The Long depression was the first worldwide economic crisis, which happened in 1873. It all began with a building boom in Europe, with increasing building construction taking place in Vienna, Paris and Berlin. They were leading European cities at the time, with strong and developed financial markets. Housing bubble further expanded with mortgages.
In those days mortgages were easy to get and large British banks happily made loans to any developer who requested them. Developers made more buildings to satisfy the demand and soon more mortgages became available from new savings banks especially designed for the emerging middle-class. Because credit was so easy to obtain, people even used half-completed buildings as collateral.
The roots of the depression in Europe were also in the 1870 Franco-Prussian War that hurt the French economy and forced the country to make large war reparations payments to Germany. All European economies had their weaknesses, which came to light at different times.
Unresolved international relations combined with negative economic cycle proved to be a perfect mix for a crisis.
United States railroad speculation
In the United States the economy was over-expanded, particularly in railroad construction. After the Civil War the country needed rebuilding, so housing and construction boomed. Railroads were built at a record rate in order to connect the cities, to find new wealth, to establish new trade routes, etc. It was considered to be an era of great prosperity, which seemed to last for years. Shops were full of customers, while prices of commodities continuously reached new levels.
Transcontinental Union Pacific Railroad paved the way to the railroad speculation bubble, as people began to think that growth is unlimited. The company mentioned above will play a major role in the next great crisis, but at the time it was considered to be a cornerstone of the American economy. Several other railroad companies together with banks actually caused the crisis, abusing poorly written government imposed regulation and misjudging the market state completely. The myth of infinite growth was finally shattered in 1873, with stock market crash which started the Long Depression. The weak link turned out to be Jay Cooke and Company, a large and respected banking house.
The weak link turned out to be Jay Cooke and Company, a large and respected banking house. Cooke had played a large role in financing the Union war effort by marketing federal bonds to farmers and workers. After the war, his firm had become the government's agent in financing railroad construction. In the years between the end of the Civil War and the demise of Cooke's firm, railroads laid 35,000 miles of new track in the United States and became the nation's largest employers.
Eastern financial markets and railroad companies shared many common interests. They helped the United States Government finance the Civil War efforts and also underwrote the construction of the Northern Pacific Railroad. On September 18, 1873 the Northern Pacific company announced its failure and declared bankruptcy which is considered to be the start of the Long Depression.