Liaquat Ahamed on the Railroad Bubble That Crashed the World | #642

Liaquat Ahamed, Pulitzer Prize-winning author of "Lords of Finance," discusses his new book "1873: The Rothschilds, The First Great Depression and the Making of the Modern World," which serves as a prequel exploring the first truly global financial crisis. The pre-1873 period saw unprecedented global economic growth, with world GDP doubling in the four major economies and world trade growing fivefold, driven by massive capital flows from Britain and France into developing infrastructure, particularly railroads—the "AI tech stocks" of the mid-19th century. This boom was enabled by a new European upper-middle class with substantial savings seeking investments, as real interest rates on government bonds had declined dramatically to 3-4%. The Rothschilds and Barings dominated global bond issuance, accounting for 70% of the market. The monetary system was based on precious metals—primarily gold in Britain and Portugal, silver in Central Europe (especially from Bohemian mines), and a combination in France and the United States. France's Banque de France, backed by the Rothschilds, acted as the essential balancing wheel of the global financial system, absorbing excess silver or gold as needed. After the U.S. Civil War, America abandoned precious metals for a floating currency (greenbacks) that caused inflation, but committed to returning to gold by 1879, inadvertently abandoning silver in the process. The boom transformed into a mania after 1870, particularly in Germany following the Franco-Prussian War, when a $1 billion reparations injection into a $4-5 billion economy (approximately 20% of GDP) created massive stock market speculation and the "Gründerzeit" (founders' era)—the first IPO bubble, with hundreds of new companies listed across German exchanges. The crisis began with the stock market crash in Central Europe (Vienna and Germany) in May 1873, with major stocks falling 50% in a day, followed by a September crash on the New York Stock Exchange driven primarily by railroad company defaults, including the failure of Jay Cook & Company—the country's premier investment bank that had financed the Union during the Civil War. This triggered a domino effect across railroad companies; by year's end, one-third had stopped paying interest, and within five years, half had defaulted. Additionally, emerging market sovereigns including Egypt and Turkey, which had borrowed heavily on the London Stock Exchange, defaulted. The crisis was amplified by Bismarck's decision to sell German silver reserves and shift to gold, collapsing silver prices globally and forcing every European country to abandon silver and concentrate their scramble for safe assets entirely on gold, creating a severe shortage of liquidity. This triggered a 20-year deflation with wholesale prices falling 30% by year-end 1873. Deflation proved devastating for debtors—farmers, homeowners, and developing economies—while benefiting asset owners. The prolonged deflation split the United States politically between western farmers and eastern bankers, fragmenting both political parties and creating a 20-year political stalemate. The economic distress fueled populist movements and conspiracy theories; in Europe, this manifested as a resurgence of anti-Semitism (now economic rather than religious in nature), with people blaming Jews for the financial crisis. In the United States, farmers blamed British bankers and the Rothschilds (despite their having no actual presence in America) for the "Crime of 73"—the abandonment of silver—though these conspiracy theories were entirely false. The term "anti-Semitism" itself was coined in 1879 by German Wilhelm Marr as a term of approbation. Ahamed draws parallels to 2008, when banks were bailed out but homeowners were not, fueling political fragmentation and populist movements on both the left (Bernie Sanders) and right (Tea Party). He argues the modern challenge is not debt but stock market valuation: at $80 trillion against a $30 trillion GDP (over 250% of GDP), this represents unprecedented territory compared to 2000 (when it briefly reached 120%). With broader equity participation through 401(k)s and speculative bubbles in meme stocks and crypto, the potential wealth effect of a market correction could be severe. Ahamed suggests there is a through line in his work: 1873 shows how monetary mistakes (abandoning silver) turned a boom-bust into depression, while "Lords of Finance" demonstrates how staying on the gold standard after World War I created similar monetary constraints that deepened the Great Depression. The underlying theme is the dilemma central banks face during crises: they must provide liquidity to address panics while potentially accommodating inflation, with no winning solution.