Lessons from the ‘Long Depression’
In particular, there has not been the kind of dramatic collapse in economic activity and employment that we saw in the entire world in the early 1930s. While there is economic stagnation in the US, Europe and Japan, the world economy as a whole is still growing, even if at a slower rate than a few years ago.
What then is the position that we are in and can we discern any historical parallels? One possibility is that we are in a similar situation to that of the 1930s but have avoided the worst of what happened then because of partially effective interventions. Another possibility however is that focusing on the 1930s is ultimately misguided because we are looking at the wrong ‘Great Depression’. Maybe we should pay more attention to the events that generally had that title before the 1930s, the economic contraction of the later nineteenth century.
In fact until as late as the 1950s the term ‘Great Depression’ in economic history generally referred to the period between 1873 and 1879 (in the US) or 1873 and 1896 (in the UK and much of Europe). When we look more closely at what happened in those years the likeness to where we are now becomes noticeable. The ‘Long Depression’ (as it has come to be known) was sparked off by a global financial panic in 1873, which arose from the bursting of several speculative bubbles, particularly in railroads and real estate. What followed was a thirty year period of gradually declining prices (deflation) in most parts of the world. Most historical records of GDP show a significant slowdown of growth in most parts of the world for at least part of the period between 1873 and 1896.
However this picture of a prolonged period of stagnation needs to be qualified. While nominal wages stagnated or declined, real living standards increased for those in work because of the falling cost of products. Output increased but this is not fully captured unless one properly applies a GDP inflator to take account of the increasing value of money. So the ‘Long Depression’ of the 1870s and 1880s was not a simple story of economic standstill. What then had happened? Essentially, a set of innovations in technology and business organisation that were made in the later eighteenth and early nineteenth century had exhausted their potential to raise productivity and lead to higher growth by the 1860s. This, combined with mistaken policies, had led to a lot of malinvestment and a significant build up of debt by the early 1870s.
What followed, as Irving Fisher argued, was a crisis brought about by the realisation that many investments were not going to pay enough and the consequent need for sustained deleveraging (paying back or writing off of debt in plain English). At the same time there was a burst of technological and organisational innovation. This increased productivity and created many new products but also led to very large adjustments as older industries shrank. There was also a shift in the focus of the world economy, towards the new developing parts of the world such as Germany and the US. Significant parts of the population in many places were worse off but the majority gained because of the rise in living standards brought about by technical innovation and the consequent ‘benign deflation’.
Increasingly it looks as though the world as a whole is going through a similar experience today with an exhaustion of profitable investment opportunities in some places and sectors leading to an artificially stimulated bubble, the bursting of which has triggered sustained deleveraging and a decline in growth in many regions. At the same time other parts of the world are enjoying continued growth. The underlying problem is one of a long-term economic realignment rather than a simple decline in demand.