“Three panics and a nonevent”

While exploring Blogs yesterday I came across this one from John Cochran at The Circle Bastiat:

In a comment at Coordination Problem, “Is This How the Myth of the Laissez Faire Herbert Hoover Was Invented?” Barkley Rosser challenges Austrians with the following, “As it is, I await somebody explaining the 1870s to us, still the second worst depression in US history, and one where there was pretty much complete wage and price flexibility as well as no Fed, although as Steve Horwitz points out, there was a lot of state regulation of banks.”

It might be useful to quote Rothbard in depth on the “myth of the ‘great depression’ of the 1870s.

Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.

And he continues:

It should be clear, then, that the “great depression” of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. …  Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era.

According to Wikipedia:

The Long Depression was a worldwide economic recession, that began in 1873 and ended around 1896. It was the most severe in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great Depression and held that designation until the Great Depression of the 1930s. Though a period of general deflation and low growth, it did not have the severe economic retrogression of the Great Depression.[1]

The American Civil War was followed by a boom in railroad construction. 33,000 miles (53,000 km) of new track were laid across the country between 1868 and 1873.[4] Much of the craze in railroad investment was driven by government land grants and subsidies to the railroads.[5] At that time, the railroad industry was the nation’s largest employer outside of agriculture, and it involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry as well as overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns.[6]

The last paragraph above is very “Austrian”, in the sense that it states that capital had been misallocated during the “railroad bubble”. But Rothbard is right. There was no contraction, despite all the “malinvestment”.

Towards the end of the century, once again a “railroad bubble” punctures. According to Wikipedia:

The Panic of 1893 was a serious economic depression in the United States that began in 1893.[1] Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and the railroad bubble, was a run on the gold supply. The Panic of ’93 was the worst economic depression the United States ever experienced.

Another Austrian tale. But this time there really was a strong economic contraction.

Then there´s the “Great Depression” following the excesses of the 1920s and the ‘Panic of 2008’, a consequence of the “housing bubble” and all the “misallocation” that accompanied it.

The panel below shows nominal and real spending during the different ‘panics’. As the title of this post suggests, one was a ‘nonevent’. And that´s the so-called ‘Panic of 1873’. And why is it a nonevent despite all historical accounts?

Just look at the behavior of nominal spending through the different ‘panics’ and note that the only occasion in which nominal spending didn´t crash was in the ‘Panic of 1873’.

I don´t know why Austrians decry the 1873 contraction a myth. From their perspective they should be searching for reasons why it didn´t happen despite all the malinvestments that, according to them, are a root cause of all the other ‘Panics’.

In 1873 and in 1893 there was no Central Bank. In 1929 and 2008 the Fed was there to minimize the effects of such ‘panics’. Apparently, Central Bank or not, it surely doesn´t help to let nominal spending crash! And Bernanke should note that in the 1870s and 1880s the economy performed robustly in spite of a drawn out fall in prices, an ingredient of his worst nightmares!

3 thoughts on ““Three panics and a nonevent”

  1. Pingback: "Three panics and a nonevent" « Economics Info

  2. Pingback: Hayek’s Law or Rothbard’s Wisdom : A Revisit :: The Circle Bastiat

  3. Pingback: Hayek’s Law or Rothbard’s Wisdom : A Revisit-Economic Issue | Coffee At Joe's

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