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Not to be confused with long-term depression.

The Long Depression was a period of global economic turmoil beginning in the 1870s and extending into the 1890s. The Long Depression was felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution and the conclusion of the American Civil War. At the time, the episode was labeled the Great Depression, remaining so until the Great Depression of the 1930s. The United Kingdom is often considered to have been the hardest hit; during this period it lost some of its large industrial lead over the economies of Continental Europe.

Background

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The period preceding the depression was dominated by several major military conflicts and a period of economic expansion. In Europe, the end of the Franco-Prussian War yielded a new political order in Germany, and the £200 million reparations imposed on France led to an inflationary investment boom in Germany and central Europe.[1] New technologies in industry such as the Bessemer converter were being rapidly applied; railroads were booming.[1] In the United States, the end of the American Civil War and a brief post-war recession (1865-1867) gave way to such an investment boom, focused especially on railroads on public lands in the West - an expansion funded greatly by foreign investors.[1]

Causes of the crisis

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Main article: Panic of 1873

The Panic of 1873 has been described as "the first truly international crisis."[1] 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 begining 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.[1] Financial panic arrived in America 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.[2] The Northern Pacific railway had been given 40 million acres of public land in the West and Jay 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.[1]

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.[1]

Others have argued the depression was rooted in the 1870 Franco-Prussian War that hurt the French economy and, under the Treaty of Frankfurt (1871), forced that country to make large war reparations payments to Germany. The primary cause of the price depression in the United States was the tight monetary policy that the U.S. followed to get back to the gold standard after the Civil War. The U.S. was taking money out of circulation to achieve this goal, therefore, there was less available money to facilitate trade. Because of the monetary policy described above the price of silver started to fall causing considerable losses of asset values, however, by most accounts, after 1879 production was growing, thus further putting downward pressure on prices due to increased industrial productivity, trade and competition.

In America the speculative nature of financing due to both the greenback which was specie issued to pay for the US Civil War and rampant fraud in the building of the Union Pacific Railway up to 1869 culminated in the Credit Mobilier panic. Railway overbuilding and weak markets collapsed the bubble in 1873. Both the Union Pacific and the Northern Pacific lines were center in the collapse; another railway bubble was the UK railway mania.

Because of the Panic of 1873, governments depegged their currencies, to save money. The demonetization of silver by European and North American governments in the early 1870s was certainly a contributing factor. The Coinage Act of 1873 in America was met with great opposition by farmers and miners, as silver was seen as more of a monetary benefit to rural areas than to banks in big cities. In addition, there were Americans who advocated the continuance of government-issued fiat money (United States Notes) to avoid deflation and promote exports. The western US states were outraged--Nevada, Colorado, and Idaho where huge silver producers with productive mines, and for a few years mining abated. The resumption of the US government buying silver was enacted in 1890 with the Sherman Silver Purchase Act.

Monetarists believe that the 1873 depression was caused by shortages of gold that undermined the gold standard, and that the 1848 California Gold Rush, 1886 Witwatersrand Gold Rush in South Africa and the 1898-99 Klondike Gold Rush helped alleviate such crises. Other analyses have pointed to developmental surges (see Kondratiev wave), theorizing that the Second Industrial Revolution was causing large shifts in the economies of many states, imposing transition costs, which may also have played a role in causing the depression.

Course of the depression

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Like the later Great Depression, the Long Depression impacted 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 railroad development boomed.[3] But at the same time, prices in several markets collapsed - the price of grain in 1894 was only a third what it had been in 1867,[4] and the price of cotton fell by nearly 50 percent in just the five years from 1872 to 1877,[5] imposing great hardship on farmers and planters. This collapse provoked protectionism in many countries, such as France, Germany, and the United States[4], while triggering mass emigration from other countries such as Italy, Spain, Austria-Hungary, and Russia.[6] Similarly, while the production of iron doubled between the 1870s and 1890s[3], the price of iron halved[4].

Many countries experienced significantly lower growth rates relative to what they had experienced earlier in the nineteenth century and to what they experienced afterwards:

Growth rates of industrial production (1850s-1913)[7]
1850s-1873 1873-1890 1890-1913
 Germany 4.3 2.9 4.1
 United Kingdom 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

United States

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Estimated declines in United States manufacturing output in selected sectors (1872-1876)[8]
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.[9] [10] 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.[9]

The dramatic shift in prices mauled nominal wages - in the United States, nominal wages declined by one-quarter during the 1870s,[2] and as much as one-half in some places, such as Pennsylvania.[11] 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.[12] The collapse of cotton prices devastated the already war-ravaged economy of the southern United States.[5] Although farm prices fell dramatically, American agriculture continued to expand production.[8]

Thousands of American businesses failed, defaulting on more than a billion dollars of debt.[11] One in four laborers in New Yorkers were out of work in the winter of 1873-1874[11] and, nationally, a million became unemployed.[11]

The sectors which experienced the most severe declines in output were manufacturing, construction, and railroads.[8] 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.[8] 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.[8]

The Freedman's Savings Bank was a typical casualty of the financial crisis. Chartered in 1865 in the aftermath of the American Civil War, the bank had been established to advance the economic welfare of America's newly emancipated freedmen.[13] In the early 1870s, the bank had joined in the speculative fever, investing in real estate and unsecured loans to railroads; its collapse in 1874 was a severe blow to African-Americans.[13]

Recovery began in 1878. The mileage of railroad track laid down increased from 2,665 mi in 1878 to 11,568 in 1882.[8] 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 high immigration.[14]

The recovery, however, proved short-lived. Business profits declined steeply between 1882 and 1884.[14] The recovery in railroad construction reversed itself, falling from 11,569 mi of track laid in 1882 to 2,866 mi of track laid in 1885; the price of steel rails collapsed from $71/ton in 1880 to $20/ton in 1884.[14] Manufacturing again collapsed - durable goods output fell by a quarter again.[14] The decline became another 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.[14] This financial panic destroyed eleven New York banks, more than a hundred state banks, and led to defaults on at least $32 million worth of debt.[14] 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.[14]

This second recession led to further deterioration of farm prices. Kansas farmers burned their own corn in 1885 because it was worth less than other fuels such as coal or wood.[14] The country began to recover in 1885.[14]

France

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France's experience was somewhat unique. 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.[1] The French adopted a policy of deliberate deflation while paying off the reparations.[1]

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 nineteenth century."[15] 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.[14]

The financial crisis was compounded by diseases impacting the wine and silk industries[15] French capital accumulation and foreign investment plummeted to the lowest levels experienced by France in the latter half of the nineteenth century.[15] After a boom in new investment banks after the end of the Franco-Prussian War, the destruction of the French banking industry wrought by the crash cast a pall over the financial sector that lasted until the dawn of the twentieth century.[15] French finances were further sunk by failing investments abroad, principally in railroads.[16] The French net national product declined over the ten year period from 1882-1892.[17]

Austria-Hungary

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The global economic crisis first erupted in Austria-Hungary, where in May 1873 the Vienna Stock Exchange crashed.[1] In Hungary, the panic of 1873 terminated a mania of railroad-building.[16]

Italy

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A ten-year tariff war broke out between France and Italy after 1887, damaging Franco-Italian relations which had prospered during Italian Unification. As France was Italy's biggest investor, the liquidation of French assets in the country was especially damaging.[18]

Russia

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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.[19]

United Kingdom

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The United Kingdom, which had previously experienced crises every decade since the 1820s, was unusually insulated from the effects of this financial crisis, even though the Bank of England kept interest rates as high as 9 percent in the 1870s.[1]

Reactions to the crisis

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Protectionism

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The period preceding the Long Depression was one of increasing economic internationalism, championed by efforts such as the Latin Monetary Union, many of which were derailed or stunted by the impacts of economic uncertainty.[20] The extraordinary collapse of farm prices[4] provoked a protectionist response in many nations. Rejecting the free trade policies of the Second Empire, French president Adolphe Thiers led the new Third Republic to protectionism, leading ultimately to the stringent Méline tariff in 1892.[21] Germany's agrarian Junker aristocracy - under attack by cheap, imported grain - successfully agitated for a protective tariff in 1879 in Bismarck's Germany over the protests of his National Liberal Party allies.[21] In 1887, Italy and France embarked on a bitter tariff war.[22] In the United States, Benjamin Harrison won the 1888 US presidential election on a protectionist ticket.[23]

As a result of the protectionist policies enacted by the world's major trading nations, the global merchant marine fleet posted no significant growth over the period 1870-1890, before nearly doubling in tonnage in the prewar economic boom that followed.[24] Only the United Kingdom and the Netherlands remained committed to low tariffs.[22]

Monetary responses

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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.[25] Under pressure from business interests, President Grant vetoed the measure.[25] In 1878, Congress overrode President Hayes's veto to pass the Silver Purchase Act, in a similar but more successful attempt to promote "easy money."[8]

Labor unrest

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The United States endured its first nationwide strike in 1877, the Great Railroad Strike of 1877.[8]

New Imperialism

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Main article: New Imperialism

The Long Depression also 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 goods[26]. According to Hannah Arendt's The Origins of Totalitarianism (1951), the "unlimited expansion of power" followed the "unlimited expansion of capital".[27]

In the United States, beginning in 1878-1879, 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 of course 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 another huge market crash in 1893.

Explanations

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Irving Fisher believed that the Panic of 1873 and the severity of the contractions which followed it could be explained by debt and deflation. Fisher believed that a financial panic would trigger catastrophic deleveraging in an attempt to sell assets and increase capital reserves; this sell-off would trigger a collapse in asset prices and deflation, which would in turn prompt financial institutions to sell off more assets, only to further deflation and strain capital ratios. Fisher believed that had governments or private enteprise embarked on efforts to reflate financial markets, the crisis would have been less severe.[28]

Controversy

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Some economic historians argue that the Long Depression was actually a deflationary period but not a time of falling production and GDP. The deflation thesis has led to the claim that the Long Depression was not truly a depression at all because production and real GDP expanded over the twenty-year period. They argue that the confusion comes from the fact that prices were falling because of greater industrial productivity and the presence of sound money (gold and silver).

One economist to make this argument is Murray Rothbard of the Austrian school, who studied the period extensively. Rothbard writes:

As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum 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.
It should be clear, then, that the "great depression" of the 1870s is merely a myth—a myth 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. 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.[29]

Another important factor was that labor productivity in the U.S. was growing throughout the period. Between 1869 and 1879 manufacturing output per man-hour grew from 14.7 to 16.2 (1958 = 100).

In a 2006 article in the New York Times, Charles R Morris argued that the "Long Depression" was actually a period of great economic growth, but that many Americans at the time were confused because of falling prices and increasing income inequality, as the living standards of the wealthiest Americans were increasing at an even faster rate. [30]

See also

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References

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  1. ^ a b c d e f g h i j k "Crisis of 1873". Business Cycles and Depressions: An Encyclopedia. Taylor & Francis. 1997. ISBN 0824009444. {{cite encyclopedia}}: Unknown parameter |authors= ignored (help)
  2. ^ a b Ron Chernow (1998). Titan. New York: Vintage Books. p. 160. ISBN 1-4000-7730-3.
  3. ^ a b Eric Hobsbawm (1989). The Age of Empire (1875-1914). New York: Vintage Books. p. 35. ISBN 0-679-72175-4.
  4. ^ a b c d Eric Hobsbawm (1989). The Age of Empire (1875-1914). New York: Vintage Books. p. 36. ISBN 0-679-72175-4.
  5. ^ a b Eric Foner (2002). Reconstruction: America's unfinished revolution, 1863-1877. HarperCollins. p. 535. ISBN 0060937165.
  6. ^ Eric Hobsbawm (1989). The Age of Empire (1875-1914). New York: Vintage Books. p. 37. ISBN 0-679-72175-4.
  7. ^ Andrew Tylecote (1993). The long wave in the world economy. Routledge. p. 12. ISBN 0415036909.
  8. ^ a b c d e f g h "Depression of 1873-1879". Business Cycles and Depressions: An Encyclopedia. Taylor & Francis. 1997. ISBN 0824009444. {{cite encyclopedia}}: Unknown parameter |authors= ignored (help)
  9. ^ a b "Business Cycle Expansions and Contractions". National Bureau of Economic Research. Retrieved January 4, 2009. Cite error: The named reference "NBER" was defined multiple times with different content (see the help page).
  10. ^ Fels, Rendigs (1949). "The Long-Wave Depression, 1873-79". The Review of Economics and Statistics.
  11. ^ a b c d Philip Mark Katz (1998). Appomattox to Montmartre: Americans and the Paris Commune. Harvard University Press. p. 167. ISBN 0674323483.
  12. ^ The Cambridge Economic History of the United States. Cambridge University Press. 2000. p. 223. ISBN 0521553075. {{cite book}}: Unknown parameter |authors= ignored (help)
  13. ^ a b Eric Foner (2002). Reconstruction: America's unfinished revolution, 1863-1877. HarperCollins. pp. 531–532. ISBN 0060937165.
  14. ^ a b c d e f g h i j "Depression of 1882-1885". Business Cycles and Depressions: An Encyclopedia. Taylor & Francis. 1997. ISBN 0824009444. {{cite encyclopedia}}: Unknown parameter |authors= ignored (help)
  15. ^ a b c d France and the Economic development of Europe (1800-1914). Routledge. 2000. pp. 70–71. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help) Cite error: The named reference "france-4" was defined multiple times with different content (see the help page).
  16. ^ a b France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 320. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  17. ^ France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 457. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  18. ^ France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 457. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  19. ^ "Business cycles in Russia (1700-1914)". Business Cycles and Depressions: An Encyclopedia. Taylor & Francis. 1997. ISBN 0824009444. {{cite encyclopedia}}: Unknown parameter |authors= ignored (help)
  20. ^ France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 38-39. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  21. ^ a b France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 39. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  22. ^ a b France and the Economic development of Europe (1800-1914). Routledge. 2000. p. 40. ISBN 0415190118. {{cite book}}: Unknown parameter |authors= ignored (help)
  23. ^ The Reader's companion to American history. Houghton Mifflin Harcourt. 1991. ISBN 0395513723. {{cite book}}: Unknown parameter |authors= ignored (help)
  24. ^ Eric Hobsbawm (1989). The Age of Empire (1875-1914). New York: Vintage Books. p. 50. ISBN 0-679-72175-4.
  25. ^ a b Eric Foner (2002). Reconstruction: America's unfinished revolution, 1863-1877. HarperCollins. p. 522. ISBN 0060937165.
  26. ^ Eric Hobsbawm (1989). The Age of Empire (1875-1914). New York: Vintage Books. p. 45. ISBN 0-679-72175-4.
  27. ^ Hannah Arendt (1973). The Origins of Totalitarianism. Houghton Mifflin Harcourt. p. 137. ISBN 0156701537.
  28. ^ "Debt-deflation theory". Business Cycles and Depressions: An Encyclopedia. Taylor & Francis. 1997. ISBN 0824009444. {{cite encyclopedia}}: Unknown parameter |authors= ignored (help)
  29. ^ Murray Rothbard (2002). History of Money and Banking in the USA. pp. 154–155.
  30. ^ http://www.nytimes.com/2006/06/02/opinion/02morris.html?ei=5090&en=c97654fb300e789b&ex=1306900800&partner=rssuserland&emc=rss&pagewanted=print
  • J H Clapham "The Bank of England", 1944 rev 1970.
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