One of my applications requires me to submit two writing samples of 2,000 words. The choice of the first one is simple — I will just rewrite the draft of my thesis in a more concise way. Selecting the second piece has been more difficult, because I haven’t produced any long writings recently. Last year’s 350 paper would qualify, but frankly it’s not very good. The History of Economic Thought final is good, but cannot be cut by the necessary two thirds.
Finally I remembered the five page essay I wrote as a part of one of my seminar assignments this fall. It applies the Kindleberger/Minsky six-step theory of financial crises on the Prussian crash in 1873. At 1,200 it is too short, but I had a couple of history books shipped to my place in Ohio and after going skimming a few relevant chapters, I am elated. By the end of the week the paper will be much great!
Personally, I find the 1873 crisis extremely interesting. Brief overview: it occurred because the Prussian government was able to pay off all of its public debt as a result of the French indemnities after the Franko-Prussian war. The lack of low-yielding but safe investment opportunities pushed Prussian financiers — both professional and amateur, ie, households — into riskier assets. The stock market boomed and hundreds of companies filed for IPO during the final months before the crisis (as a consequence of a new law that made incorporation easier). Henry B. Strousberg, a prominent industrialist, grew fantastically rich during the boom — his holding company’s stock would not cease to rise. Unfortunately, it was discovered that he was cooking the books. Market suffered a confidence shock and began to fall, soon being joined by other stock exchanges throughout Europe.
That all seems fairly mundane (apart from the reparations bit). The most curious aspect of the 1873 crisis is the transmission mechanism that brought it to the U.S..
United States were at that time in the middle of their own financial problems. Stock markets were soaring uncontrollably, as were real estate prices in New York and Chicago. Significant portion of U.S. exports was in form of silver.
Europe at that time relied on a silver standard, ie, each country’s money was backed by its physical holdings of silver (or also on bimetallic standard). The precious metal ensured stable prices for trading, particularly with the East. Its commercial importance, however, had been waning. Bismarck, who was awash with gold received form the French, decided to switch entirely to gold standard. He began dumping Prussian silver to the market, where the French had to purchase it to maintain their bimetallic standard. To pay for it, they began selling their gold. Bismarck thus got rid of his silver at artificially high prices, acquired more gold at artificially low prices, and established Prussia’s position in international trade. As soon as the French realized they are not behaving ideally, they stopped purchasing silver and the whole market for the commodity froze. The U.S. exports of silver came to a halt, and so did the economic growth. Recession followed. Some world economies recovered relatively quickly — Prussia in about five years — but growth of others remained retarded for more than two decade. Hence the name Long Recession.
Thrilling, isn’t it? Can’t wait to read and write about it more.