Lessons from the ‘Long Depression’

A lot of people are looking to economic history for help in understanding the current economic situation. Most attention is being paid to the Great Depression of the 1930s, with a slew of papers and articles being published. However it is worth pointing out how the present situation is different from that of the 1930s.

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.

Dr Steve Davies is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).

4 thoughts on “Lessons from the ‘Long Depression’”

  1. Posted 04/01/2012 at 04:17 | Permalink

    The 1930w great depression is exactly what we should be comparing too!

    The FED printed so much money it was becoming worthless and they recalled 2/3rds of the cash in circulation to try and drive its value back up,all it did was cause the great depression.

    Today their printing money by mouseclick as bernake calls his wall str banksters to come collect the cash and buy up worthless selected stocks to pump up the DOW MARKETS.Ive heard as much as 50 trillion has been spent this way over the last 5 years.

    Unemployment is probably worse than the great depression as the governments changed the way it formulates those numbers like what 7 times since the great depression and they still play with the numbers every week. I think we all know the actual number of unemployed is around 20% give or take a few points.

    Hyper-inflation is taking off just today I went to buy a quart of motor oil at advance and it was right at 6 bucks for a single quart! I saw some name brands as much as 8 bucks……..chilling doesnt even qualify.

    You can keep on with the denial stories and keep harping obamas plan that its getting better when everyone knows its not. They print money and give it to the banks so they can buy up the new debt creations to keep the economy from total collapse.Business has about 7 trillion dollars its sitting on and will not spend,they need it to weather the current storm and survive,especially not knowing what the rules for business will be.

    Pension funds another seriously close to collapsing social fund,that the federal govmnt will no doubt have to bail out since governments around the world have already stolen that money from the banks and put on their own balance sheets especially ireland,protugal,spain,greece etc……

    If its got cash assetts the governments are out to steal it one way or another.

    Obama has hired over 15,000 new IRS agents replete with new weapons ie shotguns for raids….and their are a lot of them simply to go to switzerland and dig dig dig for other peoples money!

  2. Posted 19/01/2012 at 08:53 | Permalink

    It sounds as if there are lessons to be learned from both the 1930’s and 1873-1896 depressions. We would do well not to forget those of the 1980s, though whether the current UK government has applied them sufficiently remains to be seen. The rapidly deteriorating unemployment data announced yesterday suggest they need to learn the right lessons from the 1980s to avoid a decade of mass unemployment.

  3. Posted 19/01/2012 at 15:58 | Permalink

    I am very young. But I think the 1930’s depression was ended by a great public works programme.
    It is known in the UK as World War 2.

  4. Posted 01/02/2012 at 10:10 | Permalink

    Recently published UK and EU data on unemployment and GDP and forward projects for the same suggest that your statements in paragraph two above may be inaccurate.

    Joseph Stiglitz also gives detailed economic information in the recent article in Vanity Fair, which also suggest these statements may be inaccurate in respect of the US economy too. He intimates that the USA is going through a massive structural economic adjustment similar to that experienced in the 1930’s. 6 million fewer jobs, falling wages and 80% of the population spending 110% of their earnings in the run up to the crash are amongst some of the interesting data uncovered.


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