Roots of the Evil – The Great Crash 1873

Bankers and politicians declare in millions of interviews and press statements that the current banking crisis is something totally new and nobody could predict it. This is certainly not true (much like the other stuff your banker is telling you) . The great crash in 1873 in Germany was just one of many starting points of the great depression hitting Europe in 1929.

• The first common problem between 1873 and the current crisis was deregulation. Starting with a law in1870 which allowed creating banks and  public companies without any strings attached. As a result 107 banks and 928 public companies were founded between 1871 and 1873.  Everybody could found a bank and collect money from the public.
• The second problem was short term. massive supply of money (3 times the GNP of Germany) mainly coming from France, after France lost the war 1871.  However, the money was flowing only for a very short time.
• The third common problem was the explosion of the real estate market. Profits of 600% per year were possible. Most of the long term real estate investments was financed with short financing contracts.  Today you still can see a lot of big buildings from the “Gründerzeit”.  Brick and Mortar lasted but the money of the investors was gone.
• The fourth problem was the huge amount of “fake” and overvalued shares. Even in 1870 the Germans bought American railway shares which soon became worthless. One company was even selling shares successfully for a “moon to earth” railway system.
• The fifth problem was a major change in technology. With the exploitation of steam engines to the production and transportation of wheat from USA and barley from Russia. The German farmers were no longer competitive – export of grain declined dramatically (much like export of cars or import of goods from China today).
• The sixth problem was that more and more people could not make their living anymore in the countryside. Thus people moved to the cities and lived in slums.
• Much like today everybody was playing the financial poker game. The game ended when the Rothschild Bank collapsed in May 1873 (the Lehman Brothers of 1873).

I guess that’s enough material to think about!

Recommended reading: Die Wurzeln des Bösen [The Roots of Evil] by Massimo Ferrari Zumbini