not less than £100,000,000 were required according to law. There were thus established 175 banks, 604 industrial undertakings, 34 railway companies, 39 insurance companies, 23 mining companies, 8 shipping companies, and 18 hotel companies. In 1866, the total paid-up capital of the banks amounted to 190 millions of gulden, at the end of 1872 to 508 millions. In the first three months of 1873, 15 new banks were established, with a paid-up capital of 72 millions of gulden. The share capital invested in railways nearly doubled in the same time, while the preference shares nearly trebled. So enormous was the amount of capital subscribed and to be expended, that if all the enterprises had been undertaken and carried on there would not have been nearly enough skilled workmen in the country to complete the works. A similar state of things was to be found in Germany. In the year 1872 there were established in Prussia alone banks, building societies, mining companies, railway companies, iron works, etc. etc., with a capital of £76,000,000, while in the same year the total issues on the European Stock Exchanges reached the vast figure of £500,000,000, following upon similar issues to the still greater amount of over £600,000,000 in 1871, without any estimate of premiums.

In Prussia 259 companies were established in 1871, and 504 in 1872, as against 34 in 1870 and 225 since the beginning of the century. Even in the first six months of 1873, companies and loans were issued in Europe to the amount of fully £300,000,000, though the crash was then close at hand.

These figures, and many more might be given, only express, after all, the truth that the continent of Europe had fully entered upon that period of wholesale capitalistic production and speculation which had already produced such disastrous effects on countries economically more advanced. What made matters even worse was the foundation of all sorts of banking institutions, which had little else than stock-jobbing in view. The real object of banks and companies was quite lost sight of, and men were swept into the whirl of speculation without having any other desire than to gamble and to make money in the lottery of the share market. Mortgage banks and building societies gave an undue impetus to building speculations in the great cities, from which Berlin and Vienna still suffer. These building speculations were indeed among the most unsound and ruinous of all the business of the time. The price of land was run up to a purely fictitious level, and loans were made to cover the sites with houses to an extent which, when the crash came, rendered it impossible to recover even a fraction of the principal. The great object was to run up the houses in good, or what were likely to be good, situations, and put a rental upon them which, in nine cases out of ten, was never realised. To give an adequate account of this building mania in Berlin and Vienna would require a chapter to itself. But similar follies can be seen in London on a smaller proportional scale, and the speculative builder who, working on a small capital, must live continuously from hand to mouth, borrowing at usurious rates to complete jerry-built structures, is well-known here at home.

A very short consideration would have proved to the speculators that no possible increase of population could justify the excessive competition for building land and the inordinate sums spent in erecting houses upon it. But at such times nobody reasons. Each expects that the good times will last until he is able to “get out” at a profit, and what the result may be when a crash does come—that is a matter which can be attended to when it presses, not before. What concerned the gamblers for the moment was that building plots were fetching fully ten times what they were unsaleable at a few years before; that they were able to borrow on their purchases up to the hilt; and that no sooner were the buildings above ground than they could borrow up to the hilt again. And so for the time the building companies made an exceedingly good showing and divided up large sums on paper. During the same period railway contractors and speculators such as Dr. Strousberg, who at this time came to London and took a mansion in Grosvenor Place, made vast fortunes likewise on paper, and also constructed railways so badly that, as was the case with more than one firm of English contractors, they obtained so infamous a name for their fellow-contractors of the same nationality that no English contractor has been allowed to build a line in certain countries since. Adulteration in commodities, jobbing and jerry-building in contracts and house construction, such unfortunately is the rule in days of high prices and prosperity such as these before 1873 appeared to be. The swindling and corruption which accompanied the procuring of the concessions in Austria and Germany formed a fitting preface to the shameful scamping which followed in carrying them out. There was thus quite enough inflation in the German-speaking countries at home to render a crisis inevitable, and to ensure that its effects should be disastrous; but the enormous extent to which Germans of all classes had invested their savings in American railways rendered the crash more calamitous when it came.

Germany and Holland, more farseeing than England taken as a whole, and better informed perhaps by their emigrants as to the prospects of eventual victory, had steadily backed the North during the Civil War, and had continuously purchased American securities at low prices during the whole of the struggle. When the fight was over they reaped their reward, and their successful investments in United States bonds encouraged them to take up those American railway securities with which Europe was now flooded. The development of railways in the United States had attained a height quite unparalleled in Europe, rapidly as railways had been constructed in Great Britain and elsewhere to meet the necessities of increasing trade. In America railways were really the only permanent roads over vast stretches of territory, and it was by this means alone that the great cities could be connected together and the magnificent far West opened up to colonisation. The United States had therefore, even in 1870, seven times the mileage of railway per inhabitant to that which was formed by Europe; and in 1870 the Great Republic had fully 60,000 miles of railway completed and running between the Canadian State line and the Gulf.

It was a period of marvellous “boom” in West and East alike. The first great trans-continental line to San Francisco had only recently been completed, and the inhabitants of that city and of California generally anticipated that the development of the Pacific Slope would rival or even surpass the older settlements of the Eastern States. The farmers of the West, not as yet crushed down under the weight of mortgages as they too often are to-day, were prospering in every way, and, unprecedented though the expenditure on railways had been, there was every reason to believe that it would fully repay the investors and benefit the entire country. Those who have been in the United States at such times know the sensation of general well-being and universal progress which is felt throughout the country. Nowhere is a period of prosperity more suddenly and surely exhibited in the lives of the people. During these years when the losses by the war had been replaced and the whole nation thought itself on the full flow of continuous improvement, everybody was making money and nearly everybody was spending it. Good trade in one quarter made good trade in another. The spread of luxury even in the villages of the far West was something astounding. Never perhaps in the history of the United States had the mass of the people been so well off as during the years from 1869 to 1873.

On railways alone it is estimated that not less than £400,000,000 had been expended since 1867, of which nearly one-half was represented by mortgage bonds. It was these mortgage bonds at low prices, with sometimes an accompanying bonus in the shares of the company, which tempted the European investors to invest in America again, as they realised their profits on the United States loans bought back at high prices by the Americans themselves. All this marvellous well-being for the many and fortune for the few was duly reported to their friends and relatives at home by the ten millions or more Germans who were now settled in the United States. For the Germans had benefited even more than the English or the Irish by the settlement of the great West. Small thrifty farmers or tradesmen at home, they went out to the United States with a little capital, prepared to rough it, and to devote many years of their life to building up a happy home for themselves and a moderate competence for their children.

The great through lines of railway which were being built served for them the same purpose as the great rivers had served before, and thrifty, well-to-do German colonies were to be found pushing on steadily along the routes of the main railways to the new unsettled countries which had not yet been overrun. For the Germans did not as a rule linger round the cities in the same way as the Irish, nor did they meddle much with politics until they had made their reasonable competence, or until their own individual interests were directly affected. But now these men in country-township, town and city alike, were getting rich, not slowly but fast. Their habits of life and expenditure were below the scale adopted by native Americans or English when they are successful, and their savings were proportionately greater. Wonderful accounts, therefore, they sent home of what they were doing, and it is not too much to say that the whole middle-class of Germany and Austria looked to America as to the promised land. Those who went put themselves and their capital under the Stars and Stripes; those who remained and could do so invested their savings largely in the bonds of those American railways which were to bear their relatives to the regions of plenty. The process went on steadily, and this German exodus contributed even more to the wealth of the United States than the Irish colonisation, of which so much more, in England at any rate, has been heard. The injury which was thus done to Germany herself, and the overwhelming competition to which German and other European agriculture would be subjected by the competition of the products from their own fellow-countrymen, were not at first fully seen, while at the same time the pressure of the Imperial Government drove away across the Atlantic many Germans who could ill afford to spend even their passage money. Meanwhile the American railways, with their enormous land grants from Congress, continued to attract European capital, and among others two great new trans-continental lines, the Northern and the Southern Pacific, were taken in hand.

As usual, the causes of the crash were not observed, nor was its imminence believed in, even by business men, until the collapse in prices and the helter-skelter rush to sell had well begun. Yet all the symptoms of crisis were well exhibited in Austria and Germany for some time beforehand. A glance at the list of enterprises launched in those countries in the year 1872 alone is sufficient to show that already speculation and excessive construction of permanent works, and over-production, as it is called, had reached their extreme limit. Prices of commodities, of shares in good enterprises, of land, of houses, had all risen, and wages had gone up in at least an equal ratio, attaining a level, in America more especially, higher than anything ever reached before. At the same time the workers in every country were constantly on strike, and efforts were being made to obtain better conditions of existence and shorter hours of labour, so that the wage-earners might in turn derive some benefit from the enormously increased power to create wealth.

The upward sweep of luxurious living among the well-to-do kept pace with the rest of the development. A visitor to Berlin or Vienna, who had known those cities well before the great changes wrought by the recent extension of capitalism, could not fail to be struck with the spread of luxury and display among the middle and upper classes. The simplicity of German bourgeois life had vanished. Ostentation had displaced elegance, and domestic comfort had given way before vulgar profusion. Nor had the people benefited in the same degree even as in Great Britain. The overcrowding, due to the erection of magnificent palaces where labourers’ dwellings had formerly stood, had raised rents for the poor for worse accommodation to an extent that could only be paralleled in London or New York. Wages had not advanced in proportion to the dearness of living, and the right of combination was greatly interfered with.

The whole industrial growth of Austria had so concentrated itself in companies, credit establishments, banks, and similar institutions, represented by shares in the Stock Exchange, which were dealt in and settled for day by day, that the great crisis which began in Vienna on May 10th took at first exclusively the form of a Stock Exchange panic, such as might be, and lately was, brought about at the same centre by a war scare. It was even supposed that this might be the beginning and the end of it. That the prices of shares in such companies had been run up far too high by the declaration of fictitious dividends, by assiduous puffing in the parasite press, and by the usual trickery resorted to to keep stocks above their real value, was freely admitted by some German financiers, not a few of whom regarded the commencement of this, as it proved, overwhelming crisis as only a natural and wholesome shrinkage of the price of shares to reasonable dimensions. They were soon undeceived as to the magnitude of the calamity which had befallen the whole of Central Europe and the countries with which their recent operations had brought them most directly into contact. Even the most important agricultural industries of the country, connected as they were, like the sugar industry, in an increasing degree with factories managed and owned by share companies, were represented by shares on the Vienna and Berlin Stock Exchanges. And the gambling in all these shares was carried on upon a scale hitherto quite unprecedented on the Continent. Creatures of finance too often to begin with, they soon become mere playthings of the stock operator.

At the end of April the Vienna Bourse was already in the first throes of the panic, and herculean efforts were made to meet the threatened catastrophe, which also, it was hoped, would be in some strange fashion conjured away by the opening of the Exhibition that was arranged for the 1st May. Meetings of banks were held to consider if any steps could be taken to restore confidence, and to stem what was still regarded as a mere fall in stocks. But the evil was too deep-seated to be arr...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• PREFACE TO THE FIRST EDITION
• PREFACE TO THE SECOND EDITION
• Table of Contents
• INTRODUCTION
• I. THE CRISIS OF 1815
• II. THE CRISIS OF 1825
• III. THE CRISIS OF 1836–1839
• IV. THE CRISIS OF 1847
• V. THE CRISIS OF 1857
• VI. THE CRISIS OF 1866
• VII. THE CRISIS OF 1873
• VIII. THE CRISIS OF 1882
• IX. THE CRISIS OF 1890
• X. REMEDIES