This is from 'Conversations with Tyler Cowan'
The Panic of 1873 and Its 20-Year Political Toll
In Britain there was a 13 year period of lower growth and price deflation. In particular, the agricultural depression diminished the importance of the 'Squirearchy'- i.e. the landed gentry whose power and influence had been rising since the 1830s.
The brief
Historian Liaquat Ahamed argues the Panic of 1873 did not collapse the world economy,
It didn't affect much of the world. The truth is there were a lot of crooked speculators who needed to be squeezed out of the market.
it poisoned its politics for twenty years. Growth held near 2.5% through a long deflation
i.e. higher real wages & returns for landowners
, but the fallout helped end Reconstruction,
it would have ended anyway. Whites weren't going to kill whites so as to protect blacks.
fueled Gladstone's Egyptian bond windfall
It was obvious that Egypt- unlike Ottoman Turkey- had enormous economic potential and thus could pay its debts. This meant that the foreign administrators who were levying taxes on salt, tobacco, etc. in Turkey, could not recover even half the debt amount.
The yield on Egyptian bonds was high (12 percent) precisely because of the possibility of a native rebellion against the foreign origin Khedive & other Pashas.
and let Bismarck wreck bimetallism/
Getting French reparations enabled Germany to go on the gold standard. Japan followed suit after getting reparations from China. In Germany's case, Bismark wanted the new unified country to have a strong currency as well as a strong army. He believed this was achieved by Fredrick the Great's monetary reforms.
There is a version of investing wisdom that says the best returns come from information nobody else has.
Everyone knew that Egypt was of vital interest to the UK because of the Suez Canal. Baring become controller general in 1879. He was confident that Britain would prevail because the Egyptian army had done badly in a war with Ethiopia.
William Gladstone, four-time British prime minister, seems to have proven it by accident.
Gladstone had the same information as other investors in London.
In the early 1880s he quietly put 40 percent of his net worth into Egyptian government bonds, which were paying 12 to 14 percent interest.
Britian had been controlling Egypt's finances since 1876..
Then Britain invaded Egypt.
They crushed Urabi Pasha's revolt which threatened the foreign origin aristocracy. The Khedive initially appealed to the Ottoman Caliph for aid to put down the revolt but only Britain had the money & men to restore the Khedive.
Then Britain insisted Egypt repay its foreign creditors in full,
there was a 25 percent bonus, but this was cut down to 10 percent. It appears that loan amounts were inflated relative to cash actually disrbursed.
at par. Gladstone's bonds, bought at a discount reflecting real default risk, turned into one of the great trades of the Victorian age.
I doubt there would have been an intervention if Egypt hadn't done so badly in the Ethiopian war.
Whether he engineered this or simply believed, with total sincerity, that debts are debts and must be paid, is a question the historian Liaquat Ahamed cannot fully answer. "I'm sure he thought that it was the moral thing for Egypt to pay its debts," he tells Tyler Cowen ,
Gladstone understood that there has to be a haircut if the debtor can't pay in full.
before adding the harder part: if Gladstone could have forced the same terms on Turkey,
they too had foreigners controlling a lot of the State's finances But their ability to pay was lower.
which also owed European bondholders, he would have. He couldn't, because Turkey mattered more. Egypt owed roughly 500 billion dollars to British and French investors and paid close to full value; Turkey owed about a billion and settled for something like 30 to 50 cents on the dollar.
: At the time of its sovereign default in October 1875, the Ottoman foreign debt was estimated at £214.5 million. (When Egypt suspended its debt servicing in 1876, the accumulated Egyptian public debt managed by the European-controlled
Caisse de la Dette Publique totaled roughly £94 million
The difference was not the size of the debt. It was geopolitics. Britain needed the Ottoman Empire intact as a check on Russia, and needed Egypt as nothing more than a ledger entry.
Britain had taken Cyprus and, obviously, the Suez canal was important for it but it preferred to have a 'veiled' protectorate.
Ahamed's new book is called 1873, after the panic that supplies its title, and his conversation with Cowen keeps circling back to a single, almost architectural idea: a financial crisis can leave the economy standing while it quietly rearranges the politics around it.
Politics gets rearranged whether or not there are booms of slumps. Indeed, they occur even in non-monetized economies.
His earlier book, Lords of Finance, won a Pulitzer Prize for showing how the 1929 crash produced the Great Depression.
Previoulsy, people thought it was caused by everybody getting really sad coz of the rumour that Mickey Mouse had cancer.
The new one argues that the Panic of 1873, despite giving its name to what contemporaries called the Long Depression, did remarkably little damage to output. By one measure, the major economies grew at 2.5 percent a year for two decades after 1873, even as prices fell . "A better title would have been The First Great Deflation," Ahamed says, noting that wages and prices in that era were flexible enough to absorb the shock in a way later economies, with their sticky nominal wages, could not.
There was some wage stickiness and this tended to increase as time went on.
If the economy adjusted, the political system did not.
No. The political system did adjust almost everywhere.
Ahamed traces a line from the 1873 crisis to the collapse of the Republican Party's postwar dominance in the United States,
which was bound to happen. Whites won't fight whites just so as to help blacks.
the contested 1876 election, and the backroom bargain that ended Reconstruction. What followed, he argues bluntly, was Jim Crow.
Also the persecution of homosexuals. Previously, Southern gentlemen displayed patience and stoicism when black homosexuals took turns wrecking their rectums. I tell you the 1873 panic has much to answer for.
This is the pattern that interests Ahamed more than GDP charts: deflation does not just lower prices, it redistributes power,
Workers got more power.
and the losers in that redistribution do not stay quiet. In Europe the same decades brought a revival of protectionism,
Germany put in 'iron & rye' tarrifs in 1879.
a retreat from the liberal confidence of the mid-Victorian years, and new imperial appetites, including Britain's invasion of Egypt.
They put down a revolt. They annexed Cyprus a few years previously.
Cowen pushes back gently, noting that imperial land grabs were hardly new to nineteenth-century Britain. Ahamed's answer is that 1873 marked "a sort of second wind to imperialism"
because the fucker is obsessed with Egypt. Incidentally, Egypt was trying to annex African territory to its south. Sadly, the Ethiopians kicked them in the goolies.
, reviving a project that had briefly seemed to be losing momentum.
Fuck off! The opposite was the case.
The Villain of the Piece
Ask Ahamed who the heroes of this story are and he resists the frame; mostly, he says, the people running the global monetary system in the 1870s and 1880s had no real idea how it worked ).
Stock Markets needed to adopt better protocols to shut out conmen & crazy people.
Ask him who the villain is, though, and he does not hesitate.
"The biggest villain in my whole book is Bismarck."
German chancellor Otto von Bismarck, flush with victory after the Franco-Prussian War,
which followed a victory over Austria-Hungary.
imposed a punishing reparations bill on France and, in Ahamed's telling, went further by dismantling bimetallism, the system under which currencies were backed by both gold and silver at a fixed ratio.
It was bound to breakdown. Everyone would try to convert silver into gold at the fixed exchange rate.
France had been the linchpin of that system, holding the largest reserves of precious metal and successfully stabilizing the relative price of gold and silver for decades. When Germany abandoned bimetallism for a pure gold standard, the system France had anchored came apart,
because Germans wanted to exchange their silver for gold. In the US, silver was underpriced and thus disappeared from circulation even before the 1873 Coinage act.
and with it went the cushion that had kept global prices steady.
Global prices shouldn't be steady if supply and demand determinants are changing.
Ahamed believes the resulting deflation, not some natural law of monetary history, set off the distributional damage of the next quarter century .
One could say that the agricultural depression led to a loss of power and influence for the Country Squire.
Cowen presses him on whether any currency peg can really survive for long, and Ahamed concedes the obvious limit: a system backed by two metals collapses once one metal's supply swings wildly relative to the other. What saved the gold standard from exactly that fate,
if a country didn't have enough gold, it didn't have gold convertibility. But this made borrowing more expensive.
almost by accident, was geology. The gold discoveries in South Africa in the 1890s flooded the world with new bullion just as deflationary pressure was becoming unbearable.
"I think the South African gold discoveries essentially saved the gold standard." — Liaquat Ahamed
What permitted to burgeon was global peace. With the Great War, convertibility had to go.
Without that windfall, Ahamed thinks the United States might well have abandoned gold for silver within another decade (17:38), a counterfactual that would have rewritten twentieth-century finance before it began.
The US would have had to raise the silver/gold exchange rate which had been fixed some decades previously.
Who Pays the Bill
The conversation jumps forward half a century to Germany's hyperinflation of the 1920s, when the currency collapsed so completely that people reportedly used wheelbarrows to carry cash to market. Ahamed offers a reading that is more cynical than the textbook story of simple monetary mismanagement: he suspects the inflation may have been, in part, a deliberate strategy to convince Germany's creditors that war reparations could never be collected.
The Germans, very foolishly, decided to subsidize the striking workers in French occupied territory. They soon ran out of cash. Hyperinflation liquidated their war-debt to their own people.
The policy worked in one narrow sense. Central bank governor Hjalmar Schacht later stabilized the currency and is credited with presiding over what Ahamed calls two separate German economic miracles, the recovery of the mid-1920s
based on borrowing & 'extend & pretend'. After the Wall Street crash, the chickens would come home to roost.
and, more troublingly, the rearmament boom of the 1930s under Hitler,
or FDR or Chamberlain
built on empty reserves and tight import controls.
and robbing Jews.
From here the thread runs forward to Ahamed's own years working with the World Bank and his book on the International Monetary Fund. His verdict on that institution is pointed: the United States, he says, has repeatedly used the IMF as an arm of its own foreign policy, pushing money into countries whose debts are not sustainable.
'Free money' is the most expensive sort of finance.
The deeper failure, in his view, both in the Eurozone crisis and in the run-up to 2008, was the absence of any clean mechanism for restructuring debt that cannot be repaid.
There is also the problem of the 'vulture fund'.
Someone has to decide who eats the loss, and Europe, lacking a single fiscal authority willing to play that role, let the question fester.
There were plenty of Accountancy firms and Merchant Banks getting fat fees for debt consolidation & restructuring.
Asked why Britain, with an educational system that keeps producing the inventors behind modern artificial intelligence, has seen almost no real wage or productivity growth since the 2008 financial crisis, Ahamed admits he does not know.
The composition of the work-force has changed. Still, historically, England has substituted skilled labour for capital which meant that they didn't get internal economies. The scaling up problem continues. To be fair, England can't create cities from scratch. Hyperscaling has to be left to the US and China.
It is a small, honest gap in an otherwise confident account, and it matters, because it is the same puzzle that runs through the whole conversation: good institutions and smart people do not automatically produce good outcomes.
Geography matters.
Systems need something to hold them steady, the way France's reserves once held gold and silver in balance.
France was doing very stupid shit at that time.
That idea resurfaces, unexpectedly, at the end of the interview, when Cowen asks about Ismaili Islam, the branch of Shia Islam to which Ahamed belongs by birth though he describes himself as non-practicing. Ismailis, he explains, follow a living spiritual leader, the Aga Khan,
just like the Dawoodi Bohras. But the Bohras went in an ultra-conservative direction whereas the Khojas have a Europeanised leader.
regarded as a direct descendant of the Prophet Muhammad,
There are at least ten million such.
whose authority over a community of two to three million people worldwide is centralized and continuously updated. If the Aga Khan says move to Africa, Ahamed notes, large parts of the community will do it.
Come to think of it, Prince Sadruddin Aga Khan was UN High Commissioner for Refugees just when Idi Amin expelled the Asians. East African Asians have done very well in their new homes in he West. But the Bohras, in India, are doing very well economically.
With hindsight, the Aga Khan's support for the Pakistan movement created a set-back for his Indian followers.
It is, structurally, the opposite of the chaos Ahamed has spent the whole conversation describing: one trusted authority, able to adjust course in real time, rather than a system of rigid pegs waiting to snap.
The Ismailis have to be cautious. Previously, they had been persecuted by the Sunnis. History may repeat itself
Near the close, Cowen asks what Ahamed is optimizing for, since he left a successful private-sector career, declined to finish a Harvard doctorate, and has now written three books he did not need for income. The answer is almost offhand but it is the clearest statement of method in the whole hour.
"When you want to find out about something, writing a book about it is a remarkably good way of learning it." — Liaquat Ahamed
Sadly, it is also a remarkably good way to remain ignorant and bigotted.
Ahmed,who is about a decade older than me, was born in Kenya. He went to a British Public School back at a timee when teachers thought the Empire was a jolly good thing. Darkies, it is true, are horrible, but they became slightly less so once they learnt to play cricket. Perhaps, moving to Harvard for his Doctorate changed his attitude to the Raj.
COWEN: Do you view imperialism as a natural expression of liberalism, or as something contrary to its spirit?
Historically, the owners of plantations in the West Indies or Nabobs who had gotten rich in the East Indies, tended to be Liberal or even Radical. Burke & Sheridan- as Irishmen- were suspicious of the influence this new moneyed class was acquiring. The Scots, too, felt that the rewards of Empire might end up making England even more dominant
Because the liberals themselves often favored it. There’s a whole literature called liberal imperialism as a topic.
Indeed. The Liberals- including Benthamites- tended to favour Imperial expansion whereas the Tories only embraced Imperialism in the 1870s. One reason was the extension of the franchise. The newly enfranchised upper middle class might have reason to envy the toffs but they could console themselves that the nig-nogs had it worse.
AHAMED: No, I think it’s definitely contrary to the spirit of liberalism.
Some Indians wanted to believe that Gladstone & Morley & so forth were anti-imperialist at heart. The truth is, they supported self-administering & self-garrisoning Federations under the British Crown.
COWEN: The liberalism of that era, surely it was a doctrine that thought England and some other countries could improve the rest of the world.
Yes. Even Bertrand Russell, who went to jail because of his Pacificsm during the Great War, believed that a just war could be fought against less advanced races.
They thought of that as quite a liberal idea. Malthus
who opposed Tory 'paternalism'. If the workers weren't half starved, they wouldn't work long hours under horrible conditions.
and Mill, of course, worked for the East India Company. They don’t seem so morally torn over that. I’m not saying they were correct, but isn’t that in some way a high watermark of liberalism to think you can reengineer the whole world along liberal lines?
The Classical liberal thought upper middle class men- under the leadership of the great Whig aristocrats- should run a night-watchman state. Mill became more radical after retiring
AHAMED: Yes, you’re right. They didn’t think that they were damaging these societies, but I think the long-run consequences weren’t happy.
Yet, mercantile Gujeratis, like his own family, did very well under the Raj. Incidentally Zohran Mamdani is of Islamili origin on his father's side. But so too is the great Ben Kinglsey. Gujarat certainly has very talented people.