George Selgin (1997)
The ‘Great Depression’ of 1873-1896
The period from 1873 to 1896 bothered economic historians for decades.  Both people living at the time, and many later academics, branded it a time of unprecedented economic stagnation throughout the gold-standard nations. In Britain (supposedly the hardest hit), ‘there was an overwhelming mass of opinion – in reports of parlianlentary committees and royal commissions, in parliamentary debates, newspapers, books, pamphlets, and speeches – that conditions were bad’ (Musson, 1959, p. 199).
The popular impression was supported by a single, indisputable fact: Britain and most of the West had witnessed a ‘uniquely persistent deflation’ (Landes, 1965, p. 462) with the British wholesale price index losing close to one-third of its value in less than a quarter-century. For many this ‘most drastic deflation in the memory of man’ (ibid., p. 458) was both evidence and cause of what Josiah Stamp (1931, p. 26) called ‘a chronic depression in trade’.
The decades-long decline in prices has been termed ‘the essential problem of the Great Depression’ (Coppock, 1961, p. 205). In what sense was it a problem? Basically, because the popular linking of deflation with depression was contradicted by all sorts of other evidence. As early as 1877 Robert Giffen (1904, p. 108) found himself countering the ‘common impression’ that a depression of unprecedented severity was in progress. ‘The common impression’, Giffen insisted, ‘is wrong, and the facts are entirely the other way.’ Despite a drop in Britain’s foreign trade and a series of poor harvests, which were serious enough, ‘the community as a whole,’ Giffen argued (ibid., p. 109), was ‘not really poorer by the pricking of all these bladders’. In support of his revisionism, Giffen presented statistics showing the lack of any ‘depression’-era decline in nominal income or wages per head (ibid., pp. 178-9; compare Bowley, 1920, pp. 9ff). Giffen’s data actually show a distinct upward trend in both per capita taxable incomes and per capita nominal wages commencing with the year 1880.
Friedman and Schwartz’s more recent figures (1982, Table 4.9), shown in Table 1, tell a similar story: although per-capita nominal income declines very gradually from 1873 to 1879, that decline was more than offset by a gradual increase over the course of the next 17 years.  Finally and most significantly, 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 (Musson, 1959, p. 292). Accompanying the overall growth in real prosperity was a marked shift in consumption from necessities to luxuries (Landes, 1965, p. 469): by 1885, according to Beales (1934, p. 74), ‘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 symbolised by ‘the spectacular development of the department store and the chain store’ (Landes, 1965, p. 471). In short, the Great Depression of 1873-96, considered as a depression of anything except the price level, appears to be a myth:
‘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.’ (Musson, 1959, p. 199)
How can the myth – and its persistence – be explained? Partly it springs from the fact that certain branches of economic activity were indeed depressed between 1873 and 1896; in Britain these included foreign trade prior to 1875, agriculture in the late 1870s, and (as a result of increased foreign competitiveness) ‘basic industries’ such as the iron industry beginning in the 1880s. These troubled sectors of the economy were a source of increased structural unemployment and of ‘continuous ululations of business people’ (Beales, 1934, p. 66) inspiring calls for ‘reciprocity’ and ‘fair trade’ (Musson, 1959, p. 227) and provoking various royal and parliamentary inquiries. Britain and other gold standard nations were also far from being immune to genuine cyclical downturns, sometimes lasting several years and interrupting the otherwise positive trend of per-capita real income.
But neither sectoral troubles nor genuine cyclical downturns can account for the persistent belief that Britain suffered an ‘unprecedented’ depression lasting over two decades. As Landes observes (1965, p. 465), that belief has been based ‘more on theoretical deductions, political dogma, and sympathy’ for the truly affected groups than on any real evidence. The crucial ‘theoretical deduction’ in this case has consisted of the popular belief,to which some zero inflationists still subscribe, that ‘falling prices curtail production … and thereby reduce wealth and well-being’ (Warren and Pearson, 1933, p. 298).
Where deflation is linked to a contraction of nominal spending, or a failure of spending to keep step with growth in the labour force or capital stock, one may be justified in viewing it as a symptom, if not a cause, of depression. But 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, according to Landes (1965, p. 462), 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 paralysed 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!
Incidentally, Arthur Pigou (1924, pp. 70-71) once pointed out the irony that, if there ever was a protracted ‘depression’ at the end of the 19th century, it occurred, not during the oft-maligned era of falling prices, but immediately afterwards, when output prices began to rise:
‘Whereas during the twenty years before 1896 the trend of general prices had been downwards and the rate of real wages had been rising, the reversal of the price trend in the later nineties was accompanied by a check to the upward movement of real wages. Indeed, apart from the shifting of people from lower paid to higher paid occupations, the rate of real wages actually declined between the later nineties and the outbreak of the Great War.’
It is worth to recall that a deflation caused by productivity growth should not be confused with a deflation caused by an economic crisis, following the collapse of a bubble.