Rothschilds, Railroads, & Ruin | Liaquat Ahamed on “1873” (New Book!)

**Jack Farley** (0:00)
I am so glad today we have a very special guest, one of my favorite authors of all time, Liaquat Ahamed, who is the author of the new book, 1873, The Rothschilds, The First Great Depression, and The Making of the Modern World. Liaquat, welcome to Monetary Matters.

**Liaquat Ahamed** (0:17)
Thank you, Jack, and thank you for having me.

**Jack Farley** (0:19)
I want to ask you about 1873, why it's so important. What drew you to this year?

**Liaquat Ahamed** (0:28)
I had written a book about the lead up to 1929 and the Great Depression, and that focused very much on the conduct of monetary policy by the four central bankers. I was looking around for another financial crisis. I'm actually not a misanthrope, but I do like writing about financial crises, because as an economic historian, they're really quite dramatic and history speeds up, but lots of things happen. And 1873 really piqued my interest, because it was both a giant financial crisis or a sequence of financial crises in three different financial centers.
But superimposed upon it was a crazy reordering of the monetary system, and a totally unnecessary reordering of the monetary system that very few people seek to know about. I thought that makes a fantastic story of both what a boom-bust cycle looks like, and then throw in a sequence of major monetary missteps. And since my original book, Lords of Finance, argued that the central mistake in the 20s was a series of monetary policy mistakes, I thought this sounds just perfect material for me.

**Jack Farley** (1:58)
Yeah, your book, Lords of Finance, about the 1920s and 1930s, in my opinion, the greatest financial history book in my opinion. Tell us, what was the monetary misstep coming up into 1873?

**Liaquat Ahamed** (2:14)
Okay, for 50 years, the world had relied on a combination of gold and silver, as the foundation for the monetary system. And we'd had periods of major gold discoveries, and we'd had periods of major silver discoveries. And it had proved, the system had proved to be really quite resilient. That when there was a lot of silver, that was absorbed by central banks, and when there was a lot of gold, that was also absorbed by central banks. So the monetary base, if you like, which depended on precious metals, was really quite stable and grew quite systematically. At the heart of this were two countries. Somewhat surprisingly, the US, which relied both on silver and gold, and France, which also had a bimetallic system relying on gold and silver.
Now, a third of the financial world, Britain, was on gold. The other third was on silver. So Germany, China, India, Turkey, Mexico, were all based on silver. And the swing factor that acted as a balancing item was France and the US. And it had worked brilliantly. We'd had stable prices throughout the 19th century.
And in 1873, and this is not a well-known story, Bismarck had defeated France on the battlefield, and decided to double down by trying to attack France using his reserves, his precious metal reserves, by dumping all his silver and moving to gold in the period of one to two years. Thinking that that way, because the French held the most amount of silver in the world, that they, he would be damaging France.
And he did, but he damaged himself. It was actually a self-inflicted wound, because every country in Europe at that point panicked and started dumping their silver. And that caused a giant sort of move from silver to gold. And people started trying to horde central banks, started trying to, there was a scramble for gold. And under any sort of precious metal standard, whenever everyone tries to scramble for a particular precious metal, it causes a contraction in liquidity and money supply.

**Jack Farley** (5:29)
So Bismarck, the head of Germany, won a war against France and wanted to penalize France, so moved off of silver. Why did that cause a contraction in liquidity? And also, what year is it? Is this before 1873 or exactly 1873?

**Liaquat Ahamed** (5:44)
Actually exactly in 1873 And the world could have coped with it if, you know, under normal circumstances. But to do this in the middle of a financial crisis. Now, anyone who knows about financial crisis, crises, knows that in the middle of a financial crisis, everyone tries to hoard precious metals and get out of paper money.
And so, the role of the central bankers, banks, is to expand their money supply and accommodate that demand. And to have that, to have Bismarck try to damage France and cause it to contract its money supply, right in the middle of the financial crisis was a step too far.