Downloading PDF. Please wait... Issue 2872

150 years since capitalism’s first great crash

Out of the ashes of a broken financial system came a drive to colonialism and war. Rob Hoveman explains why an economic crisis 150 years ago casts a long shadow over today
Issue 2872
Painting of ‘Black Friday' on the Vienna stock exchange in 1873, lots of people in a crowd with many wearing top hats and seemingly arguing with each other

‘Black Friday’ on the Vienna stock exchange in 1873 (El bes/Wikipedia)

A world gripped suddenly by economic crisis so severe that big banks fall, firms go to the wall and the pillars of capitalism are shaken. Thousands are made bankrupt and many more are thrown out of work.

Those are not just ­snapshots of the system after the financial crashes in 1929 or 2008. They are also a summary of the economic disaster that struck 150 years ago.

On 18 September 1873, the biggest bank in America declared bankruptcy. Jay Cooke and Co had played a very important role in financing the Union side in the US Civil War. It was central to raising money for the bonds that had financed the railroad boom in the preceding years.

But now it was bust. The effects of the collapse were dramatic. A further one hundred banks across the US were forced to close. By November some 55 railroads were bankrupt and they were joined by many more by the ­following September.

It’s estimated that some 18,000 businesses shut down and unemployment rocketed. Up to a quarter of the entire working population of New York were thrown out of work.

The US National Bureau of Economic Research claims the US economic downturn which followed the crash lasted some 65 consecutive months—nearly five and a half years. That’s 22 months longer than the contraction that followed the Wall Street Crash of 1929.

The crisis was met with ­resistance and revolt. In 1874, up to 100,000 unemployed people demonstrated in Manhattan and a riot ensued.

Three years later, a railroad strike spread across the country as workers showed they were no longer prepared to tolerate further wage cuts. The part-time state ­militia, the National Guard, was ­summoned to release trains from Martinsburg in Ohio.

But they couldn’t be relied on because many were themselves railroad workers and sympathetic to the strikes. So, the government called in federal troops.

Strikers burned down depots and rolling stock, and some speculated the US was witnessing a rising similar to that of the Paris Commune some six years earlier. The strikes were brutally suppressed and ended after 52 days. Over a hundred workers died at the hands of troops and unofficial militias.

Resistance and revolt were also accompanied by political reaction. Many victims of the crash blamed Republican President Ulysses S Grant.

In the elections of 1874, the Democrats, with their strong base among Southern racists, took control of the House of Representatives.

This effectively spelled the end of the “Reconstruction”, which was the Northern ruling classes’ programme to recreate conditions of “free labour” in the conquered southern states—and guarantee minimum rights for African Americans.

The 1873 crash was most dramatic in the US but was an international crisis. One reason why the US economy got into trouble was that the market for US railroad bonds in Europe, which had financed building across America, dried up as panic spread.

In 1872 in Berlin, the biggest railway magnate, Bethel Henry Strousberg, who happened to be Jewish, declared ­bankruptcy after a disastrous financial adventure.

Shortly after the Vienna stock market crashed.

But what lay behind the ­economic ­turmoil? Here there are important arguments between reformists and Marxists.

Reformists believe that a different set of economic policies might have avoided the catastrophe. Marxists instead see the crisis as an inevitable part of the system.

Following the 1848 revolutions, Europe had enjoyed a long period of rapid economic expansion.

Railway mania led the way, with tens of thousands of miles of track laid between 1850 and 1870. That construction stimulated the growth of other related industries, such as steel and mining. There was a similar ­expansion in the US.

For some theorists, such a long period of growth must inevitably end in “irrational exuberance”, with more and more speculative investments in a race to gain the most from the economic expansion.

They also point to the rapid but unplanned expansion of the productive base of the economy. This they argue, must inevitably run into a mismatch between supply and demand, which eventually forces down profits.

In addition, they cite some specific factors that helped ­precipitate the crash.

The French economy was depressed by the reparations it was forced to pay to the German empire following the Prussian victory over France in 1871.

German financial ­speculation was undoubtedly boosted by the wealth gained from this, and the German economy declined when reparations ended in late 1873. Attempts to overcome ­inflation in both Europe and the US made matters worse.

German chancellor Otto von Bismarck tried to hold down prices by pegging the German currency to gold. The US had only recently established a single national currency, the greenback, but president Grant followed suit. The policy was an attempt to reduce effective demand.

These various factors no doubt all contributed to the crash but couldn’t fully explain it.

Taken together they would likely have produced no more than a mild economic downturn in the business cycle were it not for an underlying problem in the big economies. These stemmed from what Karl Marx termed the falling rate of profit.

In his book, The Long Depression, Marxist economist Michael Roberts establishes that in the run up to 1873, bosses sought to replace human labour with ever greater ­investment in machinery.

This will have appeared to individual capitalists—locked in competition with others—as a logical way to cut costs. But because the exploitation of human labour is the source of all value, and ultimately ­profits, the process had the effect of driving down the profitability of the system as a whole.

Roberts shows that rates of profit fell in the run up to the crash of 1873, and it was that which made the crisis so severe. The ruling class responded to the growing calamity with ­protectionism. As capitalist enterprises became bigger in size but fewer in number, they became enmeshed with the state.

The fusing of state and ­capital, and the relatively weaker profitability and growth at home, led to increasing international rivalry—and two specific consequences.

The first was the growth of imperialism, and more ­specifically colonialism.

In 1885, the Treaty of Berlin saw Europe’s powers carve up Africa between themselves.  In 1870 just 10 percent of the continent was under colonial rule. By 1900, that figure had reached 90 percent. Plundering “new lands” was a way to boost profits.

The second was the growth of arms spending as imperialist rivalry grew. Spending on weapons helped lift capitalist economies out of depression. It had the great virtue of injecting ­spending into the economy without depressing profit rates in the ­production of machines and raw materials, or the ­consumption goods.

The parcelling out of Africa may have temporarily stabilised imperialist competition, but it inevitably became unstable again, raising the ­possibility of war.

That instability was made worse because such economic growth as there was after 1873 was highly uneven.

Britain grew much more slowly in the aftermath of the crash than the two countries which were rapidly becoming its main rivals—Germany and the United States.

In capitalism, economic crises function as a way of ­clearing out unproductive capital in the system, and to increase the rate of exploitation of labour.

Much ink has been spilled trying to analyse Britain’s long economic decline and there is no consensus on the issue. Nevertheless, Britain was ­relatively insulated from some of the effects of the crash because of its empire. And, as a result, it didn’t suffer the same financial crises as the US and Germany.

Both factors may have ­contributed to British capital not going through the process of capitalist restructuring forced on others.

The 1873 crash, and the long depression that followed, led to immeasurable hardship for the poor. It disastrously reinforced the endemic racism and exploitation of people in the colonies, and towards African Americans.

It fanned the flames of antisemitism as Jewish bankers and industrialists, such as Strousberg, were blamed for the crisis. And growing imperialist rivalry culminated in the terrible slaughter of the First World War.

It’s the same chaotic, murderous system that is with us today and of which we ever more urgently need to rid ourselves.

Sign up for our daily email update ‘Breakfast in Red’

Latest News

Make a donation to Socialist Worker

Help fund the resistance