Thursday, September 6, 2012

Reply to “Unemployment, Deflation and Growth During the Period of 1873–1896”

A commentator on called “Rodolphe Topffer” attempts a critique of my views on US GNP growth in the late 19th century:
“Unemployment, Deflation and Growth During the Period of 1873–1896,” 4 September, 2012.
My response:

(1) The whole post suffers from the use of a straw man argument.

Curiously, the author cites Bordo and Filardo for the view that it is “abundantly clear that deflation need not be associated with recessions, depressions, and other unpleasant conditions” – but this very view is, as far as I can see, already accepted by Keynesians. Certainly, I accept it.

The idea that there is “a common belief among Keynesians that a situation of a falling prices will result in a recession” is simply not true, if by that we mean that academic Keynesian economists think that price deflation always results in recession. On the contrary, any Keynesian with a decent knowledge of economic history knows about the long period of deflation in the Western world from 1873–1896, during which there was in fact real output growth. In one of the first posts on my blog, I in fact noted this myself.

Now what Keynesians would say is that deflation can be a consequence of economic crisis when the money supply collapses, or that, in an environment of heavy private debt, steep deflation is likely to induce debt deflationary effects. This is quite different from thinking price deflation is always bad or results in real output collapse.

(2) Rodolphe Topffer states:
“The periods running from 1873 to 1879 and 1879 to 1896 show a huge increase in GNP per capita, see Rothbard (2002) ‘A History of Money and Banking in the United States’ (see pages 360–361, 400–403, 154–155, 159–161, 164).”
Let us look at US per capita GDP in the late 19th century from the figures in Angus Maddison (2006), which appear to be calculated from the estimates in Balke and Gordon (1989):
US per capita GDP 1870–1900
(in 1990 international Geary-Khamis dollars)

Year | GDP | Growth rate
1870 | 2445 |
1871 | 2489 | 1.79%
1872 | 2524 | 1.40%
1873 | 2562 | 1.50%
1874 | 2601 | 1.50%
1875 | 2643 | 1.61%
1876 | 2686 | 1.62%
1877 | 2732 | 1.71%
1878 | 2780 | 1.75%
1879 | 2829 | 1.76%
1880 | 2880 | 1.80%
1881 | 2921 | 1.42%
1882 | 2963 | 1.43%
1883 | 3008 | 1.51%
1884 | 3056 | 1.59%
1885 | 3106 | 1.63%
1886 | 3158 | 1.67%
1887 | 3213 | 1.74%
1888 | 3270 | 1.77%
1889 | 3330 | 1.83%
1890 | 3392 | 1.86%
1891 | 3467 | 2.21%
1892 | 3728 | 7.52%
1893 | 3478 | -6.70%
1894 | 3314 | -4.71%
1895 | 3644 | 9.95
1896 | 3504 | -3.84%
1897 | 3769 | 7.56
1898 | 3780 | 0.29
1899 | 4051 | 7.16
1900 | 4091 | 0.98
Average Growth Rate 1871–1900: 1.78%
Average Growth Rate 1873–1879: 1.64%
Average Growth Rate 1879 to 1896: 1.36%
Average Growth Rate 1871–1880: 1.64%
Average Growth Rate 1881–1890: 1.65%
Average Growth Rate 1891–1900: 2.04%
(Maddison 2006: 465–466).
The average per capita GDP rate from 1873 to 1879 was 1.64%.

The average per capita GDP rate from 1879 to 1896 was 1.36%. This was not especially high historically.

As always, the data is only an estimate and might be challenged. For example, Joseph H. Davis’s (2006) list of recessions in the 19th century, on the basis of his annual dataset of US industrial production from 1796 to 1915, shows that the US had a recession from 1873 to 1875 lasting about 3 years, a recession which is absent from Balke and Gordon (1989).

If Davis is right, the mid-1870s was hardly a prosperous period.

The most telling data is unemployment, which we can see here from the estimates is that of J. R. Vernon (1994):
Year | Unemployment Rate
1869 | 3.97%
1870 | 3.52%
1871 | 3.66%
1872 | 4.00%
1873 | 3.99%
1874 | 5.53%
1875 | 5.83%
1876 | 7.00%
1877 | 7.77%
1878 | 8.25%
1879 | 6.59%

1880 | 4.48%
1881 | 4.12%
1882 | 3.29%
1883 | 3.48%
1884 | 4.01%
1885 | 4.62%
1886 | 4.72%
1887 | 4.30%
1888 | 5.08%
1889 | 4.27%
1890 | 3.97%
1891 | 4.34%
1892 | 4.33%
1893 | 5.51%
1894 | 7.73%
1895 | 6.46%
1896 | 8.19%
1897 | 7.54%
1898 | 8.01%
1899 | 6.20%

(Vernon 1994: 710).
The 1873–1896 era saw two periods of rising unemployment: (1) 1875–1878 and (2) 1893–1896.

Thus the period from 1873–1896 in the US had two periods of economic crisis: the mid/late 1870s and 1893–1896. During both these periods unemployment rose sharply. A financial crisis also appears to have begun the crisis periods. It is quite likely that the economy in both 1870s and 1890s experienced some degree of debt deflation, so that the deflation was the cause of economic malaise.

(3) The author objects to a comparison of per capita GDP between 1946–1973 and 1873–1896, but the major objection is simply absurd:
“2) Theoretically, we can say that economic growth is much easier when the economy has to recover from the damages caused by the war. The comparison therefore does not hold.”
Why is this absurd? The US was not invaded or damaged during the war in the way the European economics were. Thus there was no “war reconstruction” in the US as there was in Europe. Instead, what occurred was the reconversion of the US economy from its wartime command structure to a peacetime consumer economy. That was certainly accomplished by 1950. So even if we were to subtract the 1946–1949 period, it is obvious that a comparison of 1950–1973 with an equivalent period in the late 19th century (say, 1873–1896) should be perfectly justifiable.


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.

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

Maddison, Angus. 2006. The World Economy: Volume 1: A Millennial Perspective and Volume 2: Historical Statistics. OECD Publishing, Paris.


  1. More bizarro history from the "empirics don't matter according to our epistemology" Austrians. So, the Long Depression didn't happen. It was just peoples' heads. Next, I guess the Great Depression will be seen as an era of prosperity.

    Since I've already pointed out that during the above cited period there were "distortionary" interventions from the US central bank, I'll make another historical point: this was the era in which the trade union movement rose to prominence. This was not a coincidence. And out of this movement eventually arose the RSDLP and from there, the Bolsheviks.

    It's generally recognised that due to the fairly crappy economic growth of the late-nineteenth century workers organised. It is also generally recognised that in this period in history many large monopolies were consolidated. This, again, is not a coincidence, if you are in any way familiar with economic history -- as opposed to Austrian-style historical mythology.

    Please make them aware of this or repost this on their boards. I'd sooner go to a Scientologist personality test than be caught over there.

    1. The US's move toward foreign intervention, under both Cleveland and McKinley, was also the result of the 1890s' "fairly crappy economic growth". There was a naive understanding of slumps as being caused by overproduction/underconsumption; it was thought that foreign markets could absorb the surplus. And thus Hawaii, Cuba, the Phillipines, China, and a string of Latin American republics became targets.

  2. Lord Keynes,

    As you may recall, earlier in the year I said I would work on a paper in the summer dealing with the Panic of 1873. While my overall project which planned to encompass all the relevant economic history was not completed, I did manage to finish a much smaller paper that deals less with history and more economic statistics on the time period. It was sent for a contest earlier in the month, and I will let you know if anything comes of it.


    While I cannot speak for the person who posted the initial argument, I would say that in general, “mainstream” economics is against deflation. This does not imply that they argue that output cannot increase with falling prices, but that in general with regards to monetary policy most major thinkers, including those at the Fed, what is taught in school as orthodox, and probably yourself would advocate a policy where prices slowly increase 1-3% per annum in normal times, and not allow prices to fall. So, while “mainstream” economists may readily admit that falling prices from an increase in output may not be detrimental, most economists would rather have that not occur. I do not think I am wrong in this respect then to conclude that most economists are against deflation, or they would prefer that it would not occur.

    I have not had a time to fully study per capita GNP growth rates for this time period. However, it is important to note that an economy can still be progressing even if real GNP per capita or real wages slows down its rate of growth or remains constant. This is due to the fact that the labor supply may increase from immigration, augmenting the total population and lowering wage rates. An improvement in the standard of living comes from bringing more workers from dirt poor to poor-middle class rather than improving the overall standards of the middle class. This happened in America during this time period as real wages grew slower per year from factor arbitrage. Poorer countries actually had some of the largest real wage rate growth from decreases in labor supply from emigration. An illuminating paper on this is Jeffrey Williamson “Globalization, Labor Markets and Policy Backlash in the Past”.

    I would be careful in calling Davis’ contraction from 1873-1875 as a 3 year slump. The NBER chronology lists the recession as starting in October 1873. Even Davis shows growth from 1872-73. So, using Davis’ figures at most the recession, assuming it ended in December 1875 lasted less or equal to 2.25 years. In fact, rather than showing that the mid 1870s was “hardly a prosperous period”, both Davis’ papers make the remarks that the depression of the 1870s was shorter and shallower than previously believed.

    I have already spoken in multiple posts about my comments on the B&G data and its relation to the Vernon unemployment series, and I will not repeat myself here.

  3. Here's a bit of real history for your Austrian friends. This is from Hobsbawm's Age of Capital:

    "The new era which follows the age of liberal triumph was to be very different [Hobsbawm dates the end of the liberal era around 1971]. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from intereference and what the Germans called 'Manchesterismus' (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory [LOL!]. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of 'collectivism' began." (p. 354)

    This is not controversial at all. As Hobsbawm points out, even the free-traders recognised the shift. It is only a few idiot Austrians who only read other idiot Austrians that would debate the periodisation here (in fact I've read Austrians who refer to Dicey and his pronouncements, which shows some are not completely blind). Their ignorance is astounding. Please inform them of their miseducation and general clownishness.

    1. :rolleyes:

      I assume you've never read "The Triumph of Conservatism" by Gabriel Kolko.

      Don't let the title fool you, he's supposed to be a new left historian.

  4. Any talk of this kind is not serious until you use Alex Gheg's scale for economic growth. Quantity, quality, variety and convenience in one equation.

  5. Now that I think about it, the deflation and the tendency toward monopoly were probably linked. I've never read anything regarding the 1870s+ on this, but its well known that the monopolies that formed in the 1930s were spurred on by deflation.

    Deflation induces debt deflation. Indebted companies that were previously solvent tend toward bankruptcy. These perfectly viable companies are then taken over by less indebted companies and this leads to monopoly and acts as a major restriction on laissez faire.

    So, there's a certain irony when the Austrians champion mild, long-period deflation as it tends to induce bankruptcies of viable companies which in turn leads to monopoly and responses against monopoly (trade unions, easy money politics like the Greenback Party etc.).

    Once again, the simplifications of the Austrians' historical mythologies are shown up for what they are: fantasies of some sort of self-regulated Golden Era that can be recreated through using certain economic policies. I believe the psychoanalysts would refer to it as a fantasy of returning to the womb (which, suggestively, is linked to tendencies to hoard -- gold bugs! LOL!).

    1. It's always amused me that 'free market' advocates never seem to go on about how they need to beef up anti-trust legislation and break apart large companies to make sure that competition continues to work.