Rothschilds, Railroads, & Ruin | Liaquat Ahamed on “1873” (New Book!)

Liaquat Ahamed's new book, 1873: The Rothschilds, The First Great Depression, and the Making of the Modern World, examines the crash of 1873 through the lens of the bond market boom that preceded it, the monetary system that amplified the collapse, and the political consequences that followed across two decades.

For the fifty years before 1873 the world ran on a bimetallic system combining gold and silver, with France and the US absorbing surpluses of both metals and keeping prices broadly stable. The crisis was triggered when Bismarck, after defeating France militarily, decided to dump Germany's silver reserves and move to gold within one to two years, deliberately targeting France which held the most silver in the world. Every European country then scrambled for gold, contracting liquidity and the money supply. Silver prices relative to gold tracked commodity prices year by year and were the single most important determinant of deflation from 1873 through the 1890s, with prices falling 25 percent in the first five years and 40 percent over twenty years.

The bull market that preceded the crash had started around 1850, fueled by a Rothschild-architected expansion in the bond market that channeled British and French savings into railroads, ports, and undersea cable infrastructure. Rather than ending the boom, the Franco-Prussian War of 1870 to 1871 actually fueled three simultaneous bubbles running from 1870 to 1873: a stock market bubble in Berlin and Vienna, a railroad construction boom in the US, and a speculative bubble on the London Stock Exchange. France paid Germany reparations of approximately one billion dollars, equivalent to roughly 1.2 to 1.3 trillion dollars in relative economic size today, and the transfer of those funds directly fueled the central European equity bubble, which subsequently collapsed by 70 percent with losses falling on ordinary people.

Approximately three billion dollars went into the US railroad boom, of which roughly one billion came from Europe, and railroad bond issuance jumped from two to three percent of GDP to four, five, or six percent of GDP at the peak. Railroad sponsors created private construction companies such as Credit Mobilier to siphon profits from shareholders to insiders, and Credit Mobilier shares were distributed to favored congressmen in what became the biggest corruption scandal of the 19th century to that point. Congressional funding dried up after the scandal broke in 1872, Northern Pacific ran out of funds in 1873, and the first railroad collapse followed. The default rate on railroad bonds reached approximately 50 percent over three to four years, the highest in US corporate investment history, with recovery estimated at 30 to 40 cents on the dollar. Total losses represented roughly 10 percent of US GDP in aggregate, but because those losses fell largely on high net worth individuals rather than ordinary citizens they did not translate into a collapse in consumer spending.

About two billion dollars went into emerging market sovereign debt on the London Stock Exchange, and roughly half was never repaid. Turkey alone received about one billion dollars and investors recovered approximately 25 cents on the dollar. European savers devoted 50 percent more to financing Turkey and Egypt than they devoted to American railroads, and British Prime Minister Gladstone put 40 percent of his net worth into Egyptian bonds.

The deflation that followed produced massive redistribution from debtors including western farmers and Prussian aristocrats, triggered a wave of protectionism across Europe reversing the prior trend toward free trade, and Ahamed identifies the political fracturing from the 1873 crisis as the single most important factor in the wave of populism in the US. Governments of the era did not believe it was their responsibility to smooth the business cycle, and the twenty-year period produced roughly two and a half percent growth but in fits and starts.

Ahamed draws a direct comparison to the current AI data center investment cycle, noting that approximately one trillion dollars is expected to be spent on AI data centers in the US in the current year, representing roughly 3 percent of GDP, below the peak railroad investment of four to five and a half percent. He identifies the main risk as competing companies all targeting the number one position while AI firms have not yet clearly developed a business model for generating revenues on the trillions they plan to invest, and he would not be surprised by a series of mini booms and busts analogous to the railroad cycle. Looking forward, he predicts the more likely monetary mistake is looseness leading to systematic inflation rather than deflation, says being a bond investor will not be a good position as interest rates will constantly spike upward, and describes a central bank under political pressure to keep rates low as reminiscent of the late 1960s and early 1970s.