When the Vienna Stock Exchange collapsed on Friday, May 9, 1873, few people were taken by total surprise. For months, observers had been sounding alarms about how the market was becoming untethered from reality—the value of stocks listed on the exchange had gone up an eye-watering 300 percent over the previous three years—and predicting that it was bound to eventually implode. Hundreds of newly minted companies had been floated on the exchange, and the volume of stock trading had exploded. For a while, it seemed as if everyone in Vienna had succumbed to a kind of collective madness. People from every stratum of society—not just the usual middle-class doctors and lawyers with savings to spare but waiters from the coffeehouses on the Ringstrasse and shoeshine boys from the Graben, even archdukes and generals, duchesses and their housemaids—had joined in the frenzy of gambling, buying stocks on margin with money they did not possess. The speculative fever was not restricted to stocks alone. The bubble had in fact originated in the real-estate market. Beginning in the late 1860s, prime Viennese properties had started climbing in price, and by the early 1870s, they were doubling in value every eighteen months.

Black Friday in Vienna

What did come as a shock, though, when the stock market finally tumbled that Friday, was the sheer velocity of the fall. Bank stocks, the most speculative segment of the market, went down a staggering 45 percent in a single day, which the papers promptly dubbed, not very originally, “Black Friday.”* While the turmoil on the exchange created wider ripples (for example, the Bank of England, which set credit conditions for much of the world, did briefly tighten by raising its base rediscount rate from 3 to 7 percent), the reverberations proved to be short-lived. Within weeks, international bankers were dismissing the crash in Vienna as an isolated event, a much-needed correction in a single market that had lost its moorings.

Trouble crosses the Atlantic

Four months later, however, in early September, financial troubles emerged across the Atlantic in New York, suggesting that perhaps more profound, systemic forces were at work beneath the surface prosperity of the global economy. Jay Cooke & Co.—the preeminent American investment bank with branches in Philadelphia, New York, and Washington, D.C.—had fatally overextended itself after making loan commitments that it could now no longer meet. In a desperate bid for survival, the firm tried to raise additional funds but, despite offering extremely generous terms to potential investors, found no takers. Jay Cooke, the bank’s founder and namesake, insisted, in total denial of reality, that his institution faced only temporary liquidity problems and remained fundamentally sound. No one else, not even any of his partners, was persuaded. Within a few days, the bank shuttered its doors and declared bankruptcy.

The collapse of this one institution had a devastating impact; in one fell swoop it dramatically changed the psychology of investors, setting in motion a scramble for cash that metastasized into a full-blown run on the New York banking system. The New York Stock Exchange took the unprecedented step of suspending trading entirely—the market would remain closed for ten days. To calm Wall Street, the president and his secretary of the Treasury were compelled to step in by providing emergency liquidity to the market. While the most visible sign of distress was the implosion of the stock market, the real trouble, its true epicenter, in fact lay in the bond market, particularly railway bonds. Within five years, more than half of the $2.2 billion in railway bonds listed on the New York Stock Exchange would default, leaving investors with losses of almost $600 million.

Contagion returns to Europe

The contagion of fear now shifted, reversing course and crossing back over the pond. On September 20, as the news from New York arrived in Europe, German and Dutch investors who had put money into American railroads took flight. A wave of panic selling hit exchanges across Europe, including in Berlin, Amsterdam, and Brussels, which in turn reignited the selling in Vienna. On November 1, the Vienna Stock Exchange took another giant tumble.

Over the next three years, both the Berlin and Vienna stock markets would plummet by 40 percent. In the meantime, the scare spread to other markets closely linked to those in central Europe, such as those of Switzerland and Italy, though Europe’s two largest markets, those of London and Paris, remained strangely immune.

From London to the rest of the world

The turmoil on the stock exchanges of Vienna, Berlin, and New York had its most immediate impact on the economies of central Europe and the United States. It took a little while for it to register across the wider world. The transmission went through London, the world’s financial capital, as bankers, chastened by the mounting risks of default, slashed their lending. By 1876, the volume of loans channeled from Britain to the rest of the world had fallen by 80 percent. Only a couple of years before, British and French banks had competed with reckless abandon to lend money to the poorer countries of the world. Now with their supply of new credit cut off, these countries found it impossible to keep servicing their existing debts. Fifteen non-European nations, collectively owing more than $2 billion, suspended interest payments. The two biggest defaulters—Ottoman Turkey, with $1.1 billion outstanding, and Egypt, with nearly $500 million—faced particularly severe consequences.

The fall of two autocrats

The autocrats at the helm of these two countries—Abdülaziz, sultan of the Ottoman Empire, and his cousin and vassal Ismail Pasha, khedive of Egypt—who had mortgaged their nations during the boom years to finance their extravagances, paid dearly. Sultan Abdülaziz was deposed in a palace coup on May 30, 1876. A few days later, on June 4, he was found dead in his private chambers at Çırağan Palace in Constantinople, where he, his family, and selected members of his harem were being held prisoner. Both of his wrists had been slashed—an apparent suicide with a pair of scissors, though the circumstances were highly suspicious. The Egyptian, Khedive Ismail, survived somewhat longer. But he, too, was ultimately deposed. In the summer of 1878, he was replaced by his son Tawfiq and sent into luxurious exile at a royal palace nestled on the slopes of Mount Vesuvius, outside Naples.

A forgotten crisis with a familiar ring

Despite the profound changes in the financial landscape since then, it is remarkable how so many elements of the preceding story—the real-estate bubble, stock-market mania, careless lending, cascade of defaults, financial disruptions ricocheting across the ocean, drastic austerity programs, and ensuing social unrest—carry such a familiar ring. The events of 1873 are now largely forgotten. But to the generation growing up in the early twentieth century, 1873 loomed as large in the public consciousness as the Great Crash of 1929 does today. And like the Great Crash, it was viewed as having set the stage for a twenty-year period of economic upheaval that in its day even came to be known as the Great Depression.

The first era of globalization

The year 1873 marked the first truly significant global financial crisis. Like so many of the cataclysms that were to hit the capitalist world over the next 150 years—the Great Depression of the 1930s, for instance, and the global financial crisis of 2008—the crisis of 1873 was foreshadowed by an extraordinary boom. The two and a half decades from 1848 to 1873 represented the first worldwide economic expansion in Western history, fueled by a massive spread in international trade and a jump in capital investment. This quarter century, which would prove to be the first era of globalization, was dominated by four powers—Britain, the United States, France, and Germany—which collectively grew by 80 percent over those twenty-five years.

Britain remained the world’s dominant economic force, serving as the manufacturing, financial, and trading powerhouse at the hub of the global system. The fastest-growing economy, however, was that of the United States, which nearly tripled, despite an intervening civil war, and stood poised to overtake Britain’s as the world’s largest. France and the recently unified Germany occupied third and fourth place with nearly equal economies, roughly two-thirds the size of Britain’s and America’s.

A cascade of shocks

When the financial collapse came in 1873, the global economy was struck not by a single shock but by a cascading chain of them, originating in different parts of the world—in Europe, in the United States, and in developing countries—each with distinctive causes yet all feeding upon one another as financial chaos in one corner of the globe successively contaminated other parts of the world.

And yet what is also notable, and what makes 1873 so distinctive, is that the immediate economic impact of all the financial turbulence proved to be relatively modest.

Excerpted with permission from Penguin Random House India.