More Evidence on the Profit Squeeze of 1873–1896

Around about 1884 to 1886 many Western nations experienced recession, and this was in the midst of the extended price deflation that occurred from 1873 to 1896.

America seems to have had a recession too in the years around 1888, and in 1886 the newly-established US Bureau of Labor (which was founded in 1884) issued a report called Industrial Depressions. The First Annual Report of the Commissioner of Labor, March, 1886, which looked into the recession and current economic conditions.

As part of their research into conditions in Europe, the report noted the following:

“One of the agents of the Bureau reports as the result of interviews had with leading economists in Europe the following as the predominant features of modem industrial development among the producing nations: (1) The influence of the increased facilities for transportation and international communication. (2) The steady progress of rising wages, contemporaneous with declining profits. (3) The enlargement of the circle of producing nations to such extent as to make the means of production far in excess of the needs of consumption.” (Industrial Depressions. The First Annual Report of the Commissioner of Labor, March, 1886, pp. 258).

So the “profit deflation” or profit squeeze that British business people were complaining about (the evidence for which can be read here, here, and here) seems not to have been restricted only to Britain.

There is also evidence in the report that the fall in prices and the increasing wage rigidity was distributing income from capital to labour in other European countries too:

“Upon the phenomenon of the rise of wages side by side with the general decline of prices and profits in Germany, Dr. Barth, one of the highest economic authorities of that country, observes that ‘human labor has become more productive; by the same quantity of labor vastly more useful products are produced and exchanged to-day than even twenty years ago. The sum of all products of labor in which the world has to share or which the world is free to enjoy has not only absolutely but also relatively been largely increased, and the economical condition of mankind has been improved. This, of course, does not mean that all classes of mankind have profited equally by the change. Certainly, however, the wage-laborers are not the losers but the gainers by this change. Take a list of wages wherever you please, and you will always find wages to have advanced with rare interruptions during the last half century. Even where such an advance of wages is not found, the contemporaneous decline in the prices of commodities nevertheless amounts to an advance of wages. This constant increase in the value of labor constitutes an immense progress of civilization.’

M. Piermez, a thoughtful Belgian banker and public man, in an examination of the present economic situation, asks the questions: ‘(1) Are we in the face of a general diminution of wealth? (2) Or is there only a change in its distribution?’ Answering the first in the negative, he proceeds to show how the distribution has been modified so as to give a proportion of revenue relatively less to land and capital and greater to labor. Capital has greatly increased and will continue to increase, but probably not in such a rapid progress as heretofore and chiefly for these reasons: ‘(1) It is not likely that there will be again an economic progress comparable to that by which this century has changed the face of the whole world. (2) The accumulation of savings will tend to diminish in proportion as they are rendered less and less productive. (3) The lower classes, whose share in the world’s distribution of wealth will continue to increase, save less than the upper classes. The average well-being of society increases with increase of wealth, and in the partition of this well-being a continually smaller share will go to those who live by wealth already acquired and a greater share to those who work. It will be still more difficult than it is to-day to live without working. Side by side with the fact of the increased reward of the wage-earner must be placed the great advance in the purchasing power of his wages. All the necessaries of life, food, clothing, heating, and lighting have been cheapened, and the tendency is for them to become cheaper still, that is, unless, in the case of the first-named article, the tariffs recently imposed in some European countries, Germany and France especially, the cost of food should remain normal or ascend. Laborers are feeling the effects of higher wages by eating more, clothing themselves better, and lodging in more wholesome houses. This, in return, reacts in making their labor more efficient and enables them to gain still more.” (Industrial Depressions. The First Annual Report of the Commissioner of Labor, March, 1886, pp. 260–261).

BIBLIOGRAPHY
Industrial Depressions. The First Annual Report of the Commissioner of Labor, March, 1886. Government Printing Office, Washington, 1886.

Armitage-Smith on the Profit Deflation of the 1873–1896 Era

From George Armitage-Smith’s book The Free-Trade Movement and its Results (1898), in which he discusses profit deflation in the context of the new calls for protectionism in Britain in the late 19th century:

“The Protectionist reaction has received some countenance from a very different quarter. If agricultural profits have fallen, so also have business profits (both industrial and commercial) declined during the last quarter of a century, and among the classes dependent upon this source of income much discontent has arisen. This finds ready publicity with the capitalist class. Without very profound investigation of the causes of the decline in profits, some of the sufferers fall in with the suggestion offered on behalf of agriculture, that Protection may provide a remedy by stimulating home industry.

Various circumstances have contributed to the decline in profits. If, as has been maintained, the chief cause be an alteration in the standard of value. Protection can provide no remedy. Two other factors, however, enter unmistakably into the explanation of low profits: (i) the great increase in the supply of capital which has kept pace with the prosperity of the country, and which, being more rapid in its growth than the demand, has forced down the rate of interest; and (2) the sharper competition of foreign countries in the markets formerly held by British produce, which has sprung up of late years.

Formerly capital was saved only by the rich landed classes from rents, and by the merchant traders. The industrial revolution brought in new wealthy classes, the manufacturer and dealer, to whom the term capitalist came to be applied. These made fortunes rapidly, and accumulated wealth. Time has wrought great changes in this field also. The joint-stock system, banking, and all the machinery of modern investment stimulated saving among the professional and middle classes, and opened up new sources of income. As education and prosperity extended, capital was augmented from the thrifty shopkeeper and artisan class; the openings for fresh investments were made easily available to all classes by new developments of the loaning and company system, so that the term ‘capitalist’ is no longer capable of restriction to any particular class. The joint-stock system is tending in some industries to drive out the private employer, and capital is brought into the reservoirs of trade from tiny rivulets of saving over the whole field of industry. Two events have followed, which are specially relevant to the present matter. Although the field of loaning has been enlarged so as to cover the whole industrial world, capital has increased so much more rapidly than fresh openings for its investment that the rate of interest has declined; and owing to the facility with which it can be borrowed the competition of employers of capital has been greatly intensified by an accession to the class of controllers of industry, of men who live, not on their own capital, but by the skilful employment of borrowed capital. Both facts have tended to depress profits.

Another not less potent influence in the fall of profits is the increased knowledge and power of the working classes, who now, with better capacity for bargaining and strength gained through their trade-unions, succeed in obtaining a larger share of the product than formerly, while legislation on behalf of labour tends to throw greater expense upon the employer. Meanwhile keener competition among employers hands over, in reduced prices, an increasing portion of the commodity to the consumers of their products, and tends to keep down profits by ‘cutting rates’. On all sides circumstances seem to have been combining to reduce ordinary profits; fortunes are rarely made now with the rapidity of bygone times; men have to remain longer in business, and be content to earn a living instead of making a fortune. While the general standard of comfort has advanced and prosperity has been more widely diffused, capital has suffered a reduction in value. The so-called depression of trade in recent years would seem to be more correctly described as a fall in the value of investments and capital employed in industry; it is a genuine depression as regards capital and profits, but wages on the whole have advanced, and goods have been cheapened. From business men complaints of dulness in trade have been frequent. The real fact is, that trade has been quieter but steadier than formerly; while there have been no periods of violent excitement and huge profits, commercial crises, once frequent and very acute, have been fewer and less disastrous in their effects during the past twenty-five years, and the interference with industry from these causes has been diminished. Profits, however, have steadily declined, and among the numerous causes to which this has been attributed, our free-trading system has, without any reason, been included. If profits were determined by Free-trade, the fall should have commenced from its adoption, but the contrary was the case; profits rose and were maintained for thirty years after 1846. The decline has taken place during the last twenty years, and must therefore be accounted for by causes which have made themselves felt in that period.

The other factor contributing to the fall of profits is the competition of other countries, which has lately become so keen and intense. On this account some persons favour protective proposals as a species of retaliation or defence. Our rivals have gained a firmer footing in neutral markets, and their rivalry has reduced prices. Time was when Great Britain had sole command of many markets, she was in the van of mechanical invention, and early succeeded in spreading the products of her industries over the globe; but she could not hope to retain this monopoly. There is no ‘corner’ in scientific knowledge or industrial skill; other nations are rapidly developing their powers and extending their industries, and their commercial activity is increasing; their competition is inevitable, and has hereafter to be recognized and reckoned with. Its tendency is, however, to lower profits. This fact has naturally excited some concern; it is not the sole, nor yet the chief, cause of the fall; profits, as we have seen, have fallen from causes at home which are independent of foreign competition. But it is the commonest of errors to mistake a part of the cause for the whole; and since in this case self-interest seems opposed to foreign interests, undue emphasis is placed upon this factor. Many persons dependent upon interest on capital have suffered from reduced incomes without understanding the economic grounds for the reduction; such persons are naturally attracted by any proposal which promises a remedy; they cannot demonstrate the effects of that exclusion of foreign goods from which they are told to anticipate a revival of vigorous trade and large profits, but join in the demand for Protection, in the vague hope that it may resuscitate their business profits and restore the prosperity of a past period. There is, however, no basis for any such expectation by the method of trade regulation.” (Armitage-Smith 1898: 196–199).

This was written in 1898, a few years after the deflation ended in 1896, but still gives a fascinating insight into how contemporaries saw the “profit deflation” of 1880s and 1890s.

BIBLIOGRAPHY
Armitage-Smith, G. 1898. The Free-Trade Movement and its Results. Blackie & Son, London.

Saul’s The Myth of the Great Depression, 1873–1896

Samuel B. Saul’s The Myth of the Great Depression, 1873–1896 (2nd edn. 1985) analyses the 1873 to 1896 deflationary period from the perspective of Great Britain. Saul raises many questions in this book, such as the question whether we are justified in considering 1873–1896 as a unified period of economic importance, and what causes produced the general deflationary trend.

Of course his major conclusion was that there was no actual continuous depression throughout the period, that real output at the end of the period was higher than at the beginning (Saul 1985: 54), and that the term “Great Depression” should not be used of the period (Saul 1985: 55). Furthermore, some of the trends visible in the 1873–1896 period continued afterwards and perhaps the downwards trend in prices was already underway in the 1860s and may, in some respects, have ended in the late 1880s (Saul 1985: 54). Overall the 1873–1896 period may not be a unified and historically significant era in the way previous economic historians thought (Saul 1985: 54–55).

Nevertheless, Saul also found that there were economic problems within the period (Saul 1985: 54), and a careful reading of the book shows that it presents problems for the advocates of price deflation.

I have summarised the main points and findings of Saul’s book below.

First, are we justified in seeing 1873 to 1896 as a unitary period?

Landes (1965), for example, argued that the whole period from 1815 to 1897 was essentially a unified period displaying a long-run downward trend in prices, with a plateau in prices in the middle, driven by technological advances and positive supply-side factors (Saul 1985: 13).

Nevertheless, to many historians and economists there is also something anomalous about the 1873 to 1896 deflation.

Saul (1985: 15) raises the possibility that there was an overall major factor driving the deflation until the late 1880s, but thereafter perhaps no general overall factor driving it. In fact, this was the view of Keynes in the Treatise on Money (1931), and Keynes saw monetary factors as the general cause of the deflation until the late 1880s, and then a different explanation for the 1890 to 1896 deflation (Saul 1985: 17).

Both at the time and continuing to this day, there have been two main explanations offered for the late 19th century deflation:

(1) falling prices owing to positive supply shocks and revolutionary technologies driving down prices, and

(2) a quantity theory of money explanation, either through (i) the modern neoclassical quantity theory or (ii) one stemming from the quantity tradition in Classical Economics, where the cost of production of gold was assumed to also influence changes in its “price”.

The second neoclassical quantity theory explanation has numerous supporters and certainly amongst monetarists, and it became popular by the 1980s (Saul 1985: 60). This explains the phenomenon as having been caused by the failure of the money supply to grow at a rate consistent with the growth in economic activity.

The second explanation sees the deflation as caused mainly by price falls in many goods from technological factors, innovative production techniques driving down costs and positive supply side factors. For example, freight rates on shipping from America to Britain and to the Continent fell sharply in the 1880s (Saul 1985: 22), as did overland freight rates too (Saul 1985: 23). Many agricultural goods saw price falls as production in the Americas, Australia, New Zealand, and South-East Asia increased markedly and transport costs fell.

In the end, Saul himself preferred an eclectic, not mono-causal, explanation of what caused the deflation that draws on many factors (Saul 1985: 26–28, 55).

But what about the economic problems that resulted from the deflation?

UK wages tell a very interesting story. Money wages fell from 1874 to 1879, but thereafter, despite long-run price deflation, were either stable or actually rose (apart from a brief and small fall from 1884 to 1886) (Saul 1985: 31). Real wages also rose virtually continuously from 1873 to 1896, apart from small falls from 1876–1878, 1879–1880, 1883–1884, and 1890–1892. It is clear that workers were able to maintain money wages even in the deflationary years and even during the recession of the early 1890s: in fact, in this period the share of income going to labour increased at the expense of profits (Saul 1985: 32–33, 63). This strongly confirms what contemporaries were saying: that the 1873–1896 period was marked by “proft deflation” or a profit squeeze that left business people highly pessimistic. While one cause of this for exporting industries is usually taken to be the slower growth of exports in the late 1880s (Saul 1985: 63), a fundamental cause must also have been price deflation and a significant degree of downwards nominal wage rigidity.

There emerges a further crucial point from the “profit deflation” phenomenon of these years. In Britain, it appears that a major source of business and industrial finance in the late 19th century was retained earnings out of profits (Saul 1985: 41). Saul adduces evidence that the share of profits out of industrial income fell as the deflation of 1873–1896 proceeded (Saul 1985: 42, citing Feinstein 1959), as can be seen in the following graph.

As we can see, the inflationary boom of the mid-Victorian age (1850–1873) saw rising levels of profits, but when the long-run deflation occurred, the percentage of profits of total industrial income fell significantly. It is possible too that what we would now call UK capacity utilisation rates fell in the late 19th century in this period (Saul 1985: 43, citing Ashworth 1966).

Saul blames institutional factors, the negative legacy of Britain’s “early start” in industrialisation, and the decline in Britain’s overseas export markets in the late 19th century for its failure to innovate and its lower levels of investment (Saul 1985: 51).

But he also points to another important explanation: it can be argued that, given that UK investment was financed out of retained earnings to an important degree, the price deflation led to a falling profit rate given relatively inflexible wages so that this probably adversely affected aggregate investment and expectations (Saul 1985: 53–54). This actually stands out as one of Saul’s most important conclusions (Saul 1985: 53–54).

So the effects of the “profit deflation” on business expectations were significantly negative, which probably caused increasing pessimism and unwillingness to invest. Saul, however, does not address the issue of debt deflation as a cause of business pessimism, but it may have been an important factor, and there seem to be hints from contemporaries like Alfred Marshall that it was a factor.

Finally, recent estimates of UK unemployment in the late 1800s show that significant unemployment did exist for much of this period, as can be seen in the graph below (with data from Boyer and Hatton 2002).

Further Reading
“Robert Giffen on the Deflation of 1873–1896,” December 7, 2014.

“Alfred Marshall on Business Confidence,” December 3, 2014.

“Alfred Marshall on Wage Stickiness and Debt Deflation,” November 30, 2014.

“The Profit Deflation of the 1890s,” June 13, 2013.

“Alfred Marshall’s Judgement on the “Depression” of 1873–1896,” June 13, 2013.

“S. B. Saul on the Profit Deflation of the 1873–1896 Period,” June 14, 2013.

“Alfred Marshall on the Deflation of 1873–1896,” October 14, 2014.

“Alfred Marshall’s Interest Rate Theory,” November 3, 2014.

BIBLIOGRAPHY
Ashworth, W. 1966. “The Late Victorian Economy,” Economica n.s. 33.129: 17–33.

Beckworth, David. 2007. “The Postbellum Deflation and its Lessons for Today,” The North American Journal of Economics and Finance 18.2: 195–214.

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

Capie, F. H. and G. E. Wood, 1997. “Great Depression of 1873–1896,” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 287–288.

Feinstein, Charles H. 1959. “Home and Foreign Investment: Some Aspects of Capital Formation, Finance and Income in the United Kingdom, 1870–1913,” Ph.D. dissert., University of Cambridge.

Hanes, C. 1998. “Consistent Wholesale Price Series for the United States, 1860–1990,” in Trevor J. O. Dick (ed.), Business Cycles since 1820: New International Perspectives from Historical Evidence. E. Elgar, Cheltenham, UK and Northampton, MA.

Landes, D. S. 1965. “Technological Change and Development in Western Europe, 1750–1914,” in H. J. Habakkuk and M. Postan (eds.) The Cambridge Economic History of Europe (vol. 6). Cambridge University Press, Cambridge. 274–601.

Saul, Samuel Berrick. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.), Macmillan, London.

S. B. Saul on the Profit Deflation of the 1873–1896 Period

S. B. Saul’s book The Myth of the Great Depression, 1873–1896 (London 1985) is frequently cited by defenders of price deflation. Though it is indeed an important book, the deflation advocates ought to read it more carefully, for I contend that it does not really support their case.

Saul comments on the UK economy during the long period of price deflation from 1873 to 1896:

“one major source of finance for industry was industrial profits and variations in their level were of high importance in determining the trends in industrial investment. Evidence for the years after 1870 suggests that such investment varied more than proportionately with changes in profits. When profits fell, for instance, industrial investment declined to a greater extent. Probably at those times entrepreneurs used such profits as they made to buy foreign securities or to maintain dividends. Now, as we have already seen, a major feature of the British economy after 1876 was the low level of such profits.” (Saul 1985: 41).

Even more interesting is Saul’s conclusion about the
UK:

“Lower prices squeezed profits to the benefit of wages and probably this led to lower industrial investment.” (Saul 1985: 53).

So here price deflation’s effects may have been good for real wages of labour at certain times, but bad for business, which in the end only decreased aggregate investment and employment.

So much for the great claims made for this period of late 19th century deflation! Business seems to have hated it and the deflation depressed their expectations and investment levels.

BIBLIOGRAPHY

Saul, S. B. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.). Macmillan, London.

Real US GNP Growth Rates, 1873–1896

Jonathan Finegold Catalán appears to declare that the period of secular deflation between 1879 and 1894 was objectively a “period in American history [sc. that] was the most productive” in a comment here.

First, I intend to examine this assertion in light of the real GNP estimates of (1) Balke and Gordon and (2) Romer.

Secondly, I will examine the real GNP growth rates for the 1873–1896 period, in which there was almost continuous deflation in the US and in many other Western nations (on this period of deflation, see Saul 1985; Capie and Wood 1997: 287–288).

Thirdly, I will look at the unemployment estimates of Vernon (1994) for this period.

It is not possible to declare that either 1879–1894 or 1873–1896 was “the most productive” in American history.

I. Real US GNP, 1879–1894
The GNP estimates of Balke and Gordon (1989: 84) are as follows (I have added the annual growth rates by my own calculation):

Year | GNP* | Growth Rate
1879 | $123.1 | 12.31%
1880 | $137.6 | 11.77%
1881 | $142.5 | 3.56%
1882 | $151.6 | 6.38%
1883 | $155.3 | 2.44%
1884 | $158.1 | 1.80%
1885 | $159.3 | 0.75%
1886 | $164.1 | 3.01%
1887 | $171.5 | 4.50%
1888 | $170.7 | -0.46%
1889 | $181.3 | 6.20%
1890 | $183.9 | 1.43%
1891 | $189.9 | 3.26%
1892 | $198.8 | 4.68%
1893 | $198.7 | -0.05%
1894 | $192.9 | -2.91%

Average real US GNP growth rate, 1879–1894: 3.67%.

We thus have an average growth rate of 3.67%. The average real US GNP growth rate from 1947–1973, during the classic era of Keynesianism, was 3.86%, higher than 1879–1894, so it is not possible to declare 1879–1894 “the most productive in period in American history,” on the basis on real output growth estimates of Balke and Gordon.

The figures for GNP in Romer are here (I have added the annual growth rates by my own calculation):

Year | GNP* | Growth Rate
1879 | $127.675 | 7.37%
1880 | $139.990 | 9.64%
1881 | $143.580 | 2.56%
1882 | $149.307 | 3.98%
1883 | $152.097 | 1.86%
1884 | $155.684 | 2.35%
1885 | $157.789 | 1.35%
1886 | $164.375 | 4.17%
1887 | $169.453 | 3.08%
1888 | $168.940 | -0.3%
1889 | $175.030 | 3.60%
1890 | $182.964 | 4.53%
1891 | $191.757 | 4.80%
1892 | $204.279 | 6.53%
1893 | $202.616 | -0.81%
1894 | $200.819 | -0.88%
* Billions of 1982 dollars.

Average real GNP growth rate, 1879–1894: 3.36%

So matters aren’t any better by looking at Romer’s estimates. In fact, they are worse: the average real GNP growth rate from 1879–1894 was 3.36%, lower than the average calculated from Balke and Gordon’s figures.

Now let’s look at the entire 1873–1896 period.

II. Real US GNP, 1873–1896
The estimates of Balke and Gordon (1989: 84) for 1873–1896:

Year | GNP* | Growth Rate
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%
1880 | $137.6 | 11.77%
1881 | $142.5 | 3.56%
1882 | $151.6 | 6.38%
1883 | $155.3 | 2.44%
1884 | $158.1 | 1.80%
1885 | $159.3 | 0.75%
1886 | $164.1 | 3.01%
1887 | $171.5 | 4.50%
1888 | $170.7 | -0.46%
1889 | $181.3 | 6.20%
1890 | $183.9 | 1.43%
1891 | $189.9 | 3.26%
1892 | $198.8 | 4.68%
1893 | $198.7 | -0.05%
1894 | $192.9 | -2.91%
1895 | $215.5 | 11.7%
1896 | $210.6 | -2.27

Average real US GNP growth rate: 3.60%.

The average real US GNP growth rate from 1873–1896 was 3.60%, lower than the average real US GNP growth rate from 1947–1973, which was 3.86%.

Here are some decadal rates from Balke and Gordon’s estimates and the averages for the 1873–1880 and 1891–1896 periods:

Average real GNP growth rate, 1871–1880: 5.10%
Average real GNP growth rate, 1873–1880: 5.76%
Average real GNP growth rate, 1881–1890: 2.96%.
Average real GNP growth rate, 1891–1896: 2.40%
Average real GNP growth rate, 1891–1900: 3.85%.

Most interesting is that average rates fell in the 1881–1890 period (to 2.96%), and then again (to 2.40%) in 1891–1896 in the last years of the deflation.

Why did growth fall? Did it have anything to do with shocked business expectations and business pessimism in this period, which negatively affected the level of investment? If one bothers to look at contemporary accounts in the business press in both Europe and America in this era, one finds numerous complaints of reduced profits and pessimism. Unless you think shocked business expectations do not affect the level of investment, then there is a clear case that investment levels fell below what they could have been, perhaps in a number of nations.

Let us move on to the figures for GNP in Romer, which are below (I have added the annual growth rates by my own calculation):

Year | GNP* | Growth Rate
1873 | $94.863 | 5.86%
1874 | $96.205 | 1.41%
1875 | $97.684 | 1.53%
1876 | $104.628 | 7.10%
1877 | $110.797 | 5.89%
1878 | $118.906 | 7.31%
1879 | $127.675 | 7.37%
1880 | $139.990 | 9.64%
1881 | $143.580 | 2.56%
1882 | $149.307 | 3.98%
1883 | $152.097 | 1.86%
1884 | $155.684 | 2.35%
1885 | $157.789 | 1.35%
1886 | $164.375 | 4.17%
1887 | $169.453 | 3.08%
1888 | $168.940 | -0.3%
1889 | $175.030 | 3.60%
1890 | $182.964 | 4.53%
1891 | $191.757 | 4.80%
1892 | $204.279 | 6.53%
1893 | $202.616 | -0.81%
1894 | $200.819 | -0.88%
1895 | $215.668 | 7.39%
1896 | $221.438 | 2.67%
* Billions of 1982 dollars.

Average real GNP growth rate, 1873–1896: 3.87%

Romer’s figures show an average of 3.87%. This was only very slightly higher than the average real US GNP growth rate from 1947–1973 (3.86%). Even if we take the most favourable GNP estimates of Romer, the average is only higher than the average for 1947–1973 by a tiny margin. In fact, it is not even significant.

Finally, here are some decadal rates from Romer’s data and the averages for the 1873–1880 and 1891–1896 periods:

Average real GNP growth rate, 1873–1880: 5.76%
Average real GNP growth rate, 1881–1890: 2.72%.
Average real GNP growth rate, 1891–1896: 3.28%
Average real GNP growth rate, 1891–1900: 3.79%

While 1873–1880 did have an unusually high average growth rate (5.76%), the rate slumped in the 1881–1890 period to just 2.72%, the core period of the deflation from 1873–1896. The latter fall in growth rates in the 1880s is confirmed in Balke and Gordon’s estimates. By Romer’s estimates, the 1891–1896 period average rose to 3.28%.

III. Unemployment, 1873–1896
There are a number of estimates of US unemployment in the late 19th century. One of the widely-cited estimates is that of J. R. Vernon (1994), although other estimates are considerably worse than those of Vernon, especially in the 1890s, such as the work of Lebergott or Romer (1986). Vernon’s (1994) estimates are as follows:

Year | Unemployment Rate
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%
(Vernon 1994: 710).

I have highlighted in yellow those years where unemployment was over 5% and the years where unemployment showed a tendency to rise when it was above 5%.

According to the figures of Balke and Gordon (1989: 84), the US had negative GNP growth in 1874, 1888, 1893–1894, and 1896. There is a correlation between these recessions and rising unemployment in Vernon’s estimates.

But more puzzling is the marked rise in unemployment in the 1875–1878 period. According to the GNP estimates of Balke and Gordon, the US had positive GNP growth rates from 1875–1878, yet unemployment rose in this period. Earlier estimates of GNP showed that the US economy experienced a recession in these years, with the NBER data showing the longest recession in US history from October 1873 to March 1879 (a 65 month recession). At the very least, there appears to have been contraction in certain important sectors. This confirms that something was wrong with the US economy even in the 1870s, and that revised annual GNP estimates do not necessarily give us an accurate picture of the health of the economy on their own.

On the metric of unemployment, the 1873–1896 period saw high unemployment from 1875–1878 and from 1893–1896. While unemployment was relatively low in the 1880s, that period did not have particularly high growth rates.

Moreover, as I have mentioned above, other estimates put unemployment at higher levels for the 1890s. We can review the unemployment estimates in Romer (1986: 31) for the 1890 to 1896 period below:

Year | Unemployment Rate
1890 | 3.97%
1891 | 4.77%
1892 | 3.72%
1893 | 8.09%
1894 | 12.33%
1895 | 11.11%
1896 | 11.965
Romer (1986: 31).

By these figures, the 1873–1896 period of deflation ended with double digit unemployment.

IV. Conclusion
Nearly all of the average real GNP estimates for either 1879–1894 or 1873–1896 show inferior growth to the 1947–1973 period. Only the GNP estimates of Romer for 1873–1896 show a slightly higher average, but it is only by a tiny margin, which cannot be regarded as significant.

By the criterion of unemployment, the 1873–1896 period saw high unemployment from 1875–1878 and from 1893–1896.


BIBLIOGRAPHY

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.

Capie, F. H. and G. E. Wood, 1997. “Great Depression of 1873-1896,” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 287–288.

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

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