Panic of 1873 – Wikipedia

Economic expansion took place in Germany and Austria-Hungary, where the period from German unification in 1870 and 1871 to the crash in 1873 came to be called the Gründerjahre (“Founders’ Years”). A liberalized incorporation law in Germany gave impetus to a rise in IPOs the foundation of enterprises such as Deutsche Bank, and the incorporation of established ones. After the Franco-Prussian War in 1871 there was a massive influx of capital from the payment by France of war reparations. According to Liaquat Ahamed “German states paid off their debts. So they retired all their government bonds, and the savers who held German government bonds were left with cash. The question was what to do with this cash.” It was invested in the stock market and fueled speculation in railways, factories, docks, and steamships, the same industrial branches that expanded unsustainably in the United States.^[4] In the immediate aftermath of his victory against France, Otto von Bismarck also began the process of silver demonetization and placed Germany on the gold standard.^[5] The process began on 23 November 1871 and culminated in the introduction of the gold mark on 9 July 1873 as the currency for the newly founded German Empire, replacing the silver coins of all constituent lands. Demonetization of silver was thus a common element in the crises on both sides of the Atlantic Ocean.

On 9 May 1873, the Vienna Stock Exchange crashed because it was unable to sustain the bubble of false expansion, insolvencies, and dishonest manipulations.^{[citation needed]} A series of Viennese bank failures ensued, causing a contraction of the money available for business lending. One of the more famous people who went bankrupt in 1873 was Stephan Keglevich of Vienna, a relative of Gábor Keglevich who had been the master of the royal treasury (1842–1848) and in 1845 had co-founded a financial association to fund the expansion of Hungarian industry and to protect the loan repayments, similar to the 1870 Kreditschutzverband, an Austrian association for the protection of creditors and the interests of its members in cases of bankruptcy. That made it possible for several Austrian banks to be established in 1873 after the Vienna Stock Exchange crash.^[6]

In Berlin, the railway empire of Bethel Henry Strousberg crashed after a ruinous settlement with the government of Romania, bursting the speculation bubble in Germany. The contraction of the German economy was exacerbated by the conclusion of payments by France in September 1873. Two years after the foundation of the German Empire, the panic came and became known as the Gründerkrach or “Founders’ Crash”.^[7][8][9] In 1865, Keglevich and Strousberg had come into direct competition in a project in what is now Slovakia. In 1870 the Hungarian government, and in 1872 the Emperor-King Franz Joseph of Austria, resolved the question of the competing projects.^[10][11]

Although the collapse of the foreign loan financing had been predicted, the events of that year were in themselves comparatively unimportant. Buda, the old capital of Hungary, and Óbuda were officially united with Pest,^[12] thus creating Budapest in 1873. The difference in stability between Vienna and Berlin had the effect that the French indemnity to Germany flowed into Austria and Russia, but the indemnity payments aggravated the crisis in Austria, which had benefited by the accumulation of capital not only in Germany but also in England, the Netherlands, Belgium, France, and Russia.^[13]

Recovery from the crash occurred much more quickly in Europe than in the United States.^[14][15] Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations.^[15] There was an anti-Semitic component to the economic recovery in Germany and Austria, as small investors blamed Jews for their losses in the crash.^[16][17] The Neuer Sozial-Demokrat newspaper of the General German Workers’ Association (ADAV) published several articles blaming Gerson von Bleichröder for the stock market crash. An October 29 article called Bleichröder “Bismarck’s Jew”.^[18]

Soon, more luxury hotels and villas were built in Opatija, and a railway line was extended in 1873 from the Vienna–Trieste line to Rijeka (Fiume), making it possible to go by tram from there to Opatija. The strong increase of port traffic generated a permanent demand for expansion.^[19] The Suez Canal was opened in 1869.^[20] 1875–1890 became “the golden years” of Giovanni de Ciotta in Rijeka.

The crash is central in the 1877 novel The Breaking of the Storm by the German writer Friedrich Spielhagen. A portrayal of German business life in the 1870s, the literary scholar Jeffrey L. Sammons has described it as “the major fictional treatment of the financial crash of the 1870s as a harbinger of the predatory but erratic capitalism that was to become characteristic of the Reich”.^[21]

The opening of the Suez Canal was one of the causes of the Panic of 1873 because goods from the Far East had previously been carried in sailing vessels around the Cape of Good Hope and had been stored in British warehouses. As sailing vessels were not adaptable for use through the Suez Canal (because the prevailing winds of the Mediterranean Sea blow from west to east), the British entrepôt trade suffered.^[22]

When the crisis came, the Bank of England raised interest rates to 9 percent. Despite this, Britain did not experience the scale of financial mayhem seen in America and Central Europe, perhaps forestalled by an expectation that the liquidity-constraining provisions of the Bank Charter Act 1844 would be suspended as they had been in the crises of 1847, 1857, and 1866. The ensuing economic downturn in Britain seems to have been muted – “stagnant” but without a “decline in aggregate output”.^[23] However, there was heavy unemployment in the basic industries of coal, iron and steel, engineering, and shipbuilding, especially in 1873, 1886, and 1893.^[1]