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Source link: http://archive.mises.org/9790/the-truth-about-the-depression-of-the-1870s/

The Truth About the Depression of the 1870s

April 14, 2009 by

Here’s an interesting article, courtesy of a poster in the Mises Community section, about how mild this supposedly six-year depression was for the vast majority of Americans, who in fact experienced it as a time of great prosperity. (Naturally, the author then follows up with a lot of nonsense about “fairness,” and that even though everyone was becoming better off, it was intolerable that some people had lots and lots of stuff.)

{ 25 comments }

J Cortez April 14, 2009 at 2:18 pm

Very interesting. I’ve always had questions regarding the “long depression” but haven’t read much about it save for it being a (stupid) argument for why gold was bad. This article combined with the little I know about that era makes me question why it was called the long depression in the first place. Anybody have any reading suggestions about this topic?

Dennis April 14, 2009 at 2:27 pm

“But the unbridled entrepreneurialism of the 1870′s gave rise to the robber barons.”

A much more accurate analysis is that extremely high tariffs, and subsidies given to certain politically connected business interests, such as the railroads, were the causes of the excesses of this period. Since the end of the Civil War, the Republican Party had a lock hold on the federal government, and used this power to reward the interest groups that supported it.

Jaycephus April 14, 2009 at 2:58 pm

“A conviction of fairness, a feeling of not being totally on one’s own, a sense of reasonable stability and predictability are all essential components of good economic performance.”

What the….?

This concluding sentence is at total odds with the first half of the article, in which he says the 1870s had great economic performance. So if they are ‘essential components’, and they are lacking in the 1870s as he contends, then HOW did the 1870s have great economic performance?

S Andrews April 14, 2009 at 3:08 pm

He is the author of the book: Trillion Dollar Meltdown. I read it and was not impressed. He is a middle of the road Keynesian like a lot of mainstream economic commentators.

Philip April 14, 2009 at 3:20 pm

Economic data sets for the 19th century is said to be even less reliable than modern economic data. I’m sure that’s true, as national income accounting is a modern innovation.

But I’ve often wondered: Just how are the GDP figures for earlier years constructed?

Mark Thornton April 14, 2009 at 3:29 pm

The “unfairness” should be attributed to protectionism (there was high tariff rates on imports) and on the National Banking Act (which privileged some groups and hurt others.)

Thomas E. Woods April 14, 2009 at 3:34 pm

Almost every one of these comments could be expanded into an interesting paper in its own right.

Juliusz April 14, 2009 at 3:38 pm

“Even if ordinary people were doing better in the 1870′s, the yawning gap between the very rich and everybody else fanned resentments. Interestingly, wealth inequality in today’s America is roughly the same as in the Gilded Age.”
Was it Winston Churchill who said that capitalism means unequal distribution of wealth and communism means equal distribution of poverty? Can’t author understand that the more very rich people there are the more whole society benefits out of it? Equality is fantastic thing: to be equal in front of God if you religious but mainly by law, not by size of bank account.

Miklos Hollender April 14, 2009 at 3:39 pm

Putting it as “fairness” is indeed nonsense, but with a different wording it does make sense: human beings are human beings, not fully rational, there are vices, and envy is one of the biggest ones that can really cause a lot of problems.

Nathan Mayer April 14, 2009 at 3:44 pm

so what are the chances of gov’t confiscating gold like in ’33?

Anyone?

Ken April 14, 2009 at 3:46 pm

The article interests me because I don’t know much about the depression of the 1870s, and it contradicts the little I have read about it (I can’t remember where, perhaps it was someone from the Sovereign Society). The previous claim to which I was exposed was that 1873 was far worse than 1929. I am still a tyro with respect to the 1870s, so I’ll let those statements stand without further comment until I learn more.

MatthewWilliam April 14, 2009 at 4:15 pm

The recession of the 1870s, and the alleged “Long Depression” of 1873-1896 just goes to show how confused mainstreamers are. They look at falling prices and assume this must be a recession.

I’m also interested in the way in which recessions are defined pre-1929. The NBER claims the recession lasted 6 years.

JC Butte April 14, 2009 at 6:49 pm

Nathan, minimal I think. Besides the lack of confidence (not that there is much) in what this would mean for FRN’s, there’s little to be gained.
In 1932, anyone could take their currency and demand gold at the rate of an ounce for every 20 something in currency. By pilfering the national stash and subsequently raising the price to 35/oz, FDR made a pretty handsome profit that would not be attainable under the present regime.

Jeremy H. April 14, 2009 at 8:35 pm

The reconstruction of pre-1929 GNP data is quite interesting. The original recession/expansion dates were created by Burns and Mitchell for the NBER back in 1946. The pre-1929 GNP data originally came from estimates by Kuznets, also in 1946, though he fully acknowledged the fuzziness of this data, so much so that he only published decade-long measures.

There have been several attempts to make better estimates than Kuznets since then, and the most recent (and most widely accepted, I believe) were in two papers published in the Februrary 1989 Journal of Political Economy. The first was by Christy Romer (yes, that Christy Romer) and the second by Balke and Gordon.

These are very technical (e.g., boring) papers if you’re not really into the data and the debates, but the results are actually quite surprising. While the two papers differ somewhat, they both basically show little decline in GNP following the Panics of 1873 and 1893 (hint to young Austrians: this is largely untouched in the literature! Fill the gaps!). The relevant debates on this data are nicely summarized by Rhode and Sutch in their essay “Estimates of National Product before 1929″ in Vol. 3 of the Historical Statistics (Millenial Edition).

Furthermore, while NBER still lists over half the months between 1873 and 1900 as contractions, real per capita income nearly doubled during this period (and had very few years in which it declined). You may also want to check out the comments to this MR post:

http://www.marginalrevolution.com/marginalrevolution/2009/04/new-deal-revisionism.html

Specifically, my back and forth with Barkley Rosser is relevant to this thread.

Christopher Lewis April 14, 2009 at 9:19 pm

“A conviction of fairness,…” – define fair

“…a feeling of not being totally on one’s own,…” – it’s called personal responsibility, try it out some time

“…a sense of reasonable stability…” – stability is a completely unreasonable demand once one takes into consideration that governments meddling in economies serve more to produce volatility than anything else. for a reference look at the economic data from last September going forward

“…and predictability…” – ? if life were predictable, the “psychological…dimension” of an economy would be unnecessary, no?

“are all essential components of good economic performance” – a former lawyer/banker turned terrible, misleading, author on economic performance, what’s next?

Philip April 14, 2009 at 9:53 pm

Jeremy H.,

Thanks! I greatly appreciate the information.

P.M.Lawrence April 14, 2009 at 10:21 pm

I have somewhere heard that, in the USA before the 1880s, economic problems usually didn’t translate into personal distress on anything like the scale that it did later (say in the 1930s) because people could realistically find work for at least board and lodging in nearby rural areas. Farmers could still afford to offer that because it cut down on their cash outgoings without cutting as much from what they could get by selling their output as prices had fallen, because they had less need for cash to service debts and buy farm inputs etc. than in later years, and because they often had more land than labour to work it fully anyway.

Gil April 14, 2009 at 10:33 pm

“. . . because people could realistically find work for at least board and lodging in nearby rural areas.” – PML

I s’pose many would argue labour laws interfere with people working ‘off the books’ and all.

dewind April 15, 2009 at 5:43 am

“Before the Civil War, America was perhaps the most egalitarian society in the world.”

Now Africa is the most egalitarian society in the world (if government is excluded). The post-civil war era gave rise to industry, entrepreneurship, and competitive markets. This is a good thing, no?

Dennis astutely pointed out that tariffs, subsidies, and well connected business men can generally account for unnatural monopolies forming. But even in a free market monopolies can temporarily exist until the market deals with it via its own anti-trust force — competition.

Lars April 15, 2009 at 5:50 am

“But as the 1870′s suggest, … well-being doesn’t come just from piling up toys. [A society] has psychological or, if you will, spiritual, dimensions. A conviction of fairness, a feeling of not being totally on one’s own, a sense of reasonable stability and predictability are all essential components of good … performance.”

With the above corrections, I can’t but agree with the statement.

fundamentalist April 15, 2009 at 8:42 am

PM: “I have somewhere heard that, in the USA before the 1880s, economic problems usually didn’t translate into personal distress on anything like the scale that it did later…”

Rothbard’s history of the depression of 1819 shows that there was quite a bit of distress. Some people starved. Unemployment in the cities was high as farm families left and moved there looking for work, and there were a lot of kitchens built to serve food to the jobless. But you may have a point about 20th century depressions, because Hayek mentions in “Prices and Production” that most modern jobs depend upon capital equipment and a worker who is out of work may not be able to find employment if the capital he needs is not available. In addition, 1929 was the first time in history that the state attempted to stop a depression by intervening in the economy and the result was the longest, deepest depression in mankind’s history. A logical person might conclude that state intervention made 20th century depressions worse than those of the 19th century.

Ralph Fucetola JD April 15, 2009 at 11:41 am

“But why did people feel so miserable? Partly they were confused by prices, which were dropping sharply. Farmers thought falling grain prices meant they were getting poorer, without noticing that the price of everything else was falling too. Farmers’ terms of trade — the price differences between what they sold and what they bought — actually racked up solid gains in the 1870′s.”

If people living with (almost) Constitutional Money did not understand the benefits of deflation (of the increase in the value of real money) how do we expect modern people, brainwashed as we have become, to understand fiat money and the engineered boom/bust cycle?

I fear that only the experience of hyperinflation, an experience we will have very soon, will get people to do what the demonstrators were chanting last November before the FRB building in NYC: “Wake up America! End the Fed!”

http://www.youtube.com/watch?v=R9PSETSdTgw

Recession April 15, 2009 at 3:55 pm

Wow! I didn’t even know there was a depression in 1870s. So everything repeats every 60 years?

David Spellman April 15, 2009 at 4:26 pm

“Even if ordinary people were doing better in the 1870′s, the yawning gap between the very rich and everybody else fanned resentments. Interestingly, wealth inequality in today’s America is roughly the same as in the Gilded Age.”

When times are tough, demagogues simply need to say “Follow me and I will lead you to the promised land!” Totalitarianism is easy to institute when the victims think they have nothing to lose.

When times are good, no one listens to the demagogues so they need to create trouble. The easy way is to appeal to envy. “Sure you are better off–but look at all the people who are richer still! Follow me and I will take from them and give to you.”

It is amazing how pervasive the politics of envy are in our society. It is not enough to get richer–we have to stop others from getting richer than we are. That is what social justice and fairness are really code words for.

cavalier973 August 8, 2009 at 11:07 pm

I pose this question to my fellow workers:
“Would you rather live in a society where you never get a raise, but the price of everything you buy drops 5% a year on average; or in a society where you are guaranteed a 10% yearly raise in wages, but the price of everything you buy rises an average of 8% each year?”

About half the people decide the first situation is better; whatever the answer, it allows me the opportunity to point out that simply printing up money and giving it to people doesn’t raise their standard of living.

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