Around the World in One Long Depression: Liaquat Ahamed on 1873 & the Making of the Global Economy

“Be optimistic about the boom, but don’t buy the stock.” — Liaquat Ahamed on the AI bubble

Yesterday, Alexander Starritt argued that the 2008 financial crash ruined the lives of his generation. But compared with the great crash of 1873, 2008 looks like a tremor. The Pulitzer Prize-winning economic historian Liaquat Ahamed has a new book out today, 1873, which presents this 19th century economic crash as the first truly global financial crisis.

In 1870, three globalising infrastructure projects were completed in quick succession: the US transcontinental railroad, the Suez Canal, and the Trans-India railroad linking Bombay to Calcutta. Into this newly integrated global economy, the Franco-Prussian War injected a trillion-dollar-equivalent indemnity that the Rothschilds helped France raise — and the resulting dramatic capital flows produced three simultaneous bubbles in Berlin, Vienna, and New York. A French journalist named Jules Verne worked out that for the first time, you could circumnavigate the globe in less than eighty days. Around the world in one global economic crisis.

The lesson for posterity, Ahamed warns, is that the authorities made a catastrophic error by doubling down on the gold standard, producing decades of deflation that triggered an anti-semitic and anti-globalist populism, and ultimately led to the Great Depression of the 1930s. So what does that tell us about today’s AI boom, which is about to be rocketed by three trillion-dollar IPOs? Be optimistic about the boom, the wise Ahamed says. But don’t buy the stock.

Five Takeaways

•       Jules Verne and the First Global Economy: In 1870, three iconic infrastructure projects were completed: the US transcontinental railroad, the Suez Canal, and the Trans-India railroad linking Bombay to Calcutta. A French newspaper noted that for the first time, a traveller could circle the globe in less than eighty days. Jules Verne read the article and found his next novel. The point for Ahamed: this moment marked the creation of a genuinely integrated global economy for the first time in history. And with global integration came the first global financial crisis. The boom of the 1850s and 1860s was not irrational. It reflected real economic growth. The crash came from what happened next.

•       The Trillion-Dollar Indemnity and Three Simultaneous Bubbles: Under the peace treaty ending the Franco-Prussian War, France was required to pay Germany an indemnity worth the equivalent of $1.2 trillion in today’s money. With the help of the Rothschilds, France raised this sum in six months. The resulting capital injection caused the Berlin and Vienna equity markets to rise 200–300 percent. Simultaneously, European capital fleeing the war flowed into US railroad construction, inflating that bubble further. A third bubble formed in foreign borrowing on the London capital markets, as money chased yield in countries that should never have been given credit. Three bubbles, one crash.

•       The Wrong Lesson from 1873: Gold Standard Orthodoxy: When the crash came, the authorities made a catastrophic error: they concluded that the gold standard had worked because the 1850s and 1860s boom had happened under it. They failed to see that the crash itself was partly produced by the gold standard’s rigidities. The resulting decade of deflation crushed farmers, debtors, and ordinary people across Europe and America, fuelling anti-globalist populism. The same orthodoxy — applied by Montagu Norman and others in the 1920s — helped cause the Great Depression. We always fight the last war.

•       The Rothschilds: Scape