The Crises of 1929 and 1873 Compared.
For the purpose of comparison with the present, the crisis of 1873 is probably the most interesting of the crises of the nineteenth century. It lasted for six years, from 1873 to 1879, and before it had fun its course its effects had been
felt in practically every country in the world. The period before 1873 had been one of enormous expansion everywhere.
New developments in communications, due to railways, steamships and the telegraph cable, had opened up new areas, had created a demand for capital equipment of all kinds, and had revolutionised the production of foodstuffs. Immense increase in wealth and business activity resulted from these developments and from the introduction of limited liability, which fostered the founding of companies for every conceivable purpose.
European countries, such as Germany and Russia, which had lagged behind in economic development, began to make rapid strides. Loans to Governments and the flotation of private companies enabled machinery, plant, etc., to be imported into developing countries. “Between 1860 and 1876, more than £320 million was raised in the London money market upon foreign Government loan issues.
In the same, period half as much again was raised upon the credit of the Governments of India and of other parts of the British Empire. £232 million was paid up in the same years on the shares and debentures of private companies engaged in railway building or other enterprises outside the British Isles.”, (See “The Migration of British Capital,’” by L. H. Jenks. Pub. Alfred A. Knopf, New York, 1927, page 280.) In every financial centre the values of securities, etc., soared. There seemed to be nothing that could hinder the growth of wealth, and industry and international finance seemed to have entered into the golden age.
Then, in May, 1873, the bubble burst in Vienna. Prices of securities had been run up by speculators on the Vienna Bourse, just as they had been on every other Stock Exchange in the world, and just as they were in Wall Street and elsewhere in the period preceding the crash in October, 1929. Finally, the speculation petered out and security prices tumbled more rapidly than they had risen. The consequence was, to quote Hyndman, “panic, chaos, wild despair, hopeless madness, collapse of confidence, complete crash in business.” These terms are to be heard to-day when the effects of the Wall Street collapse of 1929 and the failure of the Credit Anstalt in Vienna last year are discussed.
The depression soon spread to the neighbouring European States. By September, 1873, America was in the throes of the severest crisis of its history. In U.S.A., from 1869 to 1873, there had been what Hyndman described as a “marvellous boom in West and East alike,” owing to the rapid railway development that had taken place and the opening up of the West. Writing in 1892 of this period, Hyndman uses words which find an echo in the accounts of the boom in America that ended in 1929. He states :—
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 . . . the whole nation thought itself on the full flow of continuous improvement, (p. 108.)
Finally the period of overbuilding of railways and rash financing came to an end. Half the railways fell into the hands of receivers, “banking house after banking house came down, and the New York Stock Exchange was closed, only opening again on 30th September. Great commercial and distributing houses were also obliged to suspend payments: Not a single industry remained unaffected by the collapse. There was a.glut in every department of trade.
From a third to a half of the workpeople in the Eastern States were said to be without employment. The number of actual “tramps” during the winters of 1873 and 1874 was placed as high as 3 millions out of a whole population of little over 40 millions. All prices were down and yet goods were unsaleable. Cotton, wheat, wool, lead, iron, steel, leather were all selling from 20 per cent. and more below the prices they had fetched before the crisis” (pp. 116 and 117).
The likeness between the situation in the U.S.A. in 1873, as described by Hyndman in the sentences just quoted, and the situation to-day is sufficiently obvious for further comment to be unnecessary.
The 1873 crisis was not felt so acutely in England as in other countries, but this country did not escape unscathed. To the era of foreign financing that had preceded 1873 succeeded a period of insolvency and defaults. In this respect the history of the years 1927 to 1932 merely repeats that of the crisis half a century ago. In 1873 the bankers announced that the Honduras Government was in default.
Costa Rica, Santo Domingo and Paraguay defaulted in the same year . . . . To relieve a desperate financial situation in Spain and keep King Amadeus on the throne, bondholders consented to a funding of the portion of the interest then due. There was, in consequence, a, heavy fall in Spanish stock, a ‘collapse of credit, the abdication of King Amadeus, civil war and complete default in June, 1873. By this time foreign Government securities were tumbling madly downwards in price. . . . In November, 1873, the Bank Rate in London was at a minimum of 9 per cent. and the recession in stock prices began slowly to spread into industry and commerce. In the following year all South America became depressed as the currents of capital, which had moved to that region, ceased to flow. Then . . . . the suspension of interest payment by Bolivia, Guatemala, Liberia and Uruguay. Insolvency spread to Turkey, Egypt and Peru.” (Jenks, pp. 291 and 292.)
Finally, in 1875, defaults on foreign loans had reached such a point that a House of Commons Committee was set up to inquire into the whole position. The revelations contained in its report find a counterpart in those how being made before an investigating committee sitting in America which is inquiring into the question of foreign lending during the 1927/8 boom.
One other aspect of the 1873 crisis in England is worth referring to, because the same features loom large to-day. The price index in 1873 stood at 111. ‘
There now set in a fall which continued without interruption until a low point of 81 was reached in 1879 . . . . export values fell off dramatically, while quantities could, with difficulty, be increased. But there was more food, and more copper, and more iron and wool for which to pay. Great Britain did it out of the surplus which had formerly been available for foreign investment. For the twenty years ending in 1874, Great Britain had been exporting an average surplus of capital of about £15 million. She had done this in addition to re-investing abroad all of the earnings upon foreign investments already made. These, by the ’seventies, amounted to at least £50 million a year. At this time the surplus capital exports above this ran well over £30 million. Within the space of three years this item of the British balance of payments entirely disappeared and became, in fact, reversed. (Jenks, pp. 332/3.)
Jenks goes on to say that by 1876 Great Britain “could scarcely balance her requirements of food and raw materials with the manufactures she could export and the freights her merchant marine could collect. The export of a capital surplus was over.” He estimates that Great Britain’s capital surplus reached £56 million in 1872, and dwindled to £1½ million by 1876. From then until 1880 there was a deficit each year, amounting to £110 million for the five-year period. The deficit reached its peak of £38 million in 1877. When allowance is made for the expansion in wealth that has taken place since the ’seventies, these figures show that the “adverse balance of payments,” of which we hear so much to-day from economists and politicians, is not in any way remarkable.
Before leaving the 1873 depression, let us see how, at the time, it was explained. A contemporary writer, quoted by W. T. Layton in his “Introduction to the Study of Prices,” stated that the following causes were “generally regarded as having been especially potential ” :—
“Over-production, ” “the scarcity and appreciation of gold,” “restrictions on the free course of commerce,” through protective tariffs on the one hand, and excessive and unnatural competition caused by excessive foreign imports, contingent on the absence of “fair” trade, or protection on the other; heavy national losses occasioned by destructive wars; the continuation of excessive war expenditure; the unproductiveness of foreign loans and investments; excessive speculation and reaction from great inflations; . . . . a general improvidence of the working class.
The above “explanations” of the 1873 depression, which were current at that time, are identical with the popular attempts to explain the present depression. And yet we are told that the present depression is of a kind unknown to the past!
Given the time and the space, every single feature of the present crisis could be shown to have its counterpart in one or other of the crises of the nineteenth century. In 1931 the Bank of England borrowed from the Bank of France in order to protect the exchange value of sterling. It had done the same in 1839 and 1890. (See Andreade’s “History of the Bank of England,” p. 367.) The financial manipulations of Kreuger recall those of Nicholas Biddle in the thirties of last century. (See Jenks, Chap. III.)
Finally, the remedies now proposed are the same as in the past. To-day we are told that if trade is to recover, prices must be raised, and that for this purpose recourse must be had to bi-metallism or to a managed currency, of gold or of paper. These panaceas for our ills are as old as the ills themselves. Bi-metallism was being advocated in 1817. It was resurrected frequently during subsequent crisis, particularly in 1896, when W. J. Bryan, candidate for the American Presidency, made his famous speech in which he declared: “You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold.”
In 1817, also, proposals for a gold currency system, under which “money contracts should be ‘corrected’ by reference to a price index number,” were put forward by Lowe and Thomas Attwood respectively. (See “Financial Reconstruction in England, 1815-1822,” by A. W. Acworth. Pub. P. S. King & Son, Ltd., 1925, pp. 83-90.) The present schemes of our economists like J. M. Keynes represent little advance on these proposals of more than a century ago. They are of interest as showing how the present crisis lacks even the originality of provoking new proposals for its cure.
The foregoing only touches the fringe of the subject, but it may at least serve as a warning against unquestioning acceptance of the contention almost universally made that the present crisis is not part of the usual trade cycle, but is entirely different in kind from any crisis that has gone before. It may prevent those who stop to consider the matter, from being gulled into the belief that by currency manipulations and international conferences of politicians and business men a new era of permanent prosperity can be ushered in.
One further warning can, perhaps, usefully be given. It is frequently maintained that because commodity prices have fallen, because Governments and companies have defaulted, because investments in securities no longer yield the income they did three years ago and show a shrinkage in market value, and because established firms all over the world have failed, that the wealth of the world has diminished.
In fact, the real wealth of the world to-day is greater than it was in 1929. It cannot be measured by the prices of shares and securities on the Stock Exchange. When fundamentals are considered, it is seen to consist in the accumulation of consumable goods and equipment produced by the expenditure of labour in the past, and in the supply of labour available to operate and add to that equipment in the future. Changes in prices of commodities and securities have not reduced this real wealth.
This assertion runs so counter to what is usually written and said on the subject, that it may be worth while quoting the view of an economist whose ”orthodoxy” cannot be questioned. Professor T. E. Gregory of London and Manchester Universities, has written :—
In so far as equipment and human labour continue to produce as fruitfully as before, society, as a whole, suffers no loss even if the market values of the securities representing the nominal value of the productive enterprises of the community undergo a decline, and society, as a whole, gains nothing if these securities rise in value. The real wealth of the U.S.A. was no greater as a result of the phenomenal rise in stock market values in 1928/9 and is no less because of the subsequent decline; for the real wealth of a country consists of the stream of goods and services which can be consumed and not of the nominal value of the securities issued by the enterprises producing these goods and services. (See Outline of Modern Knowledge. Victor Gollancz, Ltd. 1931, page 651.)
That capitalism does not secure a satisfactory distribution of the products of industry at the best of times, and that it imposes aggravated suffering on the workers in its periodical crises of “over-production,” is something that it is beyond the scope of the present article to discuss.
B. S.
