Neil Faulkner writes about the The Long Depression – an unprecedented economic slump which started the countdown to the First World War.

Between 1848 and 1873, the European economy experienced an economic boom without historic precedent.

Exports of British cotton goods increased in the single decade 1850-1860 by the same amount as over the entire preceding three decades. Exports of Belgian iron doubled between 1851 and 1857. Overall, world trade, which had increased by just under 100% between 1800 and 1840, increased by more than 250% between 1850 and 1870.

Europe had just 14,500 miles of railway in 1850, but 63,300 miles of it by 1870. The tonnage carried in British steamships rose 16-fold between 1850 and 1880, that of the rest of the world more than four-fold.

All the indices pointed upwards. After the trade depression and revolutionary ferment of the 1840s, a new epoch of confidence, growth, and endless opportunity seemed to have dawned. Eric Hobsbawm, the great historian of the 19^th century, has dubbed the period 1848-1875 ‘the Age of Capital’.

The bust, when it came, was correspondingly shocking. In May 1873, the Vienna Stock Market crashed, resulting in a series of Austrian bank failures as the money supply contracted.

The panic quickly spread to other parts of Europe. In Germany, it was the collapse of the railway empire of Bethel Henry Strousberg that burst the speculative bubble. Over the next four years, shares in German companies lost 60% of their value.

In September 1873, Jay Cooke & Company, a major US bank with big investments in railroads, went bankrupt. The Jay Cooke failure triggered a US panic that brought down 98 banks, 89 railroad companies, and 18,000 other businesses. By 1876, one in seven Americans was out of work.

What had happened? The question can be answered at two levels. The immediate issue was that the booming economies of Europe and America were awash with surplus capital, and this had flowed into speculative investments, creating a bubble of inflated asset-values. Politics had played a part in this.

Bismarck’s victory in the Franco-Prussian War (1870-1871), the creation of a united Germany state, and an influx of reparations payments from France had stoked up a ‘get-rich-quick’ speculative boom in Germany. The Union victory in the American Civil War (1861-1865) and the government-backed capitalism of the Reconstruction era (1865-1877) had had a comparable impact in the United States.

In both Europe and America, political unification and a railway boom contributed to market frenzy.

But there were deeper factors at work – factors that would turn the financial crash into a protracted slump.

Capitalism is unplanned. During a boom, capitalists rush to invest in profitable enterprises, but if too many pile into the same industry, the result is excess capacity and a wave of bankruptcies when goods and services cannot be sold.

What further destabilises the boom is the limited purchasing-power of the working class. Because capitalists aim to minimise wages and maximise profits, workers lack the income to buy back all the goods and services their labour produces.

Over-production and under-consumption are twin features of every capitalist crisis. Bubbles and crashes in financial markets always take place in the context of a deeper dysfunctionality of the entire economic system.

Profits and prices plunged after 1873. In a world of many small and medium-size firms, intensified competition in contracting markets led to drastic cuts in prices and profit-margins. The Long Depression of 1873-1896 was characterised by deflation rather than inflation.

Comparing the years 1850-1873 with the years 1873-1890, growth rates fell sharply – from 4.3% a year to 2.9% in Germany, from 6.2% to 4.7% in the US, and from 3.0% to 1.7% in Britain.

This meant that the Long Depression – in contrast to the Great Depression of the 1930s – was relatively slow and shallow. Many firms prospered, and many workers, partly because wages did not fall in line with prices, experienced a rise in living-standards. New industries, like chemicals and electrics, grew apace. New centres of capital accumulation pulled ahead of old ‘workshops of the world’.

But agricultural prices remained depressed for a generation, and mass unemployment became endemic. World capitalism settled into what the great liberal economist John Maynard Keynes would later call an ‘underemployment equilibrium’.

The system, it turned out, did not always boom. The market, after all, was not self-correcting. The ‘hidden hand’ could deliver permanent slump as readily as speculative bubble and boom-time frenzy.

Frederick Engels, surveying the scene in 1886, felt that the world was ‘in the slough of despond of a permanent and chronic depression’. The measure of it was the plight of the unemployed: ‘each succeeding winter brings up afresh the great question, “what to do with the unemployed”; but while the number of the unemployed keeps swelling from year to year, there is nobody to answer that question; and we can almost calculate the moment when the unemployed, losing patience, will take their own fate into their own hands.’

How did the bourgeoisie respond to this first great crisis of the system? We can identify three trends.

First, there was rapid centralisation and concentration of capital. Small and medium firms went to the wall, markets became dominated by a small number of giant corporations, and these organised themselves into ‘trusts’ or ‘cartels’ as a way of managing competition to protect prices and profits.

The industrial giants relied heavily on government contracts and bank loans, creating a tight nexus between the state, finance capital, and industrial capital. ‘Classical capitalism’ was giving way to what contemporary Marxist commentators called ‘monopoly capitalism’, ‘state capitalism’, or ‘finance capitalism’: it was, in fact, all three at once.

The process was most advanced in Germany and the US – the two countries that now pulled ahead of Britain to become the world’s leading economic superpowers.

A key feature of the new capitalism was protectionism. Britain alone remained committed to free trade. The average tariff charged on foreign imports in 1914 was 13% in Germany, 18% in Austria-Hungary, 20% in France, 38% in Russia, and 30% in the US (in the latter case, down from a staggering peak of 57% in 1897).

The second trend was colonialism. In pursuit of cheap raw materials, captive markets, and new investment outlets, the great powers turned much of the ‘underdeveloped’ world into a geopolitical battleground.

Colonial rivalries erupted in the Far East, Central Asia, the Middle East, Africa, and the Balkans. In 1876, only 10% of Africa was under European rule. By 1900, more than 90% of it had been colonised.

Railways were again at the centre of events. With the market glutted in Europe, new railways were constructed across the globe. The ‘Berlin to Baghdad’ railway, designed to link Germany, Austria-Hungary, the Balkans, and the Ottoman Empire, is a famous example. It was a direct challenge to British and French interests in the increasingly important Middle East.

Protectionism and colonialism were competitive. So, too, was the third trend: rising arms expenditure.

British military expenditure, for example, which had remained stable in the 1870s and 1880s, rose dramatically from £32 million in 1887 to £77 million in 1914.

Britain’s rulers were responding to a European-wide arms race, and in particular to the challenge of a growing German navy. German naval spending rose from 90 million marks in the mid 1890s to 400 million in 1914. The British fleet increased in size from 29 battleships in 1899 to 49 in 1914, the German fleet from 7 battleships to 29.

The Long Depression was ended, like the Great Depression, by military expenditure. State arms contracts turned firms like Krupps in Germany and Armstrong-Whitworth in Britain into giant corporations.

Krupps at Essen employed 16,000 workers in 1873, but 70,000 in 1912. Armstrong employed 40% of the all the engineering workers on Tyneside in 1914.

The ‘multiplier effect’ was huge. Some 1500 small firms worked as direct sub-contractors of Armstrong of Newcastle, for example, while uncounted thousands more supplied the goods and services required by a growing industrial city of 200,000 people.

The Long Depression started the countdown to the First World War.