Long Depression

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The Long Depression (1873–1896) affected much of the world from the early 1870s until the mid-1890s and was contemporary with the Second Industrial Revolution. At the time it was regarded as the Great Depression, until the more severe Great Depression occurred in the 1930s. It was most notable in Western Europe and North America, but this is in part because reliable data from the period is most readily available in those parts of the world. The United Kingdom is often considered to have been the hardest hit by the Long Depression, and during this period it lost much of its large industrial lead over the economies of Continental Europe. The Depression is usually believed to have ended by 1897. The global economy grew at an impressive rate from that year to the start of World War I.

Two decades of contraction

The "Long Depression" was a period of economic growth in the US that was mistakenly taken for a depression since prices were falling in a period of deflation. Unemployment was very low and production was increasing. Increases in productivity and a strong currency, backed by gold, made deflation possible. Consumers benefited from falling prices.

Causes of the crisis

The causes of the Depression are debated. The primary cause of the depression was a shortage of available money to facilitate trade. The most immediate cause, and the date that is often used as the start of the Depression, was the collapse of the Vienna Stock Exchange on May 9, 1873. Others have argued the depression was rooted in the 1870 Franco-Prussian War that hurt the French economy and, under the Treaty of Frankfurt (1871), forced that country to make large war reparations payments to Germany. 5milliard (billion) francs in gold, or £200million, "financed mainly through London" according to Clapham, p286. Germany went on to gold and the price of silver started to fall causing considerable losses of asset values.

The demonetization of silver by European and North American governments in the early 1870s was certainly a contributing factor. The Coinage Act of 1873 in America was met with great opposition by farmers, as silver was seen as more of a monetary benefit to rural areas than to banks in big cities. In addition, there were Americans who advocated the continuance of government-issued fiat money (United States Notes) to avoid deflation and promote trade. Although this was the economic platform of Abraham Lincoln this policy was not continued by the American government after Lincoln was assassinated, as the US began to move towards a gold standard. Monetarists believe that the depression was caused by shortages of gold that undermined the gold standard, and that the 1848 California Gold Rush, 1886 Witwatersrand Gold Rush in South Africa and the 1898-99 Klondike Gold Rush helped alleviate such crises. Other analyses have pointed to developmental surges (see Kondratiev wave), theorizing that the Second Industrial Revolution was causing large shifts in the economies of many states, imposing transition costs, which may also have played a role in causing the depression.

Reactions to the crisis

Like the Great Depression, the Long Depression saw many nations of the world resort to protectionism to shore up faltering industries. Influenced by List's nationalist argument for industrial protection, Bismarck abandoned the German free trade policy in 1879, enacting tariffs over the objections of his National Liberal Party allies. France, which had adopted free trade during the Second Empire (1852-1870), also abandoned it, while Benjamin Harrison won the 1888 US presidential election on a protectionist ticket. Only the United Kingdom retained the low tariffs enacted in the 1846 repeal of the Corn Laws.

Besides tariff policy, governments of the time were not closely involved in managing the economy. According to the tenets of classic liberalism, it was generally believed that it was not the government's role to intervene in the economy, and thus little was done.

The Long Depression also contributed to the revival of colonialism leading to the New Imperialism period, symbolized by the scramble for Africa, as the western powers sought new markets for their goods. According to Hannah Arendt's The Origins of Totalitarianism (1951), the "unlimited expansion of power" followed the "unlimited expansion of capital".

In the United States, the meltdown of the European economies led directly to the Panic of 1873 and ushered in the Long Depression.

GNP for selected European Great Powers

Year	Russia	France	Britain	Germany	Habsburg Empire	Italy
1830	10.5	8.5	8.2	7.2	7.2	5.5
1840	11.2	10.3	10.4	8.3	8.3	5.9
1850	12.7	11.8	12.5	10.3	9.1	6.6
1860	14.4	13.3	16.0	12.7	9.9	7.4
1870	22.9	16.8	19.6	16.6	11.3	8.2
1880	23.2	17.3	23.5	19.9	12.2	8.7
1890	21.1	19.7	29.4	26.4	15.3	9.4

at market prices, in 1960 US dollars and prices; in billions
(Paul Kennedy, The Rise and Fall of the Great Powers, Fontana Press, 1989, p 219)

References

J H Clapham "The Bank of England", 1944 rev 1970.