Tuesday, January 18, 2011

US GNP Estimates in the Recession of the 1890s

In the 1890s, the US and other countries suffered either a depression or a severe recession (for the US downturn, see Steeples and Whitten 1998). The US GNP contraction began in January 1893 and continued until June 1894, and a further contraction started after December 1895 until June 1897 (for the official data, one can consult D. Glasner and T. F. Cooley, Business Cycles and Depressions: An Encyclopedia, New York, 1997; this is an incredibly useful book!).

The downturn was made worse in the US by a financial crisis and banking panic in 1893, in which there was also a suspension of payments from August to September (Rockoff 1996: 671). Furthermore, the money stock declined by 4% between 1892 and 1893 (Rockoff 1996: 671), and many banks and businesses failed.

An important point is that 1890s America had no central bank, government spending was a very small percentage of GDP (it fluctuated between 2.55% and 3.62% in the 1890s), and governments tended to pursue austerity in times of recession. In fact, US federal government spending fell from 1893 to 1896 and fell from $465.1 million in 1893 to $443.1 million by 1896, which was obviously contractionary fiscal policy.

The 1890s was a period of comparatively strong laissez faire, certainly by the standards of neoclassical economics. It can even be invoked as an approximation of the type of free market system imagined by Austrians.

As an aside, I would note how utterly absurd it is for Austrians to invoke 1920–1921 as an (alleged) vindication of their theories, when in that period America had a central bank. By any definition, 1920–1921 was even less of a laissez faire system than 1890s America, so it should be less relevant than the 1890s.

If 1920–1921 can be invoked as relevant to how a pure Austrian system might work, then, with even greater reason, the 1890s can be as well. But, of course, given there was no period in recent history when the fantasy Austrian world of no fractional reserve banking, no fiduciary media, no regulation, and no government has ever existed, there is no direct empirical evidence whatsoever that such a system would work or be stable.

All we can do is look to real world capitalism in the 19th century for indirect evidence: given there was no central bank, a gold standard, and minimal regulation in 1890s America, this must give at least an approximation of what an Austrian system would look like.

The trouble with any US GNP figures for the 1800s is that the official Department of Commerce series only began in 1929 (Maddison 1995: 137), and we can only ever have rough estimates for GNP, not reliable data. The reliability of any estimates for the 19th century depends on the sources and methodology used, and there is still dispute about the figures (Maddison 1995: 135–137).

The standard estimates for pre-1914 real US GNP are based on the work of Simon S. Kuznets (1938, 1941, 1946, 1961), whose work was developed by Gallman (1966) and Kendrick (1961). The resulting data is normally called the Kuznets-Kendrick series.

As is well known, the standard data shows far more volatile output in the 19th century than after 1945, but that was challenged by Christina Romer (see Romer 1986, 1986a, 1988, and 1989).

Romer, in turn, was challenged by the estimates of Balke and Gordon, who found that real GNP was on average as volatile as seen in the Kuznets-Kendrick series (Balke and Gordon 1989: 40, 86; Zarnowitz 1992: 362, n. 5).

It is obvious that US GNP estimates for the 19th century are controversial, and that this issue is far from settled.

Now what are the actual estimates of the contraction in GNP in the 1890s?

The Kuznets-Kendrick series shows a real GNP fall of 4% from 1892 to 1893 and another 6% decline from 1893 to 1894, with a further fall of 2.5% from 1895 to 1896. By this data, the 1890s was hit by a full-blown depression (that is, where output fell by 10% or more).

By contrast, Romer’s estimates show a 1.69% contraction in GNP from 1892 to 1894, but no further contraction in the 1890s (Romer 1989: 22, Table 2).

According to Balke and Gordon, real GNP contracted by 2.96% from 1892 to 1894, and, after a recovery in 1895, by 2.27% from 1895 to 1896 (Balke and Gordon 1989: 84, Table 10). Balke and Gordon, then, show a quite severe recession, but not a depression.

Most recently, the New Keynesians G. A. Akerlof and R. J. Shiller have contributed to his debate by arguing the 1890s was so bad partly because of the shock to business expectations (Akerlof and Shiller: 59–64), a view that is essentially consistent with a Post Keynesian theory of fluctuating subjective expectations having serious effects on investment, liquidity preference, spending and aggregate demand.

But there is a real paradox here. Romer’s lower figures for GNP seem blatantly contradicted by the astonishingly high unemployment that began in 1893 and that continued until 1898 (Wicker 2000: 81; Akerlof and Shiller 2009: 60). Perhaps that provides support to Balke and Gordon’s findings, which contradict Romer’s.

We can review the two estimates for unemployment in the 1890s below. First, we can take the revised figures in Romer (1986: 31):

Year Unemployment rate
1892 3.72%
1893 8.09%
1894 12.33%
1895 11.11%
1896 11.965
1897 12.43%
1898 11.62%
1899 8.66%
1900 5.00%

Even using Romer’s figures, the US economy did not return to full employment for nearly a decade after 1893.

The other widely used estimate of unemployment in the 1890s is the work of Stanley Lebergott, and his estimates of unemployment are much higher than Romer’s, so, even if his estimates are invoked as more accurate than Romer’s, they would only make matters worse.

Some argue that Romer’s estimates are questionable (Lebergott 1992), or at least for the period from 1900–1929 (Weir 1986), as the idea that movements in the labour force were pro-cyclical before 1945 can be challenged: if aggregate participation rates were anti-cyclical, then Lebergott’s estimates for 1900–1929 may be better (Weir 1986: 364; Weir 1992, however, does agree that Lebergott’s figures for 1890–1899 are too volatile). Here are Lebergott’s estimates of the unemployment rate:

Year Unemployment rate
1890 4.0
1891 5.4
1892 3.0
1893 11.7
1894 18.4
1895 13.7
1896 14.5
1897 14.5
1898 12.4
1899 6.5
1900 5.0

On either measure of unemployment, the US in the 1890s was mired in suboptimal growth, shockingly high unemployment, and real GNP that did not reach potential GNP.

The experience of the 1890s demonstrates how false is the neoclassical idea that free markets tend to return quickly to full employment equilibrium. What is frequently forgotten is that an economy mired in high involuntary unemployment, even if it has growth, is in an underemployment disequilibrium. The US from 1893 to 1899 was clearly such an economy.

This is important empirical support for the Post Keynesian view that free markets do not have a tendency to full employment equilibrium in the short term. If one considers the return to low unemployment by 1900 after eight years an example of “long-term” tendency to full employment equilibrium, I can only say: such apologists for free markets have already lost the debate.

What use is a system that, after a shock, takes eight years of underemployment disequilibrium, high unemployment and all the resulting social misery caused by this to return to full employment?

Neoclassical laissez faire in the 19th century was a system inferior to a well-run Keynesian economy, on the grounds both of economic efficiency and morality.


The real GNP estimates of Balke and Gordon (1989: 84) are as follows:

Year Real GNP*
1888 $170.7
1889 $181.3
1890 $183.9
1891 $189.9
1892 $198.8
1893 $198.7
1894 $192.9
1895 $215.5
1896 $210.6
1897 $227.8
1898 $233.2
1899 $260.3
1900 $265.4
1901 $297.9
1902 $303.0
* GNP figures are in billions of 1982 dollars.

The estimates of Romer (1989: 22) for real GNP are as follows:

Year Real GNP*
1889 $175.030
1890 $182.964
1891 $191.757
1892 $204.279
1893 $202.616
1894 $200.819
1895 $215.668
1896 $221.438
1897 $233.655
1898 $241.459
1899 $254.728
1900 $264.540
1901 $284.908
* GNP figures are in billions of 1982 dollars.


Akerlof, G. A. and R. J. Shiller. 2009. Animal Spirits: How Human Psychology drives the Economy, and Why it Matters for Global Capitalism, Princeton University Press, Princeton.

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.

Gallman, R. E. 1966. “Gross National Product in the United States, 1834–1909,” in Output, Employment, and Productivity in the United States after 1800 (Studies in Income and Wealth, vol. 30), Columbia University Press, New York.

Glasner, D. and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York.

Kendrick, J. W. 1960. “Comment,” in Trends in the American Economy in the Nineteenth Century (Studies in Income and Wealth, vol. 24), Princeton University Press, Princeton, N.J.

Kendrick, J. W. 1961. Productivity Trends in the United States, Princeton University Press, Princeton.

Kuznets, S. S. 1938. Commodity Flow and Capital Formation, National Bureau of Economic Research, New York.

Kuznets, S. S. 1941. National Income and Its Composition, 1919–1938 (2 vols), National Bureau of Economic Research, New York.

Kuznets, S. S. 1946. National Product since 1869, National Bureau of Economic Research, New York.

Kuznets, S. S. 1961. Capital in the American Economy: Its Formation and Financing, Princeton University Press, Princeton, N.J.

Maddison, A. 1995. Monitoring the World Economy, 1820–1992, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2001. The World Economy: A Millennial Perspective, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2003. The World Economy: Historical Statistics, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2007. Contours of the World Economy, 1–2030 AD: Essays in Macro-economic History, Oxford University Press, Oxford and New York.

Rockoff, H. 1996. “Banking and Finance, 1789–1914,” in S. L. Engerman and R. E. Gallman (eds), Cambridge Economic History of the United States. Vol. 1, Colonial Era, Cambridge University Press, Cambridge. 643–684.

Romer, C. D. 1986. “Is the Stabilization of the Postwar Economy a Figment of the Data?,” American Economic Review 76: 314–334.

Romer, C. D. 1986a. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.

Romer, C. D. 1988. “World War I and the Postwar Depression: A Reinterpretation based on alternative estimates of GNP,” Journal of Monetary Economics 22.1: 91–115.

Romer, C. D. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37.

Steeples, D. W. and D. O. Whitten, 1998. Democracy in Desperation: The Depression of 1893, Greenwood Press, Westport, Conn.

Weir, D. R. 1986. “The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability,” The Journal of Economic History 46.2: 353–365.

Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.

Wicker, E. 2000. Banking Panics of the Gilded Age, Cambridge University Press, New York.

Zarnowitz, V. 1992. Business Cycles: Theory, History, Indicators, and Forecasting, University of Chicago Press, Chicago.


  1. Some thoughts on this interesting piece.

    A GNP figure would include domestic investment, and domestic spending. If it so happens that a firm sits on its cash instead of investing it, it has merely decided to invest later rather than now or invest in something else. And if it so happens that consumers decided to save up money, especially if a natural disaster or a draught happened, then they have simply decided to spend in the future and not now.

    So in that respect, would it really matter if GNP did or did not increase by a certain amount? Wouldn't it simply have meant that firms are investing in the future rather than the present or consumers are spending in the future rather than the present? Either of those decisions will not increase or decrease the amount of capital a business has or the amount of consumption a person does across the next few years.

    I see you have established, correctly, that the 1890s showed low growth in GNP, but I want to know how that translates into an actual, physical, tangible, flesh-and-blood problem on a day to day basis. Because otherwise, low growth in GNP just tells us low growth in GNP.

  2. "So in that respect, would it really matter if GNP did or did not increase by a certain amount?"

    You're saying: Does really matter if the nation's output falls and its wealth per capita and general living standard fall?
    Does it matter if there is mass unemployment, starvation, homelessness, misery?

    Of course it does. And if that is what Austrians say under such circumstances, then it is no surprise Austrian economics is a fringe movement taken seriously by virtually no-one.

    The faliure to invest was not some "natural" outcome: it was caused by an asset bubble collapse, a financial crisis, banking panic, money supply collapse, debt deflation and collapse in aggregate demand.

    Business expectations were shocked, destroying confidence, for years on end.

    I see you have established, correctly, that the 1890s showed low growth in GNP, but I want to know how that translates into an actual, physical, tangible, flesh-and-blood problem on a day to day basis.

    There was a steep fall in GDP from 1892 to 1893 and probably again in 1896.

    The Kuznets-Kendrick series shows a full-blown depression.

    Balke and Gordon show a severe recession.

    Romer’s estimates shows a mild to moderate
    recession, but that finding is contradicted by the astonishingly high unemployment that persisted until 1899.

    It's no wonder you don't see Austrians try to use this recession as "proof" of self-correcting markets.

  3. Austrian? I am not here as an informal representative of any school of thought. I am young and in my formative years, so I could be a Chicagoite the next week, a protectionist mercantilist the week after, then a neoclassical, a post-Keynesian, and maybe even an outright socialist if I felt convinced by the logic. Lionel Robbins made such dramatic transformations as an expert, let alone as a layman.

    Don't get me wrong, this blog is better researched than most (or perhaps nearly every) free market blogs one might see. I mean it. The debt deflation theory of Fisher may have been the most convincing writing on business cycles in my recent memory, and was on my mind for a week.

    My post was just the statistic-skeptic in me speaking, since I have seen the same statistics being used to interpret many different results by many different people. It's a knee jerk response for me to ask, everytime a statistic is cited, "so what".

  4. "The debt deflation theory of Fisher may have been the most convincing writing on business cycles in my recent memory..."

    Indeed it is. But remember research has proceeded well beyond Fisher's original article, with very important work by Hyman Minksy and more recently by Steve Keen on his debt deflation blog: