Cycles of History

A new economic superpower undermines established economic leaders. The collapse of complex financial instruments turn a boom into a bust. Banks fail in waves. Unemployment reaches up to 25% in some areas. A global depression holds on for more than two decades. Class warfare breaks out. Transportation networks stall—along with industries dependent upon them—as the main “fuel” for transportation disappears. Pandemic disease exacts a terrible toll. Religious fundamentalism skyrockets. Totalitarianism rises around the world.

I’m describing the 1870s-1890s. Hopefully, I’m not also describing the next couple of decades.

Historian Scott Reynolds Nelsen argues in the Chronicle of Higher Education that today’s financial crisis bears a much closer resemblance to the Panic of 1873 and the resulting Long Depression than to the more familiar Great Depression of 1929. He writes:

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. [...] The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. [...]

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. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing).

Among the results of the 1873 Panic & Long Depression (lasting until 1896) were the labor movement and religious fundamentalism in the US, modern anti-semitism in Europe, and (according to Hannah Arendt) the origins of totalitarianism.

As for transportation networks and pandemic, they were actually connected issues. In 1872, equine influenza took hold in the US, infecting close to 100% of all horses, with a mortality rate ranging from 1-2% to 10%. The “Great Epizootic of 1872” froze horse-drawn transportation (even leaving the US cavalry on foot), which in turn stalled trains because of the lack of coal transport.

As a preview of peak oil it’s admittedly shallow, but the similarities are there. The damage to transportation and industry in 1872 was a significant multiplier to the financial crisis; a modern collapse of transportation—even if equally temporary—would be potentially even more devastating.

Our understanding of and tools for managing the global economy are better now than in the 1870s, and there are enough divergent drivers to make the overall parallel more instructive than spooky. But while we may be missing some of the factors that made the Long Depression so bad, we have plenty new elements that threaten to make the current situation even worse: climate disaster, networked terrorism, and much more deeply-linked economic interdependence between states.

If we generalize a bit from the 1870s-1890s, a handful of key issues emerge as likely to have echoes today: