Key Moments
Liaquat Ahamed on Financial Crises, Gold, and the Lessons of 1873
Conversations with TylerKey Moments
The 1873 "First Great Depression" was less about economic collapse and more about a political poisoning that fueled populism, protectionism, and imperialism, setting the stage for future global conflict.
Key Insights
While major economies grew at 2.5% annually after 1873, the period was marked by a "political poisoning" of the global economy, characterized by the rise of populism, protectionism, and a resurgence of imperialism.
Otto von Bismarck's decision to break the bimetallic standard by demonetizing silver in 1873, aiming to cripple France, is identified as a primary driver of the subsequent deflationary period and its negative distributional consequences.
William Gladstone's investment in Egyptian bonds, which yielded 12-14% due to Britain's insistence on full repayment after the invasion of Egypt, highlights the personal financial stakes and potential ethical conflicts in imperialistic foreign policy.
The gold discoveries in South Africa were crucial in saving the gold standard, preventing a potential abandonment of the standard by the US and averting further deflationary pressures.
The author believes that many of the policy decisions in the 1920s and 1930s, particularly Britain's decision to re-peg the pound to its pre-war gold parity in 1925, were defensible but not optimal, and a collective revaluation of gold would have been a better approach.
A fundamental flaw in the Eurozone crisis was the lack of a mechanism for debt restructuring, similar to the US housing bubble, which led to prolonged economic instability.
The subtle sting of the "first great depression"
Liaquat Ahamed distinguishes his latest book, "1873: The Rothschilds, the First Great Depression, and the Making of the Modern World," from his Pulitzer Prize-winning "Lords of Finance" by highlighting a key difference in the nature of the crises they examine. While "Lords of Finance" focused on a financial crisis that directly led to the Great Depression, "1873" explores a severe deflationary crisis that, despite not causing a global economic collapse, profoundly damaged the global political economy for two decades. Ahamed argues that while major economies continued to grow at an estimated 2.5% annually during this period, the crucial impact was not purely economic but rather on the distribution of wealth and the political consequences thereof. He suggests that nominal wages did fall, but the political ramifications were far more damaging than the purely economic ones.
The political fallout of 1873
The period following 1873 was not characterized by outright political madness but by a significant and damaging shift in political trends. Ahamed identifies the rise of populism in the United States and a strong return of protectionism in Europe as key indicators of this shift. This era also saw a retreat from liberal ideas and a revival of imperialism, exemplified by Britain's invasion of Egypt. While acknowledging that imperialism was not entirely new to the 19th century, Ahamed emphasizes that the invasion of Egypt marked the beginning of a "scramble for Africa" and gave new impetus to imperial expansion, suggesting a departure from a previous, albeit limited, trend of imperial retreat.
Bismarck's gambit and the demise of bimetallism
Ahamed identifies Otto von Bismarck as a significant antagonist in his narrative, primarily for his role in dismantling the bimetallic standard. Bismarck's decision to impose a massive reparations bill on a weakened France and, crucially, to destroy the bimetallic monetary system, is presented as a pivotal event. France, as a holder of substantial gold and silver reserves, had been instrumental in stabilizing gold and silver prices throughout the first half of the 19th century. By shattering this system, Ahamed argues, Bismarck initiated the deflationary spiral that characterized the late 19th century, leading to widespread negative distributional consequences. The author contrasts this with the experience of Turkey, which, due to its greater geopolitical importance, was able to negotiate a halving of its debts to British and French investors, suggesting Egypt was treated unfairly in comparison.
Gladstone's Egyptian bonds and the ethics of empire
The conversation touches upon William Gladstone's significant investment in Egyptian bonds, estimated at 40% of his wealth at its peak. These bonds yielded a remarkable 12-14%, a rate made even more attractive by the fact that after Britain's invasion of Egypt, the British government insisted on full repayment of these bonds at face value. This situation raises questions about whether Gladstone's policy was driven by personal financial interest or a principled belief in upholding debt obligations. Ahamed suggests that while Gladstone likely believed it was morally right for Egypt to repay its debts, his ability to enforce this was tied to Britain's imperial power, a power he did not possess to the same extent over Turkey, which secured a debt reduction.
The unexpected resilience of growth
One of Ahamed's surprising findings from his research is that the deflationary aspect of the period, the "depression" part, was not as dire as commonly perceived. He notes that economic growth proved surprisingly resilient, with estimated per capita GDP growth in the US for the period being around 1.7-1.8%. However, he acknowledges that measuring economic improvements solely by GDP might be misleading and that the real growth rate could have been higher. Despite the seemingly modest average growth, the period was far from stable, with roughly half of the time from 1873 to 1896 classified as recessionary. The most significant impact, as reiterated by Ahamed, was the "torn political economy" and the division within societies, which laid the groundwork for future global economic troubles.
The rescue of the gold standard
The discovery of gold in South Africa played a critical role in preserving the gold standard. Prior to these discoveries, during the gold-scarce 1870s and 1880s, the gold standard was exerting increasing pressure on the global money supply. Ahamed posits that had the gold drought continued for another decade, the United States might have abandoned the gold standard for silver. Therefore, the South African gold finds are seen as having essentially saved the gold standard, preventing a potential shift away from it.
The limitations of fiat currency
Ahamed expresses skepticism about the feasibility of a global fiat currency system prior to 1971. He believes that without a link to gold, investor confidence would not have allowed a country like Britain to completely abandon the gold standard, citing the hyperinflation experienced in post-WWI Germany and France as examples. He suggests that the Bretton Woods system, while not a direct gold link for all currencies, provided a crucial indirect constraint through the convertibility of dollars to gold, which limited excessive inflation in the US.
Revisiting the Eurozone crisis and debt restructuring
Reflecting on the Eurozone crisis, Ahamed points to a fundamental flaw: the absence of a mechanism for debt restructuring. He draws a parallel to the US housing bubble, noting that in both instances, excessive debt accumulated by individuals or nations who could not repay it was a core problem. The ideal solution, he suggests, would have involved finding ways to restructure these debts. He identifies Germany's reluctance to lead and take responsibility for deciding how such restructurings should occur as a key impediment to resolving the crisis effectively.
Mentioned in This Episode
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Common Questions
While 'Lords of Finance' focuses on crises that led to major depressions, '1873' examines an economic downturn that, while damaging, did not plunge the world into a catastrophic depression but rather had significant political and distributional consequences over the following two decades.
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Mentioned in this video
Author of '1873: The Rothschilds, the First Great Depression, and the Making of the Modern World' and 'Lords of Finance: The Bankers Who Broke the World'. Discussed his work and perspectives on financial crises.
The 'greatest villain' in Ahamed's book for dismantling the bimetallic system and imposing heavy reparations on France, contributing to the 1873 depression's negative effects.
A prominent figure in 1920s Germany, praised for stabilizing the currency and his work as Chancellor, whose death was considered a major tragedy.
Central banker and Economics Minister in Germany, credited with stabilizing the currency in the 1920s and later overseeing a wartime economic "miracle". Discussed as opportunistic.
The founder of Islam, mentioned as an ancestor of the Aga Khan, linking the Ismaili leadership to a direct lineage.
Governor of the Bank of England, known for unusual spiritual beliefs, including the ability to walk through walls.
An American author of the 1920s, mentioned as a preferred writer over European modernists.
The former ruler of Iran, mentioned in the context of the number of Ismailis present during his reign.
An author whose modernist work, Ulysses, is contrasted with Ahamed's preference for American literature of the 1920s.
A philosopher and economist, mentioned alongside Malthus for his work with the East India Company and his views on liberalism and imperialism.
Author of 'The Best and the Brightest', a book Liaquat Ahamed found influential in understanding the US political system.
A former British Prime Minister whose investment in Egyptian bonds and subsequent insistence on repayment were analyzed as a case study in imperialism and personal interest.
The leader of the Ismaili community, believed to be a direct descendant of Prophet Muhammad, who sets the agenda for the community and is highly respected.
An American author of the 1920s, whose novels are preferred by Liaquat Ahamed over modernist European literature.
Liaquat Ahamed's new book, which explores the financial crisis of 1873 and its long-term impact on the global political economy.
Liaquat Ahamed's Pulitzer Prize-winning book that focused on major financial crises and the bankers involved.
A book by David Halberstam that profoundly influenced Liaquat Ahamed's understanding of the American political system upon his arrival in the US.
A modernist novel by James Joyce, mentioned as a contrast to Ahamed's preferred American literature of the 1920s.
Mentioned as a geopolitical factor influencing Britain's approach to the Ottoman Empire and its financial dealings.
Mentioned as a country that adopted a silver standard, its economic performance discussed in comparison to gold-standard nations.
The setting for the film 'The Situation' produced by Liaquat Ahamed, and a country with ongoing political and economic challenges.
A country whose debt restructuring negotiations were compared to Egypt's, highlighting differential treatment based on geopolitical importance.
Mentioned as a country that experienced currency devaluation due to a silver standard, similar to India.
The location of gold discoveries that significantly impacted the gold standard and helped avert a further shift towards a silver standard.
A country whose financial dealings with Britain, particularly concerning bonds held by William Gladstone, were discussed in the context of imperialism and debt.
A country that relied on a silver standard, with its economic performance discussed in comparison to gold-standard nations.
A nation central to the bimetallic system, whose financial instability after the Franco-Prussian War, due to Bismarck's policies, is discussed.
A country that adopted a silver standard, leading to currency devaluation against gold-linked currencies, discussed in terms of economic impact.
A country that adopted a silver standard, its economic performance discussed in contrast to gold-standard nations.
A country where Ismailis were once significant but are now fewer in number. Their historical presence and relationship with the ruling powers were discussed.
An international financial institution where Liaquat Ahamed gained extensive private sector experience and led investment decisions.
An international organization Liaquat Ahamed has worked with, and which was discussed in relation to bailouts and economic policy.
A branch of Shia Islam whose progressiveness and leadership under the Aga Khan were discussed. Ahamed identifies as Ismaili.
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