“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.If one defines “depression” as a fall in real output of 10% or more, then it is likely that the 1873 to 1879 period was not an era of depression.
It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).
But, apart from this truth, virtually everything else Rothbard writes is a travesty of history, on the basis of the most recent real GDP, real per capita GDP, industrial output and unemployment data.
Let us refute Rothbard’s dubious assertions one by one:
(1) Rothbard proclaims:All in all, the Austrian idea, derived from Rothbard, that the 1870s were an uninterrupted era of “prosperity …[,] economic growth, and the spread of the increased living standard” is grossly exaggerated at best, and an outright historical travesty at worst. And, while apologists for Rothbard might claim that he did the best with the data he had at the time, that is no excuse for modern Austrians repeating his flawed analysis today.“Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income?”Yet the idea that 1873 to 1879 was an era of “large expansion of industry” seems highly doubtful.
Joseph H. Davis (2004, 2006) has provided a new list of recessions in the 19th century, on the basis of his annual dataset of US industrial production from 1796 to 1915. Davis uses 43 annual components of the manufacturing and mining industries in the US, which represented about 90% of manufacturing output in the 1800s (Davis 2006: 105).
Let us look at the relevant data for the 1870s from Davis’s US industrial index:US Industrial Index, 1870–1880From 1873, industrial output fell, mildly in 1874, but sharply in 1875. Davis (2004: 1203) finds that the cumulative industrial index loss (-10.83) was the second worst of the late 19th century, and only surpassed by the double dip recession of the 1890s.
Index base is 1849–1850 = 100
Year | Index
1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2
1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).
A mild recovery ensued in 1876, but it is remarkable how feeble the growth was in 1877: indeed one could justifiably speak of recession from 1873–1875, then stagnation in 1877.
Modest recovery came from 1878, which sharply expanded in 1880. Davis finds that the US had a recession from 1873 to 1875 lasting less than 3 years, since unemployment was rising in these years and continued rising until 1878.
On the basis of this recent data, the notion that US industry experienced a “large expansion” from 1873 to 1879 is utterly absurd. These were years of recession, stagnation or very modest growth.
(2) Rothbard asserts that“the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product ... .”But “money national product” normally means “nominal national product” (or nominal GDP/GNP), and nominal GDP figures are really not that interesting: what we need is real GDP.
(3) Rothbard asserts the following:“from 1869 to 1879 saw … an outstanding real national product growth of 6.8 percent per year … .”But where does this data come from? It appears to come from Milton Friedman and Anna Schwartz’s A Monetary History of the United States (Princeton, 1963).
Friedman and Schwartz were presumably using the standard estimates for pre-1914 real US GNP 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 or Gallman-Kuznets-Kendrick series. Presumably Friedman and Schwartz were using that, or some version of it.
But this data has long been challenged as questionable.
In contrast, let us look at the estimates of Balke and Gordon (1989: 84; the annual growth rates are my own calculation):Year | GNP* | Growth RateA average annual rate of 4.69% does look high, but falls far short of the 6.8% figure used by Rothbard.
1869 | 78.2 |
1870 | 84.2 | 7.67%
1871 | 88.1 | 4.63%
1872 | 91.7 | 4.08%
1873 | 96.3 | 5.01%
1874 | 95.7 | -0.62%
1875 | 100.7 | 5.22%
1876 | 101.9 | 1.19%
1877 | 105.2 | 3.23%
1878 | 109.6 | 4.18%
1879 | 123.1 | 12.31%
* Billions of 1982 dollars
Average real GNP growth rate, 1870–1879: 4.69%.
(Balke and Gordon 1989: 84).
Moreover, how can we reconcile these estimates with the data from Davis’s industrial index which shows industrial contraction from 1873–1875 and a growth so low in 1877 as to be little better than stagnation? And Davis finds actual recession in the overall US economy from 1873 to 1875, which seems to contradict Balke and Gordon’s estimates.
This should alert us to how questionable all GNP estimates for this era are.
What we can say is that, even if one were to accept Balke and Gordon’s estimates, the real GNP growth rates for this era were far lower than Rothbard’s. And Balke and Gordon’s figures themselves can be challenged by using Davis’s industrial index.
(4) Rothbard’s next claim:“the decade from 1869 to 1879 saw … a phenomenal rise of 4.5 percent per year in real product per capita.”Again, the per capita GDP data appears to be calculated from the Gallman-Kuznets-Kendrick series, but that series is largely rejected today as being reliable.
What of the most recent real per capita GDP estimates? (for what they are worth, of course).
We can turn to Angus Maddison’s data on real per capita GDP calculated from Balke and Gordon (1989):Real US Per Capita GDP 1870–1880I cannot calculate data for 1869 and 1870, but I would be surprised if they would make much difference.
(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%
(Maddison 2006: 87–89).
Average Decadal Real Per Capita Growth Rates
Average Growth Rate 1871–1880: 1.64%
Average Growth Rate 1873–1879: 1.64%.
The average real per capita GDP growth rate from 1871–1880 was 1.64%.
As I have just shown in the previous post, this was the third worst rate for a peacetime decade of all US decades from 1870 to 2000. Only those decades affected by the Great Depression (1920s and 1930s) were worse.
The Keynesian 1960s were a far more prosperous era than the 1870s, and even the roaring ’20s (1920–1929) had a higher average real per capita GDP growth rate (at 2.04%).
Historically speaking, Rothbard’s assertion that the 1870s saw some “phenomenal rise … in real product per capita” is utterly false and absurd, on the basis of the most recent estimates.
(5) Finally, let us look at unemployment in the 1870s, a variable that Rothbard does not even consider.
Here is US unemployment in the 1870s from J. R. Vernon (1994):Year | Unemployment RateFar from having low unemployment, the period from 1874 to 1878 was an era of persistent rises in unemployment, which soared to 8.25% by 1878, and the fall in 1879 was only modest at best.
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%
What sort of period of significant prosperity or real output growth had persistently rising unemployment?
In short, the unemployment figures confirm that something went badly wrong with the US economy from 1873 to 1879.
While 1873 to 1879 might not have been a full blown depression, they were most probably an era of economic malaise: industrial recession or stagnation and rising unemployment. Real per capita GDP growth was not very high by historical standards: indeed it was some of the lowest growth seen in 130 years of modern US history.
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, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.
Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.
Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.
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. 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, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.
Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.