A Good Deflation
Liaquat Ahmed of “The
Lords of Finance” fame has written a new account of the long depression of the
last quarter of the 19th Century. To me, Ahmed mixes up depression
with deflation. A depression signals a massive decline in aggregate output,
which did not happen and a deflation signals a sustained decline in the price
level, which did happen. I have covered some of the ground here in two prior
reviews (See: https://shulmaven.blogspot.com/2016/02/my-amazon-review-of-robert-j-gordons.html and https://shulmaven.blogspot.com/2017/09/my-amazon-review-of-richard-whites.html )
In the late 1860’s
Europe witnessed a great railroad boom that was interrupted by the
Franco-Prussian War of 1870. France was required to pay a huge indemnity to the
newly united Germany. Instead of being a burden, it turned out to be a boon as
the Rothschild banks, who are featured prominently in the book, fund the
payment with two massive bond issues. Money came out of the woodwork from all
over Europe to buy the bonds and that lead to a surge in economic activity
leading to a boom in lending to eastern Europe and to Latin America. It all
came unglued when the Vienna stock market crashed that rippled into Germany. Sixty
years later a bank failure in Vienna would also deeply impact Germany, but to a
far greater extent. In the U.S. the trigger was the collapse of the Jay Cooke & Co. banking operation that financed the Union during the Civil War and became undone with the failure of the Northern Pacific Railroad.
According to Ahmed
the crash was exacerbated by Europe moving away from a bi-metallic standard
(gold and silver) towards a full gold standard. Similarly in the U.S., the
Coinage Act of 1873, later known as “The Crime of 1873” limited the use of
silver coinage. With the U.S. and Europe operating under the straitjacket of
the gold standard, money in circulation declined and a deflation ensued. Indeed,
in the U.S. both leaderships of the Republican and Democratic parties supported
hard money
All of this was going
on against the backdrop of improved global transportation which lowered
shipping costs worldwide. For example, both the Suez Canal and the U.S.
transcontinental railroad were completed in 1869. Later in the 1870’s and
especially in the 1880’s there were huge advances in farm and industrial
mechanization. Thus, if other things being equal, prices should have fallen and
fall they did.
The wholesale price
index fell from 140 in 1870 to 116 in 1878, a decline of 2.3% a year. Prices
continued to fall and did not bottom until 1899 at an index level of 81. Thus,
for the entire period prices declined at an annual rate of 1.9%. This price deflation
obviously wreaked havoc for indebted farmers, triggering a populist revolt
across the prairie. Their cause was to allow for unlimited silver coinage to
expand the money supply and increase prices. Of course, the urban workers would
have issues with this.
In Europe the
political climate darkened with moves against free trade and the creation of
the modern version of antisemitism partly tied to the Jewish Rothschild banking
family. Indeed, the term “antisemitism” was coined in the Germany of the
1880’s. Further exacerbating the sour mood was the level of opulence of the
bankers and industrialists of the gilded age.
Although there were
depressed conditions on the farm, industrial production boomed. There was only
a modest decline in U.S. industrial production between 1873 and 1876, but by
1880 industrial output was one third higher than the decade before and it would
double in the 1880’s. Industrial production was aided by the surge of immigrant
workers flooding into the country from eastern and southern Europe. This explosive
growth in industrial activity is the opposite of a depression. Further, in 1879
three major inventions would soon change the world: the incandescent light
bulb, the telephone and the internal combustion engine.
By the end of the
century gold discoveries in South Africa and Alaska eased the monetary pressure
and prices started to increase. The deflation was over, but not before the hard
money McKinley would defeat the soft money Bryan in the 1896 presidential
election.
Although I come to a
different conclusion than Ahmed, I do recommend his book. He brings insight
into the popular feelings of the day, and you get a sense of the people and
personalities of that era.
