Long Depression

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 a series of recessions. 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 vastly more severe Great Depression of the 1930s. Though a period of general deflation and low growth began in 1873, it did not have the severe "economic retrogression [and] spectacular breakdown" of the Great Depression.^[1]

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.^[2] 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, some texts refer to the period as the Great Depression of 1873–96; modern economics does not support this view.^[3]

In the United States, economists typically refer to the Depression of 1873–79, which followed 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.^{[4] [5]} 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.^[4]

Causes of the crisis

Run on the Fourth National Bank, No. 20 Nassau Street, New York City, 1873. From Frank Leslie's Illustrated Newspaper, October 4, 1873.

The causes of the Depression are debated, mainly because it was not a production depression; it was a price depression.^[6] 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. In particular the government demonetized silver with the Coinage Act of 1873 [1] which in effect reduced the money supply, as the economy no longer used silver with gold to back its currency. 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 (causing and increase in the supply of silver) 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 a fiat 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 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.

Severity

In the United States, the Long Depression is considered to be primarily a monetary depression. Prices fell by 25%, a rather severe deflation, while production is thought to have declined by 5%.^[6] The main sector of the economy in decline was railroading, as well as building construction and manufacturing that supported the construction. From 1867 to the depression's beginning in 1873, the miles of railroad in operation had grown by 50% and then plateaued. Industries outside of railroading, particularly agriculture, continued to do well during the depression. But railroading alone accounted for 15–20% of capital investment in the economy, prior to the railroading crisis and the Panic of 1873.^[6]

A few indexes of economic activity measure the severity of contraction. A general index of manufacturing production compiled by economist Edwin Frickey in 1947 showed a decline of 10% from 1872 to 1876. Durable goods declined 30% and iron and steel production declined by 45%. An index of building construction by Clarence Long declined 50% and remained at this depressed level for the rest of the decade.^[6]

According to Victor Zarnowitz, historical indexes show the 1873–79 period to be comparable to the Recession of 1882–85 and the 1921 recession in terms of severity.^[7] Zarnowitz, however, references A Monetary History of the United States by Milton Friedman and Anna Schwartz, who write:

The steady decline in prices from 1873 to 1879 probably led contemporary observers and certainly later observers to overstate the severity of the contraction in terms of real output... The contraction was severe. Yet an analyst who assessed the contraction on the basis of physical volume series alone would regard it as shorter in length and far less severe than it has been generally judget.^[7]

GNP for selected European Great Powers

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)

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, the recession exacted a harsh political toll on President Ulysses S. Grant. Historian Allan Nevins says of the end of Grant's presidency:^[8]

Various administrations have closed in gloom and weakness ... but no other has closed in such paralysis and discredit as (in all domestic fields) did Grant's. The President was without policies or popular support. He was compelled to remake his Cabinet under a grueling fire from reformers and investigators; half its members were utterly inexperienced, several others discredited, one was even disgraced. The personnel of the departments was largely demoralized. The party that autumn appealed for votes on the implicit ground that the next Administration would be totally unlike the one in office. In its centennial year, a year of deepest economic depression, the nation drifted almost rudderless.^[8]

End of depression

In the United States, the National Bureau of Economic Analysis dates the recession through March 1879. In January of 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.^[9] 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.^[10]

See also

• List of recessions in the United States
• Economic history
• Great Depression
• Kondratiev wave
• New Imperialism
• Second Industrial Revolution
• Panic of 1893

References

v • d • e United States recessions 1796–99 • 1815–21 • 1836–38 and 39–43 • 1857–58 • 1873–1879 • 1882–85 • 1893–1896 • 1907–08 • 1918–19 • 1920–21 • 1929–33 • 1937–38 • 1949 • 1953–54 • 1958 • 1960–61 • 1969–70 • 1973–75 • 1980 and 1981–82 • 1990–91 • 2001 • 2007–?