Alfred Marshall’s Judgement on the “Depression” of 1873–1896

To expand on a point in the last post, between 1873 and 1896 nations on the gold standard had a protracted period of deflation.

I will repeat here some comments I have made before.

In the 19th century, people tended to use the term “depression” loosely to refer to contractions in real output often accompanied by deflation. In the Oxford English Dictionary, we get a general definition:

“5. a. A lowering in quality, vigour, or amount; the state of being lowered or reduced in force, activity, intensity, etc. In mod. use esp. of trade; spec. the Depression, the financial and industrial ‘slump’ of 1929 and subsequent years.”(Oxford English Dictionary [2nd edn. 1989], s.v. “depression,” 5.a.).

The earliest use of the word in this sense cited in the Oxford English Dictionary is from an 1827 publication, where we read that the

“commencement of the present year was marked by a continuance of that depression in manufactures and commerce, which had prevailed at the close of the preceding [year]” (The Annual Register: Or a View of the History, Politics, and Literature, of the Year 1826, 1827, p. 1).

In the 19th century, when people referred to output contractions (normally with price deflation), they spoke of a “slump in trade,” “depression of commerce” or “depression of trade and industry”, and so on. Sometimes writers spoke of a “depression” in certain particular sectors as well. That is, “depression” was used in the modern sense of a “recession” accompanied by price deflation.

The later 1870s, 1880s and 1890s (down to 1896) were widely spoken of at the time as decades marked by “depression,” partly because of the persistent price deflation, decline in profits, and business pessimism in these years.

But we now know that actually there were several business cycles in these years, and real output was higher in 1896 than in 1873. The whole period was clearly not a “depression” or “recession” in the modern sense.

Nevertheless, there were still economic problems in these years, as follows:

(1) a serious financial crisis and recession around 1873 in many countries and serious economic stagnation in some countries like the US for almost the rest of the decade.

(2) financial crises and a serious recession in the early 1890s and economic problems in the later 1890s in some nations such as the US.

(3) a dissatisfaction with deflation from various classes of people, above all business people and debtors. In the US, this period coincided with the free silver movement and bimetallist political movement that opposed the gold standard.

In the UK and other European countries, there was also a pessimistic outlook in the business press and feelings that something was not right. Farmers were also complaining of depression.

The UK “Royal Commission on the Value of Gold and Silver” was instituted in 1887 after a report on the “depression of trade.” The commission was to investigate the question of changes in the value of gold and silver and the effects on trade and production.

Alfred Marshall was called to give evidence and this exchange with Henry Chaplin is interesting:

“[Henry Chaplin, MP:] Do you share the general opinion that during the last few years we have been passing through a period of severe depression? …

[Marshall]: 9823. Yes, of severe depression of profits.

[Henry Chaplin, MP:] 9824. And that has been during a period of abnormally low prices? …

[Marshall]: A severe depression of profits and of prices. I have read nearly all the evidence that was given before the Depression of Trade and Industry Commission, and I really could not see that there was any very serious attempt to prove anything else than a depression of prices, a depression of interest, and a depression of profits; there is that undoubtedly. I cannot see any reason for believing that there is any considerable depression in any other respect.” (Court 1965: 20).

So according to Marshall there was a “severe depression of profits.”

With price deflation, there was a squeeze on profits, as deflated prices meant lower profits in nominal terms and perhaps even in real terms when wages did not fall enough as well. Labour apparently often had rising real wages in this period, as wages did not fall as rapidly as prices. When business tried to cut wages, that provoked labour disputes (Livingston 1986: 34).

There is, strangely, also evidence of declining productivity growth in the 1880s and early 1890s (Livingston 1986: 34), and in the US price deflation, with rising real wages and insufficient labour productivity growth (Livingston 1986: 38).

The falling profits caused pessimistic businesses expectations and that, most probably, meant a reduced aggregate level of investment, since the level of investment is very much dependent on expectations, as well as aggregate demand.

Can we find any evidence for this in the economic data? I would say, yes.

Let us take the UK as an example. First, the real GDP data from 1873:

Year | GDP* | Growth Rate
Millions of international Geary-Khamis dollars
1873 | 108266 | 2.33%
1874 | 110063 | 1.66%
1875 | 112758 | 2.45%
1876 | 113881 | 0.99%
1877 | 115004 | 0.99%
1878 | 115454 | 0.39%
1879 | 115004 | -0.39%
1880 | 120395 | 4.69%
1881 | 124663 | 3.54%
1882 | 128257 | 2.88%
1883 | 129155 | 0.70%
1884 | 129380 | 0.17%
1885 | 128706 | -0.52
1886 | 130728 | 1.57%
1887 | 135894 | 3.95%
1888 | 141959 | 4.46%
1889 | 149596 | 5.38%
1890 | 150269 | 0.45%
1891 | 150269 | 0%
1892 | 146676 | -2.39%
1893 | 146676 | 0%
1894 | 156559 | 6.74%
1895 | 161500 | 3.15%
1896 | 168239 | 4.17%
1897 | 170485 | 1.33%
1898 | 178796 | 4.87%
1899 | 186208 | 4.14%
(Maddison 2003: 47).

This doesn’t look so bad at first. The worst recession was from 1891 to 1893, and mild recessions in 1879 and 1885.

But when we turn to UK unemployment from 1873 to 1896, we see something interesting:

Year | Unemployment Rate
1873 | 2.8%
1874 | 3.3%
1875 | 4.0%
1876 | 4.8%
1877 | 6.6%
1878 | 7.9%
1879 | 9.1%
1880 | 6.6%
1881 | 5.7%
1882 | 5.0%
1883 | 4.9%
1884 | 6.3%
1885 | 8.0%
1886 | 7.9%
1887 | 7.1%
1888 | 5.8%
1889 | 4.3%
1890 | 4.0%
1891 | 4.9%
1892 | 6.1%
1893 | 7.3%
1894 | 7.0%
1895 | 7.3%
1896 | 6.1%
1897 | 5.9%
1898 | 4.9%
1899 | 4.3%
1900 | 4.3%
(Boyer and Hatton 2002: 667).

Some particularly bad periods of unemployment were 1876–1880, 1884–1888 and 1892–1896. The 1876–1880 unemployment figures are very strange, because the real GDP estimates for this period show real output growth in all years but 1879.

What is fascinating is that the period of high unemployment from 1884–1887 comes at just the right time when the Royal Commission on the Value of Gold and Silver was set up. The fears of a depression in these years were not unjustified, given the high unemployment. Alfred Marshall was wrong to think there was no evidence of depression, apart from “a depression of prices, a depression of interest, and a depression of profits” (but, then, of course there were no proper national unemployment estimates in those days).

But why the high unemployment? That there was insufficient private investment seems a reasonable answer. But why insufficient private investment?

If profits were depressed and this caused business expectations to become pessimistic, then the underlying cause was deflation. Moreover, it is likely that debt deflationary dynamics were at work.

The 1890s look like a good candidate for another serious economic crisis (as was the case in the US), and, as noted above, there was a serious recession in the UK from 1891 to 1893.


BIBLIOGRAPHY
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.

Court, W. H. B. 1965. British Economic History, 1870–1914: Commentary and Documents. Cambridge University Press, Cambridge.

Johnson, H. Clark. 1997. Gold, France, and the Great Depression, 1919–1932. Yale University Press, New Haven and London.

Livingston, James. 1986. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913. Cornell University Press, Ithaca, N.Y. and London.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.