We continue to study the topic of financial crises. Today you will learn about the second world financial crisis, which was subsequently called THE LONG DEPRESSION.
In a previous article, we found out that the financial crisis was emerged long before the first signs. It can take decades to form, but it is falling much faster. Moreover, you will always learn about the real causes of the crisis after the fact, because before the collapse you don’t even suspect a bubble swelling.
In this article, we propose a similar approach to this issue. First, we consider all the reasons for the formation of the house of cards, and then the consequences of its collapse.
The Long Depression
Introduction. Not so many people heard about The Long Depression as The Great Depression. In general, it was initially the period 1873-1896 that was called the Great Depression. But then the crisis of 1929 happened and it was called The Great Depression, and the period 1873-1896 was renamed The Long Depression. Although in some sources The Long depression is exactly the time that we will tell you about today.
We started our first article on crises from a story about life in the USA. Of course, many associate any global financial crisis with the States. However, today’s story will begin with Germany, or rather with Prussia, at the helm of which stood Otto von Bismarck.
By 1871, the unification of Prussia with neighboring lands was already ending. Bismarck united the northern state and began to look south to annex it. However, France was unhappy with these events. Indeed, who needs a strong enemy right on the border? Bismarck was an outstanding strategist, he understood that:
1. The war with France to take place for sure. It will take place before the south joins the new state.
2. It is France that must act as an aggressor, so that the inhabitants of southern Germany more willingly join Prussia to fight against a common enemy.
In the end, everything went according to plan. Bismarck won the war, united the country (and also took a little territory of France (Alsace-Lorraine)), and made Wilhelm I king of Prussia. In addition, Bismarck demanded 5 billion francs from France. Napoleon III tried to bring down the price to 1.5 billion, but Prussia was unshakable.
«In this case, Prussia occupies France. And then we’ll see if we can get the right amount on our own» he replied.
France paid 5 billion francs. Not immediately, but within 2 years. For comparison, then its annual GDP was 20 billion. This is the same as America would now give someone more than $ 5 trillion. Well, or France would give Germany $ 650 billion. In general, the numbers are huge. But this is only a contribution. There were still significant costs for the war itself.
This was a significant leap in the economy for Germany. They spent 80% to cover the costs of war, pensions, the construction of fortresses, the construction of modern Berlin.
Why do we need to know this? More on that later, but for now let us return to the stronghold of capitalism – to the States.
What is there in America?
In 1865, the civil war ended. Northerners defeated under the leadership of Abraham Lincoln. Immediately after it, the boom in railroad construction continues (do you remember the reasons of the first global financial crisis?) Nevertheless, this area is developing. For the period from 1860 to 1870, the most significant road at that time was built – The Pacific Railway. Its length is 3 thousand km. It connected west and east. In 1876, the first transcontinental express train appeared that delivered a passenger from San Francisco to New York in 83 hours and 39 minutes. Even 10 years ago, such a path was overcome in months by land or weeks by sea.
In 1970, Jay Cook decided to build another road, but a little north. After all, he saw success first and wanted to repeat it (it is as if you saw the rise of bitcoin from $ 1,000 to $ 20,000 and decided to buy it after growth).
After the end of the civil war in the United States, a whole series of events began that are not connected in any way, but significantly hit the economy.
• 1869 – BlackFriday on the New York Gold Exchange.
• 1871 – The Great Chicago Fire. The lion’s share of the city was destroyed.
• 1872 – The Great Epizootic. Horse flu, which killed a bunch of horses. It should be reminded, we are talking about the time when there are no cars yet. The main transport were horses.
In addition, in 1871, Germany refused to mint silver coins, which caused significant damage to the demand for silver, which was purchased in the States. In 1873, the United States abandoned the bimetallic standard. Previously, there was possible to come to the bank and ask to melt a piece of silver into coins. There was a fixed rate – 15.5 ounces of silver cost as much as 1 ounce of gold. However, now there remains only the gold standard, and silver fell in price.
Back to Germany
Money poured into the country. The indemnity was 3 times more than the amount of all money in circulation in Germany. Many of those money began to be directed to speculation on the railways. It didn’t cost the domestic market, the money went to the international one. Especially popular are new companies – startups. In 2 years, more companies were opened than in the last 70 years. A third of these startups were banks. In 1870 there were 48 banks, in 1873 already 143. But this is only in Berlin. Bank stock prices rose at a rapid pace, as did railroad stocks. A similar situation was observed in neighboring Austria-Hungary.
Part of the funds went to the US economy, since there was a boom in the railways.
In general, the situation is similar to the first world financial crisis. Those who read previous article, have already found out the parallels. There is a lot of money they are invested in stocks of banks and railway companies a bubble is inflated everything bursts.
It all began on May 9, 1873 (the Germans are unlucky with this number). On that day, the Vienna Stock Exchange collapsed. The panic began in Germany and Austria-Hungary, as well as in the USA. Shares of banks, railways and mines fell by 70%. Hundreds of startups went bankrupt. It was on that day that The Long Depression was launched, which lasted until 1896.
Interestingly, Germany suffered the most (which a year ago had a huge amount of money due to indemnity). Moreover, France coped with the crisis better. What didn`t rise that cannot fall.
Investors began to actively withdraw their funds. Business activity began to decline, production slowed down, profit declined. After all, the main demand for the products of the USA, France and Great Britain was from Germany. Germany itself didn`t produce much. Why, if there is possible to buy? Here the demand has decreased.
Do you remember we talked about Jay Cook? He wanted make a second Pacific Railroad. So, until 1873 there were investors who gave him money. However, after these events the situation has changed. On September 18, 1973, Cook declared bankrupt. This was the starting point in America. Everyone began to withdraw money from banks and exchanges. For the first time in history, the New York Stock Exchange closed for 10 days. 18,000 companies filed for bankruptcy over the next 6 years. A long period of economic recession has begun. Unemployment was in the region of 8-14%. After the war, many were involved in road construction. However, it stopped and a tenth of the country’s population could not find work.
As a result, many countries were forced to levy duties on imported goods to protect the national producer.
The crisis has touched many countries, that`s why it is called global. Russia, Italy, Chile-in different countries everything went differently. However, it is believed that for all it ended in 1896. As we can see, the crisis happened due to a series of unrelated and random events, such as the war between Germany and France (and the payment of indemnities), investing in the U.S. railways, avoiding silver, a sharp rise in bank shares and a collapse on the stock exchange. Even today, not all historians can unequivocally name the true cause of The Long Depression. Some even believe that there was no depression at all. There was some recession, but not as strong as during The Great Depression. By the way, we will talk about it in the next article.
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