Tuesday, October 14, 2014

Alfred Marshall on the Deflation of 1873–1896

On 16th January, 1888, Alfred Marshall appeared before the British “Royal Commission on the Value of Gold and Silver” (instituted in 1887), and was questioned about the economic conditions of the 1870s and 1880s in Britain during the first part of the great deflation of 1873 to 1896.

For clarity, I have edited the original text to make the questions and Marshall’s answers clearer:
“[Question:] 9823. Do you share the general opinion that during the last few years we have been passing through a period of severe depression?

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

[Question:] 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. There is of course great misery among the poor; but I do not believe it is greater than it used to be. I do not mean that we should idly acquiesce in the existence of this misery, and regard it as inevitable. I hold rather extreme opinions in the opposite direction.

[Question:] 9825. (Chairman.) Then I understand you to think that the depression in those three respects is consistent with a condition of prosperity?

[Marshall:] Certainly.

[Question:] 9826. (Mr. Chaplin.) The depression of profits, does not that more or less affect all classes?

[Marshall:] No, I believe that a chief cause of the depression of profits is that the employer gets less and the employé more.

[Question:] 9827. You think that during a period of depression the employed working classes have been getting more than they did before?

[Marshall:] More than they did before, on the average. I do not deny that during the years of spasmodic inflation everybody was working very hard; everybody got exceptionally high returns, employers and employed together. But, as I have already said, I think that history shows that those times have always sown the seeds of coming disasters.

[Question:] 9828. Can you speak as to the fact whether there has been a larger number of the working classes than usual unemployed altogether during this period of depression?

[Marshall:] My belief is that there have not been a larger number of people unemployed during the last 10 years than during any other consecutive 10 years. Of course there are many more unemployed now than there were in 1872–73.

[Question:] 9829. Do you speak with knowledge of the thing and of the working classes?

[Marshall:] I speak from personal observation ranging over many years, and a study of almost everything of importance that has been written on the subject.

[Question:] 9830. Are you aware that we have had evidence given by gentlemen speaking with definite knowledge of a directly opposite nature to what you are stating now?

[Marshall:] I am aware that some persons actively engaged in business have given evidence that they believe there is an increasing unsteadiness of employment. But the facts which they bring forward are, in my opinion, outweighed by the statistical and other evidence in the opposite direction. I have given reasons for believing that the statistics showing unsteadiness of employment require to be carefully interpreted; because the more people are employed in factories the more every interruption of employment shows itself in statistics. I have, however, omitted one thing of very great importance. I think that whatever had been the condition of prices there would have been a special reason causing irregularity of employment now; that is the transitional stage in which a great number of industries are. When an improvement is brought into an industry it benefits the public at once, and in the long run it is pretty sure to benefit even the trade into which it is introduced; but in many cases an improvement in the methods of the industry injures that industry, and throws people temporarily out of employment. Now, I do not think there has been any period in which there have been so many great changes. That has been put before you by Mr. Fowler, and it has been argued at great length in Mr. Wells’ articles that this has been a period of great changes in the methods of industry, changes of such a kind as to tend to throw people out of employment. But in spite of that, I do not believe that the want of employment is, on the average, greater than it has been.

[Question:] 9831. But you mean to say that these changes, as you have described them on the methods of industry, have not been continuing now for a great number of years?

[Marshall:] I think there have been exceptionally great changes within the last few years. Many of them are to be traced to America, and before about 1868 or so, the Americans had other things to do; they had not settled down after the great war sufficiently to exert their full influence in changing the methods of industry. The changes are, I think, chiefly due to the great fall, the unparalleled fall, in the cost of transport, which renders it worth while to do a great many things that it was not worth while to do before; but besides this there are an immense number of changes in all industries, chemical and mechanical. I think Mr. Wells’ evidence points very strongly in that direction.”
Final Report of the Royal Commission Appointed to Inquire into the Recent Changes in the Relative Values of the Precious Metals; With Minutes of Evidence and Appendixes. Eyre and Spottiswoode, London, 1888. Appendix, Minutes of Evidence taken before the Royal Commission on Gold and Silver, pp. 21–22.
According to Marshall, then, there had been a “severe depression of profits and of prices,” but this condition was still compatible with “prosperity.”

An interesting research question is: if real wages were rising in this period, was this because of sticky nominal wages in the face of price deflation, which in turn would have squeezed profits? Or was there some other reason?

On unemployment, Marshall did not think that during the 10 year period from 1878–1888 high unemployment was higher as compared with other periods.

For what they are worth, we have the following recent estimates of UK unemployment from 1873 to 1896 in Boyer and Hatton (2002):
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 (in Maddison 2003) show real output growth in all years but 1879:
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).
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.

But caused 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, though hardly as severe as that which hit the Western world from 1929 to 1933. This seems to be the reasonable explanation for the unusual data for this period.

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

Final Report of the Royal Commission Appointed to Inquire into the Recent Changes in the Relative Values of the Precious Metals; With Minutes of Evidence and Appendixes. Eyre and Spottiswoode, London, 1888.

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


  1. LK,

    This question is off topic, but do you consider Rod O'Donnell to be a Post-Keynesian economist?

    If not, to which school does O'Donnell belong?

  2. LK

    Why would sticky nominal wages in the face of price deflation have squeezed profits?

    1. If a firm produces some product whose sale price falls, and the firm can't reduce non-labour factor input costs and wages are hard to cut, then profits will be diminished.

    2. Of course, Marshall's "depression of profits" might mean profits in nominal terms, not real, inflation-adjusted profits -- but even here this would support the idea that businesses don't like even a fall in nominal profits either, just as workers don't like a fall in nominal wages. The neoclassicals call this the "money illusion".

    3. assuming the firm can't sell more units at the lower price, resulting in them still receiving the same total revenue as before.


    4. Yes, assuming that the quantity demanded doesn't rise to offset this.

      In deflation caused by falling demand or even increased production and competition, an individual firm may see its sales volume fall too, as prices fall.

  3. "The 1876–1880 unemployment figures are very strange, because the real GDP estimates for this period (in Maddison 2003) show real output growth in all years but 1879"

    Was this maybe due to large population growth?