Saturday, February 9, 2013

19th Century Deflation and Recession in the US

Below is the data on inflation for the US in the 19th century.

In yellow, I have highlighted the periods where price deflation is correlated with recessions identified by Davis (2006) (data from Balke and Gordon (1989) can be found here).

In green, I have highlighted the years when there was (apparently) real output growth with price deflation.

Now I do not deny that an economy can have real output growth with price deflation. It certainly a myth that price deflation is always associated with recessions.

Nevertheless, outside of the historically aberrant 1873–1896 period, there were many occasions when price deflation was clearly correlated with recession, as can seen below:
Year | Inflation Rate
1800 | 2.10%
1801 | 1.31%
1802 | -15.73%
1803 | 5.49%
1804 | 4.38%
1805 | -0.70%
1806 | 4.23%
1807 | -5.41%
1808 | 8.66%
1809 | -2.05%
1810 | 0.00%
1811 | 6.80%
1812 | 1.26%
1813 | 20.02%
1814 | 9.89%
1815 | -12.29%
1816 | -8.65%

1817 | -5.36%
1818 | -4.34%
1819 | 0.00%
1820 | -7.87%
1821 | -3.52%

1822 | 3.65%
1823 | -10.65%
1824 | -7.88%
1825 | 2.57%
1826 | 0.00%
1827 | 0.83%
1828 | -4.96%
1829 | -1.85%

1830 | -0.89%
1831 | -6.26%
1832 | -0.95%

1833 | -1.93%
1834 | 1.97%
1835 | 2.89%
1836 | 5.62%
1837 | 2.77%
1838 | -2.70%
1839 | 0.00%
1840 | -7.10%

1841 | 0.95%
1842 | -6.62%
1843 | -9.24%

1844 | 1.12%
1845 | 1.10%
1846 | 1.09%
1847 | 7.69%
1848 | -4.14%
1849 | -3.14%

1850 | 2.16%
1851 | -2.11%
1852 | 1.08%
1853 | 0.00%
1854 | 8.68%
1855 | 2.95%
1856 | -1.91%
1857 | 2.92%
1858 | -5.67%
1859 | 1.00%
1860 | 0.00%
1861 | 5.96%
1862 | 14.17%
1863 | 24.82%
1864 | 25.14%
1865 | 3.68%
1866 | -2.53%
1867 | -6.82%
1868 | -3.91%
1869 | -4.14%
1870 | -4.24%
1871 | -6.40%

1872 | 0.00%
1873 | -2.03%
1874 | -4.83%
1875 | -3.62%

1876 | -2.35%
1877 | -2.31%
1878 | -4.73%

1879 | 0.00%
1880 | 2.48%
1881 | 0.00%
1882 | 0.00%
1883 | -2.02%
1884 | -2.06%
1885 | -2.00%

1886 | -2.15%
1887 | 1.10%
1888 | 0.00%
1889 | -3.25%
1890 | -1.12%

1891 | 0.00%
1892 | 0.00%
1893 | -1.13%
1894 | -4.36%
1895 | -2.40%
1896 | 0.00%

1897 | -1.23%
1898 | 0.00%
1899 | 0.00%
1900 | 1.24%
1901 | 1.23%
1902 | 1.21%
1903 | 2.28%
1904 | 1.17%
1905 | -1.16%
1906 | 2.23%
1907 | 4.47%
1908 | -2.09%
1909 | -1.12%
1910 | 4.42%
1911 | 0.00%
1912 | 2.06%
1913 | 2.13%
1914 | 0.94%

http://www.measuringworth.com/calculators/inflation/result.php
Some of the “green” years (apparent real output growth with price deflation) may be misleading, however:
(1) a number of “green” years follow recessions (e.g., 1817–1818, 1824, 1830, 1876, 1886, 1897 and 1909), and perhaps these were merely ongoing deflations caused by the previous recessions not yet finished.

(2) the real output data may well be simply inaccurate in the era before 1870: too little is known of real output movement for any definitive chronology. So some of the “green” years may well be recessions we do not know about. For example, there is some evidence that the 1817 to 1821 period was really a recession (Benson 2010: 33). Although Davis’s industrial index only shows contraction in 1816 (Davis 2004: 1189), there seems to have been a contraction of agricultural output c.1817 to 1821, and this must have been a significant part of GDP in this period (since even in 1839 industry only accounted for 22% of US output).

(3) Some “green” years seem to have had very weak growth, or essentially stagnation, e.g., 1877 (on the basis of Davis’s industrial index [Davis 2004: 1189]).

(4) the 1866–1871 period looks like post-Civil war deflation.
Other points of interest are the inflationary recessions of 1836–1837, 1860–1861, 1864–1865 (end of the Civil war) and 1903–1904. But all other periods of real output growth (i.e., booms) are inflationary.

We might also note how some of the worst deflationary years were also years of recession:
(1) 1802 | -15.73%
(2) 1815 | -12.29%
(3) 1823 | -10.65%
(4) 1816 | -8.65%
(5) 1840 | -7.10%.
So it is perfectly clear that one can identify many periods in the 19th century where price deflation was correlated with recession.

Of course, a number of years (especially within 1873–1896) saw both price deflation and real output growth.

Yet when Irving Fisher wrote this in 1933 he could have cited some considerable evidence in US history to support it:
“I had since 1909 been stressing the fact that deflation tended toward depression and inflation toward a boom.” (Fisher 1933: 350, n.).
Appendix 1: Davis’s Chronology of US Recessions
US Recessions in the 19th Century
Years (Peak–Trough) | Recession Length (years)

1796–1798 | less than 1
1802–1803 | less than 1
1807–1808 | less than 2
1811–1812 |
1815–1816 |
1822–1823 |
1828–1829 |
1833–1834 |
1836–1837 | less than 1
1839–1840 | less than 3
1856–1858 |
1860–1861 |
1864–1865 | less than 2
1873–1875 | less than 3
1883–1885 | 1
1892–1894 |
1895–1896 |
1903–1904 |
1907–1908
(Davis 2006: 106).
BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Benson, William Edmunds. 2010. A Political History of the Tariff 1789–1861. Xlibris

Davis, J. H. 2004. “An Annual Index of U.S. Industrial Production, 1790-1915,” Quarterly Journal of Economics 119: 1177-1215.

Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Fisher, Irving. 1933. “The Debt-Deflation Theory of Great Depressions,” Econometrica 1.4: 337–357.

Gallman, R. E. and Howie, E. S. 1971. “Trends in the Structure of the American Economy since 1840,” in R. Fogel and S. Engerman (eds.), The Reinterpretation of American Economic History. Harper and Row, New York. 25–37.

11 comments:

  1. Monetary theory identifies 2 types of deflation - "good" deflation where rising productivity allows manufacturers to reduce prices and "bad" deflation where increased demand for money leads to prices falling due to depressed demand for output. The period 1873–1896 is generally associated with the first type of deflation.

    For most of the 20th century "good" deflation is rarely seen as central banks have tended to increase the money supply to avoid any sort of deflation - but the period at the end of the 19th century proves that deflation per-se is not bad for the economy.

    ReplyDelete
    Replies
    1. "The period 1873–1896 is generally associated with the first type of deflation."

      I disagree: look at how many years from 1873-1896 were associated with recession.

      Delete
    2. Could the two really be separated? They essentially give the same effect - encourage people to wait and sit on their money while their wealth rises.
      It is also not at all clear that rising productivity will necessarily increase output, especially if one considers the interdependence of goods and money flows in any economy.

      Delete
    3. On "I disagree: look at how many years from 1873-1896 were associated with recession."

      Yes, there were examples of "bad" deflation within that period as well but as you yourself acknowledge growth rates during this period of steady price deflation almost matched (and possibly exceeded) the period that you see as the golden age of Keynesianism)

      http://socialdemocracy21stcentury.blogspot.fr/2012/02/real-us-gnp-growth-rates-18731896.html

      Delete
    4. Some points:

      (1) From the estimates of Balke and Gordon, average real US GNP growth from 1873–1896 was 3.60%, lower than the average real US GNP growth rate from 1947–1973, which was 3.86%. Other data indicates a serious unemployment problem in the 1870s and 1890s.

      http://socialdemocracy21stcentury.blogspot/2012/02/real-us-gnp-growth-rates-18731896.html

      (2) In terms of real per capita GDP 1873–1896 was clearly inferior:

      Average Growth Rate 1871–1914: 1.63%
      Average Growth Rate 1873–1896: 1.42%
      Average Growth Rate 1873–1879: 1.64%
      Average Growth Rate 1879 to 1896: 1.36%
      Roaring 20s, Average Growth Rate 1920–1929: 2.04%
      Recovery from Depression 1934–1940: 5.75%
      Average Growth Rate 1948–1973: 2.30%.

      (3) Also, notice how the growth rates slumped in Balke and Gordon’s data as the 1873-1896 deflation unfolded:

      Average real GNP growth rate, 1873–1880: 5.76%
      Average real GNP growth rate, 1881–1890: 2.96%.
      Average real GNP growth rate, 1891–1896: 2.40%

      (3) Romer's real GDP figures show an average of 3.87%. This was only very slightly higher than the average real US GNP growth rate from 1947–1973 (3.86%). Yet, as noted above, other data indicates a serious unemployment problem in both the 1870s and 1890s. Compare that with the 1946-1973 period: low unemployment in nearly all years.

      So - even if you want to say Romer's figures are better (and most economists these days prefer Balke and Gordon) - employment was still better in the 1946-1973 era.

      And most strange of all is that in the 1873-1896 period unemployment continued to rise during a number of years even when there was (apparently) real output growth.

      Delete
  2. I think if you look at an industry like computing you see an example of how "good" deflation works. Prices have come down significantly over the years and sales have increased to match.

    At any given moment consumers might be thinking "if I wait a year I'll be able to get a faster and cheaper device" but that doesn't seem to ave held back growth.

    ReplyDelete
    Replies
    1. Except price falls in one specific good do not constitute deflation - that is, a fall in the general price level.

      You can have a mild inflation, even with a number of goods falling in price.

      Delete
  3. Could you do a piece about the excessive buildup of private debt in 1880-1890 era in Australia and how that was effectively a bubble economy, as shown by Steve Keen's Data?

    http://i.bnet.com/blogs/deleveraging-then-and-now.png

    ReplyDelete
    Replies
    1. I have done some posts on the 1890s Australian depression here:

      http://socialdemocracy21stcentury.blogspot.com/2012/05/free-banking-in-australia.html

      http://socialdemocracy21stcentury.blogspot.com/2012/05/tale-of-two-depressions-1930s-and-1890s.html

      As to the bubble economy, there was in fact a real and huge bubble in property (and some financial assets) in the 1880s.

      Delete
    2. Do you have any data for the US Economy in the Libertarian "Golden Age" in the late 19th century specifically regarding private debt?

      If our Post-Keynesian framework is correct, then the levels of private debt to GDP should be similar to that in Australia. We can already see evidence of financial bubble in Output volatility.

      Delete
    3. I think Steve Keens's blog has some graphs of private US debt to GDP ratios in the 19th century, but you would have to look for them.

      Delete