Long Depression - Explanations

Explanations

Irving Fisher believed that the Panic of 1873 and the severity of the contractions which followed it could be explained by debt and deflation. Fisher believed that a financial panic would trigger catastrophic deleveraging in an attempt to sell assets and increase capital reserves; this sell-off would trigger a collapse in asset prices and deflation, which would in turn prompt financial institutions to sell off more assets, only to further deflation and strain capital ratios. Fisher believed that had governments or private enterprise embarked on efforts to reflate financial markets, the crisis would have been less severe.

David Ames Wells (1890) wrote of the technological advancements during the period 1870-90, which included the Long Depression. Wells gives an account of the changes in the world economy transitioning into the Second Industrial Revolution in which he documents changes in trade, such as triple expansion steam shipping, railroads, the effect of the international telegraph network and the opening of the Suez Canal. Wells gives numerous examples of productivity increases in various industries and discusses the problems of excess capacity and market saturation.

Wells' opening sentence:

“The economic changes that have occurred during the last quarter of a century - or during the present generation of living men - have unquestionably been more important and more varied than during any period of the world’s history.”

Other changes Wells mentions are reductions in warehousing and inventories, elimination of middlemen, economies of scale, the decline of craftsmen, and the displacement of agricultural workers. About the whole 1870-90 period Wells said:

“Some of these changes have been destructive, and all of them have inevitably occasioned, and for a long time yet will continue to occasion, great disturbances in old methods, and entail losses of capital and changes in occupation on the part of individuals. And yet the world wonders, and commissions of great states inquire, without coming to definite conclusions, why trade and industry in recent years has been universally and abnormally disturbed and depressed.”

Wells notes that many of the government inquires on the “depression of prices” (deflation) found various reasons such as the scarcity of gold and silver. Wells showed that the U.S. money supply actually grew over the period of the deflation. Wells noted that deflation only lowered the cost of goods that benefited from improved methods of manufacturing and transportation. Goods produced by craftsmen did not decrease in value, nor did many services, and the cost of labor actually increased. Also, deflation did not occur in countries that did not have modern manufacturing, transportation, and communications.

Nobel laureate economist Milton Friedman, author of A Monetary History of the United States, on the other hand, blamed this prolonged economic crisis on the imposition of a new gold standard, part of which he referred to by its traditional name, The Crime of 1873. This forced shift into a currency whose supply was limited by nature, unable to expand with demand, caused a series of economic and monetary contractions that plagued the entire period of the Long Depression.