The Myth of the Great Depression, 1873–1896

IN this book we are primarily concerned with finding out how economic historians have been analysing the two decades or so which followed the boom of the early 1870s and ended in the middle of the 1890s, a period which they have characterised as the ‘Great Depression’. We shall be asking ourselves three major questions. First of all, what sort of depression are we thinking about; what indicators can we employ and how do they move? Secondly, how do we explain these movements and to what extent are they interconnected? Finally, how far in fact can we justify picking out these years as a period with an economic meaning and unity of their own? Our procedure will be to take various indicators in turn and to look at these problems in terms of each as we go along.

DIAGRAM I on page 12 shows the course of wholesale prices during the nineteenth century. The long-cycle problem is apparent right away. The peaks of 1818 and 1873, the troughs of the late 1840s and the mid-1890s, are clear enough. It is the pattern in between which causes the trouble. We can create almost any trend we like to 1850, depending on the choice of dates; prices may be described as steady on the whole from 1821 to 1841 (treating 1818 as an aberration) or we may say they were falling from 1818 to 1833 and thereafter stable till the late 1840s. After 1852 there were two years of recovery from a deep slump in prices and then a remarkably steady plateau for almost two decades with a jump during the very powerful boom in 1872–3. Hardly a period of rising prices as the long-swing analysis postulates. Simply to look at the trough in 1852 and the peak in 1873 is certainly misleading. Even two of the most powerful advocates of the long-cycle analysis once wrote: ‘anyone who did not know these waves in advance might conclude that the trend of prices was not falling from 1823 to 1840 or rising during 1853–71’.¹

THE first explanation is the oldest and is one which could have the all-pervading effects mentioned in the previous paragraph. It arises from a simple form of the quantity theory of money which provides for a direct relationship between the supply of money (and its velocity of circulation), the level of production and the level of prices. ‘Long period fluctuations [of prices] are chiefly caused by changes in the amounts of precious metals relative to the business which has to be transacted by them, allowance being made for changes in the extent to which the precious metals are able to delegate their functions to bank notes, cheques, bills of exchange and other substitutes.’¹ The argument was that despite the development of commercial banking, the supply of money in the 1870s and 1880s failed to keep pace with the growth of activity and prices consequently fell. A combination of circumstances slowed down the rate of increase of the world’s stock of gold upon which currency supplies were based. For one thing, after 1870 most of the major countries adopted the gold standard. There was a scramble for gold as each sought to build up its reserves so as to be able to maintain a fixed rate of exchange and allow free movement of gold in and out of the country.

WE mentioned earlier Professor Landes’s view that the whole of nineteenth-century price history can be seen in terms of large and continuous cost-reducing innovations. It is not difficult to point to individual examples of striking reductions in prices resulting from cost-saving innovations. New developments in transport both on land and sea come immediately to mind. The extension and refinement of the Bessemer and Siemens processes for making steel helped to bring the price of rails down from £15 10s in 1873 (or £9 17s 6d in 1874 after the end of the boom) to around £4 in the early 1890s; other technological changes reduced the price of tinplate from 30s in 1874 to under 10s in the mid-1890s, falls which clearly reflected more than the general price decline. But before we get too excited by this approach we must ask one or two questions. First, one we have already mentioned; over the last half-century there have been technological advances of similar magnitude, but on the whole prices have risen.

IF our arguments are to hold good at all, finally we must try to explain the recovery of prices after the mid-1890s. Fortunately our problems here are less serious, provided we do not worry too much about the precise turning-point. This is reasonable because the five years from 1896 to 1900 can be considered as a vigorous cyclical upswing — a home boom topped off by a war. 1895 can be viewed simply as the trough of an eight-year cycle. It is the trend after the turn of the century, a distinctly though not sharply rising one, that we must discuss. The money supply was certainly much augmented by the gold discoveries in Australia, South Africa and the U.S.A. In Britain Higonnet found that bank money rose at almost twice the rate from 1895 to 1914 as in the previous two decades. In addition, there was a renewed burst of Professor Rostow’s long gestation investment — gold mining itself, the Boer War, the pre-1914 burst of investment in armaments and new spurts of railway-building. There is evidence of both a recovery of world industrial production and a slowing down in the rate of growth of supply of raw materials and food-stuffs and this despite a continued fall in transport costs.

WAGES and real wages — wages recalculated in terms of what they will buy — inevitably influenced and were influenced by the course of prices. To the wage earner himself just as important as the level of real wages was the state of employment. There has been much controversy over this last point because it is vital to the question of whether there was a depression in any real sense other than a sag of prices during the years after 1873. Our information is unsatisfactory because at that time no national figures were collected, there being no government unemployment insurance scheme in operation. We have to rely on such trade union figures as are available. Professor Rostow argued that unemployment was no higher on average than in the two preceding or succeeding decades (45, p. 48). Subsequently it has been shown, however, that this conclusion was only reached by juggling with the dates. Unemployment during 1874–95 was clearly higher than during 1851–73 and 1896–1914, the figures being 7.2 per cent compared with 5 per cent and 5.4 per cent respectively. However, we have shown no great affection for these particular dates in this essay so far and there is no need to do so now.

NOW we must turn to look at the economy as a whole after 1870, but before tackling our major problem, the decline in industrial growth, we must spend a short time with the agricultural industry, which was once considered the main victim of the ‘Great Depression’. It is true that there was a sharp fall in the numbers engaged in agriculture in Great Britain — from 1.6 m. in 1871 to 1.4 m. in 1891 and 1.3 m. in 1901 — but this was nothing new and indeed the largest absolute fall in numbers came in the 1860s. Some sectors of agriculture did suffer seriously from the fall of prices and the industry had to bear all the problems of an extensive structural change taking place over a short space of time with little or no relief from the Government. The difficulties were accentuated, too, by a run of exceptionally bad seasons in the late 1870s. Wheat-producers felt the blasts most savagely. In 1867–76 this crop accounted for 13 per cent of the gross agricultural output of the U.K.: by 1894–1903 it was 4 per cent. In England the fall was from 22 to 7 per cent. Although the prices of oats and barley fell in a similar fashion, most farmers continued to grow these crops to provide fodder and essential straw.

NOW we come to the last and in many ways most important part of our discussion, our analysis of the declining rate of growth of industrial productions in Britain both in total and per head. There is some controversy over the timing of this decline; Phelps Brown dated it from the 1890s, but Coppock demonstrated that it began two decades before and indeed, but for the distortion introduced by the recovery of the cotton industry after the American Civil War, a retardation is apparent from the mid-1860s onwards (see 10 and 38). The statistics for these years are too rough for us to be very precise on that matter, and for the whole period must be treated with caution. They are given in Table IV.¹ Again there is the problem of cyclical distortion arising from the 1873 boom, but the trends, especially of output per head, are too marked to be explained by that factor alone.

IT must be obvious to any reader of this book that there is a long way to go before we come near to a full understanding of the basic forces affecting the British economy at the end of the nineteenth century. It is directly apparent, though, that even when much more research has been carried out, no uni-causal explanation for any of the phenomena discussed here, will be arrived at. We can only hope to become more sure of the relative importance of various factors and to strive for greater statistical and analytical precision wherever possible.