My Two Cents

The longest depression

Chris Farrell Apr 16, 2009

The bursting of the railroad financing bubble in the 1870s led to the depression of 1873 to 1879, the longest in the nation’s history. The economy continued to sink back into recessions until the turn of the century.

A financial panic swept Wall Street. Jay Cooke, the most famous banker in the country, went out of business. The New York Stock Exchange closed for 10 days. “It is sellers’ panics that have so often marked the start of depressions, as people rush to unload stocks and bonds at any price and to take their money out of banks they see as unsafe,” writes historian John Steele Gordon in An Empire of Wealth.

Little wonder historians have been raising the question whether the more apt historical analogy–and the lessons to takeaway–is the long depression of the 1870s and not the Great Depression of the 1930s.

That’s why I found this such a fascinating passage about the long depression. It’s from Robert Wiebe’s The Search for Order 1977-1920. He writes:

Yet in other respects it was a strange depression. The longest in the nation’s history, in human terms it proved one of the mildest. The same falling prices that deterred investors facilitated commerce, as migrants filled the land along the new railroad lines and enterprising businessmen, adequately supplied with those short-term credits which had lured Cooke into disaster, rushed to exploit the new possibilities in trade. While overbuilding the railroads brought depression, it had created a commercial reservoir which for years afterward sustained much of the economy…. Because industrialists cut prices much more often than they did production, employment in most sectors of the economy remained reasonably high, and because prices dropped so markedly, real income rose over 60% between 1869 and 1879.

Today, the Great Contraction is accelerating the shift to an economy dominated by the human capital industries, especially health care and education. Employment is holding up in those sectors, too.Real wages are up too, at least recently. I wonder if we’ll see the emergence of price cutting in the health care and education sectors of the economy, too.

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