BOOK REVIEW
BY JAMES P. PROUT
1873: The Rothschilds, The First Great Depression, and the Making of the Modern World By Liaquat Ahamed Penguin Press, 2026 346 pages, with photographs, acknowledgments, notes, bibliography and index $ 32.00
The textbooks say that financial markets are where people come together, analyze all known information and efficiently allocate scarce resources toward the most productive outcomes. We use words like: analytical, intelligent, sober. Then it all blows up. The words become more purple: Panic! Crash! Collapse! Crisis! America has had quite a few of these episodes, starting way back in the early republic and extending right up to 2008.
In his book, 1873: The Rothschilds, The First Great Depression, and the Making of the Modern World, Pulitzer Prize-winner Liaquat Ahamed, argues that the Panic of 1873 deserves a special place in the pantheon of market collapses. Because markets had become more sophisticated and interconnected, and information was flowing more swiftly, the severity of the
1873 crash could not be contained to a single country or market. Effects were felt in Europe, the United States, the Middle East and in the developing world. It is a compelling story, and Ahamed is a compelling writer. There is not a wasted adjective or adverb in the whole book.( Full Disclosure: My first review for this magazine was in 2009 of his first book, The Lords of Finance.)
Ahamed starts the story in the 1850s and’ 60s. It was a time of extraordinary investment and growth in Europe and the United States. Transportation( read railroads), communications, mining, manufacturing, etc., led industries that required amounts of capital not seen previously. To profit from these needs, banks expanded their books. As governments and investors got comfortable with more leverage, bond offerings got bigger and crossed from being purely domestic to being international.
European financial markets at the time were dominated by the Rothschild family. Through offices in Vienna, Frankfurt, Paris and London, the family had unparalleled access and connections to aristocracy and the government officials who served them. Ideas of separating official policy from personal gain were different back then, and the Rothschilds had the capital and the reputation to be the first to be called whenever a big bond issue was in the offing. They also had the judgment and / or luck to avoid the worst excesses of the period and preserve their status far longer than other family banking enterprises. The Rothschilds’ position and wealth, and their religion, would be cited later as blame for the panic morphed into anti-Semitic campaigns.
Across the Atlantic, there was no family like the Rothschilds. Banking at the time was dominated by Jay Cooke & Co., the Philadelphia-based financial firm which had pioneered Union bond sales during the Civil War. Cooke had moved on to the new game in town: underwriting and selling railroad bonds, with particular interest in the Northern Pacific line from St. Paul to Seattle.
As the 1870s started, markets in Europe and the United States got hot … then even hotter. Railroads in the Balkans. Mining ventures in South America. Infrastructure in the Ottoman Empire. Government financings from Peru to Egypt. Offerings were internationally marketed, from California to Berlin, from Paris to Vienna, from New York to London. Market information which had taken months to get around now circulated in hours or days.
You’ d think that the Franco-Prussian War in 1870 – 1 would have slowed the tempo— but paradoxically, Ahamed writes, France’ s massive and early indemnity payments to Germany had the opposite effect. As cash flowed in, Prussian sobriety went out the window in Berlin, and in Vienna, too. Then Paris, then London. Every asset class went up, and everybody wanted in. Brokers and banks were happy to lend— to the ruling class, to the nouveau riche, to the new professional class— to keep the party going. There were voices who sounded alarms— Walter Bagehot at The Economist, for example— but they weren’ t heard or weren’ t listened to.
In mid-1873, things started to unravel. Fraud was uncovered among railroad promoters in Europe. Banks shied away from issuing any more Turkish or Egyptian bonds. In Vienna, banks began calling in margin accounts, and brokers who had lent against them closed their payment windows. Panic set in. In the United States, Jay Cooke & Co. shut down, stuck with too much Northern Pacific paper, and unable to sell more. As the year ended, company values continued to fall and over-leveraged banks failed. Markets seized up.
The effects of the market crash in 1873 went on much longer than earlier crashes, writes Ahamed. The villain? Liquidity or, more precisely, lack of liquidity. Those who could have made difference, whether governments or banks, lacked the tools and the skills to put more cash into the market. Ahamed explains how the hypnotic belief in gold as the basis for currency worked against providing creative solutions. The saga of bimetallism( always
40 FINANCIAL HISTORY | Fall 2026 | www. MoAF. org