Interpretations
Most economic historians see this period as negative for the most industrial nations. Many argue that most of the stagnation was caused by a monetary contraction caused by abandonment of the bimetallic standard, for a new fiat gold standard, starting with the Coinage Act of 1873. Other economic historians have complained about the characterization of this period as a "depression" due to conflicting economic statistics that cast doubt on the interpretation of this period as a depression. They note that this period saw a relatively large expansion of industry, of railroads, of physical output, of net national product, and real per capita income.
As economists Friedman and Schwartz have noted, 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. Even the alleged "monetary contraction" never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction. Although per-capita nominal income declined very gradually from 1873 to 1879, that decline was more than offset by a gradual increase over the course of the next 17 years.
Furthermore, real per-capita income either stayed approximately constant (1873–1880; 1883–1885) or rose (1881–1882; 1886–1896), so that the average consumer appears to have been considerably better off at the end of the "depression" than before. Studies of other countries where prices also tumbled, including the US, Germany, France, and Italy, reported more markedly positive trends in both nominal and real per-capita income figures. Profits generally were also not adversely affected by deflation, although they declined (particularly in Britain) in industries that were struggling against superior, foreign competition. Furthermore, some economists argue that a falling general price level is not inherently harmful to an economy and cite the economic growth of the period as evidence of this. As economist Murray Rothbard has stated:
"Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers."
Accompanying the overall growth in real prosperity was a marked shift in consumption from necessities to luxuries: by 1885, "more houses were being built, twice as much tea was being consumed, and even the working classes were eating imported meat, oranges, and dairy produce in quantities unprecedented". The change in working class incomes and tastes was symbolized by "the spectacular development of the department store and the chain store".
"Prices certainly fell, but almost every other index of economic activity - output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight clearances, joint-stock company formations, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco - all of these showed an upward trend."
A large part at least of the deflation commencing in the 1870s was a reflection of unprecedented advances in factor productivity. Real unit production costs for most final goods dropped steadily throughout the 19th century, and especially from 1873 to 1896. At no previous time had there been an equivalent "harvest of technological advances...so general in their application and so radical in their implications". That is why, notwithstanding the dire predictions of many eminent economists, Britain did not end up paralyzed by strikes and lock-outs. Falling prices did not mean falling money wages. Instead of inspiring large numbers of workers to go on strike, falling prices were inspiring them to go shopping.
Read more about this topic: Long Depression