Long Depression Begins

The Long Depression began in 1873, when a stock market crash in Vienna set off a wave of financial panics across Europe and North America. It was not a continuous collapse so much as a prolonged period of falling prices, weak profits and recurring slumps that lasted, depending on the historian, until the mid-1890s. The label has been debated for a long time, since output and trade in many countries kept growing. Even so, the era reshaped economic policy, ended the confident free-trade mood of the mid-century, and helped drive the rise of both protectionism and organized labor.

The background was a boom. After 1850, railways, steam shipping, telegraphs and new industrial methods spread rapidly, and German unification in 1871 brought a large French indemnity into the German economy. In Germany and Austria-Hungary, this fueled a speculative frenzy of company promotion, bank lending and property development, often called the Gründerzeit. In the United States, railroad construction was financed heavily by bonds and credit. Much of this investment rested on optimistic expectations rather than on solid returns.

The Vienna exchange crashed in May 1873, shortly after the opening of the city's World's Fair, and the shock soon spread to other financial centers. In September, the American banking house Jay Cooke & Company failed because of overextension in railroad finance, triggering the Panic of 1873 in the United States. Banks closed, railroads went bankrupt and the New York Stock Exchange suspended trading for around ten days. Unemployment rose sharply in industrial cities on both sides of the Atlantic, and construction and heavy industry were hit especially hard.

In the following years, prices generally drifted downward, a trend economists call deflation. Cheap grain from North America, Russia and later Argentina and Australia, carried by steamships and railways, undercut European farmers. Many governments responded with tariffs: Germany adopted protective duties in 1879, and France and others followed later. Several countries moved onto the gold standard in this period, and some historians argue that the resulting tightness in the money supply deepened deflation, though this is contested.

The consequences were political as well as economic. Labor movements and socialist parties gained strength, cartels and large corporations grew as firms sought to limit competition, and imperial powers pursued overseas markets with new urgency, a drive that fed into the late-century scramble for Africa. Recovery was uneven, with several weaker downturns along the way, and by the mid-1890s a new cycle of growth was under way. Many economists now see the Long Depression less as one continuous crisis than as a turbulent adjustment to a more integrated global economy.