Tuesday, August 30, 2011

The Long Depression And the Great Recession

A substantial debate over the nature of the the deflation in the US during the 1873-1896 period has erupted on marginal revolution, http://marginalrevolution.com/marginalrevolution/2011/08/the-deflation-of-1873-1896.html#comments . Much of the debate centers on reevaluations of the path of real US output during the so-called "Long Depression" of 1873-79, with newer sources arguing that declline in real output only lasted from 1873-1875, thus arguing that it was not as bad as many thought, and while indebted farmers were hurt by deflation, particularly by the 1890s, this was a golden age of the American economy and a model for laissez-faire policy, with the deflation itself generally a good thing outside of agriculture (whose falling prices helped the rest of the economy).

I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.

So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.

The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.

Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.


Anonymous said...

During the greenback period of the Civil War, gold had floated to $40/oz. Starting in 1873 the Treasury returned the fix to $22/oz and that's what caused your deflation. All the contracts set at $40 had to be unwound at $22, that is, paid back in dollars that took almost twice as much work to earn as those borrowed. Since farmers are always borrowing, and their crops are the first to feel the effects of changes in the monetary standard, they went bankrupt hardest.

During monetary inflations, those who deal in commodities benefit first (Rick Perry). During deflations they are hurt first.

This led to the eventual rise of Bryan. The farmers did have a case that they were getting nailed to a cross of gold, but Bryan's alternative, to blow up the gold standard, would have led to more suffering than staying on gold. That's why he was defeated.

Mitchell J. Freedman said...

There were the great railroad strikes, several wildcat and deeply felt, in 1877. The majority of people in the nation were still farmers, so deflation on farms was a big issue for many Americans. The deflating, meaning lowering of wages, were brutal for workers.

Good times for those wearing tuxes at country clubs. Misery for everyone else.

And contrary to Tyler Cowen, a proprietor of Marginal Revolutions, the 1880s was no picnic for workers and farmers, either. The Haymarket Square riots of 1886 were the culmination of a long brewing exploitation and struggle.

michael perelman said...

I wrote Railroading Economics, in part, to insist on the relevance of that period & the contemporary economists perverted analysis of the period.

The deflation was not so much monetary as the result of the rapid technological change which was also devaluing existing capital, much like the Internet has been doing.

Thanks Barkeley

Anonymous said...

I don't deny that's what happened, but wouldn't it look the same either way? Wouldn't railroads have the advantage in buying land and so forth if monetary deflation had wiped out the farmers who owned the land?

The goldies will even tell you that the internet boom coincided with another monetary deflation, with gold going from $350-$400 to under $200 in the late 90s.

Skeptical Economist said...

This is remarkably poor analysis. Railway construction is one and only one metric. Real GDP is somewhat more relevant. From Measuring Worth.

1873 - 138,333
1874 - 140,849
1875 - 140,598
1876 - 146,418
1877 - 153,703
1878 - 158,643
1879 - 177,133
1880 - 191,814
1881 - 215,798

Yes, there was a downturn after 1873 and I don't doubt that the deflation was substantial.

However, subsequent economic growth was vast. The same can not be said for our period.

Note that per-capita real GDP did not reach its 1873 peak until 1877. However, by 1881 real per-capita GDP was much higher (31%) than in 1873.