Long Depression

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The Long Depression was a worldwide economic crisis experienced in the latter half of the Victorian era, though there is some controversy over whether it should be labeled a depression or recession, as this article will discuss below. 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.

It was most notable in Western Europe and North America, at least in part because reliable data from the period is most readily available in those parts of the world. 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.

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.^{[1] [2]} 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.^[1]

Contents 1 Was it a Recession? 2 Causes of the crisis 3 Reactions to the crisis 4 GNP for selected European Great Powers 5 See also 6 References 7 External links

[edit] Was it a Recession?

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 grew throughout the period (see table below). The confusion comes from the fact that prices were falling (hence, deflation) 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.

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. ^[3]

[edit] Causes of the crisis

The causes of the Depression are debated, mainly because it was not a production depression; it was a price depression. The most immediate cause, and the date that is often used as the start of the Depression, was the collapse of the Vienna Stock Exchange on May 9, 1873. 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.

[edit] Reactions to the crisis

Like the Great Depression, the Long Depression saw many nations of the world resort to protectionism to shore up faltering industries. Influenced by List's nationalist argument for industrial protection, Bismarck abandoned the German free trade policy in 1879, enacting tariffs over the objections of his National Liberal Party allies. France, which had adopted free trade during the Second Empire (1852-1870), also abandoned it, while Benjamin Harrison won the 1888 US presidential election on a protectionist ticket. Only the United Kingdom retained the low tariffs enacted in the 1846 repeal of the Corn Laws.

Besides tariff policy, governments of the time were not closely involved in managing the economy. According to the tenets of classic liberalism, it was generally believed that it was not the government's role to intervene in the economy, and thus little was done.

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. According to Hannah Arendt's The Origins of Totalitarianism (1951), the "unlimited expansion of power" followed the "unlimited expansion of capital".

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.

[edit] GNP for selected European Great Powers

Year	Russia	France	Britain	Germany	Habsburg Empire	Italy
1830	10.5	8.5	8.2	7.2	7.2	5.5
1840	11.2	10.3	10.4	8.3	8.3	5.9
1850	12.7	11.8	12.5	10.3	9.1	6.6
1860	14.4	13.3	16.0	12.7	9.9	7.4
1870	22.9	16.8	19.6	16.6	11.3	8.2
1880	23.2	17.3	23.5	19.9	12.2	8.7
1890	21.1	19.7	29.4	26.4	15.3	9.4

at market prices, in 1960 US dollars and prices; in billions
(Paul Kennedy, The Rise and Fall of the Great Powers, Fontana Press, 1989, p 219)

[edit] See also

• Panic of 1873
• Economic history
• Great Depression
• Kondratiev wave
• New Imperialism
• Second Industrial Revolution
• Panic of 1893

[edit] References

History of Money and Banking in the USA, Murray Rothbard, Hardcover 2002, p.154-155

• J H Clapham "The Bank of England", 1944 rev 1970.

[edit] External links

• The Real Great Depression by Scott Reynolds Nelson

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