The 19th Century Depression

Canadian historian Francois Furstenberg reminds us of the economic depression that America had to struggle through in the 19th century:

Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873 with the collapse of Jay Cooke & Co., the nation’s premier investment bank. Like many other firms, Cooke & Co. overextended itself by offering risky loans based on overvalued real estate.

Cooke’s collapse launched the first economic crisis of the Industrial Age. For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.

In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. When economic growth eventually began, progress was slow, with periodic crises plaguing the economy through the end of the century.

Neither political party offered genuine solutions. As historian Richard Hofstadter put it, political parties during the Gilded Age “divided over spoils, not issues,” and neither Democrats nor Republicans were inclined to challenge their corporate masters. . . .

With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard for the first time since the Civil War: “hard money” policies that favored Eastern financiers over indebted farmers and workers.

With neither major party responding to the crisis, new insurgent movements arose: antimonopoly coalitions, reform parties and labor candidates all began to attract support.

via What history teaches us about the welfare state – The Washington Post.

Prof. Furstenberg goes on to cite the violent strikes of the growing labor movement and the prospect of social unrest–similar to what was happening in Europe that would spark the Marxist revolutions–that, according to him, encouraged even capitalists by the time of FDR to support social reforms and a welfare state, so as to promote social stability.  He then warns us about cutting the social safety net as we try to deal with today’s economic problems.

Since among my readers are experts in just about everything, I ask you, is Prof. Furstenberg’s account correct, or is it a leftist reading of a  history that is open to other interpretations?  Are there things we can learn from what happened in the Gilded Age?

HT:  Frank Sonnek

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • SKPeterson

    Furstenberg completely misses this one, other than noting some things on the surface. 1) the deflation was not ruinous, it was the direct result of industrial expansion during the period 1873 to 1879, i.e. productivity gains greater than money supply increases lead to greater output at lower prices, 2)the panic itself was precipitated not by the collapse of the Jay Cooke firm, but the hangover from excessive monetary expansion by the Union during the Civil War (the Greenback era) where Cooke was the largest market maker in government debt that spilled over into real estate investment in favored industrial sectors (i.e. much of the real estate was associated with rail expansion, which was often the embodiment of the worst you can get from “public-private” partnerships, Cooke got the Northern Pacific in a sweetheart deal for example), 3) the period in question saw average nominal GDP growth of 3%, real GDP growth of over 6% (what you get with output increasing faster than money supply), and +4% annual increases in productivity (from Schwarz and Friedman, who were writing under the assumption that money supply had to expand in order for economic growth to occur, but had to admit that the Long Depression was neither Long nor a Depression), 4) money supply expanded by almost 3% per year, 5) the crisis ended when the government resumed paying specie for its debt, i.e. it paid gold or silver instead of trading paper for paper, 6)Americans saw rising output and incomes, yet faced a market with falling prices, hardly a depression unless you’re a banker relying on trading government paper for real assets and finding that no one will take the paper, while also getting sweetheart deals torn apart in the face of competitive pressure.

    As an aside, the NP lurched into default again about 20 years later until it was acquired by J.J. Hill’s Great Northern who ran it profitably and set it aright until both railroads merged to form the Burlington Norther and eventually the BNSF. Hill’s reward for taking over the NP and making it a profitable enterprise no longer dependent on government subsidy or largess to survive was to be labeled a “robber baron.”

  • SKPeterson

    Furstenberg completely misses this one, other than noting some things on the surface. 1) the deflation was not ruinous, it was the direct result of industrial expansion during the period 1873 to 1879, i.e. productivity gains greater than money supply increases lead to greater output at lower prices, 2)the panic itself was precipitated not by the collapse of the Jay Cooke firm, but the hangover from excessive monetary expansion by the Union during the Civil War (the Greenback era) where Cooke was the largest market maker in government debt that spilled over into real estate investment in favored industrial sectors (i.e. much of the real estate was associated with rail expansion, which was often the embodiment of the worst you can get from “public-private” partnerships, Cooke got the Northern Pacific in a sweetheart deal for example), 3) the period in question saw average nominal GDP growth of 3%, real GDP growth of over 6% (what you get with output increasing faster than money supply), and +4% annual increases in productivity (from Schwarz and Friedman, who were writing under the assumption that money supply had to expand in order for economic growth to occur, but had to admit that the Long Depression was neither Long nor a Depression), 4) money supply expanded by almost 3% per year, 5) the crisis ended when the government resumed paying specie for its debt, i.e. it paid gold or silver instead of trading paper for paper, 6)Americans saw rising output and incomes, yet faced a market with falling prices, hardly a depression unless you’re a banker relying on trading government paper for real assets and finding that no one will take the paper, while also getting sweetheart deals torn apart in the face of competitive pressure.

    As an aside, the NP lurched into default again about 20 years later until it was acquired by J.J. Hill’s Great Northern who ran it profitably and set it aright until both railroads merged to form the Burlington Norther and eventually the BNSF. Hill’s reward for taking over the NP and making it a profitable enterprise no longer dependent on government subsidy or largess to survive was to be labeled a “robber baron.”

  • SKPeterson

    I did leave out the Great Strike of 1877 which hit the collapsing railroads. Did I mention that many of these railroads were the beneficiaries of political sweetheart deals in land grants and debt issues backed by an excess of government paper?

  • SKPeterson

    I did leave out the Great Strike of 1877 which hit the collapsing railroads. Did I mention that many of these railroads were the beneficiaries of political sweetheart deals in land grants and debt issues backed by an excess of government paper?

  • larry

    I think he’s inadvertently is hitting on the real issue. The issue, whether it be working folks or corporate giants is NOT primarily money or “economics”. These are means to an end. But stability and assurance of “what’s to be expected” x years out. The real reason ANYONE begins the “horde” mentality and spending stops is instability, lack of assurance, then the “Darwinian” survival mode kicks in.

    Time and time again we are hearing that the reason businesses are not investing and expanding is the lack of assurance coming out of Washington, they don’t know how they are going to be hit. The CEO/developer out Las Vegas (can’t recall his name right now) just made news expounding this very thing against the administration. The reason business take the “bunker mentality” is the same reason individual workers do the same thing, lack of stability.

    It’s all about stability in life. That’s why in extreme times, e.g. WWII Germany, everything “bunkered down” and nothing expanded but dilapidated over time. Neither the ‘free market’ or ‘work force’ in and of themselves are the fix, but stability. To focus on economic policy is doomed from the outset because it’s focusing on the effect and not the cause, again stability.

    We all know this intuitively and experimentally. If you don’t think so, then find yourself personally in a time of desperation and see just how “bunker like” you WILL get. The reason people are buying less and less marketable items is precisely the same reason businesses are not investing in expansion.

    The focus needs to be on policy that leads to stability both to the markets and the “everyday man”. The right tends to focus on stability given over to the free market which in turn should stabilize the “working man”, the left on the other hand tends to focus on stabilizing the “working man” that would in turn stabilize the free market. Whose right? Honestly it’s a little of both, like it or not the ‘working man’ needs the free market to achieve stability (to the chagrin of the left) and the free market needs the working man to achieve stability (to the chagrin of the right).

    They always pit, however, the two against each other in which the left says business profits on the back of the little guy, and the right accuses the little guy of always wanting to ‘eat the rich’ (another way of saying profit from them). If everyone focused on ‘loving your neighbor as yourself’ then each would both profit the stability they desire and suffer what we have to suffer. But that’s largely pie in the sky in this fallen age.

  • larry

    I think he’s inadvertently is hitting on the real issue. The issue, whether it be working folks or corporate giants is NOT primarily money or “economics”. These are means to an end. But stability and assurance of “what’s to be expected” x years out. The real reason ANYONE begins the “horde” mentality and spending stops is instability, lack of assurance, then the “Darwinian” survival mode kicks in.

    Time and time again we are hearing that the reason businesses are not investing and expanding is the lack of assurance coming out of Washington, they don’t know how they are going to be hit. The CEO/developer out Las Vegas (can’t recall his name right now) just made news expounding this very thing against the administration. The reason business take the “bunker mentality” is the same reason individual workers do the same thing, lack of stability.

    It’s all about stability in life. That’s why in extreme times, e.g. WWII Germany, everything “bunkered down” and nothing expanded but dilapidated over time. Neither the ‘free market’ or ‘work force’ in and of themselves are the fix, but stability. To focus on economic policy is doomed from the outset because it’s focusing on the effect and not the cause, again stability.

    We all know this intuitively and experimentally. If you don’t think so, then find yourself personally in a time of desperation and see just how “bunker like” you WILL get. The reason people are buying less and less marketable items is precisely the same reason businesses are not investing in expansion.

    The focus needs to be on policy that leads to stability both to the markets and the “everyday man”. The right tends to focus on stability given over to the free market which in turn should stabilize the “working man”, the left on the other hand tends to focus on stabilizing the “working man” that would in turn stabilize the free market. Whose right? Honestly it’s a little of both, like it or not the ‘working man’ needs the free market to achieve stability (to the chagrin of the left) and the free market needs the working man to achieve stability (to the chagrin of the right).

    They always pit, however, the two against each other in which the left says business profits on the back of the little guy, and the right accuses the little guy of always wanting to ‘eat the rich’ (another way of saying profit from them). If everyone focused on ‘loving your neighbor as yourself’ then each would both profit the stability they desire and suffer what we have to suffer. But that’s largely pie in the sky in this fallen age.

  • WebMonk

    Just for anyone who might be confused by what sound like directly contradictory statements between SK’s comment and the author’s comment, they aren’t actually contradictory. They’re taking slightly different sets of numbers that sound like they’re the same thing.

    The details of the Long Depression, as this era has generally been called, is a matter of continuing disagreement. I tend to side with the view SK has put forward, but that’s just me. It was a time of massive upheaval, and there are a lot of different ways to slice the numbers that sound similar but give different results.

    I just checked Wikipedia and it’s … ok. Actually, considering the level of professional economists who disagree over this era, the Wikipedia article is doing well.

    Basically, Furstenberg’s view has some correct points, but it’s not a complete picture.

    (though, SK, I have some good-sized nits to pick with a couple of your details; the “Long Depression” was not started by the monetary expansion during the Civil War – it had its origins in Europe and was exacerbated by the economic upheaval of the Civil War, not just the US’s monetary expansion but a conglomeration of a lot of different factors)

  • WebMonk

    Just for anyone who might be confused by what sound like directly contradictory statements between SK’s comment and the author’s comment, they aren’t actually contradictory. They’re taking slightly different sets of numbers that sound like they’re the same thing.

    The details of the Long Depression, as this era has generally been called, is a matter of continuing disagreement. I tend to side with the view SK has put forward, but that’s just me. It was a time of massive upheaval, and there are a lot of different ways to slice the numbers that sound similar but give different results.

    I just checked Wikipedia and it’s … ok. Actually, considering the level of professional economists who disagree over this era, the Wikipedia article is doing well.

    Basically, Furstenberg’s view has some correct points, but it’s not a complete picture.

    (though, SK, I have some good-sized nits to pick with a couple of your details; the “Long Depression” was not started by the monetary expansion during the Civil War – it had its origins in Europe and was exacerbated by the economic upheaval of the Civil War, not just the US’s monetary expansion but a conglomeration of a lot of different factors)

  • http://www.bikebubba.blogspot.com bike bubba

    Furstenberg more or less ignores the setting for the recession/depression of the late 1800s; you’ve got key interventions by government that probably made the situation worse. Start with the 1864 State Banking Act (?) that taxed the deposits of banks chartered by states, pushing many of them into bankruptcy. Then go on to the Transcontinental Railroad, which used the Tariff of Abominations (a 45% tariff if I remember right) to fund the interests of railroad men (Lincoln had been a railroad lawyer, of course), numerous protections and subsidies for industry in general (see railroad subsidies and Tariff of Abominations), brutal repression of the conquered South….and then you’ve got the shift to a monometal standard, which made the reserves of even more banks (being held in silver) effectively worthless.

    In other words, Furstenberg is assuming the recession is a given, and that the same policies that Hoover and FDR used to prolong the Great Depression would have shortened the earlier one. I’m not quite sure that follows.

  • http://www.bikebubba.blogspot.com bike bubba

    Furstenberg more or less ignores the setting for the recession/depression of the late 1800s; you’ve got key interventions by government that probably made the situation worse. Start with the 1864 State Banking Act (?) that taxed the deposits of banks chartered by states, pushing many of them into bankruptcy. Then go on to the Transcontinental Railroad, which used the Tariff of Abominations (a 45% tariff if I remember right) to fund the interests of railroad men (Lincoln had been a railroad lawyer, of course), numerous protections and subsidies for industry in general (see railroad subsidies and Tariff of Abominations), brutal repression of the conquered South….and then you’ve got the shift to a monometal standard, which made the reserves of even more banks (being held in silver) effectively worthless.

    In other words, Furstenberg is assuming the recession is a given, and that the same policies that Hoover and FDR used to prolong the Great Depression would have shortened the earlier one. I’m not quite sure that follows.

  • SKPeterson

    WM – yes there was a European factor as they were intent during this period to invest heavily in the U.S.; primarily funds were coming from Great Britain and the Netherlands, but they were being plowed into the railroads and accompanying real estate speculation that was augmented and exacerbated by the currency manipulation of the government and its primary financiers (of whom Cooke was the most preeminent). In some respects this is akin to modern concerns about “hot money” flows in emerging economies. Not that the European money was “hot” – it was going into real capital investment, hence the output surge – but much of it was highly speculative and let’s just say due diligence was honored more in the breach than in practice in many cases (like Madoff or Enron) and those who acted that way, paid the price. Those who were more prudent succeeded and did quite well. Primary difference between then and today: then if you were imprudent with your money you lost it, today you can get a government bailout for being “too big to fail.”

    To your point, WM, most of the panics during the 19th Century and even into the early 20th were in the aftermath of wars in which the government suspended specie payment and printed paper to cover war expenses. As this money sloshed around in the post-war period it created a lot of chaos in the monetary system that needed to be cleaned up during the panic, but most of this occurred in the financial sector and only had an impact on those industrial sectors that relied heavily on massive debt financing such as the railroads. Not that there aren’t competing explanations, I just find this one more compelling based upon evidence I’ve seen as well as argumentative quality by its proponents. I have to award “fails” to Furstenberg on evidentiary grounds and on using the word “ruinous” in conjunction with deflation and not providing adequate explanation of what was so ruinous.

    Economists and economic historians disagree about the Panic of 1873 because there is so much conflicting evidence: bad banks collapsing, but money supply expanding, labor strikes occurring, but real wages rising, output increasing, but prices falling. Other than the labor strife of the rail unions, everything else looks like the best possible economic situation you can have. This was the period that set aside division, overcame the destruction of the Civil War and set the stage for the U.S. to become the industrial behemoth of the 1890′s and into the 20th Century.

  • SKPeterson

    WM – yes there was a European factor as they were intent during this period to invest heavily in the U.S.; primarily funds were coming from Great Britain and the Netherlands, but they were being plowed into the railroads and accompanying real estate speculation that was augmented and exacerbated by the currency manipulation of the government and its primary financiers (of whom Cooke was the most preeminent). In some respects this is akin to modern concerns about “hot money” flows in emerging economies. Not that the European money was “hot” – it was going into real capital investment, hence the output surge – but much of it was highly speculative and let’s just say due diligence was honored more in the breach than in practice in many cases (like Madoff or Enron) and those who acted that way, paid the price. Those who were more prudent succeeded and did quite well. Primary difference between then and today: then if you were imprudent with your money you lost it, today you can get a government bailout for being “too big to fail.”

    To your point, WM, most of the panics during the 19th Century and even into the early 20th were in the aftermath of wars in which the government suspended specie payment and printed paper to cover war expenses. As this money sloshed around in the post-war period it created a lot of chaos in the monetary system that needed to be cleaned up during the panic, but most of this occurred in the financial sector and only had an impact on those industrial sectors that relied heavily on massive debt financing such as the railroads. Not that there aren’t competing explanations, I just find this one more compelling based upon evidence I’ve seen as well as argumentative quality by its proponents. I have to award “fails” to Furstenberg on evidentiary grounds and on using the word “ruinous” in conjunction with deflation and not providing adequate explanation of what was so ruinous.

    Economists and economic historians disagree about the Panic of 1873 because there is so much conflicting evidence: bad banks collapsing, but money supply expanding, labor strikes occurring, but real wages rising, output increasing, but prices falling. Other than the labor strife of the rail unions, everything else looks like the best possible economic situation you can have. This was the period that set aside division, overcame the destruction of the Civil War and set the stage for the U.S. to become the industrial behemoth of the 1890′s and into the 20th Century.

  • JH

    SK, impressed.

  • JH

    SK, impressed.

  • Cincinnatus

    Bravo, SKPeterson. I won’t even pretend to contribute anything of note to the discussion of economics here.

    I do think, however, Furstenberg deserves an additional slap–yes, even as he writhes in defeated agony already–for attempting to use the an economic crisis in 1873 as a justification for a social safety net, whatever he means by that. Perhaps we should open discussion to the question of whether interventionist polices, including “safety net” policies, are apt to prolong economic recessions/depressions/disturbances rather than ameliorate their painful effects.

  • Cincinnatus

    Bravo, SKPeterson. I won’t even pretend to contribute anything of note to the discussion of economics here.

    I do think, however, Furstenberg deserves an additional slap–yes, even as he writhes in defeated agony already–for attempting to use the an economic crisis in 1873 as a justification for a social safety net, whatever he means by that. Perhaps we should open discussion to the question of whether interventionist polices, including “safety net” policies, are apt to prolong economic recessions/depressions/disturbances rather than ameliorate their painful effects.

  • DonS

    SKP has done an outstanding job on the economics. My beef with the article isn’t so much its historical account, but the writer’s agenda in swooping into a short historical period and drawing lessons, out of context, which he deems to apply to our situation today.

    Our “social safety net” is magnitudes of order more robust than any governmental assistance available or thought of in the 1870′s. To that already robust net, we added several trillion dollars in additional stimulus spending since 2008. It’s apparent effect is negligible, in terms of bringing the economy back to what would be considered normal conditions. In the meantime, we have added $3 or so trillion dollars in permanent debt.

    Keynesian-type stimulus packages are not entirely without merit, but the premise behind them requires that the deficit spending be temporary, and that the governmental budget remain in long-term balance. In other words, like Joseph in Pharaoh’s Egypt, you save in the good times so that you have extra resources available during the lean times. In contrast, we run a permanent and substantial deficit during the good times, then sharply expand it during recessions. When the recession is over, the increased “temporary” spending levels become the new permanent baseline spending, and off we go, with ever higher deficit levels.

    At this point, our permanent debt and future entitlement obligations are de-stabilizing. They are causing economic uncertainty and consuming over 15% of our tax revenues, just to service the debt. Taking bold measures to address this problem would do far more to spike the economy and help our citizens than anything else government could ever dream of doing, despite the short term pain it would cause.

  • DonS

    SKP has done an outstanding job on the economics. My beef with the article isn’t so much its historical account, but the writer’s agenda in swooping into a short historical period and drawing lessons, out of context, which he deems to apply to our situation today.

    Our “social safety net” is magnitudes of order more robust than any governmental assistance available or thought of in the 1870′s. To that already robust net, we added several trillion dollars in additional stimulus spending since 2008. It’s apparent effect is negligible, in terms of bringing the economy back to what would be considered normal conditions. In the meantime, we have added $3 or so trillion dollars in permanent debt.

    Keynesian-type stimulus packages are not entirely without merit, but the premise behind them requires that the deficit spending be temporary, and that the governmental budget remain in long-term balance. In other words, like Joseph in Pharaoh’s Egypt, you save in the good times so that you have extra resources available during the lean times. In contrast, we run a permanent and substantial deficit during the good times, then sharply expand it during recessions. When the recession is over, the increased “temporary” spending levels become the new permanent baseline spending, and off we go, with ever higher deficit levels.

    At this point, our permanent debt and future entitlement obligations are de-stabilizing. They are causing economic uncertainty and consuming over 15% of our tax revenues, just to service the debt. Taking bold measures to address this problem would do far more to spike the economy and help our citizens than anything else government could ever dream of doing, despite the short term pain it would cause.


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