Long Depression
Encyclopedia
The Long Depression was a worldwide economic crisis, felt most heavily 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
. At the time, the episode was labeled the Great Depression, and held that title until the Great Depression
of the 1930s. Though a period of general deflation and low growth began in 1873, (ending about 1896), it did not have the severe "economic retrogression [and] spectacular breakdown" of the latter Great Depression.
It was most notable in Western Europe
and North America
, at least in part because reliable data from the period are 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
. While it was occurring, the view was prominent that the economy of the United Kingdom had been in continuous depression from 1873 to as late as 1896 and some texts refer to the period as the Great Depression of 1873–96.
In the United States, economists typically refer to the Long Depression as the Depression of 1873–79, kicked off by the Panic of 1873
, and followed by the Panic of 1893
, book-ending the entire period of the wider Long Depression. 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.
In the US, from 1873-1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended. While most others agree the entire depression was harmful, Economist Murray Rothbard
claimed that after the panic, the economy entered a period of rapid growth, with the U.S. growing at the fastest rates ever in its history in the 1870s and 1880s.
, 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. New technologies in industry such as the Bessemer converter were being rapidly applied; railroads were booming. 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.
The Panic of 1873 has been described as "the first truly international crisis". 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. 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
. The Northern Pacific railway had been given 40 million acres (161,874.4 km²) 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.
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.
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 the price of silver started to fall causing considerable losses of asset values; 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 paper currency 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 Note
s) to avoid deflation and promote exports. The western US states were outraged—Nevada, Colorado, and Idaho were 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 1896–99 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.
, 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 railroad development boomed. 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, and the price of cotton
fell by nearly 50 percent in just the five years from 1872 to 1877, imposing great hardship on farmers and planters. This collapse provoked protectionism in many countries, such as France, Germany, and the United States, while triggering mass emigration from other countries such as Italy, Spain, Austria-Hungary
, and Russia
. Similarly, while the production of iron doubled between the 1870s and 1890s, the price of iron halved.
Many countries experienced significantly lower growth rates relative to what they had experienced earlier in the 19th century and to what they experienced afterwards:
, where in May 1873 the Vienna Stock Exchange
crashed. In Hungary
, the panic of 1873 terminated a mania of railroad-building.
, the country was required to pay £200 million in reparations to the Germans and was already reeling when the 1873 crash occurred. The French adopted a policy of deliberate deflation while paying off the reparations.
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". 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.
The financial crisis was compounded by diseases impacting the wine and silk industries French capital accumulation
and foreign investment plummeted to the lowest levels experienced by France in the latter half of the 19th century. 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 20th century. French finances were further sunk by failing investments abroad, principally in railroads. The French net national product
declined over the ten years from 1882 to 1892.
. As France was Italy's biggest investor, the liquidation of French assets in the country was especially damaging.
kept interest rates as high as 9 percent in the 1870s.
Building on an 1870 reform, and the 1879 famine
, thousands of Irish tenant farmer
s affected by depressed producer prices and high rents launched the Land War
in 1879, which resulted in the reforming Irish Land Acts
.
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. 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. However, since between 1869 and 1879 the population of the United States increased by over seventeen and one-half percent, 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.
The dramatic shift in prices mauled nominal wages - in the United States, nominal wages declined by one-quarter during the 1870s, and as much as one-half in some places, such as Pennsylvania
. 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. The collapse of cotton prices devastated the already war-ravaged economy of the southern United States
. Although farm prices fell dramatically, American agriculture continued to expand production.
Thousands of American businesses failed, defaulting on more than a billion dollars of debt. One in four laborers in New York were out of work in the winter of 1873-1874 and, nationally, a million became unemployed.
The sectors which experienced the most severe declines in output were manufacturing, construction, and railroads. 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. 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.
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. 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.
The recession exacted a harsh political toll on President Ulysses S. Grant
. Historian Allan Nevins
says of the end of Grant's presidency:
Recovery began in 1878. The mileage of railroad track laid down increased from 2665 mi (4,288.9 km) in 1878 to 11,568 in 1882. 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.
The recovery, however, proved short-lived. Business profits declined steeply between 1882 and 1884. The recovery in railroad construction reversed itself, falling from 11569 mi (18,618.5 km) of track laid in 1882 to 2866 mi (4,612.4 km) of track laid in 1885; the price of steel rails collapsed from $71/ton in 1880 to $20/ton in 1884. Manufacturing again collapsed - durable goods output fell by a quarter again. 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. 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. 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.
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
. The country began to recover in 1885.
, many of which were derailed or stunted by the impacts of economic uncertainty. The extraordinary collapse of farm prices 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. 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. In 1887, Italy and France embarked on a bitter tariff war. In the United States, Benjamin Harrison
won the 1888 US presidential election
on a protectionist ticket.
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. Only the United Kingdom and the Netherlands
remained committed to low tariffs.
passed legislation called the Inflation
Bill of 1874 designed to confront the issue of falling prices by injecting fresh greenbacks into the money supply. Under pressure from business interests, President
Grant
veto
ed the measure. 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."
.
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
.
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. Real wages were flat from 1869 to 1879, while from 1879 to 1889, nominal wages rose 23% and prices fell 4.2%.
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 enterprise embarked on efforts to reflate
financial markets, the crisis would have been less severe.
David Ames Wells
(1890) wrote of the technological advancements during the period 1870-90, which included the Long Depression. Wells gives an account of the changes in the world economy transitioning into the Second Industrial Revolution
in which he documents changes in trade, such as triple expansion steam shipping, railroads, the effect of the international telegraph network and the opening of the Suez Canal. Wells gives numerous examples of productivity
increases in various industries and discusses the problems of excess capacity and market saturation.
Wells opening sentence:
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:
Wells notes that many of the government inquires on the “depression of prices” (deflation) found various reasons such as the scarcity of gold and silver. Wells showed that the U.S. money supply actually grew over the period of the deflation. Wells noted that deflation only lowered the cost of goods that benefited from improved methods of manufacturing and transportation. Goods produced by craftsmen did not decrease in value, nor did many services, 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. 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.
. They argue that most of the stagnation was caused by a monetary contraction caused by abandonment of the bimetallic standard, for a new fiat gold standard
, starting with the Coinage Act of 1873. Some economic historians have complained about the characterization as this period as a "depression". However, this period saw a relatively large expansion of industry, of railroads, of physical output, of net national product, and real per capita income. As Friedman and Schwartz have stated, 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. Although per-capita nominal income declined very gradually from 1873 to 1879, that decline was more than offset by a gradual increase over the course of the next 17 years.
Furthermore, real per-capita income either stayed approximately constant (1873-1880; 1883-1885) or rose (1881-1882; 1886-1896), so that 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 US, 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 that were struggling against superior, foreign competition. Furthermore, some economists argue that deflation is not inherently harmful to an economy and cite the economic growth of the period as evidence of this. Rothbard further denies that a monetary contraction took place because the money supply increasing by 2.7 percent per year in this period. Again, this spoke to a difference between him and most other economists, including Mises, Friedman, and Hayek, all of whom defined inflation/deflation according to changing demand for money, not a static amount of money, itself. As Mises put it:
Rothbard also objected to any concern over the fact that prices in general fell sharply during the entire period. 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. They blamed this on deflation, which most economists agree is even more devastating than inflation, but Rothbard, again, asserted that deflation was good, even desirable. When a government imposes a monopoly currency, like a gold standard, and the banking system therefore cannot increase the money supply in response to demand, any healthy economic growth can cause production and economic growth to happen so fast that there is not enough money to keep up with it. In effect, demand for money (to match the new wealth of goods and services) will increase far faster than supply. This spiraling deflation, Rothbard asserted, was actually a good thing.
Rothbard's argument, therefore, was that while incomes fell in dollars, the dollars bought more, so incomes were actually increasing, in real terms.
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'.
Most economists object to this interpretation, arguing that increasing cost of money causes malinvestment, distorting and redistributing wealth in exactly the same (but opposite) sense that inflation does. In this case, investors are punished, because nominal revenues and prices fall, but their investment remains the same size. Likewise, a home buyer quickly finds himself "underwater", because the buying price of the house remains the same, but both his nominal income and the price of the house plummets. Certain branches of economic activity were indeed depressed between 1873 and 1896; in Britain
these included foreign trade prior to 1875, agriculture in the late 1870s, and (as a result of increased foreign competitiveness) 'basic industries' such as the iron industry beginning in the 1880s. These troubled sectors of the economy were a source of increased structural unemployment and of 'continuous ululations of business people' inspiring calls for 'reciprocity' and 'fair trade' and provoking various royal and parliamentary inquiries. Britain and other gold standard nations were also far from being immune to genuine cyclical downturns, sometimes lasting several years and interrupting the otherwise positive trend of per-capita real income.
However, 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 lock-outs. 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.
Second Industrial Revolution
The Second Industrial Revolution, also known as the Technological Revolution, was a phase of the larger Industrial Revolution corresponding to the latter half of the 19th century until World War I...
in the decade following the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. At the time, the episode was labeled the Great Depression, and held that title until the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s. Though a period of general deflation and low growth began in 1873, (ending about 1896), it did not have the severe "economic retrogression [and] spectacular breakdown" of the latter Great Depression.
It was most notable in Western Europe
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...
and North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
, at least in part because reliable data from the period are 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
Continental Europe
Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands....
. While it was occurring, the view was prominent that the economy of the United Kingdom had been in continuous depression from 1873 to as late as 1896 and some texts refer to the period as the Great Depression of 1873–96.
In the United States, economists typically refer to the Long Depression as the Depression of 1873–79, kicked off by the Panic of 1873
Panic of 1873
The Panic of 1873 triggered a severe international economic depression in both Europe and the United States that lasted until 1879, and even longer in some countries. The depression was known as the Great Depression until the 1930s, but is now known as the Long Depression...
, and followed by the Panic of 1893
Panic of 1893
The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...
, book-ending the entire period of the wider Long Depression. The National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
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.
In the US, from 1873-1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended. While most others agree the entire depression was harmful, Economist Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
claimed that after the panic, the economy entered a period of rapid growth, with the U.S. growing at the fastest rates ever in its history in the 1870s and 1880s.
Background
The period preceding the depression was dominated by several major military conflicts and a period of economic expansion. In EuropeEurope
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, the end of the Franco-Prussian War
Franco-Prussian War
The Franco-Prussian War or Franco-German War, often referred to in France as the 1870 War was a conflict between the Second French Empire and the Kingdom of Prussia. Prussia was aided by the North German Confederation, of which it was a member, and the South German states of Baden, Württemberg and...
yielded a new political order in Germany, and the £200 million reparations imposed on France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
led to an inflationary investment boom in Germany and central Europe. New technologies in industry such as the Bessemer converter were being rapidly applied; railroads were booming. 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
Western United States
.The Western United States, commonly referred to as the American West or simply "the West," traditionally refers to the region comprising the westernmost states of the United States. Because the U.S. expanded westward after its founding, the meaning of the West has evolved over time...
- an expansion funded greatly by foreign investors.
Causes of the crisis
Vienna
Vienna is the capital and largest city of the Republic of Austria and one of the nine states of Austria. Vienna is Austria's primary city, with a population of about 1.723 million , and is by far the largest city in Austria, as well as its cultural, economic, and political centre...
beginning in April 1873. The collapse of the Vienna Stock Exchange
Wiener Börse
The Wiener Börse AG is the only stock exchange in Vienna, Austria, and one of the most established exchanges in Eastern- and Southeastern Europe.-History:...
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. Financial panic arrived in America only months later on Black Thursday
Black Thursday
Black Thursday is a term used to refer to events which occurred on a Thursday. It has been used in the following cases:* February 6, 1851, Black Thursday, a day of devastating bushfires in Victoria, Australia...
, September 18, 1873 after the failure of the banking house of Jay Cooke and Company
Jay Cooke
Jay Cooke was an American financier. Cooke and his firm Jay Cooke & Company were most notable for their role in financing the Union's war effort during the American Civil War...
over the Northern Pacific Railway
Northern Pacific Railway
The Northern Pacific Railway was a railway that operated in the west along the Canadian border of the United States. Construction began in 1870 and the main line opened all the way from the Great Lakes to the Pacific when former president Ulysses S. Grant drove in the final "golden spike" in...
. The Northern Pacific railway had been given 40 million acres (161,874.4 km²) 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
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
closed for ten days on September 20.
The financial contagion
Financial contagion
Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission...
then returned to Europe, provoking a second panic in Vienna and further failures in continental Europe
Continental Europe
Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands....
before receding. France, which had been experiencing deflation in the years preceding the crash, was spared financial calamity for the moment, as was Britain.
Others have argued the depression was rooted in the 1870 Franco-Prussian War
Franco-Prussian War
The Franco-Prussian War or Franco-German War, often referred to in France as the 1870 War was a conflict between the Second French Empire and the Kingdom of Prussia. Prussia was aided by the North German Confederation, of which it was a member, and the South German states of Baden, Württemberg and...
that hurt the French economy and, under the Treaty of Frankfurt (1871)
Treaty of Frankfurt (1871)
The Treaty of Frankfurt was a peace treaty signed in Frankfurt on 10 May 1871, at the end of the Franco-Prussian War.- Summary :The treaty did the following:...
, forced that country to make large war reparations
War reparations
War reparations are payments intended to cover damage or injury during a war. Generally, the term war reparations refers to money or goods changing hands, rather than such property transfers as the annexation of land.- History :...
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
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of 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 the price of silver started to fall causing considerable losses of asset values; 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
Greenback
Greenback may refer to:In currency:* Greenback , a fiat currency issued during the American Civil War**United States Note**Demand Note, issued in 1861–62* A modern United States Federal Reserve Note...
which was paper currency 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
Crédit Mobilier of America scandal
The Crédit Mobilier scandal of 1872 involved the Union Pacific Railroad and the Crédit Mobilier of America construction company in the building of the First Transcontinental Railroad. The distribution of Crédit Mobilier shares of stock by Congressman Oakes Ames along with cash bribes to...
. 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
Railway Mania
The Railway Mania was an instance of speculative frenzy in Britain in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators, until the inevitable collapse...
.
Because of the Panic of 1873, governments depegged
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
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
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
(United States Note
United States Note
A United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for over 100 years, they were issued for longer than any other form of U.S. paper money. They were known popularly as "greenbacks" in their heyday, a...
s) to avoid deflation and promote exports. The western US states were outraged—Nevada, Colorado, and Idaho were 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
Sherman Silver Purchase Act
The Sherman Silver Purchase Act was enacted on July 14, 1890 as a United States federal law. It was named after its author, Senator John Sherman, an Ohio Republican, chairman of the Senate Finance Committee...
.
Monetarists believe that the 1873 depression was caused by shortages of gold that undermined the gold standard, and that the 1848 California Gold Rush
California Gold Rush
The California Gold Rush began on January 24, 1848, when gold was found by James W. Marshall at Sutter's Mill in Coloma, California. The first to hear confirmed information of the gold rush were the people in Oregon, the Sandwich Islands , and Latin America, who were the first to start flocking to...
, 1886 Witwatersrand Gold Rush
Witwatersrand Gold Rush
The Witwatersrand Gold Rush was a gold rush in 1886 that led to the establishment of Johannesburg, South Africa. It was part of the Mineral Revolution....
in South Africa and the 1896–99 Klondike Gold Rush
Klondike Gold Rush
The Klondike Gold Rush, also called the Yukon Gold Rush, the Alaska Gold Rush and the Last Great Gold Rush, was an attempt by an estimated 100,000 people to travel to the Klondike region the Yukon in north-western Canada between 1897 and 1899 in the hope of successfully prospecting for gold...
helped alleviate such crises. Other analyses have pointed to developmental surges (see Kondratiev wave
Kondratiev wave
Kondratiev waves are described as sinusoidal-like cycles in the modern capitalist world economy...
), theorizing that the Second Industrial Revolution
Second Industrial Revolution
The Second Industrial Revolution, also known as the Technological Revolution, was a phase of the larger Industrial Revolution corresponding to the latter half of the 19th century until World War I...
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
Like the later Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, 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 railroad development boomed. But at the same time, prices in several markets collapsed - the price of grain
GRAIN
GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...
in 1894 was only a third what it had been in 1867, and the price of cotton
Cotton
Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....
fell by nearly 50 percent in just the five years from 1872 to 1877, imposing great hardship on farmers and planters. This collapse provoked protectionism in many countries, such as France, Germany, and the United States, while triggering mass emigration from other countries such as Italy, Spain, Austria-Hungary
Austria-Hungary
Austria-Hungary , more formally known as the Kingdoms and Lands Represented in the Imperial Council and the Lands of the Holy Hungarian Crown of Saint Stephen, was a constitutional monarchic union between the crowns of the Austrian Empire and the Kingdom of Hungary in...
, and Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
. Similarly, while the production of iron doubled between the 1870s and 1890s, the price of iron halved.
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 |
 United Kingdom |
3.0 | 1.7 | 2.0 |
 United States |
6.2 | 4.7 | 5.3 |
 Early Modern 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 |
| Early Modern France |
8.5 | 10.3 | 11.8 | 13.3 | 16.8 | 17.3 | 19.7 |
| United Kingdom |
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 |
| 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-HungaryAustria-Hungary
Austria-Hungary , more formally known as the Kingdoms and Lands Represented in the Imperial Council and the Lands of the Holy Hungarian Crown of Saint Stephen, was a constitutional monarchic union between the crowns of the Austrian Empire and the Kingdom of Hungary in...
, where in May 1873 the Vienna Stock Exchange
Wiener Börse
The Wiener Börse AG is the only stock exchange in Vienna, Austria, and one of the most established exchanges in Eastern- and Southeastern Europe.-History:...
crashed. In Hungary
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...
, the panic of 1873 terminated a mania of railroad-building.
France
France's experience was somewhat unique. Having been defeated in the Franco-Prussian WarFranco-Prussian War
The Franco-Prussian War or Franco-German War, often referred to in France as the 1870 War was a conflict between the Second French Empire and the Kingdom of Prussia. Prussia was aided by the North German Confederation, of which it was a member, and the South German states of Baden, Württemberg and...
, the country was required to pay £200 million in reparations to the Germans and was already reeling when the 1873 crash occurred. The French adopted a policy of deliberate deflation while paying off the reparations.
While the United States resumed growth for a time in the 1880s, the Paris Bourse crash of 1882
Paris Bourse crash of 1882
The Paris Bourse crash of 1882 was a stock market crash in France, and was the worst crisis in the French economy in the nineteenth century. The crash was triggerd by the collapse of l'Union Générale in January. Around a quarter of the brokers on the bourse were on the brink of collapse...
sent France careening into depression, one which "lasted longer and probably cost France more than any other in the 19th century". The Union Générale, a French bank, failed in 1882, prompting the French to withdraw three million pounds from the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
and triggering a collapse in French stock prices.
The financial crisis was compounded by diseases impacting the wine and silk industries French capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
and foreign investment plummeted to the lowest levels experienced by France in the latter half of the 19th century. 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 20th century. French finances were further sunk by failing investments abroad, principally in railroads. The French net national product
Net National Product
Net national product is the total market value of all final goods and services produced by residents in a country or other polity during a given time period minus depreciation...
declined over the ten years from 1882 to 1892.
Italy
A ten-year tariff war broke out between France and Italy after 1887, damaging Franco-Italian relations which had prospered during Italian UnificationItalian unification
Italian unification was the political and social movement that agglomerated different states of the Italian peninsula into the single state of Italy in the 19th century...
. As France was Italy's biggest investor, the liquidation of French assets in the country was especially damaging.
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.United Kingdom
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 EnglandBank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
kept interest rates as high as 9 percent in the 1870s.
Building on an 1870 reform, and the 1879 famine
Irish Famine (1879)
The Irish famine of 1879 was the last main Irish famine. Unlike the earlier Great Famines of 1740-1741 and 1845-1849 the 1879 famine caused hunger rather than mass deaths, due to changes in the technology of food production, different structures of land-holding The Irish famine of 1879 was the...
, thousands of Irish tenant farmer
Tenant farmer
A tenant farmer is one who resides on and farms land owned by a landlord. Tenant farming is an agricultural production system in which landowners contribute their land and often a measure of operating capital and management; while tenant farmers contribute their labor along with at times varying...
s affected by depressed producer prices and high rents launched the Land War
Land War
The Land War in Irish history was a period of agrarian agitation in rural Ireland in the 1870s, 1880s and 1890s. The agitation was led by the Irish National Land League and was dedicated to bettering the position of tenant farmers and ultimately to a redistribution of land to tenants from...
in 1879, which resulted in the reforming Irish Land Acts
Irish Land Acts
The Land Acts were a series of measures to deal with the question of peasant proprietorship of land in Ireland in the nineteenth and twentieth centuries. Five such acts were introduced by the government of the United Kingdom between 1870 and 1909...
.
United States
| Industry | % decline in output |
|---|---|
| Durable goods | 30% |
| Iron Iron Iron is a chemical element with the symbol Fe and atomic number 26. It is a metal in the first transition series. It is the most common element forming the planet Earth as a whole, forming much of Earth's outer and inner core. It is the fourth most common element in the Earth's crust... and steel Steel Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten... |
45% |
| Construction Construction In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking... |
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. Figures from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and Anna Schwartz
Anna Schwartz
Anna Jacobson Schwartz is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman "one of the world's greatest monetary scholars"...
show net national product
Net National Product
Net national product is the total market value of all final goods and services produced by residents in a country or other polity during a given time period minus depreciation...
increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame. However, since between 1869 and 1879 the population of the United States increased by over seventeen and one-half percent, 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.
The dramatic shift in prices mauled nominal wages - in the United States, nominal wages declined by one-quarter during the 1870s, and as much as one-half in some places, such as Pennsylvania
Pennsylvania
The Commonwealth of Pennsylvania is a U.S. state that is located in the Northeastern and Mid-Atlantic regions of the United States. The state borders Delaware and Maryland to the south, West Virginia to the southwest, Ohio to the west, New York and Ontario, Canada, to the north, and New Jersey to...
. Although real wages had enjoyed robust growth in the aftermath of the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
, 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. The collapse of cotton prices devastated the already war-ravaged economy of the southern United States
Southern United States
The Southern United States—commonly referred to as the American South, Dixie, or simply the South—constitutes a large distinctive area in the southeastern and south-central United States...
. Although farm prices fell dramatically, American agriculture continued to expand production.
Thousands of American businesses failed, defaulting on more than a billion dollars of debt. One in four laborers in New York were out of work in the winter of 1873-1874 and, nationally, a million became unemployed.
The sectors which experienced the most severe declines in output were manufacturing, construction, and railroads. 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. 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.
The Freedman's Savings Bank
Freedman's Savings Bank
The Freedman's Saving and Trust Company, popularly known as the Freedman's Savings Bank, was a financial organization created by the U.S. government to encourage and guide the economic development of the newly-emancipated African-American communities in the post-Civil War period...
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. In the early 1870s, the bank had joined in the speculative fever, investing in real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
and unsecured loans to railroads; its collapse in 1874 was a severe blow to African-Americans.
The recession exacted a harsh political toll on President Ulysses S. Grant
Ulysses S. Grant
Ulysses S. Grant was the 18th President of the United States as well as military commander during the Civil War and post-war Reconstruction periods. Under Grant's command, the Union Army defeated the Confederate military and ended the Confederate States of America...
. Historian Allan Nevins
Allan Nevins
Allan Nevins was an American historian and journalist, renowned for his extensive work on the history of the Civil War and his biographies of such figures as President Grover Cleveland, Hamilton Fish, Henry Ford, and John D. Rockefeller.-Life:Born in Camp Point, Illinois, Nevins was educated at...
says of the end of Grant's presidency:
Recovery began in 1878. The mileage of railroad track laid down increased from 2665 mi (4,288.9 km) in 1878 to 11,568 in 1882. 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.
The recovery, however, proved short-lived. Business profits declined steeply between 1882 and 1884. The recovery in railroad construction reversed itself, falling from 11569 mi (18,618.5 km) of track laid in 1882 to 2866 mi (4,612.4 km) of track laid in 1885; the price of steel rails collapsed from $71/ton in 1880 to $20/ton in 1884. Manufacturing again collapsed - durable goods output fell by a quarter again. 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. 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. Unemployment, which had stood at 2.5% between recessions, surged to 7.5% in 1884-1885, and 13% in the northeastern United States
Northeastern United States
The Northeastern United States is a region of the United States as defined by the United States Census Bureau.-Composition:The region comprises nine states: the New England states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont; and the Mid-Atlantic states of New...
, even as immigration plunged in response to deteriorating labor markets.
This second recession led to further deterioration of farm prices. Kansas
Kansas
Kansas is a US state located in the Midwestern United States. It is named after the Kansas River which flows through it, which in turn was named after the Kansa Native American tribe, which inhabited the area. The tribe's name is often said to mean "people of the wind" or "people of the south...
farmers burned their own corn
Corn
Corn is the name used in the United States, Canada, and Australia for the grain maize.In much of the English-speaking world, the term "corn" is a generic term for cereal crops, such as* Barley* Oats* Wheat* Rye- Places :...
in 1885 because it was worth less than other fuels such as coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
or wood
Wood
Wood is a hard, fibrous tissue found in many trees. It has been used for hundreds of thousands of years for both fuel and as a construction material. It is an organic material, a natural composite of cellulose fibers embedded in a matrix of lignin which resists compression...
. The country began to recover in 1885.
Protectionism
The period preceding the Long Depression was one of increasing economic internationalism, championed by efforts such as the Latin Monetary UnionLatin Monetary Union
The Latin Monetary Union was a 19th century attempt to unify several European currencies, at a time when most circulating coins were still made of gold and silver...
, many of which were derailed or stunted by the impacts of economic uncertainty. The extraordinary collapse of farm prices provoked a protectionist response in many nations. Rejecting the free trade policies of the Second Empire
Second French Empire
The Second French Empire or French Empire was the Imperial Bonapartist regime of Napoleon III from 1852 to 1870, between the Second Republic and the Third Republic, in France.-Rule of Napoleon III:...
, French president Adolphe Thiers
Adolphe Thiers
Marie Joseph Louis Adolphe Thiers was a French politician and historian. was a prime minister under King Louis-Philippe of France. Following the overthrow of the Second Empire he again came to prominence as the French leader who suppressed the revolutionary Paris Commune of 1871...
led the new Third Republic
French Third Republic
The French Third Republic was the republican government of France from 1870, when the Second French Empire collapsed due to the French defeat in the Franco-Prussian War, to 1940, when France was overrun by Nazi Germany during World War II, resulting in the German and Italian occupations of France...
to protectionism, leading ultimately to the stringent Méline tariff
Jules Méline
Félix Jules Méline was a French statesman, prime minister from 1896 to 1898.-Biography:Méline was born at Remiremont. Having taken up law as his profession, he was chosen a deputy in 1872, and in 1879 he was for a short time under-secretary to the minister of the interior...
in 1892. Germany's agrarian Junker
Junker
A Junker was a member of the landed nobility of Prussia and eastern Germany. These families were mostly part of the German Uradel and carried on the colonization and Christianization of the northeastern European territories during the medieval Ostsiedlung. The abbreviation of Junker is Jkr...
aristocracy - under attack by cheap, imported grain - successfully agitated for a protective tariff in 1879 in Bismarck
Otto von Bismarck
Otto Eduard Leopold, Prince of Bismarck, Duke of Lauenburg , simply known as Otto von Bismarck, was a Prussian-German statesman whose actions unified Germany, made it a major player in world affairs, and created a balance of power that kept Europe at peace after 1871.As Minister President of...
's Germany
German Empire
The German Empire refers to Germany during the "Second Reich" period from the unification of Germany and proclamation of Wilhelm I as German Emperor on 18 January 1871, to 1918, when it became a federal republic after defeat in World War I and the abdication of the Emperor, Wilhelm II.The German...
over the protests of his National Liberal Party
National Liberal Party (Germany)
The National Liberal Party was a German political party which flourished between 1867 and 1918. It was formed by Prussian liberals who put aside their differences with Bismarck over domestic policy due to their support for his highly successful foreign policy, which resulted in the unification of...
allies. In 1887, Italy and France embarked on a bitter tariff war. In the United States, Benjamin Harrison
Benjamin Harrison
Benjamin Harrison was the 23rd President of the United States . Harrison, a grandson of President William Henry Harrison, was born in North Bend, Ohio, and moved to Indianapolis, Indiana at age 21, eventually becoming a prominent politician there...
won the 1888 US presidential election
United States presidential election, 1888
The 1888 election for President of the United States saw Grover Cleveland of New York, the incumbent president and a Democrat, try to secure a second term against the Republican nominee Benjamin Harrison, a former U.S. Senator from Indiana...
on a protectionist ticket.
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. Only the United Kingdom and the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
remained committed to low tariffs.
Monetary responses
In 1874, a year after the 1873 crash, the United States CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
passed legislation called the Inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
Bill of 1874 designed to confront the issue of falling prices by injecting fresh greenbacks into the money supply. Under pressure from business interests, President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Grant
Ulysses S. Grant
Ulysses S. Grant was the 18th President of the United States as well as military commander during the Civil War and post-war Reconstruction periods. Under Grant's command, the Union Army defeated the Confederate military and ended the Confederate States of America...
veto
Veto
A veto, Latin for "I forbid", is the power of an officer of the state to unilaterally stop an official action, especially enactment of a piece of legislation...
ed the measure. In 1878, Congress overrode President Hayes
Rutherford B. Hayes
Rutherford Birchard Hayes was the 19th President of the United States . As president, he oversaw the end of Reconstruction and the United States' entry into the Second Industrial Revolution...
's veto to pass the Silver Purchase Act
Bland-Allison Act
The Bland–Allison Act was an 1878 act of Congress requiring the U.S. Treasury to buy a certain amount of silver and put it into circulation as silver dollars. Though the bill was vetoed by President Rutherford B...
, in a similar but more successful attempt to promote "easy money."
Labor unrest
The United States endured its first nationwide strike in 1877, the Great Railroad Strike of 1877Great railroad strike of 1877
The Great Railroad Strike of 1877 began on July 14 in Martinsburg, West Virginia, United States and ended some 45 days later after it was put down by local and state militias, and federal troops.-Economic conditions in the 1870s:...
.
New Imperialism
The Long Depression contributed to the revival of colonialismColonialism
Colonialism is the establishment, maintenance, acquisition and expansion of colonies in one territory by people from another territory. It is a process whereby the metropole claims sovereignty over the colony and the social structure, government, and economics of the colony are changed by...
leading to the New Imperialism
New Imperialism
New Imperialism refers to the colonial expansion adopted by Europe's powers and, later, Japan and the United States, during the 19th and early 20th centuries; expansion took place from the French conquest of Algeria until World War I: approximately 1830 to 1914...
period, symbolized by the scramble for Africa
Scramble for Africa
The Scramble for Africa, also known as the Race for Africa or Partition of Africa was a process of invasion, occupation, colonization and annexation of African territory by European powers during the New Imperialism period, between 1881 and World War I in 1914...
, as the western powers sought new markets for their goods. According to Hannah Arendt
Hannah Arendt
Hannah Arendt was a German American political theorist. She has often been described as a philosopher, although she refused that label on the grounds that philosophy is concerned with "man in the singular." She described herself instead as a political theorist because her work centers on the fact...
's The Origins of Totalitarianism
The Origins of Totalitarianism
The Origins of Totalitarianism is a book by Hannah Arendt which describes and analyzes the two major totalitarian movements of the twentieth century, Nazism and Stalinism...
(1951), the "unlimited expansion of power" followed the "unlimited expansion of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
".
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, 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
Robber baron (industrialist)
Robber baron is a pejorative term used for a powerful 19th century American businessman. By the 1890s the term was used to attack any businessman who used questionable practices to become wealthy...
of railroad owners which culminated in the genteel 1880s and 1890s. The Gilded Age
Gilded Age
In United States history, the Gilded Age refers to the era of rapid economic and population growth in the United States during the post–Civil War and post-Reconstruction eras of the late 19th century. The term "Gilded Age" was coined by Mark Twain and Charles Dudley Warner in their book The Gilded...
was the outcome for the few rich. The cycle repeated itself with another huge market crash in 1893
Panic of 1893
The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...
.
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. 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.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. Real wages were flat from 1869 to 1879, while from 1879 to 1889, nominal wages rose 23% and prices fell 4.2%.
Explanations
Irving FisherIrving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...
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 enterprise embarked on efforts to reflate
Reflation
Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle...
financial markets, the crisis would have been less severe.
David Ames Wells
David Ames Wells
David Ames Wells was an American engineer, textbook author, economist and advocate of low tariffs.-Biography:...
(1890) wrote of the technological advancements during the period 1870-90, which included the Long Depression. Wells gives an account of the changes in the world economy transitioning into the Second Industrial Revolution
Second Industrial Revolution
The Second Industrial Revolution, also known as the Technological Revolution, was a phase of the larger Industrial Revolution corresponding to the latter half of the 19th century until World War I...
in which he documents changes in trade, such as triple expansion steam shipping, railroads, the effect of the international telegraph network and the opening of the Suez Canal. Wells gives numerous examples of productivity
Productivity improving technologies (historical)
Productivity improving technologies date back to antiquity, with rather slow progress until the late Middle Ages. Technological progress was aided by literacy and the diffusion of knowledge that accelerated after the spinning wheel spread to Western Europe in the 13th century...
increases in various industries and discusses the problems of excess capacity and market saturation.
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 inquires on the “depression of prices” (deflation) found various reasons such as the scarcity of gold and silver. Wells showed that the U.S. money supply actually grew over the period of the deflation. Wells noted that deflation only lowered the cost of goods that benefited from improved methods of manufacturing and transportation. Goods produced by craftsmen did not decrease in value, nor did many services, 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
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
, 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. 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.
Interpretations
Most economic historians see this period as negative for the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. They argue that most of the stagnation was caused by a monetary contraction caused by abandonment of the bimetallic standard, for a new fiat gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, starting with the Coinage Act of 1873. Some economic historians have complained about the characterization as this period as a "depression". However, this period saw a relatively large expansion of industry, of railroads, of physical output, of net national product, and real per capita income. As Friedman and Schwartz have stated, 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. Although per-capita nominal income declined very gradually from 1873 to 1879, that decline was more than offset by a gradual increase over the course of the next 17 years.
Furthermore, real per-capita income either stayed approximately constant (1873-1880; 1883-1885) or rose (1881-1882; 1886-1896), so that 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 US, 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 that were struggling against superior, foreign competition. Furthermore, some economists argue that deflation is not inherently harmful to an economy and cite the economic growth of the period as evidence of this. Rothbard further denies that a monetary contraction took place because the money supply increasing by 2.7 percent per year in this period. Again, this spoke to a difference between him and most other economists, including Mises, Friedman, and Hayek, all of whom defined inflation/deflation according to changing demand for money, not a static amount of money, itself. As Mises put it:
- In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.
Rothbard also objected to any concern over the fact that prices in general fell sharply during the entire period. 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. They blamed this on deflation, which most economists agree is even more devastating than inflation, but Rothbard, again, asserted that deflation was good, even desirable. When a government imposes a monopoly currency, like a gold standard, and the banking system therefore cannot increase the money supply in response to demand, any healthy economic growth can cause production and economic growth to happen so fast that there is not enough money to keep up with it. In effect, demand for money (to match the new wealth of goods and services) will increase far faster than supply. This spiraling deflation, Rothbard asserted, was actually a good thing.
- 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. The analogous "great depression" in England in this period was also a myth for the same reasons.
Rothbard's argument, therefore, was that while incomes fell in dollars, the dollars bought more, so incomes were actually increasing, in real terms.
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.
Most economists object to this interpretation, arguing that increasing cost of money causes malinvestment, distorting and redistributing wealth in exactly the same (but opposite) sense that inflation does. In this case, investors are punished, because nominal revenues and prices fall, but their investment remains the same size. Likewise, a home buyer quickly finds himself "underwater", because the buying price of the house remains the same, but both his nominal income and the price of the house plummets. Certain branches of economic activity were indeed depressed between 1873 and 1896; in Britain
Great Britain
Great Britain or Britain is an island situated to the northwest of Continental Europe. It is the ninth largest island in the world, and the largest European island, as well as the largest of the British Isles...
these included foreign trade prior to 1875, agriculture in the late 1870s, and (as a result of increased foreign competitiveness) 'basic industries' such as the iron industry beginning in the 1880s. These troubled sectors of the economy were a source of increased structural unemployment and of 'continuous ululations of business people' inspiring calls for 'reciprocity' and 'fair trade' and provoking various royal and parliamentary inquiries. Britain and other gold standard nations were also far from being immune to genuine cyclical downturns, sometimes lasting several years and interrupting the otherwise positive trend of per-capita real income.
However, 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 lock-outs. 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.
See also
- List of recessions in the United States
- Economic historyEconomic historyEconomic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...
- Kondratiev waveKondratiev waveKondratiev waves are described as sinusoidal-like cycles in the modern capitalist world economy...
- New ImperialismNew ImperialismNew Imperialism refers to the colonial expansion adopted by Europe's powers and, later, Japan and the United States, during the 19th and early 20th centuries; expansion took place from the French conquest of Algeria until World War I: approximately 1830 to 1914...
- Second Industrial RevolutionSecond Industrial RevolutionThe Second Industrial Revolution, also known as the Technological Revolution, was a phase of the larger Industrial Revolution corresponding to the latter half of the 19th century until World War I...
- Panic of 1893Panic of 1893The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...
Sources
- Rothbard, Murray A History of Money and banking in the United States: The Colonial Era to world War II(2002). The Ludwig Von Mises Institute.