Long Depression
The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used.[1] It was most severe in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. The episode was labeled the "Great Depression" at the time, and it held that designation until the Great Depression of the 1930s. Though it marked a period of general deflation and a general contraction, it did not have the severe economic retrogression of the Great Depression.[2]
Great Britain was the hardest hit; during this period it lost some of its large industrial lead over the economies of
In the United States, historians refer to the Depression of 1873–1879, kicked off by the Panic of 1873, and followed by the Panic of 1893, book-ending an era of prosperity. The U.S. National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction.[5][6] In the United States, from 1873 to 1879, 18,000 businesses went bankrupt, including 89 railroads.[7] Unemployment peaked in 1878 at 8.25%.[8]
Background
The period preceding the depression was dominated by several major military conflicts and a period of economic expansion. In Europe, the end of the
Causes of the crisis
In 1873, during a decline in the value of silver – exacerbated by the end of the German Empire's production of
The Panic of 1873 has been described as "the first truly international crisis".[13] [page needed] The optimism that had been driving booming stock prices in central Europe had reached a fever pitch, and fears of a bubble culminated in a panic in Vienna beginning in April 1873. The collapse of the Vienna Stock Exchange began on May 8, 1873, and continued until May 10, when the exchange was closed; when it was reopened three days later, the panic seemed to have faded, and appeared confined to Austria-Hungary.[13][page needed] Financial panic arrived in the Americas only months later on Black Thursday, September 18, 1873, after the failure of the banking house of Jay Cooke and Company over the Northern Pacific Railway.[14] The Northern Pacific railway had been given 40 million acres (160,000 km2) of public land in the Western United States and Cooke sought $100,000,000 in capital for the company; the bank failed when the bond issue proved unsalable, and was shortly followed by several other major banks. The New York Stock Exchange closed for ten days on September 20.[13][page needed]
The financial contagion then returned to Europe, provoking a second panic in Vienna and further failures in continental Europe before receding. France, which had been experiencing deflation in the years preceding the crash, was spared financial calamity for the moment, as was Britain.[13][page needed]
Some[
In the US the speculative nature of financing due to both the
Because of the Panic of 1873, governments
Course of the depression
Like the later Great Depression, the Long Depression affected different countries at different times, at different rates, and some countries accomplished rapid growth over certain periods. Globally, however, the 1870s, 1880s, and 1890s were a period of falling price levels and rates of economic growth significantly below the periods preceding and following.
Between 1870 and 1890, iron production in the five largest producing countries more than doubled, from 11 million tons to 23 million tons, steel production increased twentyfold (half a million tons to 11 million tons), and
Many countries experienced significantly lower growth rates relative to what they had experienced earlier in the 19th century and to what they experienced afterwards:
1850s–1873 | 1873–1890 | 1890–1913 | |
---|---|---|---|
Germany | 4.3 | 2.9 | 4.1 |
Great Britain | 3.0 | 1.7 | 2.0 |
United States | 6.2 | 4.7 | 5.3 |
France | 1.7 | 1.3 | 2.5 |
Italy | 0.9 | 3.0 | |
Sweden | 3.1 | 3.5 |
1830 | 1840 | 1850 | 1860 | 1870 | 1880 | 1890 | |
---|---|---|---|---|---|---|---|
Russia | 10.5 | 11.2 | 12.7 | 14.4 | 22.9 | 23.2 | 21.1 |
France | 8.5 | 10.3 | 11.8 | 13.3 | 16.8 | 17.3 | 19.7 |
Great Britain | 8.2 | 10.4 | 12.5 | 16.0 | 19.6 | 23.5 | 29.4 |
Germany | 7.2 | 8.3 | 10.3 | 12.7 | 16.6 | 19.9 | 26.4 |
Austria-Hungary | 7.2 | 8.3 | 9.1 | 9.9 | 11.3 | 12.2 | 15.3 |
Italy | 5.5 | 5.9 | 6.6 | 7.4 | 8.2 | 8.7 | 9.4 |
Austria-Hungary
The global economic crisis first erupted in Austria-Hungary, where in May 1873 the Vienna Stock Exchange crashed.[13] In Hungary, the panic of 1873 terminated a mania of railroad-building.[21]
Chile
In the late 1870s the economic situation in Chile deteriorated. Chilean wheat exports were outcompeted by production in Canada, Russia and Argentina and Chilean copper was largely replaced in international markets by copper from the United States and Spain.[22] Income from silver mining in Chile also dropped.[22] Aníbal Pinto, president of Chile in 1878, expressed his concerns the following way:[22]
If a new mining discovery or some novelty of that sort does not come to improve the actual situation, the crisis that has long been felt, will worsen
— Aníbal Pinto, president of Chile, 1878.
This "mining discovery" came, according to historians Gabriel Salazar and Julio Pinto, into existence through the conquest of Bolivian and Peruvian lands in the War of the Pacific.[22] It has been argued that economic situation and the view of new wealth in the nitrate was the true reason for the Chilean elite to go into war with its neighbors.[22]
Another response to the economic crisis, according to Jorge Pinto Rodríguez, was the new pulse of conquest of indigenous lands that took place in Araucanía in the 1880s.[23][24]
France
France's experience was somewhat unusual. Having been defeated in the Franco-Prussian War, the country was required to pay £200 million in reparations to the Germans and was already reeling when the 1873 crash occurred.[13] The French adopted a policy of deliberate deflation while paying off the reparations.[13]
While the United States resumed growth for a time in the 1880s, the Paris Bourse crash of 1882 sent France careening into depression, one which "lasted longer and probably cost France more than any other in the 19th century".[25] The Union Générale, a French bank, failed in 1882, prompting the French to withdraw three million pounds from the Bank of England and triggering a collapse in French stock prices.[26]
The financial crisis was compounded by diseases impacting the wine and silk industries
Italy
A ten-year
Russia
The Russian experience was similar to the US experience – three separate recessions, concentrated in manufacturing, occurred in the period (1874–1877, 1881–1886, and 1891–1892), separated by periods of recovery.[29]
Great Britain
This section appears to contradict another section of this article.(January 2018) |
Great Britain, which had previously experienced crises every decade since the 1820s, was initially less affected by this financial crisis, even though the Bank of England kept interest rates as high as 9 percent in the 1870s.[13]
The 1878 failure of the City of Glasgow Bank in Scotland arose through a combination of fraud and speculative investments in Australian and New Zealand companies (agriculture and mining) and in American railroads.
Building on an
United States
Industry | % decline in output |
---|---|
Durable goods
|
30% |
Iron and steel | 45% |
Construction | 30% |
Overall | 10% |
In the United States, the Long Depression began with the Panic of 1873. The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction.[5][31] Figures from Milton Friedman and Anna Schwartz show net national product increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame.[32] However, since between 1869 and 1879 the population of the United States increased by over 17.5 percent,[33] per capita NNP growth was lower. Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.[34]
The dramatic shift in prices mauled nominal wages – in the United States, nominal wages declined by one-quarter during the 1870s,[14] and as much as one-half in some places, such as Pennsylvania.[35] Although real wages had enjoyed robust growth in the aftermath of the American Civil War, increasing by nearly a quarter between 1865 and 1873, they stagnated until the 1880s, posting no real growth, before resuming their robust rate of expansion in the later 1880s.[36] The collapse of cotton prices devastated the already war-ravaged economy of the southern United States.[17] Although farm prices fell dramatically, American agriculture continued to expand production.[30]
Thousands of American businesses failed, defaulting on more than a billion dollars of debt.[35] One in four laborers in New York were out of work in the winter of 1873–1874[35] and, nationally, a million became unemployed.[35]
The sectors which experienced the most severe declines in output were manufacturing, construction, and railroads.[30] The railroads had been a tremendous engine of growth in the years before the crisis, yielding a 50% increase in railroad mileage from 1867 to 1873.[30] After absorbing as much as 20% of US capital investment in the years preceding the crash, this expansion came to a dramatic end in 1873; between 1873 and 1878, the total amount of railroad mileage in the United States barely increased at all.[30]
The
The recession exacted a harsh political toll on President Ulysses S. Grant. Historian Allan Nevins says of the end of Grant's presidency:[38]
Various administrations have closed in gloom and weakness ... but no other has closed in such paralysis and discredit as (in all domestic fields) did Grant's. The President was without policies or popular support. He was compelled to remake his Cabinet under a grueling fire from reformers and investigators; half its members were utterly inexperienced, several others discredited, one was even disgraced. The personnel of the departments was largely demoralized. The party that autumn appealed for votes on the implicit ground that the next Administration would be totally unlike the one in office. In its centennial year, a year of deepest economic depression, the nation drifted almost rudderless.[38]
Recovery began in 1878. The mileage of railroad track laid down increased from 2,665 mi (4,289 km) in 1878 to 11,568 in 1882.[30] Construction began recovery by 1879; the value of building permits increased two and a half times between 1878 and 1883, and unemployment fell to 2.5% in spite of (or perhaps facilitated by) high immigration.[26]
Business profits declined briefly between 1882 and 1884.[26] The recovery in railroad construction reversed itself, falling from 11,569 mi (18,619 km) of track laid in 1882 to 2,866 mi (4,612 km) of track laid in 1885; the price of steel rails collapsed from $71/ton in 1880 to $20/ton in 1884.[26] Manufacturing again collapsed – durable goods output fell by a quarter again.[26] The decline became a brief financial crisis in 1884, when multiple New York banks collapsed; simultaneously, in 1883–1884, tens of millions of dollars of foreign-owned American securities were sold out of fears that the United States was preparing to abandon the gold standard.[26] This financial panic closed eleven New York banks, more than a hundred small state banks, and led to defaults on at least $32 million worth of debt.[26] Unemployment, which had stood at 2.5% between recessions, surged to 7.5% in 1884–1885, and 13% in the northeastern United States, even as immigration plunged in response to deteriorating labor markets.[26]
The 1880s 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.[39]
Reactions to the crisis
Protectionism
The period preceding the Long Depression had been one of increasing economic internationalism, championed by efforts such as the
As a result of the protectionist policies enacted by the world's major trading nations, the global merchant marine fleet posted no significant growth from 1870 to 1890 before it nearly doubled in tonnage in the prewar economic boom that followed.[44] Only the United Kingdom and the Netherlands remained committed to low tariffs.[42]
Monetary responses
In 1874, a year after the 1873 crash, the United States Congress passed legislation called the Inflation Bill of 1874 designed to confront the issue of falling prices by injecting fresh greenbacks into the money supply.[45] Under pressure from business interests, President Ulysses S. Grant vetoed the measure.[45] In 1878, Congress overrode President Rutherford B. Hayes's veto to pass the Silver Purchase Act, a similar but more successful attempt to promote "easy money".[30]
Strikes
The United States endured its first nationwide strike in 1877, the
New Imperialism
The Long Depression contributed to the revival of colonialism leading to the New Imperialism period, symbolized by the scramble for Africa, as the western powers sought new markets for their surplus accumulated capital.[47] According to Hannah Arendt's The Origins of Totalitarianism (1951), the "unlimited expansion of power" followed the "unlimited expansion of capital".[48]
In the United States, beginning in 1878, the rebuilding, extending, and refinancing of the western railways, commensurate with the wholesale giveaway of water, timber, fish, minerals in what had previously been Indian territory, characterized a rising market. This led to the expansion of markets and industry, together with the robber barons of railroad owners, which culminated in the genteel 1880s and 1890s. The Gilded Age was the outcome for the few rich. The cycle repeated itself with the Panic of 1893, another huge market crash.
Recovery
In the United States, the National Bureau of Economic Analysis dates the recession through March 1879. In January 1879, the United States returned to the gold standard which it had abandoned during the Civil War; according to economist Rendigs Fels, the gold standard put a floor to the deflation, and this was further boosted by especially good agricultural production in 1879.[49] The view that a single recession lasted from 1873 to 1896 or 1897 is not supported by most modern reviews of the period. It has even been suggested that the trough of this business cycle may have occurred as early as 1875.[50] In fact, from 1869 to 1879, the US economy grew at a rate of 6.8% for real net national product (NNP) and 4.5% for real NNP per capita.[51] Real wages were flat from 1869 to 1879, while from 1879 to 1896, nominal wages rose 23% and prices fell 4.2%.[52]
Explanations
Wells' opening sentence:
The economic changes that have occurred during the last quarter of a century – or during the present generation of living men – have unquestionably been more important and more varied than during any period of the world's history.
Other changes Wells mentions are reductions in warehousing and inventories, elimination of middlemen, economies of scale, the decline of craftsmen, and the displacement of agricultural workers. About the whole 1870–90 period Wells said:
Some of these changes have been destructive, and all of them have inevitably occasioned, and for a long time yet will continue to occasion, great disturbances in old methods, and entail losses of capital and changes in occupation on the part of individuals. And yet the world wonders, and commissions of great states inquire, without coming to definite conclusions, why trade and industry in recent years has been universally and abnormally disturbed and depressed.
Wells notes that many of the government inquiries on the "depression of prices" (deflation) found various reasons such as the scarcity of gold and silver. Wells showed that the US money supply actually grew over the period of the deflation. Wells noted that deflation lowered the cost of only goods that benefited from improved methods of manufacturing and transportation. Goods produced by craftsmen and many services did not decrease in value, and the cost of labor actually increased. Also, deflation did not occur in countries that did not have modern manufacturing, transportation, and communications.
Nobel laureate economist Milton Friedman, author of A Monetary History of the United States, on the other hand, blamed this prolonged economic crisis on the imposition of a new gold standard, part of which he referred to by its traditional name, The Crime of 1873.[55] Additionally, Friedman pointed to the expansion of the gold supply through Gold cyanidation as a contributor to the recovery.[56] This forced shift into a currency whose supply was limited by nature, unable to expand with demand, caused a series of economic and monetary contractions that plagued the entire period of the Long Depression. Murray Rothbard, in his book History of Money and Banking of the United States, argues that the long depression was only a misunderstood recession since real wages and production were actually increasing throughout the period. Like Friedman, he attributes falling prices to the resumption of a deflationary gold standard in the U.S. after the Civil War.
Interpretations
Most economic historians see this period as negative for the most industrial nations.[
Other economic historians have complained about the characterization of this period as a "depression" because of conflicting economic statistics that cast doubt on this interpretation. They note it saw a relatively large expansion of industry, of railroads, of physical output, of net national product, and of real per capita income.
As economists
Furthermore, real per capita income either stayed approximately constant (1873–1880; 1883–1885) or rose (1881–1882; 1886–1896), so 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 United States, 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 struggling against superior, foreign competition. Furthermore, some economists argue a falling general price level is not inherently harmful to an economy and cite the economic growth of the period as evidence.[58] As economist Murray Rothbard has stated:
Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket 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.[58]
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 symbolized by "the spectacular development of the department store and the chain store".
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.[59]
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 paralyzed by strikes and lockouts. 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.[60]
See also
- Crisis theory
- Economic history
- Equine Influenza of 1872
- Gilded Age
- Great Depression of British Agriculture(1873–1896)
- Kondratiev wave
- List of economic crises
- List of recessions in the United States
- New Imperialism
- Panic of 1873
- Panic of 1893
- Second Industrial Revolution
Footnotes
- ^ The Long Depression – the First Great Depression (America's Economic History. Posted Jul 16, 2015 by Martin Armstrong)
- JSTOR 2590515.
- S2CID 154705117.
- ISBN 0-8240-0944-4.
- ^ a b "Business Cycle Expansions and Contractions". National Bureau of Economic Research. Retrieved January 4, 2009.
- JSTOR 1927196.
- ^ The Economic Performance Index (EPI), Vadim Khramov and John Ridings Lee
- ^ James R. Vernon, "Unemployment rates in postbellum America: 1869–1899." Journal of Macroeconomics 16.4 (1994): 701–714. online
- ^ Glasner and Cooley, Business cycles and depressions : an encyclopedia p. 149
- ^ Glasner and Cooley, Business cycles and depressions : an encyclopedia p. 132.
- ^ Michael Edelstein, "The determinants of UK investment abroad, 1870–1913: the US case." Journal of Economic History 34.4 (1974): 980–1007.
- ^ Loomis, Noel M. (1968). Wells Fargo. pp. 219–220, 224–225.
- ^ ISBN 0-8240-0944-4.
- ^ ISBN 1-4000-7730-3.
- ^ ISBN 0-679-72175-4.
- ^ ISBN 0-679-72175-4.
- ^ ISBN 0-06-093716-5.
- ISBN 0-679-72175-4.
- ISBN 0-415-03690-9.
- ISBN 978-0006860525.
- ^ ISBN 0-415-19011-8.
- ^ a b c d e Historia contemporánea de Chile III. La economía: mercados empresarios y trabajadores. 2002. Gabriel Salazar and Julio Pinto. pp. 25–29.
- ^ Salazar & Pinto 2002, pp. 25–29.
- ^ Pinto Rodríguez, Jorge (1992), "Crisis económica y expansión territorial : la ocupación de la Araucanía en la segunda mitad del siglo XIX", Estudios Sociales, 72
- ^ ISBN 0-415-19011-8.
- ^ ISBN 0-8240-0944-4.
- ISBN 0-415-19011-8.
- ^ ISBN 0-415-19011-8.
- ISBN 0-8240-0944-4.
- ^ ISBN 0-8240-0944-4.
- JSTOR 1927196.
- ^ Milton Friedman, Anna Jacobson Schwartz. A monetary history of the United States, 1867–1960. Princeton University Press, 1971. p. 37
- ^ "United States Census" (PDF). Retrieved July 19, 2010. If the census figures are accurate, it is 17.83 percent.
- ^ "Business Cycle Expansions and Contractions". National Bureau of Economic Research. Archived from the original on September 25, 2008. Retrieved April 3, 2009.
- ^ ISBN 0-674-32348-3.
- ISBN 0-521-55307-5.
- ^ ISBN 0-06-093716-5.
- ^ a b Nevins, Allan, Hamilton Fish: The Inner History of the Grant Administration (1936) online edition 2:811[dead link]
- ^ Milton Friedman and Anna J. Schwartz, A Monetary History of the United States: 1867–1960 (1963) pp. 39–44, 87.
- ISBN 0-415-19011-8.
- ^ ISBN 0-415-19011-8.
- ^ ISBN 0-415-19011-8.
- ISBN 0-395-51372-3.
- ISBN 0-679-72175-4.
- ^ ISBN 0-06-093716-5.
- ^ McCabe, James Dabney; Edward Winslow Martin (1877). The History of the Great Riots: The Strikes and Riots on the Various Railroads of the United States and in the Mining Regions Together with a Full History of the Molly Maguires. National Publishing Company.
- ISBN 0-679-72175-4.
- ISBN 0-15-670153-7.
- JSTOR 1802106.
- S2CID 153478495.
- ^ Rothbard (2002), 154
- ^ Rothbard (2002), 161
- ISBN 0-8240-0944-4.
- ISBN 0-543-72474-3.
Recent Economic Changes and Their Effect on Distribution of Wealth and Well Being of Society Wells.
- ^ The Crime of 1873, bit Milton Friedman http://www.unc.edu/~salemi/Econ006/Friedman_Crime_1873.pdf
- ^ Milton Friedman. "A Program for Monetary Stability" (PDF). Readings in Financial Institutions.
- ^ Friedman, Schwartz. A Monetary History of the United States: 1867–1960.
- ^ a b 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, pp. 145, 153–156.
- ^ 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, pp. 49–53. Referenced 2011-01-15.
Further reading
- Samuel Bernstein, "American Labor in the Long Depression, 1873–1878," Science and Society, vol. 20, no. 1 (Winter 1956), pp. 59–83. In JSTOR.