Monday, August 29, 2011

The Long Depression And the Great Recession

A substantial debate over the nature of the the deflation in the US during the 1873-1896 period has erupted on marginal revolution, . Much of the debate centers on reevaluations of the path of real US output during the so-called "Long Depression" of 1873-79, with newer sources arguing that declline in real output only lasted from 1873-1875, thus arguing that it was not as bad as many thought, and while indebted farmers were hurt by deflation, particularly by the 1890s, this was a golden age of the American economy and a model for laissez-faire policy, with the deflation itself generally a good thing outside of agriculture (whose falling prices helped the rest of the economy).

I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.

So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.

The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.

Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.


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