The Panic of 1873 and Its 20-Year Political Toll

There is a version of investing wisdom that says the best returns come from information nobody else has. William Gladstone, four-time British prime minister, seems to have proven it by accident. In the early 1880s he quietly put 40 percent of his net worth into Egyptian government bonds, which were paying 12 to 14 percent interest (09:44). Then Britain invaded Egypt. Then Britain insisted Egypt repay its foreign creditors in full, at par. Gladstone's bonds, bought at a discount reflecting real default risk, turned into one of the great trades of the Victorian age. Whether he engineered this or simply believed, with total sincerity, that debts are debts and must be paid, is a question the historian Liaquat Ahamed cannot fully answer. "I'm sure he thought that it was the moral thing for Egypt to pay its debts," he tells Tyler Cowen (11:59), before adding the harder part: if Gladstone could have forced the same terms on Turkey, which also owed European bondholders, he would have. He couldn't, because Turkey mattered more. Egypt owed roughly 500 billion dollars to British and French investors and paid close to full value; Turkey owed about a billion and settled for something like 30 to 50 cents on the dollar (10:59). The difference was not the size of the debt. It was geopolitics. Britain needed the Ottoman Empire intact as a check on Russia, and needed Egypt as nothing more than a ledger entry.

Ahamed's new book is called 1873, after the panic that supplies its title, and his conversation with Cowen keeps circling back to a single, almost architectural idea: a financial crisis can leave the economy standing while it quietly rearranges the politics around it. His earlier book, Lords of Finance, won a Pulitzer Prize for showing how the 1929 crash produced the Great Depression. The new one argues that the Panic of 1873, despite giving its name to what contemporaries called the Long Depression, did remarkably little damage to output. By one measure, the major economies grew at 2.5 percent a year for two decades after 1873, even as prices fell (02:10). "A better title would have been The First Great Deflation," Ahamed says, noting that wages and prices in that era were flexible enough to absorb the shock in a way later economies, with their sticky nominal wages, could not.

"A better title would have been The First Great Deflation." — Liaquat Ahamed [02:10]

If the economy adjusted, the political system did not. Ahamed traces a line from the 1873 crisis to the collapse of the Republican Party's postwar dominance in the United States, the contested 1876 election, and the backroom bargain that ended Reconstruction (06:32). What followed, he argues bluntly, was Jim Crow.

"The 1873 depression... was the end of Reconstruction. It's not hard to trace a line from there to Jim Crow." — Liaquat Ahamed [07:06]

This is the pattern that interests Ahamed more than GDP charts: deflation does not just lower prices, it redistributes power, and the losers in that redistribution do not stay quiet. In Europe the same decades brought a revival of protectionism, a retreat from the liberal confidence of the mid-Victorian years, and new imperial appetites, including Britain's invasion of Egypt. Cowen pushes back gently, noting that imperial land grabs were hardly new to nineteenth-century Britain. Ahamed's answer is that 1873 marked "a sort of second wind to imperialism" (03:44), reviving a project that had briefly seemed to be losing momentum.

The Villain of the Piece

Ask Ahamed who the heroes of this story are and he resists the frame; mostly, he says, the people running the global monetary system in the 1870s and 1880s had no real idea how it worked (20:58). Ask him who the villain is, though, and he does not hesitate.

"The biggest villain in my whole book is Bismarck." — Liaquat Ahamed [14:16]

German chancellor Otto von Bismarck, flush with victory after the Franco-Prussian War, imposed a punishing reparations bill on France and, in Ahamed's telling, went further by dismantling bimetallism, the system under which currencies were backed by both gold and silver at a fixed ratio. France had been the linchpin of that system, holding the largest reserves of precious metal and successfully stabilizing the relative price of gold and silver for decades (14:53). When Germany abandoned bimetallism for a pure gold standard, the system France had anchored came apart, and with it went the cushion that had kept global prices steady. Ahamed believes the resulting deflation, not some natural law of monetary history, set off the distributional damage of the next quarter century (15:34). Cowen presses him on whether any currency peg can really survive for long, and Ahamed concedes the obvious limit: a system backed by two metals collapses once one metal's supply swings wildly relative to the other. What saved the gold standard from exactly that fate, almost by accident, was geology. The gold discoveries in South Africa in the 1890s flooded the world with new bullion just as deflationary pressure was becoming unbearable.

"I think the South African gold discoveries essentially saved the gold standard." — Liaquat Ahamed [17:38]

Without that windfall, Ahamed thinks the United States might well have abandoned gold for silver within another decade (17:38), a counterfactual that would have rewritten twentieth-century finance before it began.

Who Pays the Bill

The conversation jumps forward half a century to Germany's hyperinflation of the 1920s, when the currency collapsed so completely that people reportedly used wheelbarrows to carry cash to market. Ahamed offers a reading that is more cynical than the textbook story of simple monetary mismanagement: he suspects the inflation may have been, in part, a deliberate strategy to convince Germany's creditors that war reparations could never be collected (24:54). The policy worked in one narrow sense. Central bank governor Hjalmar Schacht later stabilized the currency and is credited with presiding over what Ahamed calls two separate German economic miracles, the recovery of the mid-1920s and, more troublingly, the rearmament boom of the 1930s under Hitler, built on empty reserves and tight import controls (26:20).

From here the thread runs forward to Ahamed's own years working with the World Bank and his book on the International Monetary Fund. His verdict on that institution is pointed: the United States, he says, has repeatedly used the IMF as an arm of its own foreign policy, pushing money into countries whose debts are not sustainable (32:26). The deeper failure, in his view, both in the Eurozone crisis and in the run-up to 2008, was the absence of any clean mechanism for restructuring debt that cannot be repaid. Someone has to decide who eats the loss, and Europe, lacking a single fiscal authority willing to play that role, let the question fester (32:56).

"I would not respond to pressure from the US to put money into unsustainable countries." — Liaquat Ahamed [32:26]

Asked why Britain, with an educational system that keeps producing the inventors behind modern artificial intelligence, has seen almost no real wage or productivity growth since the 2008 financial crisis, Ahamed admits he does not know (34:20). It is a small, honest gap in an otherwise confident account, and it matters, because it is the same puzzle that runs through the whole conversation: good institutions and smart people do not automatically produce good outcomes. Systems need something to hold them steady, the way France's reserves once held gold and silver in balance.

That idea resurfaces, unexpectedly, at the end of the interview, when Cowen asks about Ismaili Islam, the branch of Shia Islam to which Ahamed belongs by birth though he describes himself as non-practicing. Ismailis, he explains, follow a living spiritual leader, the Aga Khan, regarded as a direct descendant of the Prophet Muhammad, whose authority over a community of two to three million people worldwide is centralized and continuously updated (40:44). If the Aga Khan says move to Africa, Ahamed notes, large parts of the community will do it. It is, structurally, the opposite of the chaos Ahamed has spent the whole conversation describing: one trusted authority, able to adjust course in real time, rather than a system of rigid pegs waiting to snap.

Near the close, Cowen asks what Ahamed is optimizing for, since he left a successful private-sector career, declined to finish a Harvard doctorate, and has now written three books he did not need for income. The answer is almost offhand but it is the clearest statement of method in the whole hour.

"When you want to find out about something, writing a book about it is a remarkably good way of learning it." — Liaquat Ahamed [37:10]

That is as good a description as any of what this conversation delivers: not a tidy theory of financial crises, but the record of someone thinking his way through 150 years of them, out loud, in real time, still revising as he goes.