The 'Great Depression' of 1873-1896 held that title until the Great Depression of the 1930s and was later named Long Depression.
The myth of the great depression
Some economic historians have complained about the "great depression" that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. However, this "depression" saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, and real per capita income. As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged "monetary contraction" never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.
The myth was brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. In the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers. The analogous "great depression" in England in this period was also a myth for the same reasons.
Although per-capita nominal income declined very gradually from 1873 to 1879, that decline was more than offset by a gradual increase over the course of the next 17 years. Finally and most significantly, real per-capita income either stayed approximately constant (1873-1880; 1883-1885) or rose (1881-1882; 1886-1896), so that the average consumer appears to have been considerably better off at the end of the 'depression' than before. Studies of other countries where prices also tumbled, including the US, Germany, France, and Italy, reported more markedly positive trends in both nominal and real per-capita income figures. Profits generally were also not adversely affected by deflation, although they declined (particularly in Britain) in industries that were struggling against superior, foreign competition.
Accompanying the overall growth in real prosperity was a marked shift in consumption from necessities to luxuries: by 1885, 'more houses were being built, twice as much tea was being consumed, and even the working classes were eating imported meat, oranges, and dairy produce in quantities unprecedented'. The change in working class incomes and tastes was symbolised by 'the spectacular development of the department store and the chain store'. In short, the Great Depression of 1873-96, considered as a depression of anything except the price level, appears to be a myth:
Prices certainly fell, but almost every other index of economic activity - output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight clearances, joint-stock company formations, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco - all of these showed an upward trend.
Certain branches of economic activity were indeed depressed between 1873 and 1896; in Britain these included foreign trade prior to 1875, agriculture in the late 1870s, and (as a result of increased foreign competitiveness) 'basic industries' such as the iron industry beginning in the 1880s. These troubled sectors of the economy were a source of increased structural unemployment and of 'continuous ululations of business people' inspiring calls for 'reciprocity' and 'fair trade' and provoking various royal and parliamentary inquiries. Britain and other gold standard nations were also far from being immune to genuine cyclical downturns, sometimes lasting several years and interrupting the otherwise positive trend of per-capita real income.
But a large part at least of the deflation commencing in the 1870s was a reflection of unprecedented advances in factor productivity. Real unit production costs for most final goods dropped steadily throughout the 19th century, and especially from 1873 to 1896. At no previous time had there been an equivalent 'harvest of [technological] advances...so general in their application and so radical in their implications'. That is why, notwithstanding the dire predictions of many eminent economists, Britain did not end up paralysed by strikes and lock-outs. Falling prices did not mean falling money wages. Instead of inspiring large numbers of workers to go on strike, falling prices were inspiring them to go shopping!
Ironically, if there ever was a protracted 'depression' at the end of the 19th century, it occurred, not during the oft-maligned era of falling prices, but immediately afterwards, when output prices began to rise.
- Friedman, Schwartz. A Monetary History of the United States: 1867-1960.
- Murray N. Rothbard. "A History of Money and Banking in the United States: The Colonial Era to World War II" (pdf), The War of 1812 and its Aftermath, p.145, 153-156. Referenced 2011-01-15.
- A.E. Musson. "The Great Depression in Britain, 1873–1896: a Reappraisal", The Journal of Economic History (1959), 19: 199-228
- George Selgin. "Less Than Zero - The Case for a Falling Price Level in a Growing Economy", The Institute of Economic Affairs, 1997, p.49-53. Referenced 2011-01-15.
- Long Depression on Wikipedia