Return of the Long Depression

Risky mortgages, a rising new industrial power across the ocean, and banks unwilling to lend to each other. In 1873.

Published October 9, 2008 10:15AM (EDT)

On Monday I briefly discussed the "Long Depression" set off by the great financial panic of 1873. This morning, I stumbled across a fascinating article in the Chronicle of Higher Education by 19th century historian Scott Reynolds Nelson discussing the parallels between the Long Depression and the current financial crisis.

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral ...

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad ... Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank -- the interbank lending rate -- reached impossibly high rates.

I know, I know, what goes around, comes around. But that's just kind of freakish.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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