Saturday, February 21, 2009

About That Economic Downturn of 1873...

It did not last until 1879 and it is not the longest U.S. economic contraction on record. One would not know this, though, by looking at the NBER's business cycle dates. These dates show this economic downturn lasted a record 65 months from October 1873 through May 1879. Therefore, it is understandable why observers like Paul Krugman, Matthew Yglesias, and Robert Shiller continue to invoke this period in their discussions of the current economic crisis. These dates, however, are wrong according to a series of papers published by Joseph H. Davis ( 2004, 2006 ). Using a new and more robust measure of industrial production for the Postbellum period, Davis shows most of the NBER recessions during this time are overstated. In the case of the 1873 downturn it only lasted 2 years. The popular Balke and Gordon (1989) real GNP series for this period similarly shows only a 2-year recession following the 1873 economic downturn while the famous Romer (1989) real GNP series shows no recession at all during this time. Unfortunately, the NBER has not revised these dates and, as a result, it continues to add confusion.

The figure below shows the log version of these three series for the Postbellum period. Nowhere in this figure is there 5 year + economic downturn in the 1870s. (Click on figure to enlarge.)


  1. What is the President and CEO of the Dallas Federal Reserve Bank Richard Fisher referring to when he says that there was a "Long Depression" that lasted from 1873 to 1896. See the CSPAN link below to his Feb 2, 2009 interview at the 1:15 minute mark to the 2 minute mark.

  2. Milton:

    Some observers do call this period a long depression. I suspect they do so because there was secular deflation during this time. Between 1866 and 1897 the price level declined about 2% a year. Since most observers associate depression with deflation they make the leap that the period was one long depression. The problem with this view is that this period was also one with rapid growth on average. Over this same 30 year period the real economy grew about 4% a year. For more on this period see this paper by Michael Bordo and Andrew Filardo and my own work on the Postbellum deflation.

  3. In popular memory the period from 1873 to 1879 was referred to as the "great depression" until the 1930s usurped the name, so I would imagine that there must have been a great deal of economic hardship.

  4. I suppose 2 things come to mind:
    1. It reminds us of how GDP was increasing over 2008, even though there was much pain in the jobs market.
    2. How much of the 1873-1896 depression was an agricultural phenom - in other words, a (severe) relative price shock. It was the farmers who hurt the most, so industrial production is not much help in understanding the pain.
    I think Hugh Rockoff wrote an article about how the Wizard of Oz was a parable about this era.